OIG: High Hospital Charges Lead to Excessive Medicare Outlier Payments

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A new report from the HHS Office of Inspector General shows high charges at hospitals directly influence a supplementary Medicare payment, thus leading to billions of inflated revenue.

Under Medicare's inpatient prospective payment system, or IPPS, hospitals receive a set payment based on the type of Medicare severity diagnosis-related groups that are recorded. Hospitals receive adjusted Medicare reimbursements based on several factors, such as their geographic area wage index and whether they provide training to medical residents. Hospitals also make supplemental payments called "outlier payments," which cover hospitals from "large financial losses because of unusually expensive cases," according to the report.

The OIG found that almost all IPPS hospitals in the U.S. (97 percent, or about 3,200) receive an outlier payment. From 2008 through 2011, CMS doled out $15.8 billion in outlier payments, or about 2 percent of hospital Medicare bills. The average outlier payment alone was $15,482, and some exceeded $50,000 for a single MS-DRG. One unnamed hospital received a $1.4 million outlier payment for a single tracheostomy claim.

Further, OIG analysts identified a small group of 158 hospitals that received a high amount of outlier payments. For those hospitals, 12.8 percent of their Medicare reimbursements were tied to outlier payments. One culprit behind the excessive payments? High charges, the OIG said.

The high-outlier hospitals charged Medicare 42 percent more, on average, for the same treatments and diagnoses compared with other hospitals. High-outlier hospitals were also more likely to be larger, urban teaching hospitals. The OIG did not identify specific high-outlier hospitals.

OIG officials immediately recommended CMS to instruct Medicare administrative contractors and recovery auditors to monitor outlier payments. In addition, the OIG wants CMS to add hospital outlier payments to its public reporting and examine the necessity of some MS-DRGs with high rates of outlier payments. CMS agreed with all three recommendations.

The results relate back to May, when HHS and CMS released a trove of data on hospital inpatient charges. The data showed charges vary wildly across the country at different hospitals for the same procedure. For example, at Upper Chesapeake Medical Center in Bel Air, Md., the average Medicare charges for a major joint replacement with major complications and comorbidities totaled a little more than $23,000. At Crozer Chester Medical Center in Upland, Pa., a roughly hour-drive east, the average charges for the same procedure cost almost $322,000. However, hospital and health system executives have argued the charges do not reflect what they are actually reimbursed, although the OIG's report paints a much different picture.

A new blog post at the Harvard Business Review suggested that reforming the charges at the highest-priced U.S. hospitals could be "significantly reduced simply through better management" and could save the healthcare system billions of dollars.

More Articles on Hospital Charges:
Opening Up: How Pricing Transparency Will Change Hospital Benchmarking
Hospital Charges Not Tied to Quality of Care, Analysts Say
Study: Larger, Investor-Owned Hospitals Typically Have Higher Charges

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