Medicare Outlier Limits Led to $502M in Excess Hospital Payments

December 10, 2019 - Supplemental hospital payments from Medicare were overstated by $502 million for 60 hospitals because of limits on the reconciliation process for outlier payments that stops contracted reviewers from examining certain cost reports, according to a recent Office of Inspector General (OIG) report. 

Specifically, from fiscal years 2011 to 2014, Medicare paid 53 hospitals $541 million more than they would have been paid and seven hospitals $39 million less than they would have been paid over the four-year period, the report stated. 

Medicare pays hospitals outlier payments to protect the facilities from excessive losses stemming from cases in which care costs are abnormally high for Medicare beneficiaries. The program determines if a hospital qualifies for outlier payment using a cost-to-charge ratio threshold. 

Medicare requires its administrative contractors to calculate a hospital’s cost-to-charge ratio annually using the hospital’s yearly overall Medicare costs by its yearly charges for services provided to Medicare patients. Since hospital charges can fluctuate from year to year, the contractors also use the ratio applied at the time of claims processing and the actual ratio for a year to determine if a hospital is eligible for retroactive outlier payments. If the ratio is found to be plus or minus ten percentage points from the ratio applied during the payment period, contractors adjust the amount of outlier payments made to hospitals.

However, the ten-percentage-point threshold applied to outlier payments was the driving force behind overpayments to hospitals from 2011 through 2014, OIG found.

Using claims data, information from CMS, and hospital cost reports for a four year period, OIG recalculated outlier payments based on the actual cost-to-charge ratios of 60 hospitals that had received $3.5 billion in outlier payments. The agency then analyzed the ratios of 912 hospitals that received $11.2 billion in outlier payments. An estimation of the potential costs to Medicare Administrative Contractors (MACS) was made, along with the potential return on investment. 

The federal watchdog reported that in these three years, Medicare made more than $18 billion in outlier payments to 3,336 hospitals that submitted 13,344 cost reports. Out of these hospitals, 972 submitted 3,888 cost reports that had outlier payments over $500,000 for each year, and 3,863 of those cost reports with outlier payments did not meet the ten-percentage point threshold for reconciliation. 

OIG’s report found that 236 associated cost reports associated with the outlier payments did not meet CMS’s ten-percentage point threshold. Specifically, 92 percent had a change less than five percent in their cost-to-change ratio.

The report also estimated that the administrative burden on the Medicare administrative contractors to reconcile these cost reports would have been a minimum of $47,200 and a maximum of $1.7 million for four years, or a minimum of $11,800 and a maximum of $425,000 per year. 

The Office of Inspector General recommended that Medicare require reconciliation of all hospital costs reports with outlier payments during a cost-reporting period. If this had been done previously, Medicare would have saved approximately $125 million per year. CMS recently stated that it is “evaluating the current outlier reconciliation criteria and will consider whether to propose any appropriate modifications to the outlier reconciliation policy in the future rule making.”