Article: CMS Reconciliation of Outliers - A Day of Reckoning?

By Ken Conner

Introduction

In 2003, Center for Medicare and Medicaid (CMS) modified the way it recognized a hospital's cost to charge ratio (CCR) for the purpose of reimbursing hospitals for outliers. Because the interim calculation of outlier payments uses the most recently available CCR, the calculation of the outlier payment may be too high or too low based on changes in the current year CCR. This issue received a significant amount of attention prior to 2003 when CMS challenged certain hospitals on their practice of significantly raising charges year over year in order to calculate the current year outlier payments using the higher historical CCR, increasing the outlier payment as a percentage of total CMS payments.

In response to what CMS saw as hospitals that aggressively raised charges to benefit from the time delay in recalculating CCR, CMS modified the regulations to require a reconciliation of outlier payments using the current year (that is the fiscal year the patient was treated) CCR to the historical CCR used in the original payment. Inpatient reconciliations are required for cost reporting periods beginning on or after October 1, 2003¹ and outpatient reconciliations are required for services rendered on or after January 1, 2009 The reconciliation applies to all types of providers receiving prospective payment, acute care hospitals, rehabilitation hospitals, psychiatric hospitals, long-term acute hospitals, and community mental health centers. Under current instructions, the reconciliation is to occur if two criteria are met:

• CCR changes by more than 10 percentage points, not 10 percent. For example, if the CCR in 200X was .50 and in 200Y was .395, the change would be 10.5 percentage points.
• The total outlier payments must also exceed $500,000. The outpatient dollar threshold is $500,000 for 2009 and $250,000 beginning January 1, 2010.

The number of hospitals impacted is relatively small as a percentage of all hospitals. However, the dollar impact on those that are affected could be significant to the individual hospital. Further, virtually all new hospitals can expect to be impacted by both overpayments and underpayments.

What Took So Long to Begin the Reconciliation?

The instructions for reconciliation were issued to Medicare intermediaries on December 3, 2010². Prior to the instructions, hospitals and intermediaries should have been aware of the pending reconciliation and anticipated amounts due to CMS as a result of reconciliation. However, any reconciliation would require a review of not only outlier claims but all claims.

The biggest challenge to reconciliation has been recalculating the claim without reprocessing it in the live environment. Solving this issue contributed to the delay in the issuance of instructions to the Medicare intermediaries. To facilitate the reconciliation, CMS has established what is known as "Lump Sum Utility." By loading all claims for the year(s) in question along with applicable hospital specific data used to calculate the applicable DRG rate and other information required to price a claim, the Lump Sum Utility will recalculate the claims changing only the applicable CCR. The result is a payment file in which the only change is the amount of outlier payment. The higher or lower outlier payment can then be entered into the applicable cost report to reconcile the originally settled cost report with the corrected outlier payment.

In order to address the calculation, Medicare intermediaries are required to report to CMS Central Office and the applicable Regional Office. The report is to designate the affected hospital and its cost reporting years in question. The Central Office will then determine if the reconciliation is appropriate and notify the Medicare contractor of their decision. Only after approval from the Central Office will the Medicare contractor notify the hospital. The Medicare contractor must submit the identified hospitals and cost reporting periods to the Regional Office no later than April 25, 2011. The specific steps to be followed by the Medicare contractor are outlined in the December 3, 2010 instructions. It is clear that CMS anticipates not only overpayments but underpayments, as well. As noted in the discussion of time value of money, there is a provision for interest being paid by the provider in the case of an overpayment or paid to the provider in the case of an underpayment. The Medicare contractors are to complete the reconciliations including the issuance of a new Notice of Program Reimbursement (NPR) by September 30, 2011.

Calculating Outliers

Calculating outliers is fairly straight forward if you understand the basic payment calculation and the criteria for an outlier payment. However, it may be useful to review the calculation and understand the role of the CCR and the sensitivity to changes in the CCR. The patient charges are multiplied by the CCR to determine the patient cost. The patient cost is compared to an outlier threshold. The outlier threshold is the sum of the DRG payment, DSH and indirect medical education payments related to the patient and a preset outlier amount. Cost in excess of the outlier threshold is reduced 20% to account for fixed cost already covered and not considered incremental to the outlier.

The following example reflects only the calculation of the operating outlier. Similar calculations for the capital outlier will be made as part of the reconciliation. In the example below, Column A reflects the calculation using final actual CCR for the cost reporting period ended December 31, 2008. Columns B and C are the higher cost to charge from the 2006 and 2007 reports, respectively.

Comparison of Outlier Payments at Historical and Actual Levels

Note that the 2008 CCR was not sufficient to reach the required threshold. Depending on when in the year the claim was paid, the hospital would have been overpaid by $6,000 to $15,000.

In most instances, the CCR used in the outlier calculation changes during the year comes from the two previous cost reports. The Medicare contractor uses the cost reports on file to determine the CCR which is updated during the year as the cost reports are tentative or final settled.  For example, at the beginning of the cost report year beginning in 2008, the CCR is from the 2006 cost report, as the 2007 report would not have been filed. When the 2007 cost report was filed five months after year end, the Medicare contractor would have updated the CCR to use the 2007 report. In order to determine if the 10 percentage points has been met, CMS has instructed intermediaries to use a CCR weighted by days.

Calculation of Weighted Outlier Used in Payment

New hospitals are underpaid for outliers in the first half of the second year (.25 versus .45) and in the second half of the year using the prior year CCR, the outliers were overpaid (.90 versus .45). The higher 2007 CCR during the start-up of a new hospital is not uncommon due to the fixed cost being spread across few patients as the census rises. Looking back at 2007, in this example, the outliers have been significantly underpaid (.25 versus .90).

Who is Impacted?

Most hospitals that are impacted are hospitals with aggressive increased charges; new hospitals who had high CCRs in the first year of the cost report; or hospitals going through a turnaround experience including a combination of lower cost, higher volume (absorbing fixed cost) and higher charges. A hospital might also have experienced a loss of patient volume without a corresponding reduction in cost, causing the CCR to increase more than 10 percentage points. Generally speaking, most hospitals involved in the reconciliation will experience lower outlier payments through the reconciliation. The exception for hospitals with rising CCR primarily impacts the new hospital's first year of operation. A new hospital is truly a new hospital, not the result of a merger or acquisition.

New hospitals must be careful in reviewing their status. The first cost report meeting the reconciliation criteria is likely the second or even the third cost report. The second year report will experience a bump in the CCR during the second six months after the filing of the first year cost report. The new hospital's first cost report will likely meet the first criteria (CCR change greater than 10 percentage points) but because the interim payments were made using the State average CCR, generally considerably lower than the first year CCR, the hospital may not meet the second criteria of $500,000. Left unattended, the absence of the first year in reconciliation seems to be somewhat unfair, as the hospital is underpaid in the first year and overpaid in the second and third year. The instructions permit the Medicare contractor to recommend consideration of a reconciliation that does not meet both criteria. No instruction is given as to what a Medicare contractor should or could consider in recommending a reconciliation that did not otherwise meet the criteria. If a hospital feels that it should receive a reconciliation that is not within the stated criteria (10 percent and $500,000), the hospital should initiate discussions with the Medicare contractor to insure the reconciliation is requested. Again, the most likely scenario for such a request is related to the first year of operations of a new hospital.

Time Value of Money

The over or under payments resulting from the outlier reconciliation are subject to an interest payment in both the case of overpayment and underpayment. The interest rate used in the calculation can be found at http://www.ssa.gov/OACT/ProgData/newIssueRates.html. When calculating the time value of money, the calculation begins with the midpoint of the cost report period(s) subject to reconciliation.

Below is an example of the adjustment for the time value of money.

Each hospital should evaluate its position relative to a repayment and those desiring to resolve the issue and stop the accrual of interest should contact the Medicare Contractor immediately to meet the aggressive CMS deadlines for notification (April 1, 2011) and completion of the reconciliation September 30, 2011.

Summary

• Is your hospital subject to reconciliation?
• Are outlier payments greater than $500,000; and
• Is the change in the CCR more than 10 percentage points?
• Estimate your reconciliation liability by recalculating outliers using the actual CCR and claims data contained in the PS&R originally provided by the Medicare contractor, making sure that the information on the PS&R includes all claims (i.e. late claims or claims recovered by Medicare for various reasons).
• If the CCR used for the initial payment of outliers is higher than the actual, then it is necessary to review only the claims paid as outliers for reconciliation of overpayments
• If the CCR used for the initial payment of outliers is lower than the actual CCR, then it will be necessary to review all claims with charges greater than the outlier threshold divided by the actual CCR. This establishes a floor. Claims below the floor would never qualify while claims above the floor would be subject to the calculation with some qualifying and other not depending on the amount of charges and the DRG Weight.
• For a year in which two CCRs were used to determine the actual payment, calculations should be made separately.
• Are you a new hospital or otherwise affected by rising CCR and should you initiate a request to the Medicare contractor for a reconciliation of one or more years with a rising CCR that do not meet the $500,000 criteria? Specifically, it may require a request for reopening of cost reports.

Special thanks to Derek Pierce, Healthcare Management Partners, LLC, and Martha Calfee, CPA, Mathney & Stees for their review and insight on outlier reconciliations.

¹ For hospitals identified using criteria set forth in PM A-03-058 and deemed to have charges increasing at an excessive rate, the reconciliation is effective for discharges occurring on or after August 8, 2003
²http://www3.cms.gov/transmittals/downloads/R2111CP.pdf
³ In the case of a new hospital, the State average is used as a proxy until such time as a CCR is established.