Department of Health and Human Services 
OFFICE OF 
 
INSPECTOR GENERAL 
 
 
 
 
 
 
 
 
M H
EDICARE  OSPITAL 
 
 
O P
UTLIER  AYMENTS 
W I
ARRANT  NCREASED 
S
CRUTINY 
 
Daniel R. Levinson   
Inspector General  
 
November 2013 
OEI-06-10-00520   
   
EXECUTIVE SUMMARY:  Medicare Hospital Outlier Payments Warrant 
Increased Scrutiny   
OEI-06-10-00520 
 
WHY WE DID THIS STUDY 
 
Medicare makes supplemental payments to hospitals, known as outlier payments, which 
are designed to protect hospitals from significant financial losses resulting from   
patient-care cases that are extraordinarily costly.  Unlike predetermined payment amounts 
for most Medicare hospital claims, outlier payments are directly influenced by hospital 
charges.   Responding to problems caused by some hospitals aggressively increasing 
charges, the Centers for Medicare & Medicaid Services (CMS) made policy changes in 
2003 to ensure the accuracy of outlier payments.  This report describes a more recent 
distribution of such payments.  
 
HOW WE DID THIS STUDY  
 
We examined all hospital claims processed through Medicare's Inpatient Prospective 
Payment System (IPPS) during calendar years 20082011.  We calculated the amount 
and volume of outlier payments and calculated each hospitals outlier payments as a 
percentage of its total IPPS payments.  We also identified hospitals that received a 
substantially higher percentage of Medicare IPPS reimbursements in outlier payments 
than all other hospitals. 
 
WHAT WE FOUND 
 
Nearly all hospitals received outlier payments and some received a much higher 
proportion of Medicare IPPS reimbursements from outlier payments.  Specifically, outlier 
payments to 158 hospitals averaged 12.8 percent of their Medicare IPPS reimbursements, 
compared to an average of only 2.2 percent for all other hospitals.  These high-outlier 
hospitals charged Medicare substantially more for the same Medical Severity Diagnostic 
Related Groups (MS-DRG), even though their patients had similar lengths of stay as 
those in all other hospitals. Some MS-DRGs triggered outlier payments frequently, and 
16 MS-DRGs accounted for over 41 percent of such payments.  
 
WHAT WE RECOMMEND  
 
In some cases, high charges could be the result of high costs because hospitals attract a 
disproportionate share of exceptionally costly patients or apply costly technologies and 
treatments.  Still, the routine receipt of outlier payments for certain MS-DRGs at  
high-outlier hospitals raises concerns about why charges for similar patient-care cases 
vary substantially across hospitals.  CMS agreed with our three recommendations to:  (1) 
instruct CMS contractors to increase monitoring of outlier payments; (2) include 
information about the distribution of outlier payments with other publicly reported 
hospital data; and (3) examine whether MS-DRGs associated with high rates of outlier 
payments warrant coding changes or other adjustments.   
   
   
TABLE OF CONTENTS 
Objectives ....................................................................................................1 

Background..................................................................................................1 

Methodology................................................................................................3 

Findings........................................................................................................6 

Nearly all hospitals received outlier payments and some
       
received a much higher proportion of Medicare IPPS 

reimbursements from outlier payments ...........................................6 

High-outlier hospitals charged Medicare substantially more for   

the same MS-DRGs, yet had similar average lengths of stay  

and cost-to-charge ratios (CCR) ......................................................8 

Some MS-DRGs triggered outlier payments frequently ..................9 

Sixteen MS-DRGs accounted for over 41 percent of outlier 

payments ........................................................................................10 

Conclusion and Recommendations ............................................................13 

             Agency Comments and Office of Inspector General Response ....14 

Appendix....................................................................................................15 

A: Example of the Effect of Charges and CCRs on Estimated 

Costs and Outlier Payments ...........................................................15 

B: Agency Comments  ...................................................................16 

Acknowledgments......................................................................................18 

 
 
 
 
 
 
 
 
 
 
 
 
   
OBJECTIVES 
1. 	  To describe the distribution of Medicare outlier payments to hospitals. 
2. 	  To identify hospitals that received high-outlier payments. 
3. 	  To compare Medicare billing patterns between hospitals that received 
high-outlier payments and all other hospitals.  
4. 	  To identify diagnoses commonly associated with Medicare outlier 
payments.    
BACKGROUND 
Medicare reimburses most acute care hospitals for hospital inpatient 
services through the Inpatient Prospective Payment System (IPPS).1   The 
IPPS classifies each hospital discharge into 1 of approximately 746 
Medicare Severity Diagnosis Related Groups (MS-DRG) on the basis of 
the average cost of care for patients with similar diagnoses, paying a 
predetermined base payment amount on each MS-DRG.  Medicare adjusts 
the payment amount to account for certain hospital-specific factors, such 
as the hospitals geographic area wage level and whether the hospital 
provides education and training to medical residents (i.e., Indirect Medical 
Education). Medicare also makes supplemental payments, known as 
outlier payments,2 to compensate hospitals for cases involving 
extraordinarily high costs.3   The purpose of Medicare IPPS outlier 
payments, hereafter referred to as outlier payments, is to protect hospitals  
from large financial losses because of unusually expensive cases.4    
Outlier Payments 
CMS uses a formula to determine the amount of outlier payments, if any,  
provided for each IPPS claim.5   When Medicare makes an outlier payment, 
a case must have estimated costs greater than the fixed-loss cost 
threshold. The fixed-loss cost threshold is the sum of the MS-DRG 
payment, the outlier threshold adjusted to reflect costs in a hospitals 
local market, and any add-on payments, which may include payments for 
treating a high percentage of low-income patients (i.e., a disproportionate 
share hospital adjustment), for being an approved teaching hospital (i.e., 
 
1 Social Security Act (SSA)  1886(d); 42 U.S.C. 1395ww. 

2 Medicare outlier payments can take two  forms:  operating  outlier payments and 
 
capital outlier payments.  For purposes this report, and in consultation with CMS 

officials at the outset of this study, we focus only on operating outlier payments, which 

are known to account for a large majority of all Medicare outlier payments.   

3 77 Fed. Reg. 27870, 28142  (May 11, 2012); 42 CFR   412.80. 

4  68  Fed.  Reg. 34494 (June 9, 2003). 

5  75  Fed.  Reg. 50042, 50426-50431 (Aug. 16, 2010). 

       
Medicare Hospital  Outlier Payments Warrant Increased  Scrutiny (OEI-06-10-00520)  1   
   
an indirect medical education adjustment), and for cases involving new 
technology.  Medicare determines the amount of the outlier threshold each 
year and publishes it in its annual IPPS Final Rule.  For FY 2011, the 
outlier threshold was $23,075. The estimated costs per case are 
determined by multiplying a hospitals covered charges on a claim by the 
hospitals operating cost-to-charge ratio (CCR).6  Generally, a hospitals 
CCR is calculated by dividing its aggregate operating costs by its 
aggregate charges, with the CCR changing over time on the basis of 
updated cost report data.7  Medicare makes outlier payments on the basis 
of a marginal cost factor, which is equal to 80 percent of the estimated 
costs above the fixed-cost loss threshold.8  
  To illustrate these calculations, consider a hospital that has a 0.7 CCR, no 
add-on payments, and a $23,075 outlier threshold.  Assume that the 
hospital submits a claim to Medicare with covered charges of $100,000 for 
an extraordinarily costly Medicare inpatient stay with a MS-DRG payment 
amount of $10,000.  In this case, the claims estimated cost is $70,000 
($100,000 x 0.7 CCR). The fixed-loss cost threshold is $33,075 (the sum 
of the MS-DRG payment amount ($10,000) and the outlier threshold 
($23,075)).9  The amount subject to an outlier payment is $36,925, 
calculated by subtracting fixed-loss cost threshold ($33,075) from the 
estimated cost ($70,000).   The outlier payment for the claim would be 
$29,540 (80 percent of the $36,925 subject to an outlier payment).  The 
total payment from Medicare would be $39,540  the MS-DRG payment 
amount ($10,000) and the outlier payment amount ($29,540). 
IPPS Outlier Payment Policy Changes  
In the 2003 IPPS Final Rule, CMS made changes to its outlier payment 
methodology to improve accuracy in determining whether cases are high 
cost and to ensure that outlier payments are made only for truly expensive 
cases.10   Before 2003, Medicare contractors used data from a hospitals 
most recent final-settled cost report when calculating a hospitals CCR.  
After a Medicare contractor accepts and tentatively settles a hospitals cost 
 
6 Consistent  with this report examining only operating outlier payments, we refer only  
to the operating CCR in this example and  throughout the report.    
7 For a further explanation of  CCRs, see CMS, Outlier Payments. Accessed at 
http://www.cms.gov/Medicare/Medicare-Fee-for-Service-
Payment/AcuteInpatientPPS/outlier.html on December 3, 2012.   

8 The marginal cost factor for burn cases is 90 percent. CMS, Medicare Claims 

Processing Manual, Pub. No. 100-04, Ch. 3,    20.1.2. 

9 The formula used by CMS is more complex because CMS divides the outlier threshold 

into an  operating portion and  a capital portion.  In this example, CMS would  use the 

operating  portion of the outlier threshold,  which it would calculate by  dividing the 

operating CCR by the sum of  the operating CCR and the capital CCR. 

10  68  Fed.  Reg. 34494 (June 9, 2003). 
       
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report, it can take 12 years before a cost report is final settled.  CMS 
indicated that some hospitals took advantage of this lag time to maximize 
outlier payments by increasing their charges before their cost reports were 
settled. These hospitals received excessive outlier payments because 
Medicare calculated the payments using outdated CCRs that did not reflect 
the hospitals higher charges.  CMS indicated that this caused hospitals 
that did not aggressively increase their charges to not receive outlier 
payments or receive reduced outlier payments for truly costly cases.11   
Recognizing the vulnerability, CMS changed the outlier methodology to 
improve the accuracy of CCRs used to calculate outlier payments.  With 
the 2003 IPPS Final Rule, CMS required Medicare contractors to begin 
using the most recently available cost reports to calculate CCRs.12 Instead 
of relying solely on a hospitals final-settled cost report, CMS required 
contractors to update CCRs using the most recent tentatively settled cost 
report or the most recent final-settled  cost report, whichever is from the 
most recent cost-reporting period.     
Hospital Charges  
Although hospital charges do not affect the Medicare payment amount on 
most IPPS claims, hospital charges directly affect whether a hospital 
receives an outlier payment and, if so, the amount of payment.  In May 
2013, CMS released data showing each IPPS hospitals average charges 
for the 100 procedures most frequently billed to Medicare.13 The data 
show that charges vary substantially among the hospitals. 
METHODOLOGY 
Data Collection 
This report outlines Medicare hospital operating outlier payments 
(hereafter referred to as outlier payments), based on analysis of IPPS 
claims in the Standard Analytic File (SAF) for services during calendar 
years 20082011.  We excluded claims paid through managed care 
organizations and all hospitals exempt from IPPS (i.e., designated cancer 
hospitals and hospitals in Maryland and the U.S. territories, which are not  
paid under IPPS.)14,15   We also excluded hospitals that did not have at least  
100 covered IPPS claims in each of the 4 years reviewed.  We identified 
 
11  68  Fed.  Reg. 34494 (June 9, 2003). 

12 CMS, Program Memorandum Intermediaries Transmittal, A-03-058, July 3,  2003. 

13 CMS, Medicare Provider Charge Data.  Accessed at http://www.cms.gov/Research-
Statistics-Data-and-Systems/Statistics-Trends-and-Reports/Medicare-Provider-Charge-
Data/index.html  on May 21, 2013.   

14  We excluded  11 cancer research hospitals, 46 hospitals in  Maryland, and  56 hospitals 

in U.S. Territories.   

15 Critical access hospitals are not included in the IPPS. 
  
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hospitals that received high-outlier payments by first calculating each 
hospitals percentage of IPPS payments received from outlier payments.16   
We then identified hospitals with outlier payment percentages greater than  
the 75th percentile plus 1.5 times the interquartile range.17   We hereafter 
refer to these as high-outlier hospitals. 
Using several hospital characteristics, we compared the percentage of each 
characteristic in the high-outlier hospitals to the percentage of each 
characteristic in all other hospitals.  These characteristics included bed 
size, total Medicare IPPS reimbursements (including outlier payments), 
total outlier payments, ownership type, whether the hospital taught 
medical residents (teaching hospital), and whether the hospital was 
designated as urban or rural. For ownership type, hospitals were either 
for-profit, nonprofit, or government.  We identified a teaching hospital as 
any that taught medical residents during the study period.  Finally, we 
employed CMSs urban/rural classification, which uses the Core Based 
Statistical Area (CBSA) to determine whether a hospital is urban or rural.  
Data Analysis  
Distribution of Outlier Payments. To analyze outlier payments, we totaled 
all outlier payments and all IPPS payments at each hospital for each 
calendar year.  We counted the number of claims with outlier payments 
and the number of IPPS claims for each hospital for each year.  Finally, we 
calculated percentages for each hospital by dividing the number and 
amount of outlier payments by the number of claims and amount of IPPS 
payments for each year and for the 4 years combined.  We also determined 
the percentage of claims that included an outlier payment by dividing the 
number of claims with outlier payments by the total number of Medicare 
IPPS claims.  We calculated the average amount of outlier payment by 
dividing the total amount of outlier payments by the number of claims  
with outlier payments.  
Measures of Hospital Billing Patterns. To compare Medicare billing 
patterns between high-outlier hospitals and all other hospitals, we grouped 
each hospitals claims by MS-DRG.  We totaled each hospitals Medicare 
IPPS charges, Medicare IPPS reimbursements, and number of claims by 
MS-DRG for each year.  We also totaled each hospitals Medicare IPPS 
charges, Medicare IPPS reimbursements, and number of claims with 
 
16 We  excluded 122 hospitals that did not have at least 100 claims  in each year during 
20082011 to  reduce the likelihood that a hospital with  only a few claims would skew 
certain variables (e.g., percentage  of IPPS payments in outlier payments). 
17 Known as Tukeys Method, this is a standard exploratory  method for identifying  
members of  a population with high values on  a given  statistic compared to the rest of the 
population when no  established benchmark exists.  See J.W. Tukey,  Exploratory Data  
Analysis, Addison-Wesley, 1977.  
  
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outlier payments by MS-DRG for each year.  We calculated these same  
statistics for the 4 years combined.  Further, we developed an outlier 
payment trigger rate by dividing the number of claims with an outlier 
payment by the total number of claims by MS-DRG for each hospital for 
the 4 years combined.  We determined the average charge amount, average 
reimbursement amount, and percentage and amount of change between 
20082011 by MS-DRG at each hospital for each year and for the 4 years 
combined.18    We also calculated the patients average lengths of stay for 
each MS-DRG by subtracting the admission dates from the discharge 
dates plus one day.19    
We compared charges, charge growth rates, and lengths of stay between 
hospitals with high-outlier payments and other hospitals for each  
MS-DRG. To make the comparisons, we calculated the MS-DRG 
averages for high-outlier hospitals by dividing the total dollar amount of 
the claims by the total number of claims for each MS-DRG.  We  
calculated the same averages for all other hospitals by MS-DRG.  We then 
created a variable that represents the difference between the MS-DRG 
average at high-outlier hospitals and the MS-DRG average for all other 
hospitals. Finally, we calculated the average differences for each statistic 
between MS-DRGs at high-outlier hospitals and MS-DRGs at all other 
hospitals.20  
Standards 
This study was conducted in accordance with the Quality Standards for 
Inspection and Evaluation issued by the Council of the Inspectors General 
on Integrity and Efficiency. 
   
 
18  We  did not adjust dollar amounts over time for inflation.    
19  We added one day to avoid instances in  which the discharge date and admission date  
occurred on the same day, resulting in a zero day stay.  
20 For these statistics, we used  hospital MS-DRGs that had  more than  10 claims in the 
year of comparison.   
       
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FINDINGS 
Nearly all hospitals received outlier payments and 
some received a much higher proportion of Medicare
IPPS reimbursements from outlier payments 
During 20082011, Medicare paid approximately $15.8 billion in outlier 
payments to the 3,186 hospitals that we reviewed.  Nearly all hospitals  
(97 percent) received at least one outlier payment during the 4-year period.  
Further, 88 percent of hospitals received at least one outlier payment 
during each of the 4 years. Medicare hospital outlier payments totaled 
slightly less than $4 billion in 2008, 2010, and 2011 and exceeded 
$4 billion in 2009.  (See Figure 1.) Although the dollar amount of outlier 
payments varied from year to year, the percentage of outlier payments 
among all Medicare IPPS payments was similar during the 4-year study 
period, about 4 percent of total IPPS payments. 
Although only 2 percent of Medicare IPPS claims (different from   
4 percent of payments) included outlier payments, these payments often 
represented a substantial portion of the payments to hospitals for each 
individual claim with an outlier.  Overall, outlier payments were  
40 percent of the total reimbursement for those claims.  The average 
outlier payment was $15,482, which does not include the MS-DRG 
payment; 6 percent of outlier payments exceeded $50,000.  For several 
claims, the outlier payment exceeded $1 million; the largest during the 
study period was $1.4 million for a single claim.21 
 
                           Figure 1: Total Medicare Hospital Outlier Payments During 20082011  
Outlier Reimbursements 
(Billions) 
$5.00 
$4.50 
$4.00 
$3.50 
$3.00 
$2.50 
$2.00 
2008  2009  2010  2011 
 
Source:  OIG analysis of Medicare  IPPS claims, 20082011. 
 
 
21 This claim was for MS-DRG 003, which is a tracheostomy requiring mechanical 
ventilation for more than 96 hours.   
       
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One hundred-fifty eight hospitals received a high percentage 
of Medicare IPPS reimbursements from outlier payments  
We identified 158 hospitals that received outlier payments beyond a  
statistically determined threshold of 8 percent of their total Medicare IPPS  
payments.22  These high-outlier hospitals received an average of  
12.8 percent of their Medicare IPPS payments from outlier payments 
during 20082011. (See Table 1.)  By comparison, the other  
3,028 hospitals averaged only 2.2 percent of Medicare IPPS payments in 
outlier payments.   
Table 1: Comparison of High-Outlier Hospitals and All Other Hospitals  
High-Outlier  All Other  
Measurements  
Hospitals   Hospitals  
Number of hospitals  158  3,028  
Average percentage of Medicare IPPS reimbursements 
12.8%   2.2%  
from outlier payments 
Average percentage of Medicare  claims that included an 
8.3%  1.7%  
outlier payment  
Average amount of outlier payment on a claim with an 
$22,843   $13,921  
outlier 
Average amount of Medicare IPPS reimbursements per 
$223,111,865  $122,192,685  
hospital (20082011)  
Average amount of outlier payments per hospital  
$25,944,213   $3,891,212  
(20082011)  
Average number of certified beds (2011)   352  226 
Percentage of urban hospitals23   95%   70%  
Percentage of teaching hospitals  47%   31%  
Source:  OIG analysis of Medicare  IPPS claims, 20082011.  
High-outlier hospitals also received larger outlier payments on a higher 
percentage of Medicare claims than all other hospitals.  The average 
outlier payment on an outlier claim was $22,843 for high-outlier hospitals, 
compared to $13,921 for all other hospitals.  Further, 8.3 percent of claims  
paid to high-outlier hospitals included an outlier payment, compared to 
only 1.7 percent of Medicare IPPS claims for all hospitals.   
Generally, high-outlier hospitals were larger, more likely to be in urban 
areas, and had a higher percentage of  teaching hospitals, compared to all 
other hospitals. On the basis of 2011 data, the 158 high-outlier hospitals 
had about 50 percent more Medicare-certified beds than all other 
hospitals, on average 352 beds, compared to 226 beds.  High-outlier 
hospitals averaged $223 million in total IPPS payments during  
20082011, compared to an average of $122 million for all other 
hospitals. Further, these high-outlier hospitals received an average  
 
22 Using the Tukey Method, we determined that hospitals receiving 8 percent or more of  
their IPPS payments in outliers received high-outlier payments.   

23  We  did not identify hospitals that applied to CMS for reclassification  of their urban to 

rural status. 
     
  
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$25.9 million in outlier payments during the 4 years, compared to $3.9 
million on average for all other hospitals.  Nearly all high-outlier 
hospitals, 96 percent, were in urban areas, compared to 70 percent for all 
other hospitals. High-outlier hospitals also had a higher percentage of 
teaching hospitals (i.e., any hospital that taught any medical residents), 
compared to all other hospitals.24,  25 Among these, larger teaching 
hospitals were even more likely to be in the group of high-outlier 
hospitals.26  
Nearly all high-outlier hospitals received outlier payments 
routinely for certain MS-DRGs 
We found that high-outlier hospitals received outlier payments more 
frequently for certain MS-DRGs during 20082011, compared to all other 
hospitals. Among the 158 high-outlier hospitals, 147 received outlier 
payments on 50 percent or more of their claims for one or more  
MS-DRG.27  As the most extreme example, one hospital received outlier 
payments on more than 50 percent of its claims for 46 different  
MS-DRGs. 
High-outlier hospitals charged Medicare substantially 
more for the same MS-DRGs, yet had similar average 
lengths of stay and CCRs  
High-outlier hospitals charged Medicare, on average, 42 percent more for 
the same MS-DRGs, compared to all other hospitals, yet had only slightly 
longer lengths of stay (4 percent).28  As an extreme example, high-outlier 
hospitals charged almost twice as much for MS-DRG 177 (respiratory 
infection and inflammation), compared to all other hospitals, and the 
average length of stay for the same MS-DRG at high-outlier hospitals was 
only 10 percent longer.29 Further, for about one-third of MS-DRGs, 
 
24 For this analysis, we included any hospital in the group of teaching  hospitals that 
taught medical students as measured  by the interns-to-bed ratio in the Provider Specific 
File. 
25 We found no difference between the two groups regarding case mix and whether the  
hospital was for-profit, nonprofit, or government. 

26  Twenty-nine percent of high-outlier hospitals were larger teaching hospitals (i.e., 

teaching hospitals with greater than a 15 percent ratio of medical students-to-beds), 

compared to  only 11 percent for all other hospitals.  Larger teaching hospitals are known 

to attract some  of the most difficult and expensive cases. 

27  We calculated this statistic using the combined  number of claims during  20082010. 
28 We  excluded MS-DRGs at hospitals with fewer than  10 claims in a year to  reduce the 
likelihood that  a small number of claims would skew the MS-DRG average. 
29 For MS-DRG  177, respiratory infection and inflammation,  charges at high-outlier 
hospitals averaged $77,076, compared to  $42,697 at all  other hospitals.  The average 
length of stay was 10.7 days at high-outlier hospitals, compared to  9.6 at all other 
hospitals.    
  
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high-outlier hospitals had higher average charges and shorter lengths of 
stay when compared to all other hospitals.  This suggests that high charges 
are not necessarily associated with more care for patients, as measured by 
average length of stay. 
High-outlier hospitals had similar average CCRs, compared to all other 
hospitals, which means that the higher charges by the hospitals directly 
resulted in larger and more frequent outlier payments.  As mentioned, 
Medicare applies a hospitals CCR to the covered charges on a claim to 
determine the estimated cost of services covered by the claim.  The 
amount of the estimated cost determines whether Medicare makes an 
outlier payment and the amount received.  In 2008, the average CCR at 
high-outlier hospitals was the same as the average CCR for all other 
hospitals, 0.35. CCRs declined, on average, during 20082011, to 0.30 at 
high-outlier hospitals and to 0.33 at all other hospitals.  Although the  
high-outlier hospitals had higher charges, their CCR (i.e., .30) was not 
significantly lower than the CCR of  all other hospitals (i.e., .33).  
Therefore, the higher charges led Medicare to calculate higher estimated 
costs for the high-outlier hospitals, and paying larger, more frequent 
outlier payments. 
An example in Appendix A illustrates how the charges and CCRs affected 
outlier payments for a single MS-DRG at one high-outlier hospital. 
Some MS-DRGs triggered outlier payments frequently 
Thirteen MS-DRGs triggered outlier payments on at least 25 percent of 
each MS-DRGs claims during 20082011. (See Table 3.) Combined, 
this group of MS-DRGs triggered outlier payments on 29 percent of the 
claims that included one of these MS-DRGs.  MS-DRG 215 triggered the 
highest percentage of outlier payments  37 percent.  High-outlier 
hospitals triggered outlier payments on 58 percent of claims from this 
group of MS-DRGs, compared to 32 percent for all other hospitals.   
 
 
 
 
 
 
 
 
       
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Table 2: MS-DRGs with the Highest Outlier Trigger Rates During 2008-2011 
Number of   Number 
Trigger 
MS-DRG Description   MS-DRG   Claims  of Outlier 
Rate  
2008-2011   Claims  
Other heart assist system implant   215  660  245  37.1%  
Heart transplant or implant of heart assist system with major 
001  4,697   1,709   36.4%  
complication/comorbidity (MCC)   
Heart transplant or implant of heart assist system without MCC   002  1,077   370  34.4%  
Pancreas transplant  010  426  138  32.4%  
Lung transplant   007  1,892   602  31.8%  
Extensive burns or full thickness burns with mechanical 
927  715  226  31.6%  
ventilation 96+ hours (hrs) with skin graft  
Liver transplant with MCC or intestinal transplant  005  3,788   1,181   31.2%  
Intracranial vascular procedures with primary diagnosis (PDX) 
020  4,718   1,417   30.0%  
hemorrhage with  MCC  
Tracheostomy  with mechanical ventilation 96+ hrs or PDX 
except face, mouth, and neck with major operating room (OR)   003  86,321   24,757   28.7%  
procedure  
Combined anterior/posterior spinal fusion with MCC  453  5,268   1,431   27.2%  
Spinal fusion except cervical with spinal curvature, malignancy,  
infection or 9 or more fusions without complication or comorbidity  456  4,973   1,325   26.6%  
(CC) or MCC  
Allogeneic bone marrow  transplant  014  639  162  25.4%  
Chemo with acute leukemia as secondary  diagnosis or with 
837  5,684   1,431   25.2% 
high-dose chemotherapy agent with MCC  
 Total     120,858  34,994   29.0%  
Source:  OIG analysis of Medicare  IPPS claims, 20082011. 
 
Sixteen MS-DRGs accounted for over 41 percent of
outlier payments  
Medicare made over 41 percent of its outlier payments during 20082011 
for claims categorized in 16 of the 746 MS-DRGs.  (See Table 2.) Outlier 
payments for these 16 MS-DRGs totaled $6.5 billion during the study 
period. The single MS-DRG associated with the most outlier payments 
was MS-DRG 003 (Tracheostomy with required ventilation), which 
accounted for $1.3 billion (8.3 percent) in outlier payments during  
20082011.  
       
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Table 3: Sixteen MS-DRGs With the Highest Amount of Outlier Payments During 2008-2011 
 
Total Medicare  Total Amount  Percentage 
MS-DRG Description   MS-DRG   IPPS  of Outlier  of All Outlier 
Reimbursements   Payments   Payments  
Tracheostomy  with mechanical ventilation  
96+ hrs or PDX except face, mouth, and neck with   003  $10,500,931,816   $1,329,228,265   8.3 
major OR procedure  
Major small and large bowel procedures with MCC   329  $6,190,669,762   $627,430,445   3.9 
Tracheostomy  with mechanical ventilation  
96+ hrs or PDX except face, mouth, and neck without  004  $6,136,675,668    $607,071,314   3.8 
major OR procedure  
Infectious and parasitic diseases with OR procedure 
853  $6,117,496,303   $611,833,593   3.8 
with MCC  
Septicemia or severe sepsis without mechanical 
871  $13,440,016,369   $505,857,309   3.1 
ventilation 96+ hrs with MCC  
Major cardiovascular procedures with MCC   237  $3,276,436,385   $347,006,348   2.1 
Respiratory system diagnosis with ventilator support   207  $4,666,072,631   $324,024,478   2.0 
Septicemia or severe sepsis with mechanical 
870  $4,276,595,714   $306,382,518   1.9 
ventilation 96+ hrs 
Extensive OR procedure unrelated to PDX with MCC   981  $3,376,069,830   $296,071,879   1.8 
Cardiac valve and other major cardiothoracic 
219  $3,150,583,161   $272,145,846   1.7 
procedure with cardiac catheter with MCC  
Other vascular procedures with MCC   252  $3,372,929,090   $243,139,762   1.5 
Cardiac valve and other major cardiothoracic 
216  $2,709,864,558   $215,418,403   1.3 
procedure with cardiac catheter with MCC  
Heart failure and shock with MCC   291  $7,282,187,658   $205,765,403   1.3 
Stomach, esophageal and duodenal procedures with 
326  $1,747,150,159   $197,323,546   1.3 
MCC 
Spinal fusion except cervical without MCC   460  $5,454,603,905   $197,877,498   1.2 
Coronary  bypass with cardiac catheter with MCC   233  $2,715,961,405   $182,008,343   1.2 
Total     $84,414,244,413  $6,468,584,949   40.6%  
Source:  OIG analysis of Medicare  IPPS claims, 20082011. 
       
Medicare Hospital  Outlier Payments Warrant Increased  Scrutiny (OEI-06-10-00520)  11 
   
   
High-outlier hospitals had a similar percentage (8.6 percent) of their 
MS-DRGs coming from the 16 high MS-DRGs, compared to all other 
hospitals (8.5 percent). However, despite similar percentages of claims  
from these 16 high MS-DRGs, high-outlier hospitals received outlier 
payments about 3 times as frequently (22 percent), compared to all other 
hospitals (7 percent). 
   
  
Medicare Hospital  Outlier Payments Warrant Increased  Scrutiny (OEI-06-10-00520) 
    
12 
   
   
CONCLUSION AND RECOMMENDATIONS 
Outlier payments are intended to protect hospitals from financial losses 
resulting from extraordinarily costly cases.  Unlike predetermined 
payment amounts for most Medicare hospital claims, outlier payments are 
directly influenced by hospital charges.  Although nearly all hospitals 
received outlier payments during 20082011, we found that some received 
such payments routinely and that a small number of MS-DRGs accounts 
for a large proportion of outlier payments.  High-outlier hospitals charged 
Medicare substantially more for the same MS-DRGs, yet had similar 
average lengths of stay and CCRs. This finding is consistent with data 
released by CMS in May 2013 showing substantial differences in hospital 
charges for the 100 most common inpatient claims.  It was beyond the 
scope of this evaluation to determine why certain hospitals routinely 
charged Medicare more than other hospitals for the same MS-DRGs or 
how their submitted charges related to the actual cost of patient care.  In 
some cases, high charges could be the result of high costs because some  
hospitals attract a disproportionate share of exceptionally costly patients or 
apply costly technologies and treatments.  Still, the routine receipt of 
outlier payments for certain MS-DRGs at high-outlier hospitals raises 
concerns about why charges and estimated costs for similar patient-care 
cases vary substantially across hospitals.     
Therefore, we recommend that CMS:   
Instruct Medicare Contractors To Increase Monitoring of 
Outlier Payments    
CMS could develop thresholds that prompt further review by Medicare 
contractors of hospitals with claims  exceeding the specified thresholds.  
These thresholds could include charges, estimated costs, percentage of  
MS-DRGs that result in outlier payments, and the ratio of outlier payments 
to all IPPS payments.   
Include Information About the Distribution of Outlier Payments  
with Other Publicly Reported Hospital Data   
CMS publicly reports information about hospital charges to Medicare for 
common procedures, as well as measures of hospital quality, such as 
information contained in the Hospital Compare Web site.  CMS should 
supplement its public reporting with information about hospital outlier 
payments, including the distribution of outlier payments across 
hospitals. Such public reporting would provide greater transparency 
regarding Medicare payments to hospitals, further inform the public and 
stakeholders about how Medicare distributes limited outlier payment 
dollars, and demonstrate the direct effect increased charges can have on 
       
Medicare Hospital  Outlier Payments Warrant Increased  Scrutiny (OEI-06-10-00520)  13 
   
   
overall Medicare payments to hospitals.  CMS could also consider 
including information about outlier payments in reports it issues to 
individual hospitals, such as in its Program for Evaluating Payment 
Patterns Electronic Reports (PEPPER), which uses Medicare data to 
provide comparisons of individual hospitals to all other hospitals on 
various statistics.  
Examine Whether MS-DRGs Associated With High Rates of 
Outlier Payments Warrant Coding Changes or Other 
Adjustments   
Although outlier payments are designed to compensate hospitals for 
extraordinarily costly cases, we found that 16 of the 746 MS-DRGs 
accounted for over 40 percent of outlier payments.  Further, 13 MS-DRGs 
had outlier payments on at least 25 percent of each MS-DRGs claims, one 
of which had outlier payments on 37 percent of the claims.  This suggests 
that certain MS-DRGs may result in outlier payments for reasons inherent 
to the MS-DRG, rather than for extraordinarily costly cases.  CMS should 
consider whether any changes are needed for such MS-DRGs.    
AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL  
RESPONSE 
In its comments on the draft report, CMS concurred with our 
recommendations and described current and future activities to improve 
scrutiny of outlier payments.  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
       
Medicare Hospital  Outlier Payments Warrant Increased  Scrutiny (OEI-06-10-00520)  14 
   
   
APPENDIX A 
Example of the Effect of Charges and Cost-To-Charge Ratios 
(CCR) On Estimated Costs and Outlier Payments   
Table A1 shows how high charges and a CCR similar to the national 
average increased the amount of outlier payments at one  
high-outlier hospital.  The table compares the national average to one 
high-outlier hospital for Medical Severity-Diagnostic Related Group 
(MS-DRG) 003 (tracheostomy requiring mechanical ventilation for over 
96 hours). 
 	  The hospital charged Medicare about 3.4 times the national average for 
MS-DRG-003 in 2008 and 2011.   
 	  The hospital had CCRs about the same as the national average during 
both 2008 and 2011.   
 	  Medicare estimated the hospitals cost for MS-DRG-003 was about  
3.4 times greater than the national average in both 2008 and 2011.30    
	   Medicare paid the hospital an average outlier payment about 4.5 times 
greater than the national average for providing services related to MS-
DRG-003 during 20082011.   
	   Medicare paid outlier payments to the hospital for 96 percent  
of MS-DRG-003 claims during 20082011, compared to the national 
average for all hospitals of 29 percent.   
Table A1:  Comparison of One Hospital From the 158 High-outlier Hospitals and the 
National Average  
Average of All  
Measurement   Hospital  
Hospitals  
Average charge, 2008   $1,456,647   $430,641  
Average charge, 2011   $1,631,441   $475,323  
CCR (2008/2011)   0.35/0.33   0.35/0.33  
Average estimated costs, 2008  $509,826   $150,724  
Average estimated costs, 2011  $538,375   $156,856  
Average outlier payment per claim, 20082011   $242,072   $53,691  
Percentage of claims with outlier payment for MS-DRG 003, 20082011   96%   29%  
Source:   Office of Inspector General  analysis of Medicare IPPS claims, 20082011. 
 
 
30 Estimated costs are the product of the charges on a claim and the hospital CCR.  
Estimated costs at the hospital were $509,826  ($1,456,647  X  0.35) in  2008, compared to 
the national average $150,724.  In  2011, estimated costs increased to  $538,375 at the 
hospital, compared to  $156,856 for the national average.   
       
Medicare Hospital  Outlier Payments Warrant Increased  Scrutiny (OEI-06-10-00520)  15 
  APPENDIX B 
Agency Comments 
.1dmi~<#Ntor 
Wu~n. C<:;WW1 
DATE: 	 SEP 23  2013 
TO: 	 Daniel R. lcvinlKln 
Inspector (icneral 
FROM: 	 Marilyn Ti\-e nm.'T 
Administrator 
SUBJECT: 	 Office ofln~p~-ctor General (OIG) Draft Report: llospltal Outlier P.tyments 
Warrantlncr.::ascd Scrutiny (OE1-06-10-00)20J 
The Ct:nters for Medicaro &. Medicaid &.'rrices (CMS) appredat~:S the opportunit) to r~vkw and 
tne 
e<1mmcnt on  above subjcet OIG Draft Report OIG's objt~tiws lbr this study arc to-( I) 
Describe the dlstrihution ofMcdkare outlier paymcn.ts to Inpatient Jlrospt.>clive Payment Systt'im 
tiPPSt hosrital~: (:!') Identify hospitals tha.t re~dved hl!houdier pa>mcnt~: 0) Compare 
Medicate billing pattt:ms between hospitals that received high-outlier payments and all other 
t~nspitals; <~nd (4) Identify diagnoses cnmmonly associated whh Medicare outlier payments. The 
OIG rt(omnwodaliuns lltld CMS's r~sponses to those re(ommeodatiMs are di~~~d below. 
01{1 Reeommrndlltion 
The OlG r.:commcnds that CMS instruct its C<1ntrncton; to increase monitoring or outlier 
payments. 
CMS Rcs ponst 
The CMS cone~and bdievcs that llUr currt!nt guiddi~s It> Medicare contractors provide 
S'llfficient monir11ring ofoutlier naynwms. 
OIQ Rtcommtnch!tlon 
The OIG recnmmcnd$that CMS include infonnatiun abolltthe distributl(m of outlier pa} ITIC'nl5 
with other publicly reported hospital dalll. 
The CMS <.:otll.1.11 s ~'iih this rteommendation. This information i~ al.n:ady publicly a,ailablc 
through the Medic~ Provider Analysis and review file. 
Medicare Hospital Outlier Payments Warrant Increased Scrutiny (OEI-06-10-00520)  16   
   
APPENDIX B 
Agency Comments Continued  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
       
Medicare Hospital  Outlier Payments Warrant Increased  Scrutiny (OEI-06-10-00520)  17 
   
   
ACKNOWLEDGMENTS 
This report was prepared under the direction of Kevin Golladay, Regional 
Inspector General for Evaluation and Inspections in Dallas; Blaine Collins, 
Deputy Regional Inspector General; and Ruth Ann Dorrill, Deputy 
Regional Inspector General. 
Amy Ashcraft served as team leader for this study, and Ben Gaddis served 
as lead analyst. Other Office of Evaluation and Inspections staff from the 
Dallas regional office who conducted the study include  
Leah K. Bostick and Nathan Dong.  Central office staff who provided 
support include Talisha Searcy and Christine Moritz.  
       
Medicare Hospital  Outlier Payments Warrant Increased  Scrutiny (OEI-06-10-00520)  18 
   
Office of Inspector General
http://oig.hhs.gov  
 
The mission of the Office of Inspector General (OIG), as mandated by Public Law 95-452, as  
amended, is  to protect the integrity of the Department of  Health and Human Services  
(HHS)  programs, as well as the health and welfare of beneficiaries  served by those 
programs.  This statutory mission  is  carried  out through  a nationwide network  of  audits, 
investigations, and inspections conducted by the  following operating components: 
Office of Audit Services 
The Office  of  Audit Services  (OAS) provides auditing services  for HHS, either by  conducting  
audits  with its own audit resources or by  overseeing  audit work done by others.  Audits  
examine the performance of HHS programs and/or its grantees and contractors in carrying  
out their respective responsibilities and are intended  to provide independent assessments of 
HHS programs and operations.  These assessments help reduce waste, abuse, and  
mismanagement and promote economy and efficiency  throughout  HHS. 
Office of Evaluation and Inspections 
The Office  of  Evaluation and Inspections (OEI)  conducts national evaluations to  provide 
HHS, Congress, and the public with timely, useful, and reliable information on significant 
issues.  These evaluations focus on preventing fraud,  waste, or abuse  and promoting  
economy, efficiency, and effectiveness of departmental programs.  To promote impact, OEI 
reports also present practical recommendations for improving program operations.  
Office of Investigations 
The Office of Investigations (OI) conducts criminal, civil, and administrative investigations  
of  fraud and misconduct  related to HHS programs, operations, and beneficiaries.  With 
investigators working in all 50 States and the District of Columbia, OI  utilizes its resources 
by actively  coordinating with the Department  of Justice  and other Federal, State, and local 
law enforcement authorities.  The investigative efforts of OI often lead to  criminal 
convictions, administrative sanctions,  and/or  civil monetary  penalties.  
Office of Counsel to the Inspector General 
The Office of Counsel to the  Inspector  General (OCIG) provides general legal services to 
OIG, rendering  advice and opinions on HHS programs  and operations and providing all 
legal support for OIGs  internal operations.  OCIG represents  OIG in all civil and 
administrative fraud and abuse cases involving HHS programs,  including False Claims Act, 
program exclusion, and civil monetary penalty cases.  In  connection with these cases, OCIG 
also negotiates and monitors corporate integrity agreements.  OCIG renders advisory 
opinions, issues compliance program  guidance, publishes fraud alerts, and provides other  
guidance  to  the health care industry concerning the anti-kickback statute and other  OIG  
enforcement authorities.