Department of Health and Human Services 

OFFICE OF 

INSPECTOR GENERAL 

MEDICARE HOSPITAL 

OUTLIER PAYMENTS 

WARRANT INCREASED 

SCRUTINY 

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 2008–2011. We calculated the amount 

and volume of outlier payments and calculated each hospital’s 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 hospital’s 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 hospital’s 

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 hospital’s covered charges on a claim by the 

hospital’s operating cost-to-charge ratio (CCR).6 Generally, a hospital’s 

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 claim’s 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 hospital’s 

most recent final-settled cost report when calculating a hospital’s CCR. 

After a Medicare contractor accepts and tentatively settles a hospital’s 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-ServicePayment/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). 

Medicare Hospital Outlier Payments Warrant Increased Scrutiny (OEI-06-10-00520) 2 
 

 

Medicare Hospital Outlier Payments Warrant Increased Scrutiny (OEI-06-10-00520) 

3 

report, it can take 1–2 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 hospital’s 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 hospital’s 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 2008–2011. 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/ResearchStatistics-Data-and-Systems/Statistics-Trends-and-Reports/Medicare-Provider-ChargeData/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. 
 

 Medicare Hospital Outlier Payments Warrant Increased Scrutiny (OEI-06-10-00520) 

4 

hospitals that received high-outlier payments by first calculating each 

hospital’s 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 CMS’s 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 hospital’s claims by MS-DRG. We totaled each hospital’s Medicare 

IPPS charges, Medicare IPPS reimbursements, and number of claims by 

MS-DRG for each year. We also totaled each hospital’s 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 

2008–2011 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 Tukey’s 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. 
 

 

 

 

 

 

 

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 

2008–2011 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. 

Medicare Hospital Outlier Payments Warrant Increased Scrutiny (OEI-06-10-00520) 5 
 

Medicare Hospital Outlier Payments Warrant Increased Scrutiny (OEI-06-10-00520) 

 

 

 

FINDINGS 

Nearly all hospitals received outlier payments and 

some received a much higher proportion of Medicare

IPPS reimbursements from outlier payments 

During 2008–2011, 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 2008–2011 

$2.00 

$2.50 

$3.00 

$3.50 

$4.00 

$4.50 

$5.00 

2008 2009 2010 2011 

Outlier Reimbursements 

(Billions) 

Source: OIG analysis of Medicare IPPS claims, 2008–2011. 

21 This claim was for MS-DRG 003, which is a tracheostomy requiring mechanical 

ventilation for more than 96 hours. 

6 
 

 

Medicare Hospital Outlier Payments Warrant Increased Scrutiny (OEI-06-10-00520) 

7 

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 2008–2011. (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 

Measurements High-Outlier 

Hospitals 

All Other 

Hospitals 

Number of hospitals 158 3,028 

Average percentage of Medicare IPPS reimbursements 

from outlier payments 12.8% 2.2% 

Average percentage of Medicare claims that included an 

outlier payment 8.3% 1.7%

Average amount of outlier payment on a claim with an 

outlier $22,843 $13,921 

Average amount of Medicare IPPS reimbursements per 

hospital (2008–2011) $223,111,865 $122,192,685

Average amount of outlier payments per hospital 

(2008–2011) $25,944,213 $3,891,212 

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, 2008–2011. 

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 

2008–2011, 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. 
 
 

 Medicare Hospital Outlier Payments Warrant Increased Scrutiny (OEI-06-10-00520) 

8 

$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 2008–2011, 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 2008–2010. 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. 
 

 

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 hospital’s 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 2008–2011, 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-DRG’s claims during 2008–2011. (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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MS-DRG Description MS-DRG 

Number of 

Claims 

2008-2011 

Number 

of Outlier 

Claims 

Trigger 

Rate 

Other heart assist system implant 215 660 245 37.1% 

Heart transplant or implant of heart assist system with major 

complication/comorbidity (MCC) 001 4,697 1,709 36.4% 

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 

ventilation 96+ hours (hrs) with skin graft 927 715 226 31.6% 

Liver transplant with MCC or intestinal transplant 005 3,788 1,181 31.2% 

Intracranial vascular procedures with primary diagnosis (PDX) 

hemorrhage with MCC 020 4,718 1,417 30.0% 

Tracheostomy with mechanical ventilation 96+ hrs or PDX 

except face, mouth, and neck with major operating room (OR) 

procedure 

003 86,321 24,757 28.7%

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 

(CC) or MCC 

456 4,973 1,325 26.6%

Allogeneic bone marrow transplant 014 639 162 25.4% 

Chemo with acute leukemia as secondary diagnosis or with 

high-dose chemotherapy agent with MCC 837 5,684 1,431 25.2%

 Total 120,858 34,994 29.0%

Table 2: MS-DRGs with the Highest Outlier Trigger Rates During 2008-2011 

Source: OIG analysis of Medicare IPPS claims, 2008–2011. 

Sixteen MS-DRGs accounted for over 41 percent of

outlier payments 

Medicare made over 41 percent of its outlier payments during 2008–2011 

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 

2008–2011. 

Medicare Hospital Outlier Payments Warrant Increased Scrutiny (OEI-06-10-00520) 10 
 

 

MS-DRG Description 

Total Medicare Total Amount Percentage 

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 

major OR procedure 

003 $10,500,931,816 $1,329,228,265 8.3

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 

major OR procedure 

004 $6,136,675,668 $607,071,314 3.8

Infectious and parasitic diseases with OR procedure 

with MCC 853 $6,117,496,303 $611,833,593 3.8 

Septicemia or severe sepsis without mechanical 

ventilation 96+ hrs with MCC 871 $13,440,016,369 $505,857,309 3.1

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 

ventilation 96+ hrs 870 $4,276,595,714 $306,382,518 1.9 

Extensive OR procedure unrelated to PDX with MCC 981 $3,376,069,830 $296,071,879 1.8 

Cardiac valve and other major cardiothoracic 

procedure with cardiac catheter with MCC 219 $3,150,583,161 $272,145,846 1.7 

Other vascular procedures with MCC 252 $3,372,929,090 $243,139,762 1.5 

Cardiac valve and other major cardiothoracic 

procedure with cardiac catheter with MCC 216 $2,709,864,558 $215,418,403 1.3 

Heart failure and shock with MCC 291 $7,282,187,658 $205,765,403 1.3 

Stomach, esophageal and duodenal procedures with 

MCC 326 $1,747,150,159 $197,323,546 1.3 

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% 

Table 3: Sixteen MS-DRGs With the Highest Amount of Outlier Payments During 2008-2011
 

Source: OIG analysis of Medicare IPPS claims, 2008–2011. 

Medicare Hospital Outlier Payments Warrant Increased Scrutiny (OEI-06-10-00520) 11 
 

 Medicare Hospital Outlier Payments Warrant Increased Scrutiny (OEI-06-10-00520) 

12 

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). 
 

 

 

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 2008–2011, 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-DRG’s 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 hospital’s 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 MSDRG-003 during 2008–2011. 

	 Medicare paid outlier payments to the hospital for 96 percent 

of MS-DRG-003 claims during 2008–2011, 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 

Measurement Hospital Average of All 

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, 2008–2011 $242,072 $53,691 

Percentage of claims with outlier payment for MS-DRG 003, 2008–2011 96% 29% 

Source: Office of Inspector General analysis of Medicare IPPS claims, 2008–2011. 

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 2 3 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 

e<1mmcnt on tne 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!h·oudier pa>mcnt~: 0) Compare 

Medicate billing pattt:ms between hospitals that received high-outlier payments and all other 

~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 gu ddi~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 OIG’s 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.