(Medicare Claims Processing Manual)

Section 1886(d)(3)(E) of the Act requires that, as part of the methodology for determining prospective payments to hospitals, the Secretary must adjust the standardized amounts for area differences in hospital wage levels by a factor (established by the S ecretary) reflecting the relative hospital wage level in the geographic area of the hospital compared to the national average hospital wage level.  This adjustment factor is the wage index.  CMS defines hospital geographic areas (labor market areas) based  on the definitions of urban (e.g., Metropolitan Statistical Areas (MSAs)) and rural areas issued by the Office of Management and Budget.  The Act further requires the wage index to be updated annually, based on a survey of wages and wage -related costs of short -term, acute care hospitals.   These data are collected on Worksheet S -3, Parts II and III of the Medicare Cost Report (Form CMS -2552).  To ensure the accuracy of the wage index, fiscal intermediaries are required to perform annual desk reviews of hospitals wage data.  CMS also publi shes the wage data, and allows hospitals an opportunity to review and request corrections to the data, before the wage index is finalized.   In computing the wage index, CMS derives an average hourly wage for each labor market area (total wage costs divided by total hours for all hospitals in the geographic area) and a national average hourly wage (total wage costs divided by total hours for all hospitals surveyed in the nation).  A labor market areas wage index value is the ratio of the areas average hourly wage to the national average hourly wage.   If a labor market areas average hourly wage is greater than the national average, the areas wage index value will be greater than 1.0000.  If an areas average hourly wage is less than the national average, the areas wage index value will be less than 1.0000.  The wage index adjustment factor is applied only to the labor portion of the standardi zed amounts.  Section 4410 of Public Law 105-33 provides that, for discharges on or after October 1, 1997, the area wage index value applicable to any hospital that is located in an urban area may not be less than the area wage index value applicable to hospitals located in rural areas in that State.  Furthermore, this wage index floor is to be implemented in such a manner as to ensure that aggregate prospective payment system payments are not greater or less than those that would have been made in the year if this section did not apply.  20.1.2 - Outliers (Rev. 3030, Issued: 08- 22-14, Effective: ASC X12: January 1, 2012, ICD-10: Upon Implementation of ICD -10, Implementation: ICD -10: Upon Implementation of ICD -10, ASC X12: September, 23 2014)   1886(d)(5)(A) of the Act provides for Medicare payments to Medicare- participating hospitals in addition to the basic prospective payments for cases incurring extraordinarily high costs.  This additional payment known as an Outlier is designed to protect the hospital from large financial losses due to unusually expensive cases.  To qualify for outlier payments, a case must have costs above a fixed-loss cost threshold amount (a dollar amount by which the costs of a case must exceed payments in order to qualify for outliers), which is published in the annual Inpatient Prospective Payment System final rule.  The regulations governing payments for operating costs under the IPPS are located in 42 CFR Part 412.  The specific regulations governing payments for ou tlier cases are located at 42 CFR 412.80 through 412.86.  The actual determination of whether a case qualifies for outlier payments is made by the Medicare contractor using Pricer, which takes into account both operating and capital costs and Medicare severity-diagnostic related group (MS-DRG) payments.  That is, the combined operating and capital costs of a case must exceed the fixed loss outlier threshold to qualify for an outlier payment.  The operating and capital costs are computed separately by multiplying the total covered charges by the operating and capit al cost -to-charge ratios.  The estimated operating and capital costs are compared with the fixed -loss threshold after dividing that threshold into an operating portion and a capital portion (by first summing the operating and capital ratios and then determ ining the proportion of that total comprised by the operating and capital ratios and applying these percentages to the fixed -loss threshold).  The thresholds are also adjusted by the area wage index (and capital geographic adjustment factor) before being compared to the operating and capital costs of the case.  Finally, the outlier payment is based on a marginal cost factor equal to 80 percent of the combined operating and capital costs in excess of the fixed -loss threshold (90 percent for burn MS- DRGs).  Any outlier payment due is added to the MS-DRG adjusted base payment rate, plus any DSH, IME and new technology add- on payment.  For a more detailed explanation on the calculation of outlier payments, visit the CMS Web site at   http://www.cms.gov/Medicare/Medicare- Fee-for-Service-Payment/AcuteInpatientPPS/index.html   The Medicare contractor may choose to review outliers if data analysis deems it a priority.  The IPPS outliers are not applicable to non- PPS hospitals.  The Pricer program makes all outlier determinations except for the medical review determination.  Outlier payments apply only to the Federal portion of a capital PPS payment.  20.1.2.1 - Cost to Charge Ratios  (Rev. 4390, Issued: 09- 06-19, Effective: 10-01-19, Implementation: 10-07-19)  For discharges before August 8, 2003, Medicare contractors used the latest final settled cost report to determine a hospitals cost -to-charge ratios (CCRs).  For those hospitals that met the criteria in part I. A. of PM A -03-058 (July 3, 2003), effective for discharges occurring on or after August 8, 2003 Medicare contractors are to use alternative CCRs rather than one based on the latest settled cost report when determining a hospitals CCR (to download PM A-03-058, visit our Web site at http://www.cms.gov/Regulations- and-Guidance/Guidance/Transmittals/CMS -Program -Memoranda. http://www.cms.hhs.gov/Transmittals/Downloads/A03058.pdf).  For all other hospitals, effective October 1, 2003, Medicare contractors are to use CCRs from the latest final settled cost report or from the latest tentative settled cost report (whichever is from the later period) to determine a hospitals operating and capital CCRs.   A. - Calculating a Cost- to-Charge Ratio   For IPPS outlier calculations, Medicares portion of hospital costs is determined by using hospital specific cost-to-charge ratios (CCRs).  At the end of the cost reporting period, the hospital prepares and submits a cost report to its Medicare contractor,  which includes Medicare allowable costs and charges.  The Medicare contractor completes a preliminary review of the as -submitted cost report and issue a tentative settlement.  The cost report is later final settled, which may be based on a subsequent review, and an NPR is issued.  The Medicare contractor shall update the PSF using the CCR calculated from the final settled cost report or from the latest tentative settled cost report (whichever is from the later period).   Effective November 7, 2005, the following methodology shall be used to calculate a hospitals operating and capital CCRs.   Inpatient PPS Operating CCR  1) Identify total Medicare inpatient operating costs from the Medicare cost report, from Worksheet D-1, Part II, line 53.  (If a positive amount is reported on line 42 for nursery costs, subtract this amount on line 42 from the amount on line 53). 2) Identify total Medicare inpatient operating charges (the sum of routine and ancillary charges), from Worksheet D -4, column 2, the sum of lines 25 through 30 and line 103. 3) Determine the Inpatient PPS operating CCR by dividing the amount in step 1 by the amount in step 2. Inpatient Capital CCR    1) Identify total Medicare inpatient capital cost from Worksheet D Part 1, column 10, sum of lines 25 through 30, plus column 12, sum of lines 25 through 30 plus  Medicare inpatient ancillary capital costs from Worksheet D Part II, column 6, line 101 plus column 8 line 101.   2) Identify total Medicare inpatient capital charges (the sum of routine and ancillary charges), from Worksheet D -4, column 2, the sum of lines 25 through 30 and line 103.   3) Determine the Inpatient PPS capital CCR by dividing the amount in step 1 by the amount in step 2.  B. - Use of Alternative Data in Determining CCRs For Hospitals   Effective August 8, 2003, the CMS Central Office may direct Medicare contractors to use an alternative CCR if CMS believes this will result in a more accurate CCR.  Also, if the Medicare contractor finds evidence that indicates that using data from the latest settled or tentatively settled cost report would not result in the most accurate CCR, then the Medicare contractor shall notify the CMS Regional Office and CMS Central Office to seek approval to use a CCR based on alternative data.  For example, CCRs m ay be revised more often if a change in a hospitals operations occurs which materially affects a hospitals costs and/or charges. The CMS Regional Office, in conjunction with the CMS Central Office, must approve the Medicare contractors request before the Medicare contractor may use a CCR based on alternative data.  Revised CCRs will be applied prospectively to all IPPS claims processed after the update. Medicare contractors shall send notification to the Central Office via email at outliersIPPS@cms.hhs.gov .  C. - Ongoing CCR Updates Using CCRs From Tentative Settlements For Hospitals Subject to the IPPS  The Medicare contractor shall continue to update a hospitals operating and capital CCRs (in the Provider Specific File) each time a more recent cost report is settled (either final or tentative).  Revised CCRs shall be entered into the Provider Specific F ile not later than 30 days after the date of the latest settlement used in calculating the CCRs.   Subject to the approval of CMS, a hospitals operating and/or capital CCR may be revised more often if a change in a hospitals operations occurs which materially affects a hospitals costs or charges. A revised CCR will be applied prospectively to all hos pital claims processed after the update.   D. - Request for use of a Different CCR by CMS, the Medicare Contractor or the Hospital   Effective August 8, 2003, CMS (or the Medicare contractor) may specify an alternative CCR if it believes that the CCR being applied is inaccurate.  In addition, a hospital will have the opportunity to request that a different CCR be applied in the event it believes the CCR being applied is inaccurate.  The hospital is required to present substantial evidence supporting its request. Such evidence should include documentation regarding its costs and charges that demonstrate its claim that an alternative ratio  is more accurate.  After the Medicare contractor has evaluated the evidence presented by the hospital, the Medicare contractor notifies the CMS regional office and CMS Central Office of any such request.  The CMS Regional Office, in conjunction with the C MS Central Office, will approve or deny any request by the hospital or Medicare contractor for use of a different CCR. Medicare contractors shall send requests to the CMS Central Office via email at outliersIPPS@cms.hhs.gov .  E. - Notification to Hospitals Under the IPPS of a Change in the CCR   The Medicare contractor shall notify a hospital whenever it makes a change to its CCR.  When a CCR is changed as a result of a tentative settlement or a final settlement, the change to the CCR can be included in the notice that is issued to each provider a fter a tentative or final settlement is completed.  Medicare contractors can also issue separate notification to a hospital about a change to their CCR(s).