Opinion ID: 2801751
Heading Depth: 2
Heading Rank: 1

Heading: the outlier payment system

Text: Medicare was “[e]stablished in 1965 as part of the Social Security Act.” Fischer v. United States, 529 U.S. 667, 671 (2000). It operates as a “federally funded medical insurance program for the elderly and disabled,” id., and is managed by the HHS Secretary, 42 U.S.C. § 1395kk(a). The program originally reimbursed hospitals for the “reasonable costs” of services provided to Medicare patients. Cnty. of L.A. v. Shalala, 192 F.3d 1005, 1008 (D.C. Cir. 1999). That system deteriorated over time, however, because it provided “little incentive for hospitals to keep costs down,” as “[t]he more they spent, the more they were reimbursed.” Id. In 1983, the Congress became particularly concerned “that hospitals reimbursed on a reasonable cost basis lacked incentives to operate efficiently.” Transitional Hosps. Corp. of La., Inc. v. Shalala, 222 F.3d 1019, 1021 (D.C. Cir. 2000). To rectify the problem, the Congress shifted to a prospective payment system that reimburses hospitals based on the average rate of “operating costs [for] inpatient hospital services.” Cnty. of L.A., 192 F.3d at 1008. Because different illnesses entail varying costs of treatment, the Secretary uses diagnosis-related groups (DRGs) to “modif[y]” the average rate. Cape Cod Hosp. v. Sebelius, 630 F.3d 203, 205 (D.C. Cir. 2011). A DRG is a group of related illnesses to which the Secretary assigns a weight representing “the relationship between the cost of treating patients within that group and the 4 average cost of treating all Medicare patients.” Id. at 205–06. To calculate a specific reimbursement, the Secretary “takes the [average] rate, adjusts it [to account for regional labor costs], and then multiplies it by the weight assigned to the patient’s DRG.” Cnty. of L.A., 192 F.3d at 1009. The major innovation of the prospective payment system is that hospitals are “reimbursed at a fixed amount per patient, regardless of the actual operating costs they incur in rendering [those] services.” Sebelius v. Auburn Reg’l Med. Ctr., 133 S. Ct. 817, 822 (2013) (emphasis added). The new system incentivizes hospitals to keep costs as low as possible. But the “Congress recognized that health-care providers would inevitably care for some patients whose hospitalization would be extraordinarily costly or lengthy.” Cnty. of L.A., 192 F.3d at 1009. To account for costly patients, the Congress allows hospitals to request outlier payments. See 42 U.S.C. § 1395ww(d)(5)(A)(ii). A hospital is eligible for an outlier payment “in any case where charges, adjusted to cost, exceed . . . the sum of the applicable DRG prospective payment rate . . . plus a fixed dollar amount determined by the Secretary.” Id. Although calculating outlier payments is an elaborate process, three particular numbers are important: (1) the cost-to-charge ratio, (2) the fixed loss threshold, and (3) the outlier threshold. A hospital’s cost-to-charge ratio is calculated from data in its most recent cost report. See 42 C.F.R. § 412.84(i)(2). The ratio represents a hospital’s “average markup.” Appalachian Reg’l Healthcare, Inc. v. Shalala, 131 F.3d 1050, 1052 (D.C. Cir. 1997). Markup is key because outlier payments are available only “where charges, adjusted to cost, exceed” the applicable DRG rate by a fixed amount. 42 U.S.C. § 1395ww(d)(5)(A)(ii) (emphasis added). The ratio ensures that the Secretary does not simply reimburse a hospital for the charges reflected on a patient’s 5 invoice but instead only for charges that are “adjusted to cost.” Id. Applying the cost-to-charge ratio in practice is straightforward. For example, if a hospital’s cost-to-charge ratio is 75% (total costs are approximately 75% of total charges), the Secretary multiplies the hospital’s charges by 75% to calculate the hospital’s cost. See Boca Raton Cmty. Hosp., Inc. v. Tenet Health Care Corp., 582 F.3d 1227, 1229 n.3 (11th Cir. 2009). The second important number is the fixed loss threshold. A hospital can request an outlier payment if its charges exceed the “DRG prospective payment rate . . . plus a fixed dollar amount determined by the Secretary.” 42 U.S.C. § 1395ww(d)(5)(A)(ii) (emphasis added). The italicized portion—“a fixed dollar amount”—is known as the fixed loss threshold. In effect, this threshold “acts like an insurance deductible because the hospital is responsible for that portion of the treatment’s excessive cost” above the applicable DRG rate. Boca Raton Cmty. Hosp., 582 F.3d at 1229. The Secretary calculates a new fixed loss threshold for each fiscal year. See 42 U.S.C. § 1395ww(d)(6). The third number is the outlier threshold. The Secretary calculates it by adding the DRG rate for a certain illness or condition to the fixed loss threshold. 1 See Cnty. of L.A., 192 1 We have simplified the calculation. Although the outlier threshold is calculated by adding the applicable DRG rate to the fixed loss threshold, there are other variables that must be added to that amount as well. These include “any IME and DSH payments, and any add-on payments for new technology.” 68 Fed. Reg. 45,346, 45,477 (Aug. 1, 2003). IME is an acronym for indirect costs of medical education, which the Secretary must consider in disbursing outlier payments. See 42 U.S.C. § 1395ww(d)(5)(B). DSH is an acronym for a disproportionate share hospital, which considers whether a hospital serves a disproportionate share of 6 F.3d at 1009. Any cost-adjusted charges imposed above the outlier threshold are eligible for reimbursement under the outlier payment provision. See 42 U.S.C. § 1395ww(d)(5)(A)(ii). Since 2003, outlier payments have been 80% of the difference between a hospital’s adjusted charges and the outlier threshold. See 68 Fed. Reg. at 45,476; 42 C.F.R. § 412.84(k). We can tie this all together with an example. Assume that the Secretary sets the fixed loss threshold at $10,000. Assume also that a hospital treats a Medicare patient for a broken bone and that the DRG rate for the treatment is $3,000. The Medicare patient required unusually extensive treatment which caused the hospital to impose $23,000 in cost-adjusted charges. If no other statutory factor is triggered, see supra n.1, the hospital is eligible for an outlier payment of $8,000, which is 80% of the difference between its cost-adjusted charges ($23,000) and the outlier threshold ($13,000). See generally 62 Fed. Reg. 45,966, 45,997 (Aug. 29, 1997) (explaining similar example). Apart from calculating individual reimbursements, the Secretary must also ensure that total outlier payments are neither “less than 5 percent nor more than 6 percent” of the total DRG-related payments in a given year. 42 U.S.C. low-income patients. See id. § 1395ww(d)(5)(F). And technological add-on payments refer to the Secretary’s obligation to consider whether the applicable DRG rate takes into account the expenses of “a new medical service or technology.” Id. § 1395ww(d)(5)(K)(ii)(I). None of these additional variables—IME, DSH and technology add-on payments—is relevant here. For convenience, then, we refer to the outlier threshold as the sum of the applicable DRG rate and the fixed loss threshold. 7 § 1395ww(d)(5)(A)(iv). The Secretary complies with this provision by selecting outlier thresholds that, “when tested against historical data, will likely produce aggregate outlier payments totaling between five and six percent of projected . . . DRG-related payments.” Cnty. of L.A., 192 F.3d at 1013. Nevertheless, testing against historical data is only a predictive exercise. Id. at 1009. Accordingly, the Secretary does not take corrective action once the fiscal year ends even if outlier payments fall outside the five-to-six per cent range. Id. We have upheld this practice. Id. at 1020.