Medicare prospective payment without separate urban and rural rates

Health Care Financing Review,  Winter, 1992  by Sheila M. O'Dougherty,  Philip G. Cotterill,  Steven Phillips,  Elizabeth Richter,  Nancy De Lew,  Barbara Wynn,  Thomas Ault

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A final change intended to provide more equal protection for each type of outlier case, especially cost outliers, involves eliminating the standardization of costs for IME and DSH in determining whether a case exceeds the cost-outlier threshold. Under current policy, to determine whether a case qualifies as a cost outlier, charges are reduced by the hospital's cost-to-charge ratio and then divided by one plus the sum of the hospital's IME and DSH factors. The effect is to increase the cost-outlier threshold for cases in teaching and DSH hospitals. Eliminating this standardization of costs would focus outlier payments on the most expensive cases, regardless of the type of institution that treats the case. Under this policy, outlier payments to teaching and DSH hospitals would clearly increase. However, their IME and DSH payments would decrease because outlier payments would be excluded from the payment base upon which IME and DSH payments are calculated.

Simulation 3 in Table 4 displays the combined effects of the five outlier refinements. The number of cases receiving outlier payments increases from 183,695 under the 5-percent pool to 552,186 under the 10-percent pool. As a result of the lower thresholds, the cases that qualified for outlier payments in the 5-percent pool receive higher payments in the 10-percent pool, but the average payment per case decreases because of the large number of new cases. The new cases have lower costs or shorter stays and receive lower payments than the other cases because they exceed the thresholds to a lesser degree. Overall, the average outlier case receives payments that are 58 percent of costs, compared with slightly less than 59 percent without these refinements. Hence, the new cases under the 10-percent pool incur significant losses before payment is received.

These outlier-policy changes also reduce the wide disparity in outlier payment-to-cost ratios across types of outlier cases. In simulation 2, the ratios range from 0.48 for cost only, paid as cost, to 0.73 for day and cost, paid as day. The refinements in simulation 3 reduce the range to 0.53-0.67. Greater payment equity among types of outlier cases helps meet the goals of eliminating profits on outlier cases and focusing outlier payments on cases with the heaviest losses.

Moving to the arithmetic mean LOS for the day-outlier per diem and eliminating the standardization of costs for IME and DSH are responsible for most of the reduction in variation across types of outlier cases. The arithmetic mean lowers the per diem payment and decreases the outlier payment-to-cost ratio for cases paid as day outliers. However, day and cost, paid as day-outlier cases, still have the highest ratio, followed by day-only, paid as day cases. Also, the change results in a shift away from cases paid as day outliers toward cases paid as cost outliers. Outlier payment-to-cost ratios for cases paid as cost outliers increase, largely because of the elimination of the standardization of costs for IME and DSH. The level of loss that must be suffered before payment is received for these cases is reduced, although outlier payment-to-cost ratios are still lowest for cost-only, paid as cost cases.