Improper Hospital Payments May Have Cost Medicare $426M

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By James Swann

Medicare contractors may have cost Medicare $426 million by improperly handling supplemental hospital payments.

The Department of Health and Human Services Office of Inspector General identified 465 hospital cost reports that should have been referred for outlier payment reconciliation or were referred but never reconciled, according to a report released Sept. 22. Failure to reconcile outlier payments before reaching a final settlement on a hospital’s cost report could lead to Medicare overpayments.

“I think the numbers identified here do serve as a reminder that there are some reimbursement implications to hospital and health system cost reports, even though most of the payments come from prospective payment systems,” said Judith Waltz, a health-care attorney with Foley & Lardner LLP in San Francisco.

The problem with reconciling outlier payments isn’t new, Katie Pawlitz, a health-care attorney with Reed Smith in Washington, told Bloomberg BNA Sept. 22, noting that the same issue was identified in a 2012 OIG audit. Pawlitz said outlier payment reconciliation could be an area for future government audits.

Outlier payments help hospitals avoid financial loss from providing extremely expensive care to Medicare patients. Hospital claims that exceed the Centers for Medicare & Medicaid Services’ fixed-loss threshold, a dollar figure, become eligible for outlier payments.

Shared Blame

The CMS and Medicare contractors share the blame for the lack of outlier reconciliation. CMS’s lack of systems to process outlier reconciliations is at least as much at fault as the contractors’ failure to timely refer the cost reports to the Medicare agency, Waltz told Bloomberg BNA Sept. 25.

The OIG report made a passing reference to a historical suspicion that hospitals can inflate their costs to influence the cost-to-charge ratios (CCR) in their favor. Hospitals determine their costs by multiplying covered charges against their CCR.

“In a time when the current administration has described a commitment to price transparency, it’s possible that this type of analysis could factor into the arguments about a need for increased pricing transparency,” Waltz said.

The OIG report examined several reviews that looked at Medicare contractor handling of outlier payments between October 2003 and March 2011.

Stronger Oversight

The OIG recommended that the CMS take several steps to improve the handling and oversight of Medicare outlier payments, but the CMS may not have adequate resources to do the job, Pawlitz said.

The CMS has previously said that system limitations have prevented it from performing reconciliations, Pawlitz said, and it will need better resources if it wants to improve the handling of outlier payment reconciliations.

The report also said the CMS should ensure that contractors review all hospital cost reports submitted after March 2011 and refer and reconcile any qualifying outlier payments, as well as create a system to keep track of all hospital cost reports that have been referred for reconciliation.

The CMS said it has already made progress in monitoring cost reports with outlier payments in need of reconciliation and said it recognizes the importance of making accurate outlier payments.

To contact the reporter on this story: James Swann in Washington at

To contact the editor responsible for this story: Kendra Casey Plank at

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