On January 22, 2016, CMS published an explanation of its FY 2004 outlier fixed-loss threshold rulemaking. The explanation was required by two 2015 federal court orders in cases brought by hospitals challenging the outlier rulemaking methodology.
As explained in a previous Health Headlines article, the FY 2004 “outlier correction” proposed rule was prompted by the Secretary’s belief that 123 “turbocharging” hospitals were manipulating the outlier payment system to overestimate costs, taking advantage of the time lag between bill submission and the cost-to-charge ratio in the settled cost report to receive additional outlier payments. The final rule required that a hospital’s cost-to-charge ratio be calculated using more recent cost reports, and that outlier payments be reconciled when the relevant cost report is ultimately settled if the actual cost-to-charge ratio varies by 10 percent from that used in calculating the outlier payment. See 68 Fed. Reg. 34494 (June 9, 2003). A group of hospitals challenged the final rule in District Hospital Partners, L.P. v. Burwell, 786 F.3d 46 (D.C. Cir. 2015), and Banner Health v. Burwell, No. 10-cv-1638 (D.D.C. Sept. 2, 2015). The rulings in both cases required the Secretary to provide further explanation regarding the methodology used in the FY 2004 rulemaking.
CMS’s explanations are available in detail here. Among other things, CMS explained that its payment simulations “employed cost-to-charge ratios calculated from recent data for all hospitals, including the 123 hospitals, and did not employ cost-to-charge ratios drawn from older historical data.” CMS also explained that it did not exclude the 123 identified turbocharging hospitals from the charge inflation calculation for FY 2004 because CMS did not believe it would “improve our simulations in a way that would bring outlier payments closer to our target of 5.1 percent of operating DRG payments.” CMS is not recalculating the 2004 outlier threshold and states there is no reason to revisit the FY 2005 or FY 2006 calculations.
Reporter, Jennifer S. Lewin, Atlanta, + 1 404 572 3569, jlewin@kslaw.com.
