The HHS OIG recently published a report detailing CMS’s and Medicare Administrative Contractor’s (“MACs’”) ongoing issues in the outlier payment reconciliation process. A previous 2012 review identified 465 cost reports that qualified for outlier payment reconciliation under CMS’s rules, but no such reconciliation had occurred. The new report examines the status of those 465 cost reports and, even for those already settled and beyond the typical three-year reopening window, OIG continues to call for payment reconciliation.

To protect themselves from financial losses, hospitals are entitled to outlier payments above typical prospective rates for cases incurring extraordinarily high costs above a fixed-loss threshold. Whether a case exceeds the threshold, and the amount of outlier payments a hospital receives for that case, is determined in part by the hospital’s cost-to-charge ratio. This ratio is used to convert the hospital’s charges for the case into costs. Because outlier payments are paid during claim submission, Medicare uses the cost-to-charge ratio from the prior year as-filed cost report to determine whether a case is eligible for outlier payments.

In 2003 and in response to allegations that hospitals were manipulating their charges to increase the amount of outlier payments, CMS promulgated regulations that subjected outlier payments to reconciliation with cost report settlement. 42 C.F.R. § 412.84(i)(2). Several years after promulgating this regulation, CMS published instructions in its Claims Processing Manual to its contractors regarding the circumstances under which it would reconcile a hospital’s outlier payments. These instructions require the MAC to refer cost reports to CMS for payment reconciliation if the hospital meets the two criteria:  1) the hospital’s actual cost-to-charge ratio for the cost reporting year in question is plus or minus 10 percentage points from the cost-to-charge ratio estimate that was used at claims payment; and 2) the hospital received more than $500,000 in outlier payments in that fiscal year. See Claims Processing Manual, Ch. 3, § 20.1.2.5.

These criteria were never submitted to the public for notice and comment. In August 2016, the United States District Court for the District of Columbia found that the Claims Processing Manual criteria were substantive regulations and thus required to go through notice and comment procedures. Clarian Health West, LLC v. Burwell, 206 F. Supp. 3d 393 (D.D.C. 2016). Having not done so, the criteria were improperly applied and the issue remanded back to the Secretary. The Secretary appealed, and the propriety of the Claims Process Manual criteria is currently being litigated in front of the United States Court of Appeals for the District of Columbia Circuit. The OIG report makes no mention of the Clarian case.

Examining cost reports from October 1, 2003 and December 31, 2008, the OIG previously found that, as of December 31, 2011, 465 cost reports that had not undergone the outlier reconciliation process identified in the Claims Processing Manual. The OIG’s current report updates its findings as follows:

• One-hundred ten cost reports still have not yet been referred for reconciliation, despite meeting the minimum thresholds. The OIG estimated that reconciliation would bring in almost $156 million in funds to Medicare, while providing $11.5 million in funds to hospitals.

• Two hundred eight-seven cost reports had been referred to CMS for reconciliation, but only 134 had actually undergone that process. OIG estimated that reconciliation of the remaining 153 cost reports would bring in almost $299 million in funds to Medicare, while providing $17.3 million in funds to hospitals.

• Sixty-eight cost reports had what the OIG described as “unreliable” cost-to-charge ratios, such that CMS could not resolve outstanding outlier payment reconciliation.

Importantly, OIG acknowledged that, of the 110 cost reports that had not been referred for reconciliation, 59 had been settled more than three years ago. Typically, under 42 C.F.R. § 405.1885(b)(3), costs reports are not subject to reopening beyond that three-year window, absent a showing of fraud or similar fault. Nonetheless, according to OIG, “[b]ecause the outlier reconciliation rules are promulgated in Federal regulations and CMS guidance, providers knew or should have known the rules when their cost reports were settled,” and thus are subject to similar fault reopening. This is despite the fact that the OIG detailed the errors made by the MAC in either failing to perform the minimum threshold test, performing it incorrectly, or performing it but failing to refer as appropriate. In no instance did the OIG state that the error was due to a provider action. The OIG also found similar fault in instances where the cost reports were referred to CMS, but for which no reconciliation ever occurred.

OIG ultimately recommended that CMS “determine whether the cost reports that had exceeded the three-year reopening limit may be reopened due to similar fault and, if so, work with the Medicare contractors to reopen them.”  While neither explicitly agreeing or disagreeing with the OIG’s recommendation, CMS responded as follows:  “CMS regulations allow for the reopening of a cost report with 3 years of a determination . . . or at any time if it is established that the determination . . . was procured by fraud or similar fault. CMS will explore if there is more conclusive evidence of similar fault, and consider appropriate actions if such evidence should be found.”  Should CMS concur with the OIG, finding similar fault simply based on publication of rules where no provider action has occurred, it would greatly expand the scope of the reopening regulation.

The most recent OIG report, Vulnerabilities Remain in Medicare Hospital Outlier Payments,  is available here. The 2012 OIG report, The Centers for Medicare & Medicaid Services Did Not Reconcile Medicare Outlier Payments in Accordance with Federal Regulations and Guidance, is available here.