[Federal Register Volume 81, Number 14 (Friday, January 22, 2016)]
[Rules and Regulations]
[Pages 3727-3729]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-01309]
[[Page 3727]]
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DEPARTMENT OF HEALTH AND HUMAN SERVICES
Centers for Medicare & Medicaid Services
42 CFR Part 412
[CMS-1659-N]
RIN 0938-ZB26
Medicare Program; Explanation of FY 2004 Outlier Fixed-Loss
Threshold as Required by Court Rulings
AGENCY: Centers for Medicare & Medicaid Services (CMS), HHS.
ACTION: Clarification.
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SUMMARY: In accordance with court rulings in cases that challenge the
federal fiscal year (FY) 2004 outlier fixed-loss threshold rulemaking,
this document provides further explanation of certain methodological
choices made in the FY 2004 fixed-loss threshold determination.
DATES: January 22, 2016.
FOR FURTHER INFORMATION CONTACT: Ing-Jye Cheng, 410-786-2260 or Don
Thompson, 410-786-6504.
SUPPLEMENTARY INFORMATION:
I. Background
On May 19, 2015, the Court of Appeals for the District of Columbia
(DC) Circuit issued a decision in District Hospital Partners, L.P. v.
Burwell, 786 F.3d 46 (DC Cir 2015) (District Hospital Partners),
holding that the FY 2004 outlier fixed-loss threshold was inadequately
explained in the FY 2004 Inpatient Prospective Payment Systems (IPPS)
final rule. The court of appeals instructed the district court to
remand to the Secretary of Health and Human Services (the Secretary)
for further explanation of the Secretary's handling of data pertaining
to 123 hospitals that the Secretary had described in a proposed rule
updating the outlier regulations (the outlier proposed rule) as
hospitals likely to have manipulated their charges to maximize their
outlier payments. The court of appeals specified--
On remand, the Secretary should explain why she corrected for
only 50 turbo-charging hospitals in the 2004 rulemaking rather than
for the 123 she had identified in the NPRM. She should also explain
what additional measures (if any) were taken to account for the
distorting effect that turbo-charging hospitals had on the dataset
for the 2004 rulemaking. And if she decides that it is appropriate
to recalculate the 2004 outlier threshold, she should also decide
what effect (if any) the recalculation has on the 2005 and 2006
outlier and fixed loss thresholds.
District Hospital Partners, 786 F.3d at 60. The District Court for
the District of Columbia, in turn, issued a remand order to the
Secretary. (See District Hospital Partners, L.P. v. Burwell, No. 11-cv-
116 (ECF 129) (August 13, 2015).)
On September 2, 2015, the District Court for the District of
Columbia issued an opinion and order in a separate case, Banner Health
v. Burwell, No. 10&cv-1638 (ECF 149 and 150) (Banner Health), remanding
the fixed loss outlier threshold from the FY 2004 IPPS final rule for
additional explanation consistent with the District Hospital Partners
case. The court stated that the agency should ``explain further why it
did not exclude the 123 identified turbo-charging hospitals from the
charge inflation calculation for FY 2004--or . . . recalculate the
fixed loss threshold if necessary.'' (Banner Health Memorandum Opinion
(ECF 150) at p.107 and p.120.) We are issuing this document to provide
the additional explanation required by these decisions.
II. Provisions of the Notice
A. The Rulemaking at Issue
The Medicare statute requires that outlier payments be calculated
based on charges, adjusted to cost (see 42 U.S.C. 1395ww(d)(5)(A)(ii)).
To compute an outlier payment, we use hospital-specific cost-to-charge
ratios (CCRs), calculated from historical cost and charge data, to
reduce the charge on the claim to a cost estimate. The estimated costs
of the case are then compared to the Diagnosis Related Group (DRG)
payment plus the fixed loss outlier threshold to determine if an
outlier payment is appropriate and, if so, the amount of any such
payment. Thus, CCRs play a significant role in determining the outlier
payment for a case.
In the March 5, 2003, Federal Register (68 FR 10420), we issued a
proposed rule (the outlier proposed rule) that would update the outlier
regulations due to improper manipulation of charges by hospitals, also
known as ``turbocharging.'' On June 9, 2003, we issued a subsequent
final rule (68 FR 34494) that finalized changes to the outlier policy
(the outlier final rule). In the FY 2004 IPPS final rule, which
appeared in the August 1, 2003, Federal Register (68 FR 45346) (the FY
2004 IPPS final rule), we applied the policies finalized in the outlier
final rule in the calculation of the FY 2004 fixed loss outlier
threshold.
In the outlier proposed rule, we proposed multiple policy changes
that affected outlier payments. These policies were finalized in the
outlier final rule. The changes were intended to respond to
turbocharging, a practice in which hospitals would repeatedly increase
their charges at rates exceeding the rates of increase in their costs.
Turbocharging would lead to outlier payments greater than warranted by
a hospital's actual costs because the historical CCR used to generate
cost estimates would not capture the true present relationship between
the hospital's costs and its charges.
Three specific changes made in the outlier final rule are relevant
to our present discussion. The first important change made in the
outlier final rule was to alter our policy regarding when to apply
statewide average CCRs. Prior to the outlier final rule, when a
hospital's CCR dipped below a pre-determined CCR floor (set in the
annual IPPS final rule), it would be assigned a statewide average CCR
in place of the hospital's computed CCR. We noted that if a hospital
repeatedly increased its charges at a faster rate than its costs
increased, its CCR could fall below the floor, which would lead to the
application of a higher statewide average CCR, and would significantly
increase outlier payments. Therefore, in order to mitigate gaming of
the application of the statewide average CCR, we finalized a policy
that would no longer substitute statewide average CCRs if a hospital's
actual CCR dipped below the floor. Hospitals would be assigned their
actual CCRs no matter how low their CCR dipped.
The second key change to the outlier policy was to require use of
CCRs from tentative settled Medicare cost reports when available.
Previously, a hospital's outlier payments would be calculated based on
a CCR drawn from its most recent final settled cost report, that is,
its most recent cost report that had undergone complete review. We
observed that if a hospital had significantly increased its charges
since the period covered by its most recent final settled cost report,
the hospital could receive inordinately high outlier payments because
the CCR used to calculate its payments would not reflect its recent
charge increases. Therefore, we modified the outlier policy to require
use of more up-to-date CCR data drawn from a tentative settled cost
report, when available. The tentative settlement is a cursory review of
the cost report that takes place within 60 days of the acceptance of a
cost report by CMS. We explained that we expected use of this more up-
to-date data would reduce the time lag between a hospital's CCR and its
current billed charges by a year or more. In our discussion of this
policy change in the March 2003 outlier
[[Page 3728]]
proposed rule, we described an analysis of the Medicare Provider
Analysis and Review (MedPAR) file data from FY 1999 to FY 2001 in which
we identified 123 hospitals whose percentage of outlier payments
relative to total DRG payments increased by at least 5 percentage
points over that period, and whose case-mix (the average DRG relative
weight value for a hospital's Medicare cases) adjusted charges
increased at a rate at or above the 95th percentile rate of charge
increase for all hospitals (46.63 percent) over the same period. We
noted at that time that the recent dramatic increases in charges for
those hospitals were not reflected in their current CCRs (based on
final settled cost reports).
The third key change made in the outlier final rule was to make
outlier payments subject to adjustments when hospitals' cost reports
are settled. We explained that outlier payments would be processed
throughout the year using operating and capital CCRs based on the best
information available at that time, but at the time a cost report was
settled, outlier payments could be reconciled using updated CCRs that
are computed from more recent cost report and charge data. We
instructed our contractors to put a hospital through outlier
reconciliation if it: 1) has a 10-percentage point change in its CCR
from the time the claim was paid compared to the CCR at final cost
report settlement; and 2) receives total outlier payments exceeding
$500,000 during the cost reporting period.
Some of the provisions of the outlier final rule became effective
for discharges occurring on or after August 8, 2003. The remaining
provisions became effective for discharges occurring on or after
October 1, 2003.
After these changes were finalized in the June 2003 outlier final
rule, we then set the fixed loss outlier threshold for FY 2004 in the
FY 2004 IPPS final rule (68 FR 45476 through 45478). When we calculated
the fixed-loss threshold for FY 2004, we simulated payments by applying
FY 2004 rates and policies to cases from the FY 2002 MedPAR file. The
FY 2004 policies applied in the payment simulations included the policy
changes that had been finalized in the June 2003 outlier final rule: 1)
we attempted to approximate the use of tentative settled cost report
data by calculating updated cost-to-charge ratios for each hospital
from recent cost reporting data; and 2) we used a hospital's computed
CCR even if it was very low, rather than substituting a statewide
average CCR. We noted that it was difficult to project which hospitals
would be subject to reconciliation of their outlier payments using
then-available data. Nevertheless, we stated that our analysis at that
time had identified approximately 50 hospitals that we thought would be
subject to reconciliation. For those approximately 50 hospitals, we
employed cost-to-charge ratios estimated from recent data using the
hospital's rate of increase in charges per case based on FY 2002
charges, compared to costs (inflated to FY 2004 using actual market
basket increases).
B. Further Explanation of the FY 2004 Determination in Response to the
Courts' Orders
The court rulings discussed previously stated that we should
explain why, in simulating FY 2004 payments to calculate the FY 2004
fixed loss outlier threshold, we made additional adjustments to the
cost-to-charge ratios for approximately 50 hospitals, given that the
March 2003 outlier proposed rule had discussed 123 hospitals that
appeared to have benefited from vulnerabilities in the outlier payment
rules. The reason is that the adjustments made to approximately 50
hospitals were intended to account for changes that might be made to
hospitals' cost-to-charge ratios through reconciliation when their cost
reports were settled. Those particular adjustments were not intended to
account for possible disparities between hospitals' historical cost-to-
charge ratios and the ratios that would be used to calculate FY 2004
outlier payments at the time the hospitals' claims were processed. We
had separately accounted for disparities of that kind by computing new
cost-to-charge ratios for all hospitals, including the 123 hospitals
previously identified as possible turbochargers.
As discussed previously, our June 2003 outlier final rule was
motivated by our observation that, because of turbocharging, the cost-
to-charge ratios used to calculate a hospital's outlier payments
sometimes failed to reflect the actual relationship between the
hospital's costs and its charges at the time the hospital submitted a
claim for payment. The June 2003 outlier final rule included separate
measures that were each designed to address a different component of
this problem. We adopted the use of more up to date cost-to-charge
ratio data from tentative settled cost reports to ensure that the cost-
to-charge ratio used to make a hospital's payments would come as close
as possible to reflecting the present relationship between the
hospital's costs and its charges. However, we recognized that while
using data from tentative settled cost reports would reduce the time
lag between cost-to-charge ratio data and outlier payment claims, it
would not eliminate the time lag altogether. Data from a tentative
settled cost report still would not reflect recent charge increases
that had occurred since the submission of the cost report. Therefore,
we separately provided for reconciliation of outlier payments at the
time a cost report was settled. Thus, if a hospital received unduly
high outlier payments because it had significantly increased its
charges since the time of its most recent tentative settled cost
report, there would be some opportunity to readjust those payments at a
later date based on even newer data.
To simulate FY 2004 payments for purposes of calibrating the FY
2004 fixed loss outlier threshold, we needed to apply the rules that
would be in place in FY 2004, and so we needed to simulate application
of the new rules that had been adopted as part of the June 2003 outlier
final rule. To approximate the use of more recent data from tentative
settled cost reports, we calculated cost-to-charge ratios from more
recent data for all hospitals, including the 123 hospitals discussed in
the March 2003 proposed rule. Our most immediate purpose in this
measure was to ensure that our simulated FY 2004 payments would match
up as closely as possible with how FY 2004 claims would actually be
paid. But this measure also had the additional benefit of reducing any
reason for concern that cost-to-charge ratios drawn from older
historical data for the 123 hospitals would not reliably approximate
the cost-to-charge ratios that would be used to pay FY 2004 claims for
those 123 hospitals. The payment simulations employed cost-to-charge
ratios calculated from very recent data for all hospitals, including
the 123 hospitals, and did not employ cost-to-charge ratios drawn from
older historical data.
The additional adjustments made to approximately 50 hospitals were
intended to simulate the operation of the newly adopted rule permitting
some outlier payments to be adjusted through reconciliation after they
were paid. Reconciliation of outlier payments is a burdensome process,
and we had indicated that reconciliation would not be performed for all
hospitals, or even all hospitals suspected of turbocharging in the
past. Rather, reconciliation generally would be performed only if a
hospital met the criteria we had specified for reconciliation: A 10-
percentage point change in the hospital's CCR from the time the claim
was paid compared to the CCR at cost
[[Page 3729]]
report settlement; and receipt of total outlier payments exceeding
$500,000 during the cost reporting period. We identified approximately
50 hospitals that we determined likely to meet these criteria in FY
2004, and we specially calculated cost-to-charge ratios for those
hospitals as explained previously and in the FY 2004 IPPS final rule,
so that our payment simulations would represent our best approximation
of the final amount of outlier payments after reconciliation had been
completed. We did not expect that all of the 123 hospitals discussed in
the March 2003 proposed rule would be likely to meet the criteria for
reconciliation, and so we did not make this same adjustment with
respect to all of those 123 hospitals.
The court rulings also called for an explanation of other steps
taken to account for any ``distorting effect'' associated with the 123
hospitals discussed in the March 2003 proposed rule. As we explained
previously, our 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. That reduced any reason for concern that cost-to-
charge ratios drawn from older historical data for the 123 hospitals
would not reliably approximate the cost-to-charge ratios that would be
used to pay FY 2004 claims for those 123 hospitals. We also anticipated
that implementation of the June 2003 outlier final rule would curb the
turbocharging practices that had caused rapid increases in charges in
previous years; and therefore, we saw no reason to further adjust our
payment simulations to account for future turbocharging by the 123
hospitals. Therefore, we did not apply any additional adjustments
focused on the 123 hospitals that had been discussed in the March 2003
proposed rule, beyond the adjustments we have already discussed.
The court rulings also stated that we should explain further why we
did not exclude the 123 identified turbo charging hospitals from the
charge inflation calculation for FY 2004. We simply did not have strong
reason to believe that excluding the 123 hospitals from the charge
inflation calculation, or from other parts of the fixed loss outlier
threshold calculation, would improve our projections.
When we simulate payments for purposes of calculating the fixed
loss outlier threshold, we use MedPAR data from an earlier period to
produce a simulated set of claims for the period for which we are
calculating the fixed loss outlier threshold. For the FY 2004 final
rule, we used cases from the FY 2002 MedPAR file to simulate FY 2004
cases. We applied a charge inflation factor to account for growth in
hospital charges between the period covered by the MedPAR data and the
period for which we are calculating the fixed loss outlier threshold.
In this instance, the charge inflation factor was intended to account
for growth in hospital charges over the 2-year period between FY 2002
and FY 2004. We estimated charge growth over this period based on
actual charge growth over an earlier 2-year period, FY 2000 to FY 2002.
More specifically, our estimate of charge inflation was based on the 2-
year average annual rate of change in charges per case from FY 2000 to
FY 2001 and from FY 2001 to FY 2002 (12.5978 percent annually, or 26.8
percent over 2 years).
Although we expected the June 2003 outlier final rule to curb
turbocharging, which would affect the rate of charge growth after the
rule became effective, we believed that past charge growth would still
be a satisfactory basis for estimating more recent charge growth, for
the 123 hospitals as well as for other hospitals. The outlier final
rule was in effect for only part of the interval that our charge
inflation estimate was intended to reflect. The outlier final rule went
into effect only in part for the last 2 months of FY 2003, and went
into effect in full only at the beginning of FY 2004.
We had no strong reason to expect that excluding the 123 hospitals
from our charge inflation calculations, or from other parts of our
simulations, would improve our simulations in a way that would bring
outlier payments closer to our target of 5.1 percent of operating DRG
payments. The 123 hospitals were not excluded from claiming outlier
payments in FY 2004, so excluding them from our simulations would have
introduced a different form of distortion into our simulations, by
causing the simulations to disregard the impact of those hospitals.
While excluding the 123 hospitals might produce a lower estimate of
charge inflation, a lower estimate is not necessarily a better
estimate. A charge inflation estimate that is too low could lead to a
fixed loss outlier threshold that produces outlier payments farther
from, instead of closer to, the target of 5.1 percent of operating DRG
payments.
Finally, the court rulings state that if we decide to recalculate
the FY 2004 fixed loss outlier threshold, we should also address any
effect that recalculation has on the FY 2005 and FY 2006 outlier and
fixed-loss thresholds. We are not recalculating the FY 2004 fixed-loss
threshold. We also note that the fixed loss outlier thresholds are set
based on new calculations each year without reference to the previous
year's threshold; even if the FY 2004 threshold had been reset, there
would be no reason to revisit the FY 2005 or FY 2006 calculation.
III. Collection of Information Requirements
This document does not impose information collection requirements,
that is, reporting, recordkeeping or third-party disclosure
requirements. Consequently, there is no need for review by the Office
of Management and Budget under the authority of the Paperwork Reduction
Act of 1995 (44 U.S.C. 3501 et seq.).
Dated: January 4, 2016.
Andrew M. Slavitt,
Acting Administrator, Centers for Medicare & Medicaid Services.
Approved: January 15, 2016.
Sylvia M. Burwell,
Secretary, Department of Health and Human Services.
[FR Doc. 2016-01309 Filed 1-21-16; 8:45 am]
BILLING CODE 4120-01-P