[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]



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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

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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

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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