[Federal Register Volume 84, Number 109 (Thursday, June 6, 2019)]
[Rules and Regulations]
[Pages 26360-26363]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-11796]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 412

[CMS-1708-N]


Medicare Program; Explanation of Federal Fiscal Year (FY) 2004, 
2005, and 2006 Outlier Fixed-Loss Thresholds 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, 2005, and 2006 outlier fixed-loss 
threshold (FLT) rulemakings, this document provides further explanation 
of certain methodological choices made in the FLT determinations for 
those years.

DATES: June 6, 2019.

FOR FURTHER INFORMATION CONTACT: Don Thompson, (410) 786-6504.

SUPPLEMENTARY INFORMATION: 

I. Background

    On May 19, 2015, in District Hospital Partners v. Burwell, 786 F.3d 
46 (D.C. Cir. 2015), the Court of Appeals for the District of Columbia 
Circuit held that the FY 2004 fixed-loss threshold (FLT) was 
inadequately explained in the federal fiscal year (FY) 2004 hospital 
inpatient prospective payment systems (IPPS) final rule. The court of 
appeals ordered the district court to remand to CMS for further 
explanation of the handling of data pertaining to 123 hospitals the 
agency had identified as likely to have engaged in ``turbocharging,'' 
that is, manipulating their charges to obtain greater outlier payments. 
The United States District Court for the District of Columbia then 
remanded to the Secretary in accordance with the decision of the Court 
of Appeals. Order, Dist. Hosp. Partners, L.P. v. Burwell, Civil Action 
No. 11-0116 (ESH) (D.D.C. August 13, 2015).
    On September 2, 2015, the District Court issued an order in a 
separate case, Banner Health v. Burwell, No. 10-1638 (ECF Nos. 149 and 
150), 126 F. Supp. 3d 28 (D.D.C. 2015), remanding for additional 
explanation of the FLT from the FY 2004 final rule consistent with the 
D.C. Circuit's decision in District Hospital Partners. The court stated 
that the agency should explain further why it did not exclude data from 
the 123 hospitals from the outlier charge inflation calculation used to 
produce estimates of future Medicare payments for FY 2004.
    In the January 22, 2016 Federal Register (81 FR 3727), we published 
an additional explanation in response to these court orders. In the 
October 14, 2016 Federal Register (81 FR 70980), we published a minor, 
non-substantive correction to the January 2016 document.
    In Banner Health v. Price, 867 F.3d 1323 (D.C. Cir. 2017), the 
court of appeals reviewed the January 2016 document and found that the 
agency still had not adequately explained why the agency, in the FY 
2004 rulemaking, did not exclude the charge data from the 123 hospitals 
it had identified as likely turbochargers when calculating the charge 
inflation factor used to transform historical charges into future 
charges for purposes of the agency's projections. The court of appeals 
also found that the agency had not adequately explained why it did not 
apply a downward adjustment to hospitals' cost-to-charge ratios when 
determining the FLTs for FYs 2004, 2005, and 2006, an issue not 
addressed in the Court of Appeals decision in District Hospital 
Partners. The court in Banner Health ordered the district court to 
remand to CMS to provide additional explanation on these two points. 
The district court issued a remand order on April 12, 2018. The 
district court also entered a similar order with respect to the FY 2004 
determination in another case, District Hospital Partners, L.P. v. 
Azar, 320 F. Supp. 3d 42 (D.D.C. 2018).
    We are issuing this document to provide the additional explanation 
required by these decisions.

II. Provisions of the Explanation

A. Inclusion of Data Pertaining to 123 Hospitals Identified as Likely 
Turbochargers in the Calculation of Estimated Charge Inflation for FY 
2004

    The first issue pertains to the use of data pertaining to 123 
hospitals whom we described in a March 5, 2003 proposed rule (68 FR 
10420), as hospitals likely to have engaged in turbocharging. We chose 
to calculate the FY 2004 charge inflation adjustment using data that 
incorporated data

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pertaining to the 123 hospitals, instead of choosing to omit data 
pertaining to those hospitals.
    As we discussed in our earlier publications, the 123 hospitals were 
identified through an analysis of Medicare Provider Analysis and Review 
(MedPAR) file data from FY 1999 to FY 2001. We singled out hospitals 
whose percentage of outlier payments relative to total diagnosis-
related group (DRG) payments increased by at least 5 percentage points 
over that period, and whose case-mix (the average DRG relative weight 
value for all of a hospital's Medicare cases) adjusted charges 
increased at a rate at or above the 95th percentile rate of charge 
increase for all hospitals over the same period. We note that we 
conducted this analysis primarily for the purpose of assessing and 
diagnosing the problem of turbocharging, not for the purpose of making 
adjustments to our projections for the FY 2004 rulemaking.
    We identified the 123 hospitals based on data from the interval 
from FY 1999 to FY 2001. Our charge inflation calculation for FY 2004 
was based on data covering a more recent interval, from FY 2000 to FY 
2002. We were attempting to project charge increases over a third 
period, from FY 2002 to FY 2004.
    The hypothesis underlying the suggestion that the 123 hospitals 
should have been omitted is that charge inflation for those 123 
hospitals was likely to begin slowing in FY 2004 in response to the 
adoption of the June 9, 2003 Outlier final rule (68 FR 34494), while 
charge inflation for other hospitals would remain in line with 
historical patterns between FY 2002 and 2004. Consequently, according 
to this hypothesis, an estimate computed from FY 2000 to 2002 charge 
data that included the 123 hospitals would likely overstate FY 2004 
hospital charges for the entire population of hospitals. But this 
hypothesis depends on assumptions that, at the time of the FY 2004 
rulemaking, we did not find appreciably more credible than the 
alternative assumptions we ultimately relied upon.
    The hypothesis that the 123 hospitals identified in our analysis 
should have been dropped from the charge inflation computation treats 
the removal of the 123 hospitals as synonymous with accounting for 
turbocharging. It presumes that removing the 123 hospitals from the 
measure of charge inflation would have accounted for the end of 
turbocharging, without otherwise introducing error or bias, and that, 
conversely, including the 123 hospitals introduced systematic error. 
But that assumes both that all of the 123 hospitals were in fact 
engaged in turbocharging, and that the population of turbocharging 
hospitals remained for the most part unchanged over all three intervals 
from FY 1999 through the end of FY 2003--that is, that those 123 
hospitals continued to engage in turbocharging after FY 2001, that they 
did not materially increase their rate of turbocharging during that 
period, and that no other hospitals started to turbocharge or otherwise 
increase their rate of charge inflation. We did not feel sufficiently 
confident that such an assumption would enhance the accuracy of the 
outlier threshold calculation to incorporate it into our projections 
for FY 2004.
    While our analysis confirmed that turbocharging was a problem, and 
that rule changes were warranted along the lines of the changes we 
adopted in June 2003, we did not otherwise have a confident grasp on 
which hospitals were turbocharging at what times. Our analysis 
suggested that the 123 hospitals that we identified were likely 
engaging in turbocharging during the FY 1999 to FY 2001 interval, but 
it did not tell us whether the population of turbocharging hospitals 
remained unchanged through the end of FY 2003, with all 123 hospitals 
continuing to engage in turbocharging and no other hospitals starting 
to turbocharge.
    There was also good reason to question the assumption that the 
population of turbocharging hospitals and the behavior of turbocharging 
hospitals did not change between FYs 2001 and 2003. Industry knowledge 
of turbocharging may have become more widespread late in calendar year 
(CY) 2002 after publication of an investment analyst report on the 
subject. As we previously explained in our March 2003 and June 2003 
documents (68 FR 10426 and 10427 and 68 FR 34505, respectively), we 
believed that it was possible that, before the June 2003 final rule 
took effect, hospitals that had not previously engaged in turbocharging 
would take advantage of this new knowledge and increase their charges 
to catch up to the charging practices of their competitors. Likewise, 
we had reason to believe that turbocharging hospitals, in anticipation 
of CMS's regulatory action curbing the effects of turbocharging, would 
accelerate their turbocharging, either so that they could gain as much 
as they could from the practice before CMS's regulatory changes took 
effect or because the hospitals now had less reason to keep 
turbocharging limited to avoid detection. For these reasons, HHS could 
not necessarily count on the assumption that aggregate charge inflation 
between FYs 2002 and 2004 would be significantly lower than predicted 
by the FY 2000 to FY 2002 data.
    In sum, in evaluating how to handle the 123 hospitals in estimating 
charge growth, we were faced with choices among various uncertain 
assumptions. We understand the intuitive appeal behind the suggestion 
that we could have imputed the phenomenon of turbocharging strictly and 
exclusively to those 123 hospitals, and accordingly assumed that 
dropping those 123 hospitals' charge data from the charge inflation 
estimate would remove a source of distortion. But that suggestion 
itself rests on a set of assumptions. Ultimately, we were faced with a 
choice between those assumptions and the alternative assumption that, 
by and large, charge inflation between FYs 2000 and 2002 would 
adequately predict charge inflation between FYs 2002 and 2004 overall. 
We did not see reason to conclude that those other assumptions were 
superior.
    We note also that there was only a very limited time interval 
between the finalization of the June 2003 rule and the publication of 
the FY 2004 final rule on August 1, 2003, so we had very little time to 
analyze the potential impact of the June 2003 rule, as finally adopted, 
on our projections. In addition, the June 2003 rule did not take effect 
upon publication. Instead, some parts of the rule were to take effect 
August 8, 2003, and the rest were to take effect October 1, 2003. 
Consequently, at the time of the FY 2004 final rule, we did not yet 
have any actual data on hospital charging behavior under the June 2003 
rule. We did take several measures designed to adapt the FY 2004 
estimates in light of the adoption of the final 2003 rule, and those 
measures resulted in a significantly lower fixed-loss threshold. But 
the timing of our efforts constrained our ability to explore additional 
avenues of analysis we might have otherwise explored.

B. Adjustments to Cost-to-Charge Ratios To Simulate Updates When More 
Recent Cost Reports Are Tentatively Settled

    The court rulings also call for additional explanation of a second 
issue with respect to each of the FY 2004, 2005, and 2006 IPPS 
rulemakings. Specifically, the court questioned why, in simulating 
future DRG payments and outlier payments, we did not apply a downward 
adjustment to hospitals' cost-to-charge ratios to account for the 
possibility that, after a more recent cost report is tentatively 
settled during the coming fiscal year, a given hospital's outlier 
payments will be calculated

[[Page 26362]]

based on an updated, and possibly lower, cost-to-charge ratio.
1. FY 2004
    We acknowledge that, by the time of the FY 2004 rulemaking, we had 
reason to believe that the posited phenomenon was real. The cost-to-
charge ratio used to compute a hospital's outlier payments was likely 
to change at some point during the year once a new cost report was 
tentatively settled. Furthermore, we had reason to believe that, by and 
large, a given hospital's updated cost-to-charge ratio would likely be 
lower than its earlier cost-to-charge ratio, because we had long 
observed that hospital charges generally increased faster than costs. 
We also acknowledge that the methods we employed did not include an 
adjustment to account for this specific phenomenon, though they did 
account for other effects associated with the general phenomenon of 
charges increasing faster than costs and the general pattern of decline 
in cost-to-charge ratios. Our reasons for not incorporating such an 
adjustment relate to the uncertainty and complexity associated with the 
task of devising and implementing such an adjustment.
    The problem of projecting changes in cost-to-charge ratios over 
time is qualitatively different from the problem of estimating charge 
inflation over time. Hospital charges--like hospital costs--are a 
simple scalar quantity, reflecting tangible real-world activity and 
measured in dollar values greater than zero. Measuring and projecting 
changes in dollar quantities of this kind is a relatively common 
problem, both in the administration of the Medicare program in 
particular and in business- and finance-related fields more generally. 
Calculating projected future figures by calculating an estimated 
percentage change from aggregate figures, and then applying that 
estimated percentage change to a past measurement, is a familiar 
approach to that problem.
    With respect to outlier threshold projections specifically, at the 
time of the FY 2004 rulemaking in 2003, we had a great deal of 
experience estimating changes in quantities of this kind using 
inflation factors computed from changes in aggregate costs or charges 
for all hospitals. From 1993 to 2001 (the IPPS rules for FYs 1994 to 
2002), we had incorporated a measure of cost inflation to account for 
year-to-year changes in hospital costs. In 2002 (67 FR 50124), we began 
accounting for inflation based on year-to-year changes in charges 
instead of costs. This was not a drastic leap, given that charges and 
costs are similar quantities measured in the same units.
    A cost-to-charge ratio is different in kind. A cost-to-charge ratio 
does not correspond to a tangible real-world dollar quantity; instead, 
it is a unitless measure that represents the proportional relationship 
between two quantities (costs and charges). Charges and costs are 
virtually always positive values, and charges virtually always exceed 
costs. Consequently, cost-to-charge ratios virtually always fall 
between 0 and 1 (instead of ranging from 0 on up as costs and charges 
do). Within that range between 0 and 1, there is considerable variation 
in cost-to-charge ratios among individual hospitals, among different 
types of hospitals, and among geographic areas. This variation is 
evident in the data we typically make available in connection with our 
annual IPPS rulemaking (including the impact files and Tables 8A and 8B 
published in the Federal Register).
    As discussed previously, computing an update factor from aggregate 
figures and applying that estimated percentage change to a dollar 
figure is a familiar method of projecting future dollar amounts. But it 
was not evident at the time of the FY 2004 rulemaking that the same 
approach would translate well to the task of projecting updates to 
cost-to-charge ratios. If we knew that all hospitals' cost-to-charge 
ratios were fairly uniform and tended to move in similar ways over 
time, then we could be fairly confident that applying a uniform update 
factor based on aggregate changes in costs and aggregate changes in 
charges would be a satisfactory way to compute projected cost-to-charge 
ratios. But, as noted previously, we knew there was substantial 
variation in cost-to-charge ratios across hospitals. We also did not 
have a solid understanding of whether there was variation across 
hospitals in how cost-to-charge ratios change over time. Given these 
factors, at the time of the FY 2004 rulemaking, it was not yet clear to 
us that it would be appropriate to compute a uniform adjustment factor 
from aggregate changes in costs and aggregate changes in charges and 
then apply that same uniform adjustment factor to the cost-to-charge 
ratios of all hospitals across the board.
    At the time of the FY 2004 rulemaking, we also had not yet 
developed any more complex method that might avoid some of the 
potential pitfalls of a uniform adjustment factor. A more complex 
method piling adjustments on top of adjustments could introduce 
uncertainties of its own, especially when done in the limited time we 
have to project the annual outlier threshold each year. It is incorrect 
to assume that adding to the complexity of a simulation method, or 
increasing the number of factors it purports to take into account, will 
necessarily improve results.
    Even if a clearly sound technique had been available to us for 
estimating updates to hospitals' historical cost-to-charge ratios, 
applying such a technique in FY 2004 would have involved an additional 
complication. As explained in our August 1, 2003 document, (68 FR 45476 
through 45477), to account for our change from the use of settled cost 
reports to the use of tentatively settled cost reports, we elected not 
to employ actual historical hospital cost-to-charge ratios in 
estimating FY 2004 payments. Instead, for most hospitals, we used cost 
and charge data from the most recent cost reporting year to compute 
estimated cost-to-charge ratios, and we used a different method to 
calculate estimated cost-to-charge ratios for 50 hospitals identified 
as likely to have their cost reports reconciled. Thus, even if we had 
had a method for projecting future cost-to-charge ratios (CCRs) from 
historical CCRs, we would have had to further modify that method for 
use with the estimated CCRs we computed for FY 2004.
    Perhaps it might have been acceptable to incorporate a cost-to-
charge ratio adjustment despite all these uncertainties (and we have 
done so in more recent years). But at the time of the FY 2004 
rulemaking, we did not believe the case for such an adjustment was so 
compelling as to make such an adjustment essential.
    Our decisions are also affected by the limited time we have to 
devise and implement adjustments to our methods in each year's annual 
outlier rulemaking. At the time of the FY 2004 rulemaking, we had 
recently made significant changes to our outlier policies in the June 
2003 rule, and we recognized that those changes would have a 
significant effect on Medicare outlier payments. In making adjustments 
to our methods, we chose to focus our efforts on those issues we judged 
most likely to have the most significant relative impact on our 
projections, while deferring fuller analysis of other issues we judged 
less likely to have a significant impact, including the effect of 
updates to CCRs.
    We strive to make the best possible estimates, but estimation, by 
definition, involves approximation, and perfect accuracy is 
unattainable in our payment projections. Adding additional layers to an 
estimation technique does not necessarily improve the estimates. And 
adding complexity to an estimation

[[Page 26363]]

method can simply create an illusion of accuracy instead of actual 
improvements in accuracy.
    In light of all these complexities, it was not evident to us in the 
FY 2004 calculation that any particular adjustment to cost-to-charge 
ratios would improve our projections. Since we believe we acted 
appropriately and in accordance with statutory requirements, we are not 
recalculating the FY 2004 threshold.
2. FY 2005
    In our FY 2005 projections, we again chose not to introduce a new 
adjustment to attempt to account for the updating of cost-to-charge 
ratios during the year as new tentative cost reports were settled. Most 
of the factors discussed previously were still present: The fundamental 
differences in the nature and properties of charges and cost-to-charge 
ratios; the complexity of simulating the updating of cost-to-charge 
ratios through either application of a uniform update factor or a more 
complex adjustment; and our lack of experience with that task.
    Also, at the time of the FY 2005 rulemaking, we were still focusing 
our efforts on the task that we believed had the most significant 
potential impact on our projections: Monitoring the effects of the June 
2003 rule changes and related changes in hospital behavior. We again 
chose to defer closer examination of the possibility of an adjustment 
to capture the effect of updates to cost-to-charge ratios.
    Also, again, it is important not to overestimate the likely impact 
of updates to cost-to-charge ratios on the overall robustness of our 
projections. First, the effect typically comes into play only for part 
of the year. In our FY 2005 projections, we did not use estimated cost-
to-charge ratios as we had done in the FY 2004 rulemaking. Rather, for 
the FY 2005 final rule, we used CCRs from the March 2004 update of the 
Provider Specific File, the latest data available (the proposed FY 2005 
IPPS rule refers to the same data as the ``April 2004'' update (69 FR 
49277)). CCRs are typically in use for 1 year or more, so, for many 
hospitals, the CCR in the March 2004 update of the Provider Specific 
File would be the same CCR used for payment at the beginning of FY 
2005, which began in October 2004.
    Also, the effect of updates to cost-to-charge ratios is just one of 
many factors--many of them highly unpredictable--that affect our 
projections. We note that several commenters on the proposed FY 2005 
IPPS rule (69 FR 49276 and 49277) advocated for adjustments to account 
for CCR updates. Three commenters in particular provided us with 
analyses that purported to include such adjustments. One of these 
commenters advocated for a FY 2005 threshold of $26,600, another 
commenter suggested a threshold of $28,455, and a third advocated for a 
threshold ``no higher than $27,000.'' In other words, each of these 
three commenters purported to incorporate adjustments designed to 
account for the effect of updated CCRs, among many other factors, yet 
each arrived at a fixed-loss threshold estimate considerably higher 
than the $25,800 level we ultimately set.
    Because we believe we acted appropriately and in accordance with 
statutory requirements, we are not recalculating the FY 2005 threshold.
3. FY 2006
    The factors discussed previously were all still present for FY 
2006: (1) The fundamental differences in the nature and properties of 
charges and cost-to-charge ratios; (2) the complexity of simulating the 
updating of cost-to-charge ratios; and (3) our desire to focus on 
monitoring the aftermath of the 2003 rule changes.
    While we carefully analyzed comments suggesting we make a separate 
adjustment to the CCRs, we again declined to do so, noting that the 
CCRs we were using from the March 2005 Provider-Specific File were the 
most recent available, were the CCRs that in many instances Medicare 
contractors would be using to make outlier payments in FY 2006, and 
were approximately 3 percent lower than the CCRs used in the FY 2006 
proposed rule (70 FR 47494).
    As had been the case in FY 2005, two commenters submitted 
recommendations based on an analysis that purported to account for 
updates to CCRs, and those recommendations were in turn endorsed by 
many other comments. These commenters advocated for a threshold of 
$24,050, higher than the $23,600 level that we computed. This lent 
further support to our decision to defer closer study of the effect of 
updates to cost-to-charge ratios.
    Because we believe we acted appropriately and in accordance with 
statutory requirements, we are not recalculating the FY 2006 threshold.

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: May 14, 2019.
Seema Verma,
Administrator, Centers for Medicare & Medicaid Services.

    Dated: May 28, 2019.
Alex M. Azar II,
Secretary, Department of Health and Human Services.
[FR Doc. 2019-11796 Filed 6-3-19; 11:15 am]
 BILLING CODE 4120-01-P