Medicare Hospital Reimbursement

University of Michigan

Health Systempresented by Thomas Marks

Director, Hospital Accounting&Reimbursement

Medicare Payment Systems

Institutional• Hospital inpatient

– medical/surgical

– psychiatric

– rehabilitation

– long-term, childrens, cancer

• Hospital outpatient

• Skilled nursing facility

• Hospice

• Ambulatory surgery center

Other Providers• Physician

• Clinical laboratory

• Physical/speech/occ therapy

• End stage renal dialysis

• Ambulance (ground and air)

• Durable medical equipment

• Home infusion

• Home health agency

Topics to Cover

• Brief historical perspective

• Medicare inpatient PPS– DRGs - Disproportionate share

– Area wage adjustments - Direct GME

– Indirect medical education - Organ acquisition

• Medicare outpatient PPS– APCs, structure and payment rules

– HOPD status

• Settlements

• Medicare policy issues

Historical Perspective

1965 1984 2003

DRGs

In the beginning, there was the cost report.

DGME

Lab fees &esrd rate

Outpatscreens

APCs

CapitalPPS

RehabPPS

Cost reimbursement

Prospective rates and fee for service now prevail.

Historical Perspective (continued)

• What remains as cost-reimbursed: – inpatient psychiatric (although subject to a cap)

– organ acquisition

• “Cost” is still important in Medicare policy– All payment systems are benchmarked to cost in the aggregate

– Some payment systems provide extensive payment differentiation based on cost differences

– Cost data is used to set weights and rates for prospective payments

Inpatient Payment• DRG-based payment = adjusted rate x DRG relative weight

– Operating and capital components are separate but similar

– Psych and rehab units are excluded

• Adjusters: – area wage index

– indirect medical education (IME)

– disproportionate share (DSH)

• Additional payments:– outliers

– direct graduate medical education (GME)

– organ acquisition

– bad debts

UMHHC 2002 PPS Revenue

in millions Operating Capital Total

DRG base payment 76.2$ 7.3$ 83.5$ Indirect medical education 38.0 2.8 40.8 Disproportionate share 7.6 0.4 8.0 Outlier payment 13.1 1.8 14.9 Direct graduate medical education 9.7 - 9.7 Organ acquisition 7.0 - 7.0 Bad debts 0.6 - 0.6 Total revenue 152.2$ 12.3$ 164.6$

2002 Inpatient PPS Revenue

PPS Payment Differences

COMPARATIVE PAYMENT PER CASE (2001)

DRG 4, Spinal Procedures UMHHC St Joe AA Foote

Operating base rate 4,251$ 4,251$ 4,251$ Area wage index adjustment 327 327 (221) Indirect medical education 2,318 641 - Disproportionate share 387 - 145 Adjusted rate 7,283 5,219 4,175

DRG weight 2.318 2.318 2.318

Operating Payment 16,885$ 12,099$ 9,680$

DRG Payments

• DRG structure– Currently 528 DRGs, intended to be groupings of clinically-similar

diagnoses and procedures

– Medical DRGs - generally based on principal diagnosis

– Surgical DRGs - generally based on principal procedure

– Complications/commorbidities and patient age may also be factors

• DRG Relative Weights– Average cost of cases in a DRG compared to average cost for all cases

– Cost derived from charges on Medicare claims

– Generally, a three-year lag between claims data (used to set weights) and payment dates

DRG Payments - Weights

Examples of Medicare DRGs and Weights

001 Craniotomy age > 17, with CC 3.7399

002 Craniotomy age > 17, w/out CC 1.9730

003 Craniotomy age 0-17 1.9504

134 Hypertension 0.5877

143 Chest pain 0.5391

389 Full-term neonate with major problems 3.1648

390 Neonate with other significant problems 1.1201

480 Liver transplant 10.3805

483 Tracheostomy except face/neck/mouth dx 17.0510

DRG Payments - Documentation

• All inpatient cases coded by Medical Information Systems

• Cannot code what is not in the medical record

• Importance of documentation– All procedures must be defined

– Existence of complications

– Existence of commorbidities

• Several initiatives are underway to improve documentation

Area Wage Index• What does it pay for?

– Differences in cost of living (wage levels) impact cost per case

• Methodology: – Each hospital reports wage, benefit and worked hour data annually

– Average compensation per hour computed for each metro area

– Each metro area assigned an Area Wage Index value

– Labor portion of DRG rate (about 71%) is adjusted

• Examples:Ann Arbor 1.1103 New York 1.4414

Grand Rapids 0.9548 Hattiesburg MS 0.7441

Indirect Medical Education (IME)

• Why does it exist?– Teaching hospitals have higher costs

– IME is intended to level the playing field

– Statistical correlation between teaching intensity and cost per case

– Ratio of residents to beds is used to measure teaching intensity

• What does it pay for?– Patient severity and complexity not adequately addressed by DRGs

– New technology and standby capacity

– Inefficiencies, as residents provide much of the care

IME - Formula

• Methodology: Resident to bed ratio converted to a % add-on to the rate

• Formula as of 10/1/02: ((1+R/B)^.405 - 1) x 1.35 = IME

• Examples: Hospital 1 Hospital 2 Hospital 3 (UM)

FTE residents 10 100 635

Available beds 200 400 680

R/B ratio .05 .25 .93

IME percentage 2.7% 12.8% 41.3%

DRG rate 4,500 4,500 4,500

IME rate adjustment 121 576 1,858

IME - Resident Count

Includes• All trainees in approved

programs - residents, fellows

• Rotations in most inpatient and outpatient hospital facilities

• Rotations in non-hospital, offsite locations if all costs borne by hospital (per contract)

• Research rotations involving patient care

Excludes• Trainees in unapproved

programs

• Rotations in exempt psych and rehab units

• Rotations in other hospitals

• Rotations in offsite locations where no contract exists

• Bench research rotations

• Time not adequately documented

IME - Other Rules

• Balanced Budget Act changes– Cap on allowable FTE: resident count cannot exceed 1996 base year

– Three-year rolling average: Resident FTE is based on the capped count for the current and two most recent years

– UM experience: have exceeded 1996 cap each year since 2000

• Available beds– Staffed beds excluding psych unit, rehab unit, nursery and observation

– Closed beds excluded: need to show that beds cannot open in 72 hours

– UM experience: opening a bed decreases IME by $50,000

Disproportionate Share (DSH)

• What does it pay for?– Hospitals with high indigent patient volumes incur more costs, and incur

more uncompensated care– DSH is a supplemental payment to help defer these higher costs and losses

• Methodology: – “Indigent” patient days divided by total patient days = DSH percentage,

converted to a percentage add-on to the DRG payment. – “Indigent” is defined as...

• Patients enrolled in Medicaid Title 19

• Medicare patients eligible for Supplemental Security Income (SSI)

– Excludes Title 5, county indigent care recipients, uninsured

DSH (continued)

• Formula:– DSH percentage > 20.2%: ((DSH % - .202) x .825) +.0588

– DSH percentage > 15%: ((DSH % - .15) x .65) + .0250

• Example: Hospital 1 Hospital 2 (UM)

DSH percentage 20.0% 25.0%

Threshold 15.0% 20.2%

Over threshold 5.0% 4.8%

DSH add-on 5.7% 9.8%

DRG rate 4,500 4,500

DSH rate 259 441

Outlier Payments• What does it pay for?

– Individual cases may have very high costs

– Outlier payment provides partial recovery of costs not covered by DRG

• Methodology:– Charges converted to cost using hospital’s cost-to-charge ratio (CCR)

– Cost is compared to a threshold: DRG payment + fixed threshold

– Cost > threshold is reimbursed 80%

• Example: – Charges=$150,000, CCR=0.50, DRG pymt=$10,000, threshold=$33,560– Cost: $75,000 (150,000 charges x 0.50 ccr)

– Threshold: $43,560 (10,000 drg payment + 33,560 threshold)

– Outlier payment: (75,000-43,560) x 80% = $25,152

– Total payment for this case: DRG (10,000)+outlier (25,152) = $35,152

Direct GME

• What does it pay for?– Direct GME is intended to cover the direct costs of approved residency

programs: • resident salaries and benefits

• faculty supervision and teaching

• other direct costs and overhead allocable to GME

• Methodology: hospitals receive a fixed amount per resident FTE, multiplied by Medicare % of patient days– Fixed amount is hospital specific, based on 1985 cost per resident

– Medicare % of patient days includes days for patients enrolled in Medicare managed care plans

Direct GME (continued)• FTE Count: Same as IME except...

– Bench research, and rotations in psych and rehab units are included– Residents beyond initial residency period are counted at 50% (fellows)

Subject to 1996 cap

Based on three-year rolling average

• UM Experience, FY2002:– Resident FTE, unadjusted 748 FTE– Impact of initial residency period limit -108 FTE– Resident FTE, adjusted 630 FTE– Capped, three-year rolling average 603 FTE– Medicare payment per adjusted FTE $20,282 – Medicare cost per adjusted FTE $34,943

Organ Acquisition Cost• What does it pay for?

– Covers all organ procurement activities:• purchases from organ procurement agency

• excision from live donors and cadavers

• transportation, preservation

• administrative support

– Also covers pre-transplant evaluations of prospective recipients/donors• clinic visits, tissue typing, diagnostic testing

• Methodology - cost reimbursement:– Medicare cost report used to determine cost for each organ type– Medicare pays its share of total cost based on ratio of Medicare usable

organs / total usable organs

• UM results: average reimbursement > $40,000 per organ

PPS-Exempt Units• Psychiatric exempt unit

– cost reimbursed subject to a per-discharge limit

– limit = 75th percentile cost per discharge

• Rehabilitation exempt unit– through 2002: cost subject to per-discharge limit

– beginning FY2003: prospective payment system• DRG-like groups called case-mix groups (CMGs)

• 100 CMGs in total, four levels of severity for each CMG

• Assignment based on...

– impairment category (stroke, spinal cord injury, head trauma, etc)

– functional scores (motor skills, cognitive skills)

– patient age

• Adjustments for Area Wage differences, DSH (no IME)

• Additional payment for outlier cases

Outpatient Reimbursement

UMHS MEDICARE OUTPATIENT (Millions)

Charges Payments

Outpatient prospective payment (APCs) 80.4$ 42.4$ Clinical laboratory 11.7 2.7 Physical, speech, occupational therapy 3.5 1.9 Renal dialysis 2.0 0.3 Air ambulance 1.3 0.9

98.9$ 48.2$

Outpatient PPS• Ambulatory Payment Classifications (APCs)

– Began effective 8/1/2000

– Prior to 2000, cost reimbursed with adjustments

• Major differences from DRGs

– measuring the payable encounter• inpatient: a single payment for each admission

• outpatient: multiple payments possible for each visit

– assigning the encounter to a payment group• inpatient: principal diagnosis

• outpatient: procedure codes

Outpatient PPS (continued)

• Current APC structure - number of APCssignificant procedures 217

other payable procedures 118

ancillary tests 41

visits 8

drugs and devices 174

• Excluded from APCs, paid under separate fee scheduleclinical laboratory

rehab therapy

renal dialysis

orthotics and prosthetics

Outpatient PPS (continued)

• Payment– Each APC assigned a relative weight

– CMS sets a national conversion factor, adjusted for area wage index

– Adjusted conversion factor x weight = payment

– Outlier payments may be available (not lucrative)

– No provision for IME, DSH

• Packaged services (bundling) - not separately paid– most drugs and devices

– medical supplies

– anesthesia, recovery

– observation, with some exceptions

– procedures deemed to be incidental (ex: pulse oximetry)

Outpatient PPS (continued)

Examples - APC Rates mid-level clinic visit $53.88

high-level ER visit 241.37

cataract procedure w/ IOL 1,236.48

level I endoscopy, upper airway 51.18

level III endoscopy, upper airway 177.79

electrocardiogram 20.47

level I plain film except teeth 42.56

CT scan with contrast material 250.53

chemotherapy by infusion 200.42

level 1 radiation therapy 87.82

cochlear implant 20,442.02

Outpatient PPS (continued)

• Special payment rules– surgical discounting: if more than one procedure is performed during a

visit, the most expensive procedure paid 100%, others paid 50%

– drugs:• in initial years of APCs, cancer drugs and several other higher-cost drugs were

paid separately

• beginning on 1/1/03, many cancer drugs are now packaged into the infusion payment and the payment for higher-cost drugs was reduced

– devices:• the OPPS legislation provided that expensive devices receiving FDA approval

within three years would be paid separately.

• Initially, there were hundreds of these devices, now a handful

Outpatient PPS (continued)

• Transitional Payment– Hospitals adversely affected by APCs receive a transitional payment to

cover part of the difference between pre-APC payment and APC payment

– Transition payment is being phased-out over three years (ends 12/31/03)

• UMHHC experience - Projected FY2003– reimbursement based on pre-APC rules $56.2M

– reimbursement under APCs 42.6M

– APC loss before transitional payment 13.6M

– transitional payment 5.3M

– remaining APC loss $ 8.3M

HOPD Status• To qualify for APCs, sites must be designated as hospital-

based outpatient departments (HOPD)

• Criteria and requirements for HOPD status: – Must be under common ownership and control

– Integrated financial operations, clinical services, medical records, admin

– Medical staff at site have privileges at the hospital

– Must hold itself out to the public as part of the hospital

– Cannot be more than 35 miles from the main campus

– Must meet federal EMTALA, anti-dumping, non-discrimination rules

• All but a handful of UMHS sites are HOPD

Other Outpatient

• Clinical laboratory - Medicare fee schedule

• Rehab therapy - Medicare fee schedule

• Renal dialysis - composite rate per visit

• Common features– no differentiation between hospital based and independents

– no differentiation based on teaching status or other factors

Settlements

• Many elements of hospital reimbursement are based on aggregate data covering the full fiscal year– Resident counts for IME and Direct GME

– Medicaid-eligible patient days for DSH

– Cost data for organ acquisition and outpatient transitional payment

A retrospective settlement is required

• Hospitals receive cash via biweekly interim payments

• Settled to “actual” after year-end

Settlements (continued)

• Settlement Process and typical timeline– Hospital year-end 6/30/02

– Cost report submitted 11/30/02

– Tentative settlement by intermediary 3/31/03

– Audit by intermediary and final settlement 9/30/04

– Appeal filed by hospital if necessary 3/31/05

– Appeal settled if possible 9/30/06

– Legal proceedings if necessary ???

Medicare Policy-Broad Issues

• How large can Medicare grow?– current federal deficits

– cost trend in health care

– aging of the population

• Competing priorities - distributing federal dollars– prescription drug benefit

– funding for the uninsured and underinsured

– between provider types - hospital vs physician vs home health vs ...

– within the hospital line:• urban vs rural

• teaching vs non-teaching

Medicare Policy-UM Issues

• Concerns– GME funding, especially IME (IME rates are “inherently too high”)

– Pressure to eliminate rate differentiation

• HOPD versus freestanding counterparts

• Disparities between hospitals

– Area wage adjustment and occupational mix

• Opportunities– Inpatient severity of illness adjustments

– IME-type adjustment for outpatient

– Rebasing GME caps on resident FTEs

– Additional payment for new technology

Resources

• HHC Reimbursement– Department number: 647-3321

– Director: Tom Marks, 6-7990 (tmarks@umich.edu)

• Centers for Medicare and Medicaid Services (CMS)– Website: http://cms.hhs.gov

– Provider data: http://cms.hhs.gov/providers/• recent regulations

• statistics

• public use files

– Other data: links to beneficiary and coverage information, publications by the Agency, Medicare manuals, research, statistics and more

Questions ???