Audit of the Effectiveness of the Revised Medicare Outlier Payment Regulations for Inpatient Acute

DEPARTMENT OF HElLLTH & HUMAN SERVICES Off~ce of Inspector General Washlngton. D C 20201 SEP - 9 2005 TO: Herb Kuhn Director, Center for Medicare Management Centers for Medicare & MedicadServices FROM: A E .engCHneputy Inspector General for Audit Services Audit of the Effectiveness of the Revised Medicare Outlier Payment Regulations SUBJECT: for Inpatient Acute Care Hospitals (A-07-04-04032) Attached are two copies of our final report on the effectiveness of the revised Medicare outlier payment regulations for inpatient acute care hospitals. We previously raised concerns to the Centers for Medicare & Medicaid Services (CMS) about excessive outlier payments in an early alert memorandum dated December 23,2002. Under Medicare's prospective payment system for inpatient acute care hospitals, CMS reimburses hospitals a predetermined amount, known as a diagnosis-related group (DRG) payment, for their services. Generally speaking, Medicare pays a fixed DRG amount per discharge for each type of inpatient case. Under this system, hospitals have a financial incentive to avoid extremely costly patients. To counter this incentive and promote access to hospital care for such patients, the Social Security Act (the Act) requires that CMS make additional payments called outlier payments. The Act also mandates that CMS set a target threshold for outlier payments at 5 to 6 percent of total projected inpatient DRG payments. CMS set the target at 5.1 percent of total ...