Tenet Healthcare Corp. has operated under a cloud since last fall's news that the company was fueling growth by using a loophole in the Medicare outlier payment program to ramp up its revenue.
Based largely on that revelation, Tenet's stock price plunged. The investor-owned chain lowered future earnings estimates, its top executives have left and it's facing investigations by the Centers for Medicare and Medicaid Services and the Securities and Exchange Commission (View web-exclusive charts).
Yet little attention has gone to many other hospitals and systems-particularly a cluster of not-for-profit providers in New Jersey-that have relied heavily on outlier payments to boost their bottom lines. Outlier payments are meant to reimburse hospitals for unusual cases in which costs exceed standard Medicare rates.
A Modern Healthcare analysis of 2001 Medicare payment data provided by HSS, a healthcare reimbursement consultancy in Germantown, Md., shows less than one-third of hospitals that received 21% or more of inpatient Medicare revenue from outliers were owned by Tenet. In fact, the vast majority of hospitals with the largest outlier percentages were locally operated not-for-profits, and more than a quarter were in New Jersey.
Some $660.7 million in outlier revenue-nearly 18% of the total paid nationally-went to New Jersey hospitals in 2001. Overall, outlier cases generated 19.1% of inpatient Medicare payments in New Jersey, four times the national average of 4.75%. California hospitals ranked a distant second, with 9.5% of inpatient Medicare revenue from outliers. Tenet, with more than 100 hospitals, had 30 facilities that received in excess of 21% of revenue from outliers.
Some of New Jersey's most prominent providers reaped huge outlier shares. Nine-hospital Saint Barnabas Health Care System, West Orange, which had 10 hospitals in 2001, received $302 million, or 41% of its total inpatient Medicare revenue, from outlier payments. Kimball Medical Center in Lakewood, N.J., received more outlier payments as a percentage of Medicare revenue-63%-than any other U.S. hospital .
Robert Wood Johnson University Hospital at Hamilton (N.J.) received $18.2 million in outlier payments, representing 44.2% of its inpatient Medicare revenue; four-hospital Cathedral Healthcare System, Newark, $30.4 million, or 26.6% of its Medicare inpatient revenue; and Hackensack (N.J.) University Medical Center, $35.6 million, or 20.4% of its Medicare inpatient revenue.
While New Jersey hospitals received the bulk of outlier payments, providers in other states also reaped disproportionate shares. For example, Methodist Hospital in Houston netted $41.4 million, or 23.8% of its Medicare inpatient revenue, while two-hospital Crozer-Keystone Health System in Springfield, Pa., received $38.5 million, or 32.1% of its Medicare inpatient revenue.
Large outlier reimbursements to certain hospitals have detracted from payments to other hospitals because the CMS ratcheted up the minimum thresholds for outlier payments to compensate for an increase in claims. Its goal has been to keep outlier payments at 5.1% of all Medicare reimbursements.
The amount by which a case must exceed a standard Medicare DRG payment to qualify as an outlier-also known as the outlier threshold-rose from $14,500 in fiscal 2000 to $33,560 in 2003. It's tentatively set at $50,645 for fiscal 2004, starting Oct. 1.
In testimony before Congress in March, CMS Administrator Tom Scully said certain hospitals were "gaming" the system by rapidly raising their listed charges. To set the reimbursement for an outlier case, Medicare adjusts a hospital's gross charges based on that facility's cost-to-charge ratio, which is determined by its most recently settled Medicare cost report. Rapidly rising charges and time lags in settling cost reports allowed payments to some facilities to soar beyond actual costs, Scully said.
In addition, Scully said some hospitals inappropriately took advantage of a policy that allows the statewide average to be substituted if a hospital's own cost-to-charge ratio greatly deviates from the national mean. The policy was meant to protect against faulty data reporting but has been used in cases where there were no reporting errors, Scully said.
To stem abuses, the CMS plans to implement new outlier payment regulations Oct. 1. Issued in final form last month, the regulations give fiscal intermediaries wide latitude to update a hospital's cost-to-charge ratio, including using cost reports that have not reached a final settlement and even changing ratios to reflect charge increases. The regulations also eliminate the use of statewide average ratios, except when there is evidence of obvious error.
Often hospitals adopt fiscal practices on consultants' advice, which could explain why certain facilities reaped higher outlier payments. But New Jersey hospital officials contacted by Modern Healthcare said they could not explain why outlier payments there far exceeded those of the rest of the country, even neighboring states such as Delaware, New York and Pennsylvania.
Sean Hopkins, senior vice president of health economics at the New Jersey Hospital Association, acknowledged some New Jersey hospitals may have tried to find "some mechanism to effectuate an increase" in their bottom lines. But he said hospitals in the state "really are setting their charges on an individual basis, so it would be hard to make a blanket statement."
Hopkins said New Jersey hospitals might have been "driven" to find new ways to increase revenue because they were disproportionately hurt by Medicare cutbacks in the federal Balanced Budget Act of 1997. "Because we are an entirely urban state we've been somewhat disadvantaged," Hopkins said.
Blue Cross and Blue Shield of Tennessee, which administers New Jersey's Medicare program, has "no idea" why hospitals there collected such a disproportionate share of outlier revenue, spokeswoman Frances Haman-Prewitt said. At the CMS' request, the company and all other Medicare fiscal intermediaries are reviewing providers in their states that received large outlier shares, due to finish in July. Some 24 out of 81 Medicare providers in New Jersey, or 30%, are under review, she said.
The CMS declined to comment for this story.
Universally, hospitals with a high portion of Medicare revenue from outliers deny they manipulated the system. All say they have sicker patients than other U.S. hospitals. Questioned by Modern Healthcare, some hospital executives also defended their pricing and billing.
Saint Barnabas Chief Financial Officer Thomas Scott said the outlier payments are "a byproduct of our charges and of our billing procedures. All of those are consistent with Medicare guidelines."
Abington (Pa.) Memorial Hospital, a 508-bed not-for-profit, has "pretty steady charge increases" that allow it to collect more from commercial health plans that do not have negotiated discounts, Chief Operating Officer Meg McGoldrick said. "We have to raise charges to keep up with the costs," McGoldrick said.
Edward Tyrrell, vice president of corporate financial services at Methodist in Houston, said the hospital raises charges periodically. "We look at other academic medical center hospitals to make sure our prices are in line with" those outside Houston, he said.
Their heavy reliance on Medicare outlier payments has some hospitals scrambling to replace the lost revenue as the CMS clamps down on abuses. Both the American Hospital Association and the New Jersey Hospital Association issued unsuccessful pleas to the CMS to phase in the payment changes over a period of years. In its letter to the CMS in April, the New Jersey association said a "steep drop in expected payments for outlier cases could be financially devastating" to hospitals.
Last month, Standard & Poor's changed its outlook on Saint Barnabas from positive to negative, citing $240 million in lost outlier revenue over a two-year period.
Because of outlier changes, Saint Barnabas expects to post an operating loss this year, on a revenue base of about $2 billion. Scott said the system expects to return to profitability on a monthly basis in late 2004, after reducing staff by 8%, trimming supply costs, cutting services and boosting charges to managed-care companies.
Abington Memorial expects to break even on operations in its current fiscal year which ends June 30, 2004, versus a $6 million operating profit on revenue of $430 million the previous year, a result of fewer outlier dollars, McGoldrick said.