Now we know what Tom Scully was referring to when he testified before a Senate panel on March 11 about abuses of the Medicare outlier payment system.
In detailing how the system is gamed, the administrator of the Centers for Medicare and Medicaid Services kept using the example of "hospital A in California" and "hospital B in New Jersey." Everyone in the hearing room knew what he meant by hospital A; by that time Tenet Healthcare Corp.'s pricing and outlier strategies in the Golden State had been thoroughly dissected.
Because of Mary Chris Jaklevic's cover story last week (July 14, p. 4), it's clear why hospital B was in New Jersey. Among other outlier probes, the CMS is trying to find out why Garden State hospitals billed Medicare at four times the national average for outlier cases in 2001, accounting for nearly one-fifth of national outlier revenue. Kimball Medical Center in Lakewood, N.J., received a whopping 63% of its Medicare revenue from outliers, the highest rate of any U.S. hospital. (The data was supplied to us by HSS, a reimbursement consulting firm.)
Either something spooky is happening to New Jersey patients or something fishy is up with hospital billing there. For the New Jersey Hospital Association's answer to this question and our story, see its letter to the editor.
It may be that New Jersey hospitals just have more experience with this game: In 1983, HHS used the state's hospital rate-setting methodology as a template for creating its own prospective payment system.
If nothing else, the story puts the Tenet situation in perspective. The company is being investigated for its own outlier scheme, with 30 facilities that received in excess of 21% of revenue from outliers, but it turns out it only is one player in a very big game.
And we can't just single out hospitals in New Jersey and California, either. Not-for-profits in other states around the country were also players, with Houston's Methodist Hospital, for example, getting nearly a quarter of its Medicare inpatient bucks from outliers.
What's driving these schemes? For part of the answer, look no further than at what took place last week. Credit-rating agencies reported that the ratings of not-for-profit hospitals have been eroding, as investment income slides, reimbursement is under pressure and competition from specialty providers increases. Meanwhile, the U.S. Labor Department reported that hospital price inflation was nearly three times greater than general inflation in June.
Translation: Hospitals are under huge financial pressures and are doing whatever they can within the law and sometimes outside the law to stay in business.
Staying in business is good, no doubt about it, but you shouldn't have to rob Peter to pay Paul. Excess outlier payments are taken from a pool available to all hospitals. Shenanigans such as this lead to congressional hearings and federal investigations. They also lead to the kind of changes being implemented by the CMS to crack down on the practice. One of the changes already made has been a boost in the qualifying cost figure used to trigger outlier payments, which means more high-cost cases are being reimbursed at a lower level nationally.
The practice even boomerangs on the hospitals that game the outlier system. Look at Saint Barnabas Health Care System in West Orange, N.J., which may be the outlier king. Seven of its hospitals were on a chart we ran with our cover story of the facilities with the highest reliance on outlier revenue-including four of the top six. Mainly because of the CMS crackdown on price inflation and outliers, the system expects to post an operating loss this year and will return to the black only in late 2004, after cutting staff and services and boosting charges to health plans.
The outlier game ultimately has no winners but plenty of losers.