Hospital 'sticker prices' push up outlier payments, OIG finds

When Medicare unveiled hospitals' undiscounted sticker prices on healthcare services last May, executives quickly fired back that Medicare never pays those rates so the figures were meaningless. But that's not true.

Virtually every hospital in America receives extra “outlier” payments from Medicare that are intended to offset costs for catastrophically expensive patients. Those billions of dollars in extra payments are based on hospitals' undiscounted charges, and a new study from HHS' watchdog office (PDF) has unearthed evidence that high sticker prices are indeed driving up Medicare payments.

Although only 2% of Medicare hospital bills include outlier payments, that still amounts to about $4 billion a year in extra reimbursements spread across about 3,200 hospitals. And since outlier payments are set as a percentage of a hospital's sticker price, hospitals with more expensive rates receive bigger outlier payments.

“Unlike predetermined payment amounts for most Medicare hospital claims, outlier payments are directly influenced by hospital charges,” said the study by officials in the Dallas regional office of HHS' Office of the Inspector General.

The average outlier payment between 2008 and 2011 was $15,842, but many were much higher, according to the report. About 6% of all outlier payments exceeded $50,000, and the largest single payment in that time went to a hospital that received $1.4 million from Medicare for a tracheostomy patient who ended up on ventilation for more than four days. (Tracheostomy with mechanical ventilation was by far the most common service to trigger outlier payments.)

The OIG zeroed in on 158 hospitals whose average outlier payments were nearly double the average of the rest—the outliers in outlier payments—and found that they each received an average of $6.5 million per year in extra payments. The other hospitals averaged less than $1 million each per year.

“Generally, high-outlier hospitals were larger, more likely to be in urban areas, and had a higher percentage of teaching hospitals, compared to all other hospitals,” the report says. The OIG did not immediately fulfill a Freedom of Information Act request for a list of those 158 hospitals.

Although these urban academic medical centers are often said to treat sicker populations of patients, the OIG study found that patients' average length of stay in the hospital—an indicator of severity of illness—was virtually the same in the lower-priced hospitals for the same services.

“This suggests that high charges are not necessarily associated with more care for patients,” the report says. The findings “raise concerns about why charges and estimated costs for similar patient-care cases vary substantially across hospitals.”

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