High outlier payments at large not-for-profits, small for-profits lead OIG to push for increased scrutiny

Cedars-Sinai Medical Center in Los Angeles treats some of the most complex Medicare patients in the country. They don't do it cheaply.

A Modern Healthcare analysis of data provided under a Freedom of Information Act request found Cedars-Sinai received $270 million from supplemental “outlier” payments—more money than any other U.S. hospital between 2008 and 2011. Maimonides Medical Center in New York received the second-highest amount, $115 million, over those four years.

Those outlier payments accounted for 21% and 12% of Cedars-Sinai's and Maimonides' total Medicare payments, respectively, placing both hospitals in a cohort of 158 “high-outlier” facilities singled out for additional scrutiny by HHS' Office of the Inspector General. That office's recent report said Medicare spent about $16 billion overall in outlier payments during the four-year period. Unlike standard Medicare payments, outlier payments are based in part on a hospital's retail prices for particular services, which typically exceed its costs for delivering the services.

The five hospitals receiving the most outlier dollars were all large, urban, not-for-profit centers. Cedars-Sinai and Maimonides were followed by Stanford Hospital, Palo Alto, Calif., at $108 million, University of Michigan Health System, Ann Arbor, at $95 million, and Ronald Reagan UCLA Medical Center, Los Angeles, at $91 million.

While large hospitals racked up the largest dollar totals, much smaller hospitals had the highest percentage of their Medicare revenue coming from outlier payments. All five of the percentage leaders were small, for-profit facilities with between 10 and 70 beds. Three are owned by Cancer Treatment Centers of America, while the other two are physician-owned facilities.

The leader in this category was CTCA-owned Eastern Regional Medical Center, Philadelphia, where 65% of its Medicare payments came in the form of outlier payments, totaling $13 million. Other CTCA-owned hospitals taking a large share of their Medicare revenue in outlier payments were Midwestern Regional Medical Center, Zion, Ill. (54%), and Southwestern Regional Medical Center, Tulsa (45%). They were followed by two physician-owned facilities, Pinnacle Hospital, Crown Point, Ind. (44%), and Doctors Hospital, Leawood, Kan. (37%).

Pinnacle, an 18-bed multispecialty hospital, received the most outlier revenue per Medicare patient, getting an average of $43,000 for each of its 142 outlier patients. The rest of the hospitals on the high-outlier list received an average of $21,000 per outlier case.

The outlier program was established in the 1980s as stop-loss protection for hospitals under Medicare's prospective pricing system in cases of rare, highly expensive patients. The idea was to give hospitals a financial incentive not to turn away patients whose care might cost much more than Medicare's fixed diagnosis-related group payment. “You are protecting hospitals against the risk of unavoidable, unusually expensive cases,” said Stuart Guterman, a vice president at the Commonwealth Fund and former federal official overseeing Medicare expenses.

But for hospitals on the high-outlier list, these payments are common: One in eight Medicare patients in these hospitals end up generating outlier payments.

Outlier payments long have been an issue for Medicare cost-control advocates. In 2006, Tenet Healthcare Corp. agreed to pay $788 million in civil settlements without admitting wrongdoing to settle claims that it manipulated its charges to inflate outlier payments. Several hospitals in New Jersey and New York agreed to pay millions each to settle civil lawsuits over inflated outlier claims in 2007 and 2008. Responding to those cases, the CMS has tweaked the program several times over the years to prevent vulnerabilities and ensure that the program is achieving its stated goal of protecting hospitals from big losses for serving very expensive Medicare patients.

But unlike regular Medicare payments, outlier payments are based in part on a hospital's retail price for particular services. That means hospitals with higher retail prices receive higher outlier payments.

Officials at four of the five hospitals that received the largest dollar volume of outlier payments said their populations of sicker, more complex patients led to the high outlier payments. Stanford did not return a call for comment.

A University of Michigan Health System spokeswoman said that 1 in 10 of the 919-bed hospital's patients are transfers from other hospitals in the region and that transfer patients are much likelier than nontransfer patients to receive care resulting in an outlier payment.

A Maimonides Medical Center spokeswoman said the hospital “is the tertiary-care hub in Brooklyn and attracts an older and poorer population than the Medicare average nationwide. These patients tend to present to us at a more advanced stage of illness.”

The OIG's report, however, said investigators could not find any difference in the amount of care at high-outlier hospitals compared with other facilities. “The routine receipt of outlier payments for certain (inpatient hospital procedures) at high-outlier hospitals raises concerns about why charges and estimated costs for similar patient-care cases vary substantially across hospitals,” according to the report. “Therefore, we recommend that CMS instruct Medicare contractors to increase monitoring of outlier payments.”

The high-outlier hospitals on the list received an average of 13% of their Medicare revenue from outlier payments, and an average of 8% of their Medicare claims generated the supplemental payments. In contrast, for the roughly 3,000 other U.S. hospitals that received Medicare outlier payments, those payments accounted for an average of 2% of their Medicare revenue, and only 2% of their claims generated supplemental payments.

The most common and most costly treatment that triggered outlier payments was tracheostomy with mechanical ventilation lasting longer than four days following a major surgical procedure. That accounted for

$1.3 billion of all outlier spending in those four years. Other common and high-dollar treatments leading to outlier payments included bowel surgery, infectious diseases with major complications, severe sepsis with mechanical ventilation, and major cardiovascular procedures with complications.

Susan Morris, a spokeswoman for Cancer Treatment Centers of America, said one factor contributing to her company's hospitals topping the list for highest percentage of Medicare revenue coming from outlier payments is its model of delivering all treatments in one hospital setting, rather than in multiple office settings. She said for the three hospitals listed in the OIG's report, most of the patients were diagnosed and treated elsewhere prior to coming to a CTCA facility. “Hence they require extensive care and use of advanced technologies and aggressive treatment plans as a result.”

Morris noted that the inspector general's report excluded other “leading cancer specialty hospitals” because they're exempted from the Medicare inpatient payment system.

Neither Pinnacle Hospital nor Doctors Hospital responded to requests for comment for this article.

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