What Are Outlier Payments to Hospitals?
Understand the vital financial mechanism that supports hospitals when facing exceptionally costly patient care, preserving essential healthcare services.
Outlier payments serve a distinct role in hospital reimbursement, providing additional funds for patient cases that incur exceptionally high costs. This mechanism is designed to protect hospitals from significant financial losses that might arise when treating individuals with unusually complex or expensive medical needs. The payments help ensure that hospitals can continue to provide necessary care without being unduly penalized for the resources required for these cases. This article will explain what these payments are, how they are determined, and which entities are responsible for making them within the healthcare system.
Understanding Outlier Payments
Outlier payments provide additional reimbursement to hospitals for inpatient cases where care costs substantially exceed the standard payment for a Diagnosis-Related Group (DRG). Their purpose is to mitigate financial risk for hospitals facing extraordinarily expensive patient stays. Without these payments, hospitals could incur significant losses, potentially discouraging them from accepting or adequately treating complex patients.
This system ensures hospitals are not unduly penalized for providing care to individuals requiring more intensive or prolonged treatment than typical for their diagnosis. Outlier payments are integrated into the Inpatient Prospective Payment System (IPPS), Medicare’s primary method for reimbursing hospitals for inpatient services. While IPPS generally pays a predetermined amount per discharge based on the DRG, outlier payments safeguard against high-cost instances.
The rationale for these payments is that some patient conditions demand resources far beyond what a standard DRG payment covers. By providing supplemental reimbursement, the system aims to maintain access to care for all patients. This helps ensure hospitals remain financially viable while serving resource-intensive patient populations.
Criteria for Outlier Payments
For a hospital stay to qualify for an outlier payment, its estimated costs must exceed a specific financial threshold, known as the “fixed-loss threshold.” This threshold is a dollar amount by which a case’s covered costs must surpass the standard DRG payment to be considered an outlier. The Centers for Medicare & Medicaid Services (CMS) annually sets and publishes this fixed-loss threshold as part of the Inpatient Prospective Payment System (IPPS) Final Rule.
A hospital’s “cost-to-charge ratio” (CCR) plays a central role in determining if a case meets this criterion. Hospitals bill for services based on charges, but payments are based on costs. The CCR converts billed charges for patient care into an estimated cost, reflecting resources consumed. This ratio is derived from the hospital’s most recent settled cost report.
The determination of whether a case qualifies for an outlier payment considers both operating and capital costs. These costs are estimated separately by multiplying the total covered charges by the respective operating and capital cost-to-charge ratios. The combined estimated operating and capital costs must then exceed the fixed-loss threshold for the case to be eligible for an additional payment.
Calculation of Outlier Payments
Once a hospital stay is determined to be eligible for an outlier payment, the exact amount is calculated based on the costs that exceed the fixed-loss threshold. The payment is not for 100% of the excess costs but rather a specific percentage, known as the “marginal cost factor.” For most Medicare cases, this marginal cost factor is 80% of the combined operating and capital costs that surpass the fixed-loss threshold.
For certain specialized cases, such as burn Diagnosis-Related Groups (DRGs), the marginal cost factor can be higher, specifically 90%. This adjustment acknowledges the high costs of treating severe burn injuries. The calculation provides a partial recovery of extraordinary expenses for complex patient cases.
To illustrate, if a case’s estimated total cost is $100,000 and the fixed-loss threshold is $40,000, the costs exceeding the threshold would be $60,000. Applying the standard 80% marginal cost factor, the outlier payment would be 80% of $60,000, equaling $48,000. This additional payment supplements the standard DRG payment, helping offset the financial burden of costly care.
Who Makes Outlier Payments
The primary entity making outlier payments to hospitals is Medicare, particularly under its Inpatient Prospective Payment System (IPPS). Section 1886 of the Social Security Act provides for these additional payments to Medicare-participating hospitals for cases incurring high costs. Medicare sets the fixed-loss threshold and marginal cost factors, published annually in the IPPS Final Rule.
While Medicare is the most prominent payer using an outlier payment system, other payers also have similar mechanisms. Many state Medicaid programs incorporate outlier payment adjustments to ensure hospitals are reimbursed for high-cost inpatient stays. Some state Medicaid rules specify that if a discharge is eligible, the outlier payment will be a percentage, often 80%, of the eligible outlier costs exceeding an established threshold.
Private health insurers may also include provisions for additional payments for high-cost cases, though criteria, thresholds, and calculation methodologies vary among plans and insurers. These private arrangements are negotiated between the insurer and the hospital. While details may differ from Medicare’s standardized system, the underlying principle of providing supplemental reimbursement for expensive care remains consistent across various payers.