Hospitals Receive Excess $500 Million From Medicare: Watchdog

Medicare overpaid 60 hospitals by more than half a billion dollars over a four-year period, the Health and Human Services Department Inspector General said in a Nov. 27 report.

The $502 million in surplus payments came during the 2011-2014 fiscal years, and stemmed from the criteria that Medicare uses to decide when to review outlier payments. Outlier payments are made when the cost of care exceeds a threshold set by the Centers for Medicare & Medicaid Services. Those payments are reviewed and reconciled by regional Medicare administrative contractors, the private insurers that process claims.

The contractors use a ratio known as the cost-to-charge ratio for each hospital when determining the cost of care for a patient’s stay. The ratio is the hospital’s yearly Medicare costs divided by the amount it charges to Medicare.

The contractors always have to use a previous year’s ratio because the current year hasn’t been calculated, and that can lead to overpayment or underpayment. The overpayment or underpayment occurs when the hospital increases charges at a higher rate than the increase in costs or when it doesn’t increase charges at the same rate as the cost increases.

When the actual ratio is determined, the outlier payments are repriced if the new cost-to-charge ratio is 10 percentage points higher or lower than the previous cost-to-charge ratio. The Medicare agency in 2003 put in place a review process because the OIG had found hospitals abused the ratio to get paid more.

The reason the CMS didn’t detect or recover these outlier payments from the 2011-2014 fiscal years was because they didn’t meet the threshold, the Inspector General’s Office said. Of the cost reports the OIG reviewed, almost all had a ratio of less than 5%.

A hospital could “dramatically increase its charges over its costs” without triggering reconciliation by making a small change to its cost-to-charge ratio, the report said.

For example, a hospital could report total costs of $20 million and total charges of $100 million in a year, so the ratio would be 0.2. The next year the hospital’s costs would stay the same and they could increase their charges to $120 million. The ratio in that case would be 0.167, and the change would only be 3.3%, which wouldn’t trigger reconciliation.

The Inspector General’s Office recommended the CMS require all hospital cost reports be reviewed, and the agency said it is evaluating whether to modify its policy in future rulemaking.