HCFA Changes Outlier Calculations

Responding to health care industry concern about the outlier calculation in the interim regulations governing the new Medicare prospective pricing system (PPS), the Health Care Financing Administration (HCFA) has substantially revised the provision. And industry leaders appear to be pleased with the outcome.

According to medical experts, the hospital-specific component of the diagnosis-related group (DRG) prices was to be reduced by 5.7 percent to create an outlier pool. However, the final regulations eliminate that provision, thereby reducing only the federal portion of the prices to provide for outlier payments.

Applauding Health and Human Services (HHS) Secretary Margaret Heckler’s decision, Jack Owen, American Hospital Association executive vice-president, Washington, DC, says “To remove 6 percent from the hospital base to establish a pool for payments for the one out of every 20 Medicare patients who is an outlier would neither have been fair to hospitals nor consistent with the intent of Congress.” It would have been “virtually impossible” for hospitals to receive fair rates for all their Medicare patients if the government had proceeded with its proposal to reduce by 6 percent both the hospital- and federal-specific portions, Owen says.

Albert Baker, deputy director for the Federation of American Hospitals (FAH), agrees with Owen that the final rules eliminate the inequity that would have resulted had all would have resulted had all hospitals been required to contribute to the outlier pool, “when not all hospitals would have had outliers.” The FAH is pleased that HHS Secretary Heckler and HCFA Administrator Carolyne Davis “in most cases reacted favorably” to the industry’s comments, he says.

Although the Healthcare Financial Management Association (HFMA) also is pleased with the change in the outlier calculation, Ronald Kovener, HFMA vice-president, says that there continue to be significant problems in the final regulations. “One problem [in the final regulations] that apparently requires legislative action is the area wage index,” he says. The area wage index methodology remains unchanged from the interim regulations. It fails to differentiate between part-time and full-time employees, and it does not reflect the influence of adjacent urban areas on the level of wage paid in selected rural hospitals.

Rural hospitals adjacent to urban areas are competing in the same labor market, and the wage index doesn’t take this into account, Kovener says. Also, the final regulations exclude federal hospital employees from calculations for the wage index. And there are communities where the salary rates of federal workers heavily influence the wage rates for all hospital workers, Kovener contends.

The organizations noted other “disappointing” elements of the final PPS regulations, including:

* No eppals mechanism for hospitals seeking to challenge their base-year case mix indexes.

* A reduction of the average prospective prices by approximately $10 to $13 per discharge.

* A continuation of the perdiem payment methodology for the transferring hospital, as stated in the interim regulations.

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