"Medicaid Hospital Outlier Payments in North Carolina - Compliance," (A-07-05-04049)

June 20, 2005

Complete
Text of Report is available in PDF format (823 kb). Copies can also be obtained by contacting
the Office of Public Affairs at 202-619-1343.

EXECUTIVE SUMMARY:

Our objective was to determine if the State correctly calculated the cost outlier
payments for all DRGs from State fiscal years (FY) 2000 through 2003. We
found that the State did not correctly calculate cost outlier payments for certain DRGs. The
State’s contractor used a 1.94 standard deviation factor in computing the threshold amount rather than
the 1.96 factor required by the Medicaid State Plan and State regulations. In addition, while
the State effectively updated the factors used to calculate the DRG base and cost outlier payment in
3 out of 4 years that we reviewed, the State did not update the factors effective October 1, 2002 on
a timely basis. The errors occurred because the State neither adequately monitored the outlier
payment calculation nor ensured factors used to calculate the DRG base and outlier payments were updated
in a timely manner.

We recommend the State: (1) collect $775,354
for cost outlier overpayments to the seven hospitals due to the use of the incorrect threshold factor
(and refund the Federal share of $476,533 to the Centers for Medicare and Medicaid Services (CMS));
(2) reprocess the improperly paid claims to the seven hospitals due to not updating the payment factors
effective October 2002 in a timely manner. For the claims associated with a cost outlier payment,
collect $368,251 for Medicaid base and outlier overpayments and underpayments (and refund the federal
share of $226,326 to CMS). For the remaining Medicaid base claims, calculate the effect of the
error and remit the Federal share of any overpayment to CMS; (3) calculate the effect of the errors
for the remaining Medicaid hospitals and remit the Federal share of any overpayments to CMS; and (4)
develop and implement policies and procedures to more closely monitor outlier payments. Specifically,
ensure that the outlier threshold amount is correctly calculated for future outlier payments. In
addition, on an ongoing basis, review factors used in the DRG base and outlier calculation to ensure
accuracy and timeliness of future payments. The State concurred with our findings and recommendations.