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Medicare Hospital Outlier Payments Warrant Increased Scrutiny


Medicare makes supplemental payments to hospitals, known as outlier payments, which are designed to protect hospitals from significant financial losses resulting from patient-care cases that are extraordinarily costly. Unlike predetermined payment amounts for most Medicare hospital claims, outlier payments are directly influenced by hospital charges. Responding to problems caused by some hospitals aggressively increasing charges, CMS made policy changes in 2003 to ensure the accuracy of outlier payments. This report describes a more recent distribution of such payments.


We examined all hospital claims processed through Medicare's Inpatient Prospective Payment System (IPPS) during calendar years 2008-2011. We calculated the amount and volume of outlier payments and calculated each hospital's outlier payments as a percentage of its total IPPS payments. We also identified hospitals that received a substantially higher percentage of Medicare IPPS reimbursements in outlier payments than all other hospitals.


Nearly all hospitals received outlier payments and some received a much higher proportion of Medicare IPPS reimbursements from outlier payments. Specifically, outlier payments to 158 hospitals averaged 12.8 percent of their Medicare IPPS reimbursements, compared to an average of only 2.2 percent for all other hospitals. These high-outlier hospitals charged Medicare substantially more for the same Medical Severity Diagnostic Related Groups (MS-DRG), even though their patients had similar lengths of stay as those in all other hospitals. Some MS-DRGs triggered outlier payments frequently; 16 MS-DRGs accounted for 41 percent of such payments.


In some cases, high charges could be the result of high costs because hospitals attract a disproportionate share of exceptionally costly patients or apply costly technologies and treatments. Still, the routine receipt of outlier payments for certain MS-DRGs at high-outlier hospitals raises concerns about why charges for similar patient-care cases vary substantially across hospitals. CMS concurred with our three recommendations to: (1) instruct its contractors to increase monitoring of outlier payments, (2) include information about the distribution of outlier payments with other publicly reported hospital data, and (3) examine whether MS-DRGs associated with high rates of outlier payments warrant coding changes or other adjustments.