Medicaid Hospital Outlier Payments in Illinois for the Period of State Fiscal Years 1998 Through 2002

EXECUTIVE SUMMARY:

Our objective was to determine whether Illinois's method of computing inpatient hospital cost outlier payments resulted in reasonable payments.  Illinois's method of computing inpatient hospital cost outlier payments did not result in reasonable payments.  Specifically, Illinois (1) used an out-of-date factor to convert billed charges to costs and (2) did not have adequate policies and procedures in place to monitor cost outlier payments.  As a result, cost outlier payments increased significantly and at a faster rate than other types of Medicaid payments.  If Illinois had applied a more current factor to convert billed charges to costs, it could have saved approximately $56.5 million between 1998 and 2002 for the three hospitals we reviewed.  We recommended that Illinois revise its method of computing cost outlier payments to ensure that payments are reasonable and that Illinois develop policies and procedures to more closely monitor cost outlier payments.  Illinois acknowledged that cost outlier payments have increased significantly, but stated that the appropriateness of the increase must be viewed in the context of the current inpatient rate freeze.  Illinois also stated that the State fiscal year (FY) 2006 proposed budget includes increasing the threshold amount in order to hold cost outlier payments at their FY 2005 levels.