Health Care Compliance Adviser: Medicare Outlier Payments for Outpatient Services Also Under Government Scrutiny

Article by Gregory M. Luce, Jesse A. Witten and Renee M. Howard

The current government scrutiny of Medicare inpatient outlier payments has been widely publicized ¹ and was the subject last year of a Jones Day Health Care Compliance Adviser. ² The government has also begun to focus on outlier payments for outpatient hospital services. The HHS Office of Inspector General ("OIG") included outpatient outlier payments on its 2003 Work Plan. It has also released seven audit reports for outpatient outlier claim reviews conducted at five New England hospitals, one California hospital, and one Illinois hospital. ³ The OIG audits found that systemic hospital billing errors—especially overstating the number of units of drugs dispensed during an outpatient procedure— have caused Medicare to make excessive outpatient outlier payments.

Below is a brief description of Medicare’s outpatient outlier payment methodology, the OIG’s recent scrutiny of outpatient outlier payments, and the risks presented by outpatient outlier reimbursement.

Since August 1, 2000, Medicare has paid hospitals a fixed amount for most outpatient services, based on the ambulatory payment classification ("APC") group to which the service belongs. In addition, Medicare pays an additional amount for outliers, i.e., for outpatient encounters that are exceptionally costly.

Outpatient outlier payments are calculated based on the costs incurred to provide the services on a given claim. As with the calculation of outlier payments for inpatient services, costs are derived by multiplying the hospital’s charges for the service by the hospital’s relevant cost-to-charge ratio (here, the cost-to-charge ratio for outpatient services). If the hospital’s total costs for the outpatient service exceed a certain threshold (currently, 2.75 times the outpatient payment for the service), an outlier payment is calculated as a percentage of the amount by which the costs exceed the payment (currently, 45%). ⁴

Since January 17, 2003, outlier payments have been calculated using the hospital’s outpatient cost-to-charge ratio from its most recent full-year cost reporting period, whether or not settled. ⁶ Previously, outpatient cost-to-charge ratios were determined based on the hospital’s most recently settled cost report. If the most recently submitted cost report were not settled, CMS applied a "settled-to-submitted" factor to estimate the cost-to-charge ratio for a settled cost report. ⁷ 

Recent OIG audit reports suggest that hospitals may be vulnerable to outpatient outlier overpayments due to certain billing system quirks. Five of the OIG’s audit reports concluded that the hospitals received excessive outlier reimbursement by not reporting the correct number of units of drugs administered to outpatients. ⁸ For example, one hospital inadvertently applied an adjustment for recording operating room services (which converted multiple OR units to 1 unit) to all Revenue Center Code line items containing multiple units. As a result, the billing system converted multiple units of pass-through drugs to units of 1. The OIG explained the effect of misstating the number of drug units as follows: 

Other billing errors identified by the OIG that resulted in excessive outlier payments included (i) failing to separately identify each surgical procedure on a claim with its specific HCPCS code; 10 (ii) incorrectly charging drugs with separate APC codes under RCC 250 (and hence not identifying the drugs as eligible for separate payment); ¹¹ and (iii) billing for unsupported, unnecessary or excessive observation charges. ¹²

After exposing weaknesses in their billing systems, the OIG recommended that the hospitals (i) improve billing controls; (ii) conduct internal reviews of outpatient outlier claims and resubmit any claims as necessary; and (iii) initiate adjustments with fiscal intermediaries to repay overpayments found by the OIG or identified through the hospitals’ subsequent internal reviews. In addition, the OIG also directed hospitals to perform self audits to determine the full extent of any excessive outlier payments. For example, for one hospital, the OIG found that each of the OPPS claims reviewed was billed incorrectly. Thus, the OIG speculated that there was a risk that payment errors were made for all other claims involving outpatient outlier payments, likely exceeding $1.3 million.

As the OIG audits demonstrate, hospitals may be vulnerable to outpatient outlier overpayments due to billing system errors. These errors could stem from computer changes resulting from OPPS implementation. The OIG acknowledged this possibility in its 2003 Work Plan, where it stated its de- sire to evaluate "the appropriateness of [outpatient] outlier payments" in light of the fact that "[s]ignificant overpayments can result if providers submit claims with clerical errors that result in overstated charges for services."

Hospitals should ensure that their billing systems appropriately capture charges for outpatient services, particularly those involving multiple units of a service. The key is for hospitals to ensure that they are billing for the correct number of units of drugs or other supplies or services. Hospitals that consistently err by charging for excessive numbers of units of supplies or services, and thereby receive excessive outpatient outlier payments, risk being accused of a False Claims Act violation. In other contexts, OIG audit reports have inspired hospital employees to bring qui tam actions under the False Claims Act against their employers based on overpayment scenarios described in the audit reports. Hospitals should thus consider auditing their billing systems to ensure that they are not making the same billing errors as those hospitals audited by the OIG.

Finally, since observation billing errors were identified in two of the OIG audit reports, hospitals should consider reviewing their practices related to coding and billing for observation services.

This Health Care Compliance Adviser is a publication of Jones Day and should not be construed as legal advice on any specific facts or circumstances. The contents are for general informational purposes only and may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at its discretion. The mailing of this publication is not intended to create, and receipt of it does not constitute, an attorney- client relationship.

1. See, e.g., Modern Healthcare, "It’s More Than Just Tenet" (July 14, 2003); The Los Angeles Times, "Tenet Gets Subpoena for Medicare Documents" (Jan. 3, 2003); CMS Program Memorandum No. A-02-122 (Dec. 3, 2002) (instructing Medicare fiscal intermediaries to review appropriateness of inpatient outlier payments made to certain hospitals); Statement of Thomas A. Scully, Administrator, Centers for Medicare and Medicaid Services, on Medicare Payment for Hospital Outliers Before the Senate Appropriations Subcommittee on Labor, Health and Human Services, and Education (March 11, 2003), available at <>; 68 Fed. Reg. 34494 (June 9, 2003) (CMS final rule revising inpatient outlier payment methodology).
2. See "Medicare Outlier Payments" (Jones Day Health Care Compliance Adviser, Nov. 2002), www1.jonesday.com/pubs/detail.asp?language=English&pubid=611.
3. See OIG, "Review of Outlier Payments Made to Mercy Hospital Under the Outpatient Prospective Payment System for the Period August 1, 2000 Through June 30, 2001," No. A-01-02-00518 (April 17, 2003) ("Mercy Audit"); OIG, "Review of Outlier Payments Made to Baystate Medical Center Under the Outpatient Prospective Payment System," No. A-01-02-00528 (March 6, 2003) ("Baystate Audit"); OIG, "Review of Outlier Payments Made to Eastern Main Medical Center Under the Outpatient Prospective Payment System for the Period August 1, 2000 Through June 30, 2001," No. A-01- 02-00507 (Jan. 15, 2003) ("Eastern Maine Audit"); OIG, "Review of Outlier Payments Made to Rhode Island Hospital Under the Outpatient Prospective Payment System for the Period August 1, 2000 Through June 30, 2001," No. A-01-02-00521 (Dec. 5, 2002) ("Rhode Island Audit"); OIG, "Review of Outlier Payments Made to Massachusetts General Hospital Under the Outpatient Prospective Payment System for the Period August 1, 2000 Through June 30, 2001," No. A-01-02-00500 (June 20, 2002) ("MGH Audit"); "Review of Outlier Payments Made to Orthopaedic Hospital Under the Outpatient Prospective Payment System for the Period August 1, 2000 Through June 30, 2001," No. A-09-03-00031 (May 29, 2003) ("Orthopaedic Audit"); OIG, "Review of Medicare Outpatient Prospective Payment System Outlier Payments Made to Rush – Presbyterian – St. Luke’s Medical Center," No. A-05-03-00033 (July 31, 2003).
4. See 67 Fed. Reg. at 66789 (Nov. 1, 2002).
5. This formula is somewhat simplified in that a hospital’s charges for a particular outpatient service are adjusted to costs by applying both an operating and a capital cost-to-charge ratio.
6. See CMS Program Memorandum No. A-03-004 (Jan. 17, 2003).
7. See CMS Program Memorandum No. A-00-63 (Sept. 1, 2000).
8. See Eastern Maine Audit at 2–3; Mercy Audit at 2-3; Baystate Audit at 3; MGH Audit at 2–3; Orthopaedic Audit at 3.
9. Eastern Maine Audit at 3.
10. Mercy Audit at 3–4.
11. Baystate Audit at 2.
12. Rhode Island Audit at 3; MGH Audit at 4.