Medicare
CMS's Proposed Approach to Set Hospital Inpatient Payment Appears Promising Gao ID: GAO-06-880 July 28, 2006Under Medicare's inpatient prospective payment system (IPPS), hospitals generally receive fixed payments for hospital stays based on diagnosis-related groups (DRG), a system that classifies stays by patient diagnosis and procedures. CMS is required to at least annually update DRG payments to address changes in the cost of inpatient care. CMS uses charge-based weights to update these payments. Cost-based weights are used to set payments in the outpatient prospective payment system (OPPS). The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 required GAO to study IPPS payments in relation to costs. During the course of GAO's work, CMS proposed a new cost-based method for determining DRG weights. This report (1) examines the applicability of CMS's cost-based method--used for the OPPS--to weight DRGs in the IPPS and (2) evaluates whether CMS's proposed approach is an improvement over its OPPS method for setting cost-based weights. Using fiscal year 2002 cost reports and claims from 2001, 2002, and 2003 to examine the applicability of the OPPS method, GAO estimated costs for 1,025 IPPS hospitals whose Medicare cost reports most consistently reflected the total charges and number of Medicare stays that these hospitals reported on their claims. To evaluate CMS's proposed approach, GAO analyzed fiscal year 2003 cost reports and 2003 claims for 3,558 hospitals.
If the OPPS method were applied to the IPPS, it could undermine the objective of better aligning DRG payment weights with actual costs. GAO estimated costs for 1,025 hospitals using CMS's cost-based OPPS weighting method to determine its applicability for weighting inpatient DRGs, and found that, for all but one of the 1,025 hospitals, GAO's application of CMS's OPPS method resulted in cost estimates for inpatient accommodation services that on average were 72 percent less than what the hospitals reported on their Medicare cost reports for these services. For 57 percent of the hospitals, GAO's application of CMS's OPPS method resulted in cost estimates for inpatient ancillary services that on average were 8 percent more than what the hospitals reported on their Medicare cost reports. For 22 percent of the hospitals, the application of CMS's OPPS method resulted in cost estimates for inpatient ancillary services that were on average 6 percent less than what the hospitals reported on their Medicare cost reports. These differences occur because the current OPPS weighting method does not address the variation in how hospitals allocate charges and costs in reporting Medicare services. GAO found that CMS's proposed new approach to set payment weights for DRGs appears promising, and may result in improvements in setting cost-based weights compared with the OPPS method. CMS's proposed approach relies on grouping charges into 10 broad service groups, and converting those charges to cost-based weights by using national-average cost-to-charge ratios (CCR) that are derived from hospital data submitted to CMS. Use of national-average CCRs ameliorates the effects that variations in hospital charge and cost allocation decisions can have on DRG weights. GAO's analysis, using 2003 claims data and fiscal year 2003 cost report data for 3,558 IPPS hospitals, suggests that 6 of the service groups, which constitute a majority of Medicare inpatient charges, appear promising. GAO also found that wide ranges in the CCRs for 2 of the groups, the therapeutic services and operating room groups, raise concerns about their ability to better align payment with costs for those services. GAO did not have enough specific information to determine whether the remaining 2 groups are likely to capture the relevant cost-to-charge relationship for services in those groups. In commenting on a draft of this report, CMS stated that it was pleased with GAO's findings. CMS also stated that it could not comment further because it is currently considering public comments in developing the fiscal year 2007 final rule for the IPPS payment rates. Hospital association reviewers agreed that cost estimation problems can result because of hospital reporting variation. However, they noted that because hospital reporting variation still affects the data CMS is proposing to use to set DRG weights, they were concerned with GAO's assessment that the CMS approach is promising. GAO believes the approach appears promising, in particular, because CMS proposes to use national-average CCRs to reduce the impact of individual hospital reporting practices.
GAO-06-880, Medicare: CMS's Proposed Approach to Set Hospital Inpatient Payment Appears Promising
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Report to Congressional Committees:
United States Government Accountability Office:
GAO:
July 2006:
Medicare:
CMS's Proposed Approach to Set Hospital Inpatient Payments Appears
Promising:
Medicare Hospital Inpatient Payments:
GAO-06-880:
GAO Highlights:
Highlights of GAO-06-880, a report to congressional committees
Why GAO Did This Study:
Under Medicare‘s inpatient prospective payment system (IPPS), hospitals
generally receive fixed payments for hospital stays based on diagnosis-
related groups (DRG), a system that classifies stays by patient
diagnosis and procedures. CMS is required to at least annually update
DRG payments to address changes in the cost of inpatient care. CMS uses
charge-based weights to update these payments. Cost-based weights are
used to set payments in the outpatient prospective payment system
(OPPS). The Medicare Prescription Drug, Improvement, and Modernization
Act of 2003 required GAO to study IPPS payments in relation to costs.
During the course of GAO‘s work, CMS proposed a new cost-based method
for determining DRG weights. This report (1) examines the applicability
of CMS‘s cost-based method”used for the OPPS”to weight DRGs in the IPPS
and (2) evaluates whether CMS‘s proposed approach is an improvement
over its OPPS method for setting cost-based weights. Using fiscal year
2002 cost reports and claims from 2001, 2002, and 2003 to examine the
applicability of the OPPS method, GAO estimated costs for 1,025 IPPS
hospitals whose Medicare cost reports most consistently reflected the
total charges and number of Medicare stays that these hospitals
reported on their claims. To evaluate CMS‘s proposed approach, GAO
analyzed fiscal year 2003 cost reports and 2003 claims for 3,558
hospitals.
What GAO Found:
If the OPPS method were applied to the IPPS, it could undermine the
objective of better aligning DRG payment weights with actual costs. GAO
estimated costs for 1,025 hospitals using CMS‘s cost-based OPPS
weighting method to determine its applicability for weighting inpatient
DRGs, and found that, for all but one of the 1,025 hospitals, GAO‘s
application of CMS‘s OPPS method resulted in cost estimates for
inpatient accommodation services that on average were 72 percent less
than what the hospitals reported on their Medicare cost reports for
these services. For 57 percent of the hospitals, GAO‘s application of
CMS‘s OPPS method resulted in cost estimates for inpatient ancillary
services that on average were 8 percent more than what the hospitals
reported on their Medicare cost reports. For 22 percent of the
hospitals, the application of CMS‘s OPPS method resulted in cost
estimates for inpatient ancillary services that were on average 6
percent less than what the hospitals reported on their Medicare cost
reports. These differences occur because the current OPPS weighting
method does not address the variation in how hospitals allocate charges
and costs in reporting Medicare services.
GAO found that CMS‘s proposed new approach to set payment weights for
DRGs appears promising, and may result in improvements in setting cost-
based weights compared with the OPPS method. CMS‘s proposed approach
relies on grouping charges into 10 broad service groups, and converting
those charges to cost-based weights by using national-average cost-to-
charge ratios (CCR) that are derived from hospital data submitted to
CMS. Use of national-average CCRs ameliorates the effects that
variations in hospital charge and cost allocation decisions can have on
DRG weights. GAO‘s analysis, using 2003 claims data and fiscal year
2003 cost report data for 3,558 IPPS hospitals, suggests that 6 of the
service groups, which constitute a majority of Medicare inpatient
charges, appear promising. GAO also found that wide ranges in the CCRs
for 2 of the groups, the therapeutic services and operating room
groups, raise concerns about their ability to better align payment with
costs for those services. GAO did not have enough specific information
to determine whether the remaining 2 groups are likely to capture the
relevant cost-to-charge relationship for services in those groups.
In commenting on a draft of this report, CMS stated that it was pleased
with GAO‘s findings. CMS also stated that it could not comment further
because it is currently considering public comments in developing the
fiscal year 2007 final rule for the IPPS payment rates. Hospital
association reviewers agreed that cost estimation problems can result
because of hospital reporting variation. However, they noted that
because hospital reporting variation still affects the data CMS is
proposing to use to set DRG weights, they were concerned with GAO‘s
assessment that the CMS approach is promising. GAO believes the
approach appears promising, in particular, because CMS proposes to use
national-average CCRs to reduce the impact of individual hospital
reporting practices.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-880].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact A. Bruce Steinwald, (202)
512-7101 or steinwalda@gao.gov.
[End of Section]
Contents:
Letter:
Results in Brief:
Background:
Applying the OPPS Weighting Method to IPPS Could Undermine the
Objective of Better Aligning DRG Payment Weights with Costs:
CMS's Proposed Cost-Based Approach for IPPS May Result in Improvements
over the OPPS Cost-Based Method:
Concluding Observations:
Agency and External Reviewer Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Comments from the Centers for Medicare & Medicaid
Services:
Appendix III: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Hospital Information Included on Claims and Medicare Cost
Reports Submitted to CMS:
Table 2: CMS's Proposed Service Groups:
Table 3: Proposed Therapeutic Services Group: Cost Centers and CCRs:
Figure:
Figure 1: How Hospitals Can Allocate Charges from Revenue Centers to
Cost Centers and the Effect on CMS's Cost Estimates:
Abbreviations:
AAMC: Association of American Medical Colleges:
AHA: American Hospital Association:
APC: ambulatory payment classification:
CCR: cost-to-charge ratio:
CMS: Centers for Medicare & Medicaid Services:
COPD: chronic obstructive pulmonary disease:
DRG: diagnosis-related groups:
HCRIS: Healthcare Cost Reporting Information System:
HHS: Department of Health and Human Services:
ICD-9-CM: International Classification of Diseases, 9th Revision,
Clinical Modification:
IPPS: inpatient prospective payment system:
MedPAC: Medicare Payment Advisory Commission:
MEDPAR: Medicare Provider Analysis and Review:
MMA: Medicare Prescription Drug, Improvement, and Modernization Act of
2003:
OPPS: outpatient prospective payment system:
United States Government Accountability Office:
Washington, DC 20548:
July 28, 2006:
Congressional Committees:
At $119.4 billion, spending for hospital inpatient services accounted
for over a third of total Medicare spending in fiscal year 2005. Most
of these dollars were spent on care provided to Medicare beneficiaries
by the approximately 4,000 acute care hospitals that bill Medicare
under its inpatient prospective payment system (IPPS). Under this
payment system, a hospital generally receives a fixed, predetermined
payment amount for a hospital stay.[Footnote 1] IPPS rates are based on
diagnosis-related groups (DRG), a system that classifies inpatient
stays by patient diagnosis and the procedures they receive. Each DRG
has a numeric weight, which signifies the average costliness of stays
assigned to that DRG relative to the average costliness of other
inpatient stays. The Centers for Medicare & Medicaid Services (CMS) in
the Department of Health and Human Services (HHS) is required by
statute to update DRG weights at least annually to address the changes
in the cost of inpatient care. As a result of the DRG updates, changes
occur annually in the payments hospitals receive for inpatient stays.
Because CMS does not have a direct measure of the cost of a hospital
stay, it uses the charge information hospitals include on their
Medicare claims to adjust the DRG weights. The weights that are
developed from charge data are referred to as charge-based weights.
Health policy analysts have had long-standing concerns about the use of
charge data to set DRG weights.[Footnote 2] They contend that charges
are not a good proxy for costs, in large part, because of the variation
in hospitals' charge-setting practices.
A hospital sets a charge for a service that is generally above the cost
of the service. The difference between the charge and cost is referred
to as a mark-up. Not all services are marked up by the same percentage;
mark-ups for services may be influenced by several factors, including
level of competition in the local market, service utilization, and
insurers' purchasing arrangements. If all services were marked up over
costs by an identical percentage, charges would represent the relative
costliness of services perfectly. However, because variations in mark-
up percentages vary across services and across hospitals, weights based
on charges can overvalue some services and undervalue others and
compromise the accuracy of DRG payment amounts.
Recognizing the problem involved in using charges to determine DRG
weights, the Medicare Payment Advisory Commission (MedPAC) recommended
in 2005 that CMS use a cost-based rather than charge-based method to
weight the DRGs in the IPPS.[Footnote 3] A cost-based method entails
estimating the costs of hospital services for each DRG. Basing weights
on cost estimates is intended to better align payments with hospitals'
costs compared with the current charge-based method.
CMS currently uses cost-based weights to determine relative costliness
for outpatient services provided to Medicare beneficiaries under its
hospital outpatient prospective payment system (OPPS).[Footnote 4]
However, in its notice of proposed rulemaking for the fiscal year 2006
IPPS rates, CMS noted that, without further analysis, it was uncertain
whether using the current OPPS cost estimation method would better
align payments with costs for inpatient DRGs.[Footnote 5]
The Medicare Prescription Drug, Improvement, and Modernization Act of
2003 (MMA) required us to conduct a study of the appropriateness of
Medicare's IPPS payments in relation to costs.[Footnote 6] In light of
MedPAC's recommendation that CMS adopt a cost-based weighting method,
we evaluated CMS's concern about using the OPPS cost-based method to
set DRG weights. During the course of our work, CMS published a notice
of proposed rulemaking describing its intent to use a new cost-based
approach to adjust the DRG weights beginning in fiscal year
2007.[Footnote 7] We discussed these developments with the committees
of jurisdiction, and this report examines (1) the applicability of
CMS's cost-based method--used to set weights in OPPS--to weight DRGs in
the IPPS and (2) whether CMS's proposed approach for the IPPS is an
improvement over its OPPS method for setting cost-based weights.
To examine the applicability of CMS's OPPS cost-based method to weight
DRGs in the IPPS, we reviewed CMS instructions to hospitals on billing
Medicare for services provided, and CMS instructions to hospitals for
filing Medicare cost reports--these cost reports are submitted annually
to CMS by hospitals and contain aggregate information on charges for
services and the actual costs of providing those services to all
patients, as well as information on total charges and estimates of
costs for services provided to Medicare beneficiaries. We used the
Medicare Provider Analysis and Review (MEDPAR)--a CMS database that
compiles and maintains hospitals' Medicare claims--to analyze hospital
claims. For 3,660 hospitals paid under Medicare IPPS in fiscal year
2002, we compared Medicare cost reports and claims for services
delivered. We identified 1,025 IPPS hospitals whose Medicare cost
reports most consistently reflected the total charges and number of
Medicare stays that these hospitals reported on their claims.[Footnote
8] Using each hospital's fiscal year 2002 claims and Medicare cost
report data for the 1,025 hospitals, we applied the OPPS cost
estimation method to estimate Medicare costs for each hospital
separately. CMS uses a single method to match cost information from the
cost reports to charge information from the claims, and applies this
method uniformly to all hospitals to estimate costs. Costs are
estimated by using hospital-specific cost-to-charge ratios (CCR)
derived from each hospital's respective Medicare cost report. A CCR is
a ratio that describes the cost and charge relationship for similar
services, such as pharmacy or laboratory, or for all services provided
in a hospital. Similar to CMS, we developed a single method to match
costs to charges, applied this method uniformly to all hospitals, and
used hospital-specific CCRs to estimate a hospital's costs.[Footnote 9]
For each hospital, we aggregated cost estimates for accommodation and
ancillary services separately.[Footnote 10] We then compared these
aggregate estimates to what each hospital reported as its total
Medicare costs for these services for fiscal year 2002 to determine the
extent to which our cost estimates matched what each hospital reported
on its Medicare cost report. We interviewed representatives from CMS,
and fiscal intermediaries (claims administration contractors for CMS
that process hospital claims). In addition, we spoke with
representatives of the American Hospital Association (AHA) and the
Association of American Medical Colleges (AAMC) about general hospital
IPPS issues in October 2004. Our results are not generalizable to
hospitals whose total charges and hospital stays from their Medicare
cost reports and claims data did not match within .3 percent in fiscal
year 2002.
To address whether CMS's proposed approach for the IPPS is an
improvement over its OPPS method of setting cost-based weights, we
first identified potential problems in applying the OPPS method to the
IPPS. If our cost estimates did not match what hospitals reported on
their cost reports, we compared how charges were categorized on the
claims relative to how they were categorized on the cost report. On the
basis of this analysis, we then determined whether CMS's proposed
approach would better capture measures of cost. In particular, CMS's
approach entails grouping charges from hospitals' claims into 10 broad
service groups.[Footnote 11] CMS uses these service groups as a basis
to create cost-based weights by using national-average CCRs to
eliminate charge mark-ups for each service group. In examining the
proposed approach, we reviewed CMS's April 2006 notice of proposed
rulemaking and analyzed 2003 Medicare claims and fiscal year 2003
Medicare cost reports for 3,558 IPPS hospitals to evaluate the national-
average CCRs.[Footnote 12] We determined the data to be sufficiently
reliable for the purposes of this report. (For more detail on our scope
and methodology, see app. I.) We performed this work from June 2004
through July 2006 in accordance with generally accepted government
auditing standards.
Results in Brief:
If the OPPS method were applied to the IPPS, it could undermine the
objective of better aligning DRG payment weights with costs. When we
estimated fiscal year 2002 costs using CMS's cost-based OPPS weighting
method to determine its applicability for weighting inpatient DRGs, we
found that, for all but one of the 1,025 hospitals in our analysis, our
application of CMS's OPPS method resulted in cost estimates for
inpatient accommodation services that on average were 72 percent less
than what the hospitals reported on their Medicare cost reports for
these services. For 57 percent of the hospitals, our application of
CMS's OPPS method resulted in cost estimates for inpatient ancillary
services that on average were 8 percent more than what the hospitals
reported on their Medicare cost reports.[Footnote 13] For 22 percent of
the hospitals, our application of CMS's OPPS method resulted in cost
estimates for inpatient ancillary services that were on average 6
percent less than what the hospitals reported on their Medicare cost
reports. These differences resulted from our application of CMS's
single approach to mapping hospital-specific cost center CCRs to
revenue center charges. Cost differences result because this method
does not address the variation in how hospitals allocate their charges
and costs.
CMS is proposing a new cost-based approach to set payment weights for
inpatient DRGs that appears promising, and may result in improvements
in setting cost-based weights compared with the OPPS method. The
proposal involves grouping charges into 10 broad service groups. The
charges for each of the 10 service groups are converted to cost-based
weights by using national-average CCRs that correspond to each of the
service groups. This approach ameliorates the problems we observed with
the OPPS method because the approach does not require the application
of hospital-specific CCRs. When CMS applies hospital-specific CCRs to
match charges to costs for all hospitals, it may not capture the
relevant cost-to-charge relationships for services. Using national-
average CCRs in the proposed approach is intended to reduce the impact
that variations in hospital charge and cost allocation decisions can
have on the DRG weights. Six of the service groups, which constitute a
majority of Medicare inpatient charges, appear promising because their
CCRs are relatively consistent with one another within a service group
and are likely to capture the relevant cost-to-charge relationship for
the services included in these groups. An additional 2 groups contain
cost center CCRs that range widely within their respective groups and,
therefore, raise concerns about their ability to better align payment
with costs for services in those groups. While the remaining 2 groups
also include cost center CCRs that vary widely, due to the limitations
of the MEDPAR data, we did not have enough specific information to
determine whether the 2 remaining service groups are likely to capture
the relevant cost-to-charge relationship for the services included in
those groups.
In commenting on a draft of this report, CMS stated that it was pleased
with our findings. CMS also stated that it could not comment further
because it is currently considering public comments in developing the
fiscal year 2007 final rule for the IPPS payment rates. Hospital
association reviewers agreed that cost estimation problems can result
because of hospital reporting variation. However, they noted that
because hospital reporting variation still affects the data CMS is
proposing to use to set DRG weights, they were concerned with our
assessment that the CMS approach is promising. We believe the approach
appears promising, in particular, because CMS proposes to use national-
average CCRs to reduce the impact of individual hospital reporting
practices.
Background:
To set payment weights for inpatient and outpatient services, CMS has
two sources of data: claims, which are bills hospitals submit to CMS
upon a Medicare beneficiary's discharge to receive payment for
inpatient and outpatient services rendered to Medicare beneficiaries,
and Medicare cost reports, which are statements that hospitals submit
annually to CMS identifying, by service category, the charges and costs
for services rendered to all patients, not just Medicare beneficiaries.
Charge-based weights, derived from claims data, are used to measure the
relative costliness of stays assigned to DRGs in the hospital inpatient
setting. Cost-based weights, derived from claims and Medicare cost
report information, are used to measure the relative costliness of
ambulatory payment classification (APC) groups in the outpatient
setting. APCs in the OPPS are analogous to DRGs in the IPPS.
Claims and Medicare Cost Reports Are the Data Sources Available to Set
Payment Weights for IPPS and OPPS Services:
Hospitals submit claims upon a beneficiary's discharge to CMS
identifying charges for services delivered to a Medicare beneficiary.
These charges are billed by categories of service--for example,
anesthesiology, cardiology, radiology--and these categories are
referred to as revenue centers. A revenue center represents a revenue-
generating department or unit within a hospital. By associating a
revenue center with each service billed on a claim, a hospital can
track its charges for services associated with that department.
In addition to keeping track of its charges for services by department
or unit, a hospital tracks the costs associated with these departments.
Hospitals submit this information annually to CMS on their Medicare
cost reports. These reports contain hospitals' actual total costs and
costs by department for all patients. The costs are reported in broad
categories called cost centers. Similar to revenue centers, pharmacy,
supplies, cardiology, and emergency room are also examples of cost
centers, based on departments common to many hospitals.
CMS requires hospitals to report total charge and cost data for all
patients by cost center. Although CMS does not require a one-to-one
match between cost centers and revenue centers, it requires that a
hospital report its list of revenue centers that are contained in each
of its cost centers. Neither the cost nor the charge data reported in
cost centers are broken down by individual items and services delivered
by hospital stay, or DRG. Revenue center charges are accumulated from
all claims for all patients and reported in total in associated cost
centers on the Medicare cost report. The relationship between revenue
centers and cost centers is subject to individual hospital discretion
in how they accumulate charges and costs and is therefore variable
across hospitals. Table 1 describes the information included on claims
and on Medicare cost reports.
Table 1: Hospital Information Included on Claims and Medicare Cost
Reports Submitted to CMS:
Information: Charges;
Claims[A]: Lists charges for each service provided;
Medicare cost report[B]: Includes hospital's total charges and charges
aggregated by cost center for (1) all patients and (2) Medicare
beneficiaries.
Information: Costs;
Claims[A]: None;
Medicare cost report[B]: Includes hospital's total costs aggregated by
cost center for all patients and hospital's estimates of the share of
costs accounted for by Medicare beneficiaries.
Information: Categories of services;
Claims[A]: Revenue centers;
Medicare cost report[B]: Cost centers.
Information: Submitted to CMS;
Claims[A]: Upon a beneficiary's discharge;
Medicare cost report[B]: Annually.
Source: GAO analysis of information contained on claims and Medicare
cost reports.
[A] A claim contains billed charges for services provided during an
inpatient stay.
[B] A Medicare cost report contains an annual summary of a hospital's
total costs and charges.
[End of table]
Hospitals vary in the number of cost centers and revenue centers they
use, and their decisions in allocating costs and charges to cost
centers are driven typically by the hospitals' own internal accounting
systems and organizational structure. For example, if a hospital does
not have a separate department for anesthesia services, it may allocate
its charges for anesthesia to the Medicare cost report's cost center
for operating room.
Though hospitals report their total charges and total costs for all
patients, as well as total costs and charges by cost center, they do
not separately track the costs of services delivered by payer source.
However, in reporting to CMS, each hospital must include in its
Medicare cost report total charges for all patients, total charges for
Medicare beneficiaries, and an estimate of the share of the hospital's
costs for services delivered to Medicare beneficiaries, in total and by
cost center.
Charge-Based Weights Are Used to Measure Relative Costliness of
Inpatient DRGs:
To determine the costliness of one inpatient DRG compared with others,
CMS uses charge data from claims. Generally, the charges on a claim are
for accommodation and ancillary services. Accommodation services
include room and board and nursing services. These services are
classified as either routine or intensive care, based on the level of
intensity of the nursing services required. Ancillary services include
all other services associated with an inpatient stay; for example,
drugs and diagnostic services.[Footnote 14]
Charges for accommodation and ancillary services have been used to
weight DRGs since 1986. In general, the average charge for each DRG is
divided by the average charge for all DRGs to produce a weight. The
resulting weights are multiplied by a base payment rate to determine
payment for each DRG.[Footnote 15]
Charges have long been considered a problem in setting relative weights
for inpatient hospital services because the method assumes a consistent
relationship between the charge set for an item or service and its cost
to the hospital. A recent MedPAC-sponsored report on hospitals' charge-
setting practices attributes the wide variation in the relationship
between costs and charges to hospital-specific factors--such as
mission, location, and payer mix--and charge mark-up
decisions.[Footnote 16]
Cost-Based Weights Are Used to Measure Relative Costliness of
Outpatient APCs:
Unlike IPPS, which uses charges to set payment weights for DRGs, CMS
uses cost-based weights in the OPPS to measure the costliness of one
APC relative to the others. Because neither the claims nor the Medicare
cost reports include the costs for individual items or services, these
costs must be estimated by CMS in order to calculate payment weights.
As a first step, CMS obtains hospital charge data on each outpatient
service from the claims. It calculates each hospital's cost for each
service by multiplying the charge amount for each service by the CCR
that is computed from each hospital's cost report, generally on a cost
center-specific basis. The application of a CCR to a charge is designed
to remove the mark-up from each charge in order to identify the cost of
the item or service. For example, to estimate the cost of a radiology
service, CMS multiplies the charge associated with a hospital's
radiology revenue center on each claim by the radiology cost center CCR
for that hospital. CMS uses these estimated costs to develop payment
weights for each APC.
Hospitals vary in how they allocate revenue center charges to cost
centers on their Medicare cost reports. When estimating costs for
purposes of weighting APCs, however, CMS uses its own system of mapping
the hospitals' revenue center charges to cost center CCRs in order to
convert the charges to an estimate of cost. This can be problematic
since hospitals may allocate their revenue centers to cost centers in a
different manner from CMS. For example, as illustrated in figure 1,
some hospitals allocate charges from the same revenue center to
separate cost centers; others allocate charges from several revenue
centers to a single cost center. CMS's use of a single method in
mapping charges to costs and then applying that method across all
hospitals for purposes of cost estimation does not recognize the
differences in hospital allocation decisions when estimating costs. As
a result, some service costs are systematically overestimated and some
are underestimated.
Figure 1: How Hospitals Can Allocate Charges from Revenue Centers to
Cost Centers and the Effect on CMS's Cost Estimates:
[See PDF for image]
Source: GAO.
Note: For illustrative purposes, these hospitals' total charges reflect
charges for only one patient. Hospitals' Medicare cost reports would
normally contain all charges for all services delivered during a fiscal
year.
[A] The CCR computed for Hospital B's operating room services is a
weighted average reflecting the costs and charges for all three of the
services reported on the Medicare cost report.
[End of figure]
The services represented in figure 1 are ancillary services typical to
many hospitals. Hospital A reports charges in all three cost centers,
and reports CCRs for these cost centers. Hospital B does not use
separate cost centers for anesthesia and supplies; therefore, it does
not report any charges in its cost centers for anesthesia and supplies.
As a result, Hospital B does not report CCRs for these services
specifically. To estimate the cost for these services without an
associated CCR, the current OPPS cost-based weighting method uses, or
defaults to, the hospital's overall ancillary CCR--which is the ratio
of a hospital's total ancillary costs to its total ancillary charges.
Therefore, in the case of Hospital B, CMS's single mapping approach
defaults to Hospital B's overall ancillary CCR to estimate a cost for
its anesthesia and supply charges. To the extent that the hospital's
overall ancillary CCR is an inaccurate measure of the cost-to-charge
relationship for those services, the costs of those services will be
overestimated or underestimated. If these cost estimates are used to
set relative weights, payment amounts for the services can be
inappropriate.
CMS asserts that the application of CCRs to Medicare charges is a
fundamental principle of cost reimbursement and has been in effect for
many years. Because CMS does not have any other financial information
from hospitals except each hospital's claims and Medicare cost report,
it views the use of CCRs as the most straightforward way to estimate
costs from charges.[Footnote 17]
Applying the OPPS Weighting Method to IPPS Could Undermine the
Objective of Better Aligning DRG Payment Weights with Costs:
When we used CMS's cost-based OPPS weighting method to determine its
applicability for weighting inpatient DRGs, we found that, for the
majority of hospitals in our analysis, our estimates of aggregate costs
for Medicare stays were on average more than what the hospitals
reported on their cost reports for ancillary services. In addition, our
estimates for accommodation services were on average less than what the
hospitals reported on their cost reports for the Medicare services
associated with these stays. These differences resulted from CMS's
single approach to mapping hospital-specific cost center CCRs to
revenue center charges. Cost differences result because the CMS method
does not address the variations in how hospitals allocate charges and
costs. Using such cost estimates to set DRG weights in the IPPS would
undermine the goal of better aligning payment with costs.
We estimated costs using the OPPS method for each hospital stay and
aggregated the accommodation and ancillary cost estimates for each of
the 1,025 hospitals in our analysis. We compared our aggregate
accommodation and ancillary cost estimates to the accommodation and
ancillary costs each hospital reported on its Medicare cost report. For
all but one of the hospitals in our analysis, our application of CMS's
OPPS method resulted in cost estimates for inpatient accommodation
services that were on average 72 percent less than what the hospitals
reported on their Medicare cost reports for these services. For 57
percent of the hospitals, our application of CMS's OPPS method resulted
in cost estimates for inpatient ancillary services that were on average
8 percent more than what the hospitals reported on their Medicare cost
reports.[Footnote 18] For 22 percent of the hospitals, our application
of CMS's OPPS method resulted in cost estimates for inpatient ancillary
services that were on average 6 percent less than what the hospitals
reported on their Medicare cost reports.
The differences between our aggregate estimates using the OPPS method
and hospitals reported costs indicate that a single approach to mapping
cost center CCRs to revenue center charges is problematic because CCRs
are applied to certain charges that do not capture the cost-to-charge
relationship for those charges. For example, approximately 18 percent
of the hospitals in our analysis did not allocate their charges for
anesthesia services to their Medicare cost report's anesthesia cost
center and thus did not report a CCR for that cost center.[Footnote 19]
In applying the CMS OPPS method to estimate the cost of anesthesia
services for these hospitals, we multiplied each hospital's anesthesia
charge included on the hospital's claims by each hospital's overall
ancillary CCR. Although we could not measure the precise effect of
using a default CCR for these services, our information on average CCRs
was instructive. That is, the average overall ancillary CCR for the
1,025 hospitals in our analysis was .34 and for the hospitals that
reported costs and charges in the anesthesia cost center, the average
anesthesia CCR was .16.[Footnote 20] The difference between the two
CCRs suggests that using each hospital's overall ancillary CCRs to
estimate its anesthesia costs produced an estimate that, on average,
overvalued these services at the individual hospital level and
contributed to the differences between the aggregated ancillary cost
estimates we calculated and what hospitals reported to CMS as their
ancillary costs. The extent of the problem for cost estimation depends
upon the frequency with which the overall ancillary CCR is used in
place of a specific cost center CCR.
Cost estimation problems can also result when hospitals report two
distinct service types, with different mark-ups, in one cost center.
Specifically, about 9 percent of the hospitals in our analysis reported
charges for intensive care services in a cost center other than
intensive care. For example, some of these hospitals may have reported
intensive care charges with routine service charges in the routine cost
center. In fiscal year 2002, hospitals' average CCR for intensive care
services for the 1,025 hospitals in our analysis was .81 compared with
the average CCR for routine services of .96. Such combining into one
cost center results in a weighted average CCR that may undervalue
routine services and overvalue intensive care services. These estimates
can systematically influence DRGs that have a disproportionate amount
of either intensive care or routine services.
CMS's Proposed Cost-Based Approach for IPPS May Result in Improvements
over the OPPS Cost-Based Method:
CMS is proposing an approach to set payment weights for inpatient DRGs
that appears promising, and may result in improvements in setting cost-
based weights compared with the OPPS method. The proposal involves
grouping charges into 10 broad service groups. The charges for each of
the 10 service groups are converted to cost-based weights by using
national-average CCRs that correspond to each of the service groups.
This approach ameliorates the problems we observed with the OPPS method
because it does not require the application of hospital-specific CCRs,
which, using CMS's single method to match charges to cost, may not
capture the relevant cost-to-charge relationships for services. Using
national-average CCRs is intended to reduce the impact that variations
in hospital charge and cost allocation decisions can have on the DRG
weights. Six of the service groups, which constitute a majority of
Medicare inpatient charges, appear promising because their CCRs are
relatively consistent within a service group and are likely to capture
the relevant cost-to-charge relationship for the services included in
these groups. An additional 2 groups contain cost center CCRs that
range widely within their respective groups and, therefore, raise
concerns about their ability to better align payment with costs for
services in those groups. Finally, due to the limitations of the MEDPAR
data, we did not have enough information to determine whether the 2
remaining service groups are likely to capture the relevant cost-to-
charge relationship for the services included in those groups.
National-Average CCRs Intended to Reduce Impact on IPPS Weights of
Variation in Hospital Charge and Cost Allocation Decisions:
Under its proposed approach for the IPPS, CMS takes several steps to
create cost-based weights for each DRG. The approach entails grouping
charges from hospital's claims into 10 broad service groups.[Footnote
21] (See table 2.) CMS uses these service groups as a basis to create
charge-based weights by standardizing the charges in each group to
remove differences due to hospital-specific characteristics. To
standardize the charges, CMS calculates an average charge for each
hospital for each of the 10 proposed service groups. CMS then divides
each individual hospital's charge for each service by that hospital's
average charge for the service group. Ultimately, these standardized
charges for all hospitals are aggregated by DRG and the average charge
for each DRG is divided by the national-average charge for all cases.
This yields 10 standardized, national charge-based weights that
correspond to each service group for each DRG. In order to convert
these charge-based weights to cost-based weights, charge mark-ups must
be removed. To accomplish this, CMS calculates 10 national-average CCRs
for each of the 10 broad service groups using hospitals' Medicare cost
report data. CMS then uses these CCRs to convert the national charge-
based weights to cost-based weights.[Footnote 22] The 10 cost-based
weights for each DRG are summed to produce one final weight for each
DRG.
Table 2: CMS's Proposed Service Groups:
CMS's proposed service group: Routine;
Revenue centers from claims used to calculate relative charge
weights[A]: Private room Semi-private room Ward;
Cost centers from Medicare cost report used to calculate national-
average CCRs: Adults & pediatrics.
CMS's proposed service group: Intensive;
Revenue centers from claims used to calculate relative charge
weights[A]: Intensive care Coronary care;
Cost centers from Medicare cost report used to calculate national-
average CCRs: Intensive care unit Coronary care unit Burn intensive
care unit Surgical intensive care unit Other special care unit.
CMS's proposed service group: Drugs;
Revenue centers from claims used to calculate relative charge
weights[A]: Pharmacy;
Cost centers from Medicare cost report used to calculate national-
average CCRs: Drugs charged to patients Intravenous therapy.
CMS's proposed service group: Supplies & Equipment;
Revenue centers from claims used to calculate relative charge
weights[A]: Medical/ surgical supply Durable medical equipment Used
durable medical equipment;
Cost centers from Medicare cost report used to calculate national-
average CCRs: Medical supplies charged to patients Durable medical
equipment rented Durable medical equipment sold.
CMS's proposed service group: Therapeutic Services;
Revenue centers from claims used to calculate relative charge
weights[A]: Physical therapy Occupational therapy Speech therapy
Inhalation therapy;
Cost centers from Medicare cost report used to calculate national-
average CCRs: Physical therapy Occupational therapy Speech pathology
Respiratory therapy.
CMS's proposed service group: Operating Room;
Revenue centers from claims used to calculate relative charge
weights[A]: Operating room Anesthesia;
Cost centers from Medicare cost report used to calculate national-
average CCRs: Operating room Recovery room Delivery and labor room
Anesthesiology.
CMS's proposed service group: Cardiology;
Revenue centers from claims used to calculate relative charge
weights[A]: Cardiology;
Cost centers from Medicare cost report used to calculate national-
average CCRs: Electrocardiology Electroencephalography.
CMS's proposed service group: Laboratory;
Revenue centers from claims used to calculate relative charge
weights[A]: Laboratory;
Cost centers from Medicare cost report used to calculate national-
average CCRs: Laboratory Provider-based physician clinical laboratory
service.
CMS's proposed service group: Radiology;
Revenue centers from claims used to calculate relative charge
weights[A]: Radiology Magnetic resonance imaging (MRI) Lithotripsy;
Cost centers from Medicare cost report used to calculate national-
average CCRs: Radiology-diagnostic Radiology-therapeutic Radioisotope.
CMS's proposed service group: Other Services;
Revenue centers from claims used to calculate relative charge
weights[A]: Ambulance Blood Blood administration Outpatient services
Emergency room Clinic visit End-stage renal disease (ESRD) Other
services;
Cost centers from Medicare cost report used to calculate national-
average CCRs: Ambulance Whole blood and packed red blood cells Blood
storing, processing, and transporting Other outpatient services
Ambulatory surgical center (Non- distinct part) Emergency Clinic Home
program dialysis Renal dialysis Other ancillary.
Source: GAO analysis and 71 Fed. Reg. 23,996, 24,009-24,010 (April 25,
2006).
[A] Data for the revenue centers are from the CMS MEDPAR file. MEDPAR
pools revenue centers into broad revenue center categories and reports
total charges by these categories. The revenue centers from MEDPAR are
not a one-to-one match with cost centers from the Medicare cost
reports.
[End of table]
The proposed approach, which entails using national-average CCRs rather
than individual hospital CCRs, is intended to reduce the impact that
variations in hospital charge and cost allocation decisions can have on
DRG weights. Specifically, the national-average CCRs, in conjunction
with standardized charge-based weights, are more likely than the OPPS
method that entails using hospital-specific CCRs to capture the
relevant cost-to-charge relationships for the services in each group.
In principle, the national-average CCRs are applied to a group of
services with similar charge mark-ups. Similarly, the national-average
CCRs will be influenced by the most commonly used hospital allocation
practices among hospitals and are, therefore, less likely to be
influenced by atypical hospital allocation practices. Furthermore,
because a national-average CCR is established for each service group,
the proposed approach eliminates the need to use, or default to, a
hospital's overall CCR when a particular cost center CCR is not
reported. For these reasons, CMS's proposed approach to establishing
cost-based weights for the purpose of better aligning payments with
costs for DRGs appears promising.
Service Group Approach Appears Promising but Some Concerns Exist:
Because CMS's broad service group approach is integral to improved
payment accuracy, and because CMS is currently considering refinements
to the service groups for the fiscal year 2007 IPPS payments, we
examined the 10 proposed service groups and their associated national-
average CCRs.[Footnote 23] For 6 of the proposed service groups, which
constitute a majority of Medicare inpatient charges, the national-
average CCRs appear promising, and are likely to capture the relevant
cost-to-charge relationships for the services included in these groups.
An additional 2 groups contain cost center CCRs that range widely
within their respective groups, and therefore, raise concerns about
their ability to better align payment with costs for services in those
groups. Due to the limitations of the MEDPAR data, we did not have
enough information to determine whether the 2 remaining service groups
are likely to capture the relevant cost-to-charge relationship for the
services included in the groups.
Six of the groups, which constitute approximately 63 percent of total
Medicare inpatient charges in 2003, appear promising since they either
contain cost center CCRs that are relatively consistent with one
another within a group, or contain individual cost center CCRs that
vary from the national-average CCRs, but the charges associated with
those services constitute a small percentage of total Medicare
inpatient charges. For example, one of these six groups--radiology--
includes three cost center CCRs that are relatively consistent with the
radiology national-average CCR, with a range of 7 percentage points
between the highest and lowest CCR for these three cost centers. This
grouping produces a national-average CCR that will not be unduly
influenced by any one cost center CCR included in the average. The
other service groups that appear promising include cardiology, routine,
drugs, supplies & equipment, and other services.[Footnote 24]
While six of the service groups that constitute a majority of Medicare
inpatient charges appear promising, two other groups, therapeutic
services and operating room, raise concerns because they contain cost
center CCRs that vary widely and involve services that can be linked to
high-volume DRGs. The national-average CCR for these service groups may
not capture the appropriate cost-to-charge relationships for certain
services in those groups and could undermine the goal of better
aligning payments with costs for those services. Table 3 illustrates
this problem for one of the groups, therapeutic services, where the
difference between the lowest and highest cost center CCR is 26
percentage points. The cost center CCR for respiratory therapy is
substantially lower than the other cost center CCRs included in this
group.[Footnote 25] Respiratory therapy is used to treat respiratory
diseases classified under DRG 088--chronic obstructive pulmonary
disease (COPD)[Footnote 26]--Medicare's fourth most frequently billed
DRG. In 2003, hospitals billed Medicare approximately $1.4 billion for
respiratory therapy services provided under DRG 088. This amount
accounted for 17 percent of the total ancillary service charges and 11
percent of the total charges for DRG 088, which were $12 billion. The
other therapy services in the group accounted for approximately 1
percent of the DRG's total charges.
Table 3: Proposed Therapeutic Services Group: Cost Centers and CCRs:
Cost centers included in the therapeutic services group: Physical
therapy;
GAO-calculated cost center CCRs: .52;
CMS-proposed national- average CCR for therapeutic services group: .35.
Cost centers included in the therapeutic services group: Occupational
therapy;
GAO-calculated cost center CCRs: .44;
CMS-proposed national- average CCR for therapeutic services group: .35.
Cost centers included in the therapeutic services group: Speech
pathology;
GAO-calculated cost center CCRs: .53;
CMS-proposed national- average CCR for therapeutic services group: .35.
Cost centers included in the therapeutic services group: Respiratory
therapy;
GAO-calculated cost center CCRs: .27;
CMS-proposed national- average CCR for therapeutic services group: .35.
Source: GAO analysis based on fiscal year 2003 Medicare cost report
data and 71 Fed. Reg. 24,021 (April 25, 2006).
[End of table]
Our analysis of hospitals' fiscal year 2003 Medicare cost report data
showed that, on average, for the 3,558 hospitals paid under the IPPS
that we reviewed, the CCR for respiratory therapy is .27. The use of
the national-average CCR would result in a weight that would undervalue
physical, occupational, and speech therapy services. Conversely, the
use of the national-average CCR in this instance would result in an
estimate that overvalues respiratory therapy services. Because these
services account for 17 percent of all ancillary charges for DRG 088,
the application of the national-average CCR will result in a weight
that would be based on an overstated cost estimate. This is a problem
because the overstated cost estimate for this service is a significant
portion of a high-volume DRG.
Similarly, the operating room service group may not capture the
appropriate cost-to-charge relationships for certain services. The
services contained within this group can be linked to DRGs that involve
surgery, and those DRGs constitute almost half of the number of IPPS
DRGs. The group contains CCRs for operating room and anesthesia, which
are .38 and .17, respectively. CMS's proposed national-average CCR for
this service group is .37. The use of the national-average CCR would
result in a weight that would overvalue anesthesia services. In its
comment on the CMS proposed approach, MedPAC noted problems with the
therapeutic services and the operating room service groups.[Footnote
27]
Finally, the remaining two groups--intensive and laboratory--include
cost center CCRs that also vary widely. However, using the MEDPAR data
that CMS uses to construct the IPPS rates, we could not assess the
charges associated with those services because they cannot be
separately identified. Without such information, we could not determine
the volume of specific services provided under these groups and,
therefore, we could not assess the potential impact on the DRG weights.
Concluding Observations:
Policy analysts have for decades suggested that replacing charge-based
with cost-based weights would improve the accuracy of the weights to
measure relative costliness for hospital inpatient DRGs. Our findings
suggest that the CMS approach of using national-average CCRs to develop
cost-based weights for inpatient DRGs appears promising because it
addresses the concerns associated with charges that are currently used
to weight DRGs. The proposed approach improves the OPPS method of
estimating costs because the OPPS uses a single method to map hospital-
specific CCRs to charges. That method does not reflect the effects that
variation in hospital charge and cost allocation decisions can have on
the DRG weights.
The national-average CCRs for the service groups are critical to the
goal of better aligning payments with costs for DRGs. As CMS is
considering refining its service group categories, we note that two of
the groups, therapeutic services and operating room, contain cost
center CCRs that range widely and raise concerns about its ability to
better align payment with costs for services in those groups. This
issue notwithstanding, we found that most of the proposed service
groups, which represent a majority of the Medicare inpatient charges,
are likely to capture the relevant cost-to-charge relationship for the
services included in these groups.
Agency and External Reviewer Comments and Our Evaluation:
We received written comments on a draft of this report from CMS (see
app. II). We also received oral comments from representatives from two
hospital associations, the AHA and the AAMC.
CMS Comments:
In commenting on a draft of this report, CMS stated that it was pleased
with our findings. CMS also stated that it could not comment further
because it is currently considering public comments in developing the
fiscal year 2007 final rule for the IPPS payment rates.
Hospital Association Comments and Our Evaluation:
Representatives from both AHA and AAMC acknowledged the problems
inherent in matching charges from claims to cost information on
hospitals' cost reports due to the differences in the ways in which
hospitals report these data. The AHA representatives specifically noted
that the problems with cost estimation due to hospital reporting
variation we describe in this report parallels what AHA has found in
its own analysis. AHA representatives also agreed that the differences
in which hospitals allocate their charges and costs, and the cost
estimates that result, could potentially affect DRG relative weights.
AHA representatives stated, however, that we should more prominently
discuss the issues of using cost report data to set the relative
weights. Specifically, they stated that we should better emphasize that
CMS's proposed national-average CCRs are based on cost report data that
could still present problems as a result of hospital reporting
variation.
As we stated in the draft report, the only data sources available to
CMS to set the DRG weights are hospital Medicare cost report and
claims. Medicare cost report data reflect hospital reporting variation
because CMS allows hospitals the flexibility to report charges and
costs in a manner that is consistent with each hospital's accounting
system and organizational structure. Our conclusion that the proposed
approach appears promising is based on our assessment that, given that
cost report and claims are the only data available, CMS's approach in
using these data to set DRG weights, that is, using national-average
CCRs with standardized charge-based weights, can ameliorate the effects
of differences in hospital reporting.
Representatives from both organizations also were concerned about the
overall message of the report that the CMS approach appears promising.
The AHA representatives stated that although the proposed approach
could address some issues associated with using cost report data, they
also noted that we did not test the validity of the proposed approach.
The AAMC representatives also questioned our overall message given some
of the concerns we noted in the report with the national service
groups. In particular, AAMC stated that although we found that the
service groups accounting for 63 percent of total inpatient charges
appear promising, they believed that the remaining 37 percent was a
substantial percentage.
Testing the validity of CMS's proposed approach was beyond the scope of
our work. However, we believe that the report presents a balanced view
of the CMS approach, given our findings on hospital reporting variation
and its effects on cost estimation. As noted in the draft report, we
found that 6 of the 10 service groups that represent 63 percent of
Medicare inpatient charges are promising because the cost center CCRs
within each service group are relatively consistent. As a result, the
proposed national-average CCRs for these 6 groups are likely to capture
the relevant cost-to-charge relationships for the services within these
groups. However, we also noted in the draft report that we have
concerns about the ability of 2 of the service groups to better align
payment with costs, and that we did not have enough information to
evaluate the 2 remaining service groups.
Additionally, we received technical comments from the two associations,
which we incorporated as appropriate.
We are sending a copy of this report to the Administrator of CMS. We
will also provide copies to others on request. The report is available
online at no charge on GAO's Web site at [Hyperlink,
http://www.gao.gov].
If you or your staff have any questions, please contact me at (202) 512-
7101 or steinwalda@gao.gov. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last
page of this report. GAO staff who made major contributions to this
report are listed in appendix III.
Signed by:
A. Bruce Steinwald:
Director, Health Care:
List of Committees:
The Honorable Charles E. Grassley:
Chairman:
The Honorable Max Baucus:
Ranking Minority Member:
Committee on Finance:
United States Senate:
The Honorable William M. Thomas:
Chairman:
The Honorable Charles B. Rangel:
Ranking Minority Member:
Committee on Ways and Means:
House of Representatives:
The Honorable Nancy Johnson:
Chairman:
The Honorable Pete Stark:
Ranking Minority Member:
Subcommittee on Health:
Committee on Ways and Means:
House of Representatives:
[End of section]
Appendix I: Scope and Methodology:
This appendix identifies data sources used for our analyses and
summarizes our methods.
Data Sources:
We used data from Medicare Provider Analysis and Review (MEDPAR)--the
Centers for Medicare & Medicaid Services' (CMS) database for compiling
and maintaining hospitals' Medicare claims--from 2001, 2002, and 2003.
A MEDPAR record represents one distinct stay, and contains patient and
hospital identifiers and diagnosis and procedure codes based on the
International Classification of Diseases, 9th Revision, Clinical
Modification (ICD-9-CM). CMS uses MEDPAR for rate-setting purposes
under the inpatient hospital prospective payment system (IPPS).
We also used fiscal year 2002 and 2003 hospital Medicare cost report
data that individual hospitals are required to submit annually to
Medicare as compiled in CMS's Healthcare Cost Reporting Information
System (HCRIS) database. HCRIS is constructed by CMS based on the
Medicare cost reports submitted to the fiscal intermediaries. Each
hospital defines its own fiscal year--the only requirement is that the
beginning date of the hospital fiscal year must fall within the federal
fiscal year (October 1 through September 30). There is a time lag of up
to 2 years before the data are complete for all hospitals.
Hospitals report total costs and total charges by cost center on their
Medicare cost reports. They have the discretion to use as many or as
few cost centers on the cost report as they choose. Beyond the more
general cost centers, hospitals have the ability to report more
detailed information, referred to as subscripts, for specific services.
For example, a hospital may report data for the cardiology cost center,
and additional data for a subscript of cardiology, called cardiac
catheterization. In the HCRIS database, the cost center data reflect
the sum of the subscripted data. This level of detail is similar to the
manner in which service-level data are available in the MEDPAR file.
To assess the reliability of the MEDPAR and HCRIS data, we reviewed
existing documentation related to the data quality control procedures
and electronically tested the data to identify obvious problems with
accuracy. We determined that the data were sufficiently reliable for
the purposes of this report. Further, because we chose to estimate
costs using only those hospitals that most consistently reported
charges and stays between their claims and their Medicare cost report,
we could then assess the validity of our cost estimates relative to the
aggregate Medicare costs these hospitals reported on their Medicare
cost reports. Because our cost estimation analysis was conducted on a
subset of hospitals in fiscal year 2002, the results are not
generalizable to the hospitals in fiscal year 2002 whose total charges
and number of stays from their Medicare cost reports and claims did not
match within .3 percent.
Methods:
To examine the applicability of CMS's current cost-based method used to
set weights in the outpatient prospective payment system (OPPS) to
weight diagnosis-related groups (DRG) in the inpatient prospective
payment system (IPPS), we first identified 3,660 short-term, acute
hospitals that were paid under IPPS and submitted fiscal year 2002 data
to CMS. A hospital's fiscal year 2002 could start anytime from October
1, 2001, through September 30, 2002. As a result, the cost reports
contain charges and estimated costs for services provided to Medicare
beneficiaries in 2001, 2002, and 2003. For this reason, we used MEDPAR
and Medicare cost reports to match claims from 2001, 2002 and 2003 to
each hospital's fiscal year 2002 Medicare cost report. Using
approximately 12 million MEDPAR records and HCRIS data from 3,660
hospitals, we aggregated charges and stays from the MEDPAR claims file
for each hospital in our universe. We compared the aggregate charges
and stays from MEDPAR with the charges and number of stays reported on
each hospital's Medicare cost report. We used fiscal year 2002 data
because these were the most recent, complete Medicare cost report data
available when we began our analysis in October 2004.
From this analysis, we identified 1,025 hospitals whose Medicare cost
report charges and number of stays matched within .3 percent. We looked
at the distribution of hospitals matching aggregate charges and stays
ranging from .1 percent to 1 percent as reported in Medicare cost
reports and claims. We chose .3 percent (1,025 hospitals), because it
represented over a quarter of the total IPPS hospitals and included at
least 25 hospitals for each hospital type (e.g., teaching, urban, for-
profit). The 1,025 hospitals have a distribution across types of
hospitals similar to the population of IPPS hospitals. We assumed these
1,025 hospitals had the most consistent cost information available to
perform our cost analysis.
To estimate costs for inpatient services for each of the 1,025
hospitals, we applied the cost estimation method that CMS uses in the
outpatient hospital setting; that is, we used individual cost center
CCRs based on each hospital's Medicare cost report data to convert
charges to costs. Similar to what CMS does for estimating costs for
outpatient services, we developed a mapping method to match revenue
centers to cost centers to determine which CCR to use to estimate costs
for the 1,025 hospitals included in our analysis. For example, we
mapped the radiology revenue center charges to the radiology cost
center. In cases where revenue centers and cost centers did not
directly correspond, we used the hospital's overall ancillary CCR to
estimate costs, with the following exceptions. If a hospital billed for
speech, occupational or physical therapy charges, but did not include a
matching cost center on its cost report for those services, we used
another therapy cost center CCR to estimate costs. For example, if a
hospital billed for physical therapy but did not have a matching cost
center, we used the speech therapy cost center CCR. In addition, if a
hospital's cost report did not include a DME cost center but the claims
showed DME revenue center charges, we applied the hospital's overall
supply CCR to estimate costs.
We multiplied the cost center CCR from the hospital Medicare cost
report to each charge for each claim. Subsequently, for each of the
1,025 hospitals we summed our cost estimates for accommodation and
ancillary services separately and then compared these aggregate cost
estimates to what hospitals reported as their costs for these services
on their Medicare cost reports. From this analysis, we calculated the
percentage of hospitals where our estimates were, on average, either
more or less than what the hospitals reported for ancillary and
accommodation services separately. After comparing our cost estimates
to what the hospitals reported on their Medicare cost report, we
examined hospital reporting methods, that is, we identified the cost
centers to which hospitals reported their charges and compared these
charges to how hospitals reported these services on their claims. For
example, while a hospital may record $1,500 in physical therapy charges
on its claims, it may record these physical therapy charges in the
occupational therapy cost center on its cost report. This practice is
in keeping with the discretion CMS affords hospitals in how they
accumulate and report charges and costs.
To examine whether CMS's proposed approach for the IPPS is an
improvement over its OPPS method for setting cost-based weights, we
estimated costs for fiscal year 2002 using the OPPS method, and
reviewed CMS's April 2006 notice of proposed rulemaking.[Footnote 28]
In particular, we identified potential problems in applying the OPPS
cost-based method to the IPPS and determined whether CMS's proposed
approach would ameliorate those problems. We evaluated CMS's proposal
to use national-average CCRs to derive cost-based weights. We used data
from 3,558 hospitals paid under the IPPS that submitted a fiscal year
2003 Medicare cost report. We used fiscal year 2003 Medicare cost
reports in order to conform to the same time period as the analysis CMS
conducted for its April 2006 notice of proposed rulemaking. We
calculated CCRs for each of the cost centers that are included in CMS's
10 proposed service groups.[Footnote 29] We determined whether the
service groups appear promising based on the extent to which cost
center CCRs contained within each group varied. Additionally, using
2003 claims data, we analyzed the proportion of service group charges
to determine whether the service groups appear promising in capturing
cost-to-charge relationships for the respective services in each group.
[End of section]
Appendix II: Comments from the Centers for Medicare & Medicaid
Services:
Department Of Health & Human Services:
Centers for Medicare & Medicaid Services:
Office of Strategic Operations and Regulatory Affairs:
200 Independence Avenue SW:
Washington, DC 20201:
Date: Jul 18 2006:
To: A. Bruce Steinwald:
Director, Health Care:
U.S. Government Accountability Office:
From: Mark B. McClellan, M.D., Ph.D.
Administrator:
Subject: Government Accountability Office's (GAO) Draft Report:
"Medicare: CMS's Proposed Approach to Set Hospital Inpatient Payments
Appears Promising" (GAO-06-880):
Thank you for the opportunity to review and comment on the GAO's draft
report entitled "Medicare: CMS's Proposed Approach to Set Hospital
Inpatient Payments Appears Promising." We appreciate GAO's efforts to
analyze potential improvements to the relative weighting methodology
used for the Hospital Inpatient Prospective Payment System (IPPS). As
GAO stated in the report, "policy analysts have for decades suggested
that replacing charge-based with cost-based weights would improve the
accuracy of the weights to measure relative costliness for hospital
inpatient DRGs" The Centers for Medicare & Medicaid Services (CMS) is
pleased that GAO's findings suggest our approach of using the national
average cost-to-charge ratios to develop cost-based weight for
inpatient diagnosis-related groups (DRGs) appears promising because it
addresses the concerns associated with charges that are currently used
to weight DRGs. As stated by the GAO, use of national-average cost-to-
charge ratios ameliorates the effects that variations in hospital
charge and cost allocation decisions can have on DRG weights.
The Medicare Prescription Drug, Improvement, and Modernization Act of
2003, required GAO to study IPPS payments in relation to costs. During
the course of GAO's work, CMS proposed a hospital-specific cost
weighting methodology for determining the DRG weights. GAO examined the
applicability of CMS' method for developing cost weights under the
Outpatient Prospective Payment System (OPPS) to the hospital-specific
cost weights proposed for the IPPS.
The fiscal year (FY) 2007 IPPS proposed rule was made available on
April 12, 2006. The comment period on the proposed rule ended on June
12, 2006, and CMS is carefully evaluating the public comments we
received. At this time, we are not commenting further on the GAO's
analysis because we are considering these issues for the FY 2007 IPPS
final rule that we expect to make available on August 1, 2006.
Once again, thank you for your analysis of this issue and the
opportunity to review your report.
[End of section]
Appendix III: GAO Contact and Staff Acknowledgments:
GAO Contact:
A. Bruce Steinwald, (202) 512-7101 or steinwalda@gao.gov:
Acknowledgments:
In addition to the contact above, Maria Martino, Assistant Director,
Shamonda Braithwaite, Melanie Anne Egorin, Hannah Fein, Nora Hoban,
Julian Klazkin, Daniel Lee, and Eric Wedum made key contributions to
this report.
FOOTNOTES
[1] Throughout this report, we use the term stay to represent a
patient's hospitalization, which CMS and hospitals refer to as a
discharge for data-reporting purposes.
[2] See Medicare Payment Advisory Commission (MedPAC), Report to the
Congress: Variation and Innovation in Medicare (Washington, D.C.: June
2003); MedPAC, Report to the Congress: Physician-Owned Specialty
Hospitals (Washington, D.C.: March 2005). MedPAC advises the Congress
on issues affecting the Medicare program. See also J. Newhouse, et al.,
"Predicting Hospital Accounting Costs," Health Care Financing Review,
vol. 11, no. 1 (1989); and Kurt F. Price, "Pricing Medicare's Diagnosis
Related Groups: Charges versus Estimated Costs," Health Care Financing
Review, vol. 11, no. 1 (1989).
[3] MedPAC, Report to the Congress: Physician-Owned Specialty Hospitals
(Washington D.C.: March 2005).
[4] See 42 U.S.C. § 1395l(t)(2)(C).
[5] 70 Fed. Reg. 23,306, 23,455 (May 4, 2005).
[6] Pub. L. No. 108-173, § 501(c), 117 Stat. 2066, 2290.
[7] 71 Fed. Reg. 23,996, 24,006-24,011 (April 25, 2006). By August 1,
2006, after evaluating comments on its notice of proposed rulemaking,
CMS expects to publish a final rule describing its decision on the use
of cost-based weights.
[8] We excluded hospitals from our analysis if the total Medicare
charges and number of stays from their cost reports and claims data did
not match within .3 percent.
[9] Because the data sources that CMS uses to set payment rates are
different for the IPPS and OPPS and because certain IPPS services are
not provided in the OPPS, we needed to develop a mapping method to
match cost information from the cost report to IPPS charge information
from the claims. For more detail on our mapping method, see our scope
and methodology in app. I.
[10] Accommodation services include room and board and nursing
services. Ancillary services include all other services associated with
an inpatient stay, for example, drugs and diagnostic services.
[11] The 10 proposed service groups are routine, intensive, drugs,
supplies & equipment, therapeutic services, operating room, cardiology,
laboratory, radiology, and other services.
[12] We did not examine the extent to which the OPPS method measures
relative costliness for outpatient services.
[13] The 8 percent is based on estimates from 1,020 hospitals. This
estimate excludes ancillary cost estimates for 5 hospitals from our
sample of 1,025 because they were extreme outliers. When we included
data from these hospitals in our aggregate cost estimates, the
resulting ancillary cost estimates for the 1,025 were overestimated on
average by 222 percent relative to what all the hospitals reported.
[14] Payment for physician services is not included in the DRG payment
to hospitals. Physicians are paid by Medicare under a separate fee
schedule.
[15] The base payment rate is a standardized amount, which is divided
into labor and nonlabor-related shares.
[16] The Lewin Group, A Study of Hospital Charge Setting Practices
(Falls Church, Va.: 2005).
[17] See 70 Fed. Reg. at 23,455 (May 4, 2005).
[18] The 8 percent is based on estimates from 1,020 hospitals. This
estimate excludes ancillary cost estimates for 5 hospitals from our
sample of 1,025 because they were extreme outliers. When we included
data from these hospitals in our aggregate cost estimates, the
resulting ancillary cost estimates for the 1,025 were overestimated on
average by 222 percent relative to what all the hospitals reported.
[19] This hospital allocation practice--billing for services and
allocating the charges to a different cost center service type--
occurred to varying degrees for all ancillary cost centers.
[20] The average mark-up for overall ancillary services was 194 percent
of the cost, and for anesthesia services the average mark-up was 525
percent. These mark-ups were in addition to the cost and result in a
charge that is almost three times and six times the cost of services
for all ancillary and anesthesia services, respectively. For example, a
hospital's cost for an anesthesia service was $16. The hospital applied
a mark-up of $84, which is 525 percent of $16, resulting in a charge of
$100.
[21] In this report, we use the term service group to describe CMS's
proposed groups. In its Federal Register notice, CMS refers to these
groups as cost centers.
[22] It is possible that a particular DRG may have a zero value for one
or more of the 10 service groups. This can occur if hospitals do not
provide particular services as part of a DRG.
[23] CMS's proposed service groups are based on its analysis of cost
report and claims data. Each group includes revenue center charges
that, in total for the group, represent at least 5 percent of all
Medicare charges for inpatient hospital services. The groups also
include cost centers that, CMS asserts, are consistent with general
hospital accounting definitions. To analyze the cost centers within the
service groups, we used fiscal year 2003 Medicare cost report data for
3,558 hospitals paid under the IPPS in order to conform to the same
time period as the analysis CMS conducted for its April 2006 notice of
proposed rulemaking.
[24] The supplies & equipment and other services groups include cost
center CCRs that range widely from the national-average CCR for their
groups; however, the charges associated with those services constitute
approximately 1 percent of total Medicare charges and, therefore, are
not likely to have an impact on the DRG weights that include those
services.
[25] Respiratory therapy is also referred to as inhalation therapy.
[26] COPD refers to chronic lung disorders that result in blocked air
flow in the lungs. The two main COPD disorders are emphysema and
chronic bronchitis, the most common causes of respiratory failure.
[27] MedPAC correspondence to CMS, June 12, 2006.
[28] We did not examine the extent to which the OPPS method measures
relative costliness for outpatient services.
[29] The 10 proposed service groups are routine, intensive, drugs,
supplies & equipment, therapeutic services, operating room, cardiology,
laboratory, radiology, and other services.
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