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Last Modified: 2/9/2024 Location: FL, PR, USVI Business: Part A

Outlier payment calculation for inpatient prospective payment system (IPPS)

Section 1886(d)(5)(A) of the Social Security Act (the Act) provides for Medicare payments to Medicare-participating hospitals in addition to the basic prospective payments for cases incurring extraordinarily high costs. To qualify for outlier payments, a case must have costs above a fixed-loss cost threshold amount (a dollar amount by which the costs of a case must exceed payments in order to qualify for outliers). The regulations governing payments for operating costs under the Inpatient Prospective Payment System (IPPS) are located in 42 CFR (Code of Federal Regulations) Part 412. The specific regulations governing payments for outlier cases are located at 42 CFR 412.80 external pdf file through 412.86 external pdf file.
Hospital-specific cost-to-charge ratios are applied to the covered charges for a case to determine whether the costs of the case exceed the fixed-loss outlier threshold. Payments for eligible cases are then made based on a marginal cost factor, which is a percentage of the costs above the threshold. For federal fiscal year (FY) 2015, the existing fixed-loss outlier threshold is $21,821. CMS publishes the outlier threshold in the annual IPPS Final Rule located on the Acute IPPS Home page external link.
The actual determination of whether or not a case qualifies for outlier payments takes into account both operating and capital costs and diagnosis-related group (DRG) payments. That is, the combined operating and capital costs of a case must exceed the fixed loss outlier threshold to qualify for an outlier payment. The operating and capital costs are computed separately by multiplying the total covered charges by the operating and capital cost-to-charge ratios. The estimated operating and capital costs are compared with the fixed-loss threshold after dividing that threshold into an operating portion and a capital portion (by first summing the operating and capital ratios and then determining the proportion of that total comprised by the operating and capital ratios and applying these percentages to the fixed-loss threshold). The thresholds are also adjusted by the area wage index (and capital geographic adjustment factor) before being compared to the operating and capital costs of the case. Finally, the outlier payment is based on a marginal cost factor equal to 80 percent of the combined operating and capital costs in excess of the fixed-loss threshold (90 percent for burn DRGs).
For discharges occurring on or after August 8, 2003, any reconciliation of outlier payments will be based on operating and capital cost-to-charge ratios calculated based on a ratio of costs to charges computed from the relevant cost report and charge data determined at the time the cost report coinciding with the discharge is settled.
Effective for discharges occurring on or after August 8, 2003, at the time of any reconciliation, outlier payments may be adjusted to account for the time value of any underpayments of overpayments. Any adjustment will be based upon a widely available index to be established in advance by the Secretary, and will be applied from the midpoint of the cost reporting period to the date of reconciliation.

Cost-to-charge ratios

As explained above, hospital-specific cost-to-charge ratios are applied to the covered charges for a case to determine whether the costs of the case exceed the fixed-loss outlier threshold. For a more detailed discussion on cost-to-charge ratios please see the Acute IPPS Home page external link.
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