Low-Hanging Fruit:
Correcting Fee-for-Service Rates for
Errors in Accounting and Cost-Finding
Kathleen Dalton
Academy Health Annual Research Meeting, 2009
Funding source: CMS Contracts
No. HHSM-500-2005-0029I and 500-00-0024-TO018
Project Officers: Philip C Cotterill and Christina Smith Ritter.
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RTI International is a trade name of Research Triangle Institute
Presentation Objective
To demonstrate –
a) The sensitivity of prospective payment rates to cost
reporting errors and outmoded cost-finding
b) The relative ease with which some systematic
reporting problems could be corrected
c) The importance of recognizing and investing in the
Medicare cost reports and claims files as rate
setting documents
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Research History
• Findings stem from two CMS contracts awarded to RTI to
assess aggregation bias in PPS weights
– Inpatient (2006): responding to challenges from medical device
industry over cost weights for device-dependent DRGs.
– Outpatient (2007): responding to findings from first study, reflecting
CMS concerns over implications for more narrowly defined APC
payment units
• This presentation focuses on the OPPS findings.
• Interpretations of the data are my own and do not
necessarily reflect opinion of the funding agency.
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Primitive Schematic for OPPS Cost-finding
Medicare Cost Reports
(for departmental
cost-to-charge ratios
(CCRs)
“Cross-walk”:
CCRs to Revenue Codes
on Claims
Claims-level cost
estimate for each type of
service charged
Compute median cost per
APC
(OPPS payment unit)
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Background
 “Aggregation Bias” – when some services have systematically different
mark-up (or CCR) than others but end up being averaged together in single
departments on the cost report.
− CCR-derived costs for some component services are then systematically over or
under estimated
 Cost report forms first designed in 1960s – departments not seriously
updated since then
− Example: No standard lines for cardiac labs; CT, MRI; medical devices
− Hospitals can use non-standard lines if they have supporting data, but they are
supposed to identify the type and subset to CMS
 “Charge Compression” a specific type of aggregation bias resulting from
common industry mark-up practice for drugs and supplies, where high cost
items are marked up at lower rates than low-cost items.
 Where accounting data does not support disaggregation, statistical modeling
is needed
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CCR: line 40_7
1
1.5
.5
0
.5
0
1
CCR: Radiology-Dx
2
1.5
CT Scan vs. Radiology-Dx
Unity
2.5
MRI
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CCR: line 40_8
1
1.5
Many hospitals group CT
Scan & MRI with Dx
Radiology on the cost
reports. But both tend to
have much lower CCRs
than other Dx radiology
⇒ overstatement of cost
estimate
⇒ overstatement of APC
weight
APC cost is overstates
decreased
Aggregation
APC
cost is increased
Aggregation
understates
APC
cost is decreased
Aggregation
overstates
0
•
APC cost is understates
increased
Aggregation
.5
Example of
Aggregation Bias
CT Scanning
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.5
1.5
1
CCR: Radiology-Dx
MRI vs. Radiology-Dx
2
Unity
2.5
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What we did:
Medicare Cost Reports
(for CCRs)

Accounting
interventions

Modeling
interventions
“Cross-walk”:
CCRs to Revenue Codes
on Claims
Claims-level costs
By type of
Service
Mechanical
interventions
Median cost per
APC
(OPPS payment unit)
Impact Assessment
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What we found:
• Accounting issues:
– Major misclassifications of services for hospital using nonstandard lines
– Inconsistent use of standard lines
– Both causing serious distortions in CCRs
• Mechanical issues
– Incomplete mapping of cost report centers to revenue
codes
• Aggregation Bias
– Regression models indicate charge compression and other
systematic distortion from aggregated CCRs.
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What we recommended
Problem
Approach to Fix
Widespread use of nonstandard lines inadvertently
sorted to wrong department
(provider errors)
Temporary: string searches on line titles to
identify and re-assign, recalculate CCRs.
Long-term: Modify cost report software for nonstandard lines; add new lines; enforce instructions
Incomplete or inaccurate
mapping of CCRs to charge
codes
Revise and expand CMS revenue crosswalk
Charge compression in
supplies and drugs; other
aggregation bias in radiology
and cardiology
Temporary: Regression-based estimates from
statistically disaggregated separate cost centers.
Long-term: Add new lines to cost report
(Better yet: rationalize hospital pricing policies)
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Impact of Corrections on Selected Services
Effect on OPPS rates (columns are additive)
Service
Accounting and Mapping
Corrections
CCR Modeling
CT Scanning
⇓ 7% to 12%
⇓ 30% to 40%
MRI
⇓ 10% to 15%
⇓ 30% to 40%
Cardiac Catheterization
⇓ 13%
N/A
Electro-Physiology
⇓ 18% to 20%
N/A
Cardiac Rehab
⇑ 169%
N/A
Hosp Clinic Visits
⇑ 8% to 11%
N/A
Drug Infusions/ Admin
⇑20% to 50%
N/A
Dx Xray (plain films)
⇑ 3%
⇑ 50%
Cardiac Implant Procs
⇓ 0% to 8%
⇑ 25% to 35%
Part B Drugs (median)
0%
⇑ 18 %
Source: RTI Reconstructions from OPPS Single Bill File, 2008
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Three Examples
Reconstructed Median Costs
APC 095
APC 336
APC 260
Cardiac Rehab
MRI w/out contrast Plain Film (Xray)
(9th most common)
(17th most common)
(single most common)
Original CMS
method and cost
documentation
$37.37
$342.02
$43.96
Adjusted for
accounting and
mapping problems
only
$100.54
$300.62
$45.39
No change
$181.11
$67.22
(63%)
89%
(35%)
Additional modelbased adjustments
Percent price is
(under) / over-stated
Source: RTI Reconstructions from OPPS Single Bill File, 2008
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Why (administered) Price Matters?
For new technologies with high fixed costs:
• Over-pricing ⇒ over-investment ⇒ over-utilization
• For scanning in particular:
– Over-use of diagnostics ⇒ increased demand for follow-on
services
For elective services like Cardiac Rehab:
• Under-pricing ⇒ under-investment ⇒ reduced access
– Under-use of proven secondary prevention services ⇒ higher
Medicare costs longer term
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Low-Hanging Fruit
• Rates don’t need to be perfect, but they can
be significantly improved with relatively little
investment. It isn’t rocket science!
• Like it or not, the Medicare cost report is the
single most important rate-setting document
– Invest in its integrity (review & audit)
– Keep it up-to-date with changing medical practice
– Encourage providers to pay more attention
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Take-Home Message
• Medicare reform clearly needs to address
significant waste from over-utilization of
services, requiring interventions on many
levels.
• Before getting to more complex regulation of
services, first:
– Fix the rates
– Give the market a chance to do its thing
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Acknowledgments
• Thanks to Phil Cotterill and Christina Smith Ritter of
CMS (even though they might not share all of my
interpretations of the data)
• Thanks to my RTI co-investigators Sara Freeman
and Arnold Bragg
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