Until CMS or Congress acts, we are forced to continue with this concatenation of cost/burden calculations, leading to high charges and more media attention..
On the last Monitor Monday show, we heard Matthew Albright explain how several states are requiring hospitals to cut their outrageous fees. This is not a new problem, as there seem to be weekly new articles about patients receiving outrageous bills.
Congress has given much attention to this issue. Price transparency regulations require more public data on health costs. The No Surprises Act requires certain patients to receive a good faith estimate of charges and provides for an arbitration process if the provider and payer disagree on a payment rate for an out-of-network service. But let’s take a step back and take the time to understand how prices for medical services are actually set.
When I was in private practice, we set our fees based on what Medicare and other insurers were supposed to pay us. It certainly didn’t make sense to charge $40 for a service when the payer had already agreed to pay $50 for that service, so we used the contracted rates as a guide. We expected there to be contractual adjustments, so if we had one payer who only paid $50, but another paid $60, we would bill everyone at least $60 and reverse the difference .
Unfortunately, it’s not that simple for hospitals. First, a disclaimer: I’m not a hospital finance expert, nor an MBA. But I’m certified in Revenue Integrity by the National Association of Healthcare Revenue Integrity (NAHRI), so I know at least enough to pass this exam. So understand that what I write is my semi-educated explanation of the system.
Payment for hospital services is very different from payment for medical services. When an insurer “purchases” an office visit from me, they are getting an office visit for their insured patient. But with hospitals, although they provide medical services to patients on an individual basis, such as imaging studies, surgery or physiotherapy, there are also a myriad of additional factors, such as payment for medical education , disaster planning, community health initiatives, care for uninsured patients, etc., all of which are factored into the amount paid to the hospital. Many talk about site neutrality, which sounds reasonable at first glance, but I’ve yet to see a 24/7 outpatient surgery center operated under the Emergency Medical Treatment and Labor Act (EMTALA). to see every patient who presents for care. These additional costs of operating a hospital must be factored into payer payments.
How hospitals are paid for these additional services is more than complex. In overly simplistic terms, for medical education, there is a direct government payment to the hospital for each resident, and there is an indirect amount paid to the hospital as part of each Medicare hospitalization. Hospitals receive what is called a disproportionate hospital payment with each Medicare admission to cover the cost of providing care to other patients without insurance, and so on.
One way or another, all of these payments are calculated and balanced by the hospital’s finance team and Medicare Administrative Contractors (MACs) through cost reports. If you want to look like you know how it all works, just refer to worksheet S-10. People will assume you’re an expert and stop asking tough questions.
But back to the charges. The Centers for Medicare & Medicaid Services (CMS) is also doing something strange with hospital charges. They know that due to the complexity of the system and the myriad of payment arrangements, and contracts with payers who pay a fixed, negotiated percentage of fees, hospitals will charge more than it actually costs to provide a service. But who doesn’t? Do the parts and labor to build a Ferrari F4 really cost $284,000? Of course not. The price also includes the costs of running the factory, advertising, developing new cars, paying a Formula 1 team, profit for the owners, etc.
What is the actual cost of the plastic and water that goes into that $2 water bottle you buy at the convenience store? Maybe a few pennies. Determining the real costs of medical services is more than complex. If an MRI machine costs $2 million and can last 100,000 imaging studies, that’s a fixed cost per use of $20 per study. But then you have to add the cost of the technician, the cost of the room, the supplies used, any repair and maintenance costs, etc.
To compensate for this complexity and uncertainty, hospitals are assigned a cost-to-burden ratio (CCR). (There are actually multiple CCRs, but that would make it completely incomprehensible, especially to me.) The 1:5 CCR tells CMS that if a charge is $500, the true cost of the service, at best, is 100 $. CMS will then look at that $100 when deciding how much it wants to pay for the service. Somewhere in giant computers, every hospital claim for every department is entered and compared to the hospital’s CCR, and CMS then knows what it costs across the country to provide care.
Now here’s how CMS describes it, from the 2022 Outpatient Prospective Payment System (OPPS) Final Rule: Hospital Charge Specific CCR at the most detailed level possible, based on a concordance table revenue-cost center code that contains a costing hierarchy used to estimate costs from charges for each revenue code. In case you are curious, CMS will traditionally use the most recent full fiscal year data for rate setting, but due to the COVID-19 Public Health Emergency (PHE) they have used data from 2019 to set the rates for 2022, instead of 2020.
CMS also uses the CCR to calculate outlier payments to hospitals for extremely expensive care. Again, quoting CMS themselves, “Hospital-specific cost/expense ratios are applied to the covered charges for a case to determine if the case costs exceed the outlier fixed loss threshold.” In Chapter 4 of the Medicare Claims Processing Handbook, CMS reiterates that, stating that “it is extremely important that hospitals report all HCPCS codes that conform to their descriptors; Correct CPT and/or CMS instructions and coding principles, and all charges for all services they provide, whether payment for services is made separately or bundled. »
This means that CMS has created a vicious cycle that cannot be stopped by anyone but themselves. What are the consequences ? This was evident in the 2022 OPPS Final Rule, when CMS set a payout rate for HeartFlow FFR, a computerized interpretation of a CT scan of the heart’s arteries. “For this final rule with comment period, we have identified 3,188 complaints billed with CPT code 0503T, including 465 single-frequency complaints for CPT code 0503T using CY 2019 complaints,” the text reads. “Our analysis revealed that the geometric mean cost for CPT code 0503T is $807.58. However, several reviewers have noted that the FFRCT service costs $1,100 and that there are additional staff costs associated with submitting coronary image data for processing by HeartFlow.
In other words, the hospital has to pay $1,100 to the company doing the computerized interpretation, but for some of those 3,188 claims, the hospital did not correctly apply its CCR to that cost and billed Medicare the appropriate amount. As a result, CMS was going to drastically reduce the reimbursement, thinking the cost of the test was much lower than what it was paying before. Now, if a new company started offering the same service at a lower price, then a lower price would be justified. But that’s not what happened here.
At a national earnings integrity conference several years ago, John Settlemeyer of Atrium Health and Jugna Shah of Nimitt Consulting engaged in an exercise regarding the pricing of CAR-T therapy for cancer. This is a very expensive new therapy that is quite effective when it works for cancers for which no other treatment was available. The patient’s blood is sent to a lab, where specific cells are isolated and ‘engineered’, then injected back into the patient to attack the cancer cells. I could never explain the pricing aspects as well as these two experts, but in short, this treatment had a Medicare-approved additional payment amount; however, this payment was only made if the price of the claim was correctly assessed. That meant cell engineering, for which hospitals must pay the company about $375,000, had to be on the claim as a budget item, with an expense of more than $1.8 million.
This charge, as outrageous as it sounds, allows CMS to make the appropriate CCR adjustment, see that the therapy costs $375,000, and then pay the hospital the correct amount. The patient who has just undergone life-saving cancer treatment will receive a statement from the hospital, often labeled “not a bill”, which will state that $1.8 million will be billed, which could raise questions. If the hospital did not list these high charges, the claim is unlikely to qualify for additional and outlier payments, and few hospitals are able to write off hundreds of thousands of dollars for a claim. But as long as CMS continues to apply the CCR to past charges to determine future payments, hospitals cannot begin to reduce their charges. If a hospital lowers its fees, then CMS will calculate a lower cost and start paying less. This lower payment will then be used by other payers who set their rate as a percentage of Medicare rates, and they will pay less. I suspect no hospital CFO likes to see a $1.8 million charge on a patient statement, but they know the CAR-T company will soon be asking for their $375,000 – so until whether CMS or Congress acts, we are bound to continue with this concatenation of cost/burden calculations, resulting in high charges and greater media attention.