$3.50 or $10,800,000? How Much Does a Service Actually Cost?

Many of us eagerly, or with dread, await the yearly payment system rules that the Centers for Medicare & Medicaid Services (CMS) releases.

Keeping up with the rules is actually a year-round project, with the first set of proposed rules appearing each April, to be finalized in August, and the second set of proposed rules released in July, to be finalized in November.

Of course, the first place I go is to search for any changes to the Two-Midnight Rule, which was thankfully left intact for 2024, except for the expansion to apply to Medicare Advantage (MA) plans, which was addressed in CMS-4201-F.

On the more mundane level, every year CMS looks at outpatient payment rates and Diagnosis-Related Groups (DRGs) to ensure that the assignments are appropriate and the payment rates are correct.

As new medications, devices, and surgical techniques are developed, the DRG assignments need adjusting. I would not dare to try to explain the changes, leaving that to the experts at ICD10monitor.com, but I will remind you that because of the DRG realignment starting on Oct. 1, your overall Case Mix Index (CMI) may shift, even without any changes to your patient population or coding practices.

I have talked before about how my personal opinion is that CMI is a terrible measure and should be banned, but finance people depend on their key performance indicators, and CMI is usually near the top of the list. Remember, if your CMI actually goes up, be sure to give all the credit to the utilization review (UR) and clinical documentation integrity (CDI) teams and physicians for their improved documentation – and if it drops, then be sure to point out the many flaws of the measure.

The rules focus a lot on payment.

I usually don’t like to talk about payment rates in the new rules, because focusing on that can lead to decisions that are based on payment and not compliance, but I do like to see what changes CMS makes. For 2024, they are proposing to raise the observation comprehensive Ambulatory Payment Calculation (APC) payment by $166.70. That’s actually a decent-sized increase, even if it still comes nowhere close to covering the cost of the average observation stay. For total joint replacement as an outpatient, CMS is raising the base rate by $221.32: a much lower-percentage raise than observation received.

Why did observation get a higher rate increase than total joint replacement? Well, CMS sets rates based on reported costs. They take all the claims and use those costs to determine the next year’s rate. So, we have to be sure our revenue teams are reporting costs properly. If implant costs increase, hospitals need to adjust their chargemaster. If the pain medication costs increase, we need to ensure the claims accurately reflect that.

Which takes me to an amazing story buried in the Outpatient Prospective Payment System (OPPS) Proposed Rule. There is a company that provides AI-driven analysis of CT coronary angiograms called Clearly Labs. This company charges hospitals about $1,500 for each interpretation, which produces crucial results that aid the cardiologist in interpreting the test.

The current payment rate is $950.

To set the rate for this test in 2024, CMS looked back at 2022 claims and found 90 claims with the HCPCS code for the test, and those 90 claims had an average charge of $3.50. Yep, hospitals paid $1,500 for the test, but reported a charge of $3.50. As a result, CMS was going to lower the payment rate to $5, but wisely decided they did not have adequate data, so they left the payment rate at $950. Hospitals and the company that sells this product got lucky this time.

Now, I know few RACmonitor readers are involved in chargemaster maintenance, but this is a great example of the real-life consequences of improper pricing. If any of you are interested in this, I will be speaking next month at the annual Revenue Integrity Symposium, sponsored by the National Association of Healthcare Revenue Integrity, along with Jugna Shah and Valerie Rinkle, two of the nation’s leading revenue integrity experts. Jugna will be discussing the consequences of poor pricing as related to CAR-T therapy, where a single infusion costs almost $500,000. As can be guessed, improper chargemaster pricing of a service with such a substantial cost can have catastrophic consequences if not done properly. In fact, one hospital used their cost-to-charge ratio to set the price for CAR-T at $10,800,000.

As a reminder, CMS told hospitals in 2006 that “we believe that hospitals have the ability to set charges for items properly so that charges converted to costs can appropriately account fully for their acquisition and overhead costs. … Therefore, if necessary, we believe that hospitals can appropriately adjust their charges for radiopharmaceuticals (insert any other type of service in place of radiopharmaceuticals) so that the calculated cost properly reflects their actual cost … We believe that payment for these items using charges converted to costs (by multiplying the charge with the department specific CCR) will be the best available proxy for the average acquisition costs.”

As can be seen, proper pricing can have consequences, both positive and negative. How these prices intersect with the efforts to achieve greater price transparency is best left to our finance teams to sort out.