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(4) Apply the cost to charge ratio. Each charge is to be reduced to a representative cost by using the Medicare cost to charge ratio. This amount shall be increased by 1 percentage point in order to reimburse hospitals for bad debt expenses attributable to CHAMPUS beneficiaries.

(5) Preliminary base year standardized amount. A preliminary base year standardized amount shall be calculated by summing all costs in the database applicable to the large urban or other area group and dividing by the total number of discharges in the respective group.

(6) Update for inflation. The preliminary base year standardized amounts shall be updated using an annual update factor equal to 1.07 to produce fiscal year 1988 preliminary standardized amounts. Therefore, any development of a new standardized amount will use an inflation factor equal to the hospital market basket index used by the Health Care Financing Administration in their Prospective Payment System.

(7) The preliminary standardized amounts, updated for inflation, shall be divided by a system standardization factor so that total DRG outlays, given the database distribution across hospitals and diagnosis, are equal to the total charges reduced to costs.

(8) Labor and nonlabor portions of the adjusted standardized amounts. The adjusted standardized amounts shall be divided into labor and nonlabor portions in accordance with the Medicare division of labor and nonlabor portions.

(E) Adjustments to the DRG-based payments amounts. The following adjustments to the DRG-based amounts (the weight multiplied by the adjusted standardized amount) will be made.

(1) Outliers. The DRG-based payment to a hospital shall be adjusted for atypical cases. These outliers are those cases that have either an unusually short length-of-stay or extremely long length-of-stay or that involve extraordinarily high costs when compared to most discharges classified in the same DRG. Cases which qualify as both a length-of-stay outlier and a cost outlier shall be paid at the rate which results in the greater payment.

(i) Length-of-stay outliers. Length-ofstay outliers shall be identified and

paid by the fiscal intermediary when the claims are processed.

(A) Short-stay outliers. Any discharge with a length-of-stay (LOS) less than 1.94 standard deviations from the DRG's arithmetic LOS shall be classified as a short-stay outlier. Short-stay outliers shall be reimbursed at 200 percent of the per diem rate for the DRG for each covered day of the hospital stay, not to exceed the DRG amount. The per diem rate shall equal the DRG amount divided by the arithmetic mean length-of-stay for the DRG.

(B) Long-stay outliers. Any discharge (except for neonatal services and services in children's hospitals) which has a length-of-stay (LC exceeding threshold established in accordance with the criteria used for the Medicare Prospective Payment System as contained in 42 CFR 412.82 shall be classified as a long-stay outlier. Any discharge for neonatal services or for services in a children's hospital which has a LOS exceeding the lesser of 1.94 standard deviations or 17 days from the DRG's arithmetic mean LOS also shall be classified as a long-stay outlier. Long-stay outliers shall be reimbursed the DRG-based amount plus a percentage (as established for the Medicare Prospective Payment System) of the per diem rate for the DRG for each covered day of care beyond the long-stay outlier threshold. The per diem rate shall equal the DRG amount divided by the arithmetic mean LOS for the DRG. For admissions on or after October 1, 1997, the long stay outlier has been eliminated for all cases except children's hospitals and neonates. For admissions on or after October 1, 1998, the long stay outlier has been eliminated for children's hospitals and neonates.

(ii) Cost outliers. Additional payment for cost outliers shall be made only upon request by the hospital.

(A) Cost outliers except those in children's hospitals or for neonatal services. Any discharge which has standardized costs that exceed a threshold established in accordance with the criteria used for the Medicare Prospective Payment System as contained in 42 CFR 412.84 shall qualify as a cost outlier. The standardized costs shall be calculated by multiplying the total

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charges by the factor described in para- agreement with a managed care supgraph (a)(1)(iii)(D)(4) of this section port contractor which would affect this and adjusting this amount for indirect payment. For hospitals with managed medical education costs. Cost outliers care support agreements which affect shall be reimbursed the DRG-based these payments, CHAMPUS will apply amount plus a percentage (as estab- these payments if the increased paylished for the Medicare Prospective ments would be consistent with the Payment System) of all costs exceed- agreements. In FY 2000 the ratio of ing the threshold. Effective with ad- outlier payments (long stay and cost) missions occurring on or after October that would have occurred under the FY 1, 1997, the standardized costs are no 94 policy and actual cost outlier paylonger adjusted for indirect medical ments made under the FY 99 policy will education costs.

be recalculated. If the ratio has (B) Cost outliers in children's hos- changed significantly, the ratio will be pitals for neonatal services. Any dis- revised for use in FY 2001 and therecharge for services in a children's hos- after. In FY 2002, the actual cost pital or for neonatal services which has outlier cases in FY 2000 and 2001 will be standardized costs that exceed reexamined. The ratio of outlier paythreshold of the greater of two times ments that would have occurred under the DRG-based amount or $13,500 shall the FY94 policy and the actual cost qualify as a cost outlier. The standard- outlier payments made under the FY ized costs shall be calculated by multi-' 2000 and FY 2001 policies. If the ratio plying the total charges by the factor has changed significantly, the ratio described in paragraph (a)(1) (iii) (D) (4) will be revised for use in FY 2003. of this section (adjusted to include av- (C) Cost outliers for burn cases. All erage capital and direct medical edu- cost outliers for DRGs related to burn cation costs) and adjusting this cases shall be reimbursed the DRGamount for indirect medical education based amount plus a percentage (as escosts. Cost outliers for services in chil- tablished for the Medicare Prospective dren's hospitals and for neonatal serv- Payment System) of all costs exceedices shall be reimbursed the DRG-based ing the threshold. The standardized amount plus a percentage (as estab- costs and thresholds for these cases lished for the Medicare Prospective shall be calculated in accordance with Payment System) of all costs exceed- $199.14(a)(1)(iii)(E)(1)(ii)(A)

and ing the threshold. Effective with ad- $199.14(a)(1)(iii)(E)(1)(ii)(B). missions occurring on or after October (2) Wage adjustment. CHAMPUS will 1, 1998, standardized costs are no longer adjust the labor portion of the standadjusted for indirect medical education ardized amounts according to the hoscosts. In addition, CHAMPUS will cal- pital's area wage index. culate the outlier payments that would (3) Indirect medical education adjusthave occurred at each of the 59 Chil- ment. The wage adjusted DRG payment dren's hospitals under the FY99 outlier will also be multiplied by 1.0 plus the policy for all cases that would have hospital's indirect medical education been outliers under the FY94 policies ratio. using the most accurate data available (4) Children's hospital differential. in September 1998. A ratio will be cal- With respect to claims from children's culated which equals the level of hospitals, the appropriate adjusted outlier payments that would have been standardized amount shall also be admade under the FY94 outlier policies justed by a children's hospital differenand the outlier payments that would be tial. made if the FY99 outlier policies had (i) Qualifying children's hospitals. Hosapplied to each of these potential pitals qualifying for the children's hosoutlier cases for these hospitals. The pital differential are hospitals that are ratio will be calculated across all exempt from the Medicare Prospective outlier claims for the 59 hospitals and Payment System, or, in the case of will not be hospital specific. The ratio hospitals that do not participate in will be used to increase cost outlier Medicare, that meet the same criteria payments in FY 1999 and FY 2000, un- (as determined by the Director, less the hospital has a negotiated OCHAMPUS, or a designee) as required

for exemption from the Medicare Prospective Payment System as contained in 42 CFR 412.23.

(ii) Calculation of differential. The differential shall be equal to the difference between a specially calculated children's hospital adjusted standardized amount and the adjusted standardized amount for fiscal year 1988. The specially calculated children's hospital adjusted standardized amount shall be calculated in the same manner as set forth in $199.14(a)(1)(iii)(D), except that:

(A) The base period shall be fiscal year 1988 and shall represent total estimated charges for discharges that occurred during fiscal year 1988.

(B) No cost to charge ratio shall be applied.

(C) Capital costs and direct medical education costs will be included in the calculation.

(D) The factor used to update the database for inflation to produce the fiscal year 1988 base period amount shall be the applicable Medicare inpatient hospital market basket rate.

(iii) Transition rule. Until March 1, 1992, separate differentials shall be used for each higher volume children's hospital (individually) and for all other children's hospitals (in the aggregate). For this purpose, a higher volume hospital is a hospital that had 50 or more CHAMPUS discharges in fiscal year 1988.

(iv) Hold harmless provision. At such time as the weights initially assigned to neonatal DRGs are recalibrated based on sufficient volume of CHAMPUS claims records, children's hospital differentials shall be recalculated and appropriate retrospective and prospective adjustments shall be made. To the extent practicable, the recalculation shall also include reestimated values of other factors (including but not limited to direct education and capital costs and indirect education factors) for which more accurate data became available.

(v) No update for inflation. The children's hospital differential, calculated (and later recalculated under the hold harmless provision) for the base period of fiscal year 1988, shall not be updated for subsequent fiscal years.

(vi) Administrative corrections. In connection with determinations pursuant to paragraph (a)(1)(iii) (E)(4)(iii) of this section, any children's hospital that believes OCHAMPUS erroneously failed to classify the hospital as a high volume hospital or incorrectly calculated (in the case of a high volume hospital) the hospital's differential may obtain administrative corrections by submitting appropriate documentation to the Director, OCHAMPUS (or a designee).

(F) Updating the adjusted standardized amounts. Beginning in FY 1989, the adjusted standardized amounts will be updated by the Medicare annual update factor, unless the adjusted standardized amounts are recalculated.

(G) Annual cost pass-throughs.

(1) Capital costs. When requested in writing by a hospital, CHAMPUS shall reimburse the hospital its share of actual capital costs as reported annually to the CHAMPUS fiscal intermediary. Payment for capital costs shall be made annually based on the ratio of CHAMPUS inpatient days for those beneficiaries subject to the CHAMPUS DRG-based payment system to total inpatient days applied to the hospital's total allowable capital costs. Reductions in payments for capital costs which are required under Medicare shall also be applied to payments for capital costs under CHAMPUS.

(i) Costs included as capital costs. Allowable capital costs are those specified in Medicare Regulation 8 413.130, as modified by $ 412.72.

(ii) Services, facilities, or supplies provided by supplying organizations. If services, facilities, or supplies are provided to the hospital by a supplying organization related to the hospital within the meaning of Medicare Regulation 8413.17, then the hospital must include in its capital-related costs, the capitalrelated costs of the supplying organization. However, if the supplying organization is not related to the provider within the meaning of $ 413.17, no part of the change to the provider may be considered a capital-related cost unless the services, facilities, or supplies are capital-related in nature and:

(A) The capital-related equipment is leased or rented by the provider;

(B) The capital-related equipment is located on the provider's premises; and

(C) The capital-related portion of the of the change). The request must be charge is separately specified in the signed by the hospital official responcharge to the provider.

sible for verifying the amounts and (2) Direct medical education costs. shall contain the following informaWhen requested in writing by a hos- tion. pital, CHAMPUS shall reimburse the (i) The hospital's name. hospital its actual direct medical edu- (ii) The hospital's address. cation costs as reported annually to (iii) The hospital's CHAMPUS prothe CHAMPUS fiscal intermediary. vider number. Such teaching costs must be for a (iv) The hospital's Medicare provider teaching program approved under number. Medicare Regulation $413.85. Payment (v) The period covered—this must for direct medical education costs shall correspond to the hospital's Medicare be made annually based on the ratio of cost-reporting period. CHAMPUS inpatient days for those (vi) Total inpatient days provided to benficiaries subject to the CHAMPUS all patients in units subject to DRGDRG-based payment system to total based payment. inpatient days applied to the hospital's (vii) Total allowed CHAMPUS inpatotal allowable direct medical edu- tient days provided in units subject to cation costs. Allowable direct medical DRG-based payment. education costs are those specified in (viii) Total allowable capital costs. Medicare Regulation $ 413.85.

(ix) Total allowable direct medical (3) Information necessary for pay- education costs. ment of capital and direct medical edu- (1) Total full-time equivalents for: cation costs. All hospitals subject to (A) Residents. the CHAMPUS DRG-based payment (B) Interns. system, except for children's hospitals, (xi) Total inpatient beds as of the end may be reimbursed for allowed capital of the cost-reporting period. If this has and direct medical education costs by changed during the reporting period, submitting a request to the CHAMPUS an explanation of the change must be contractor. Beginning October 1, 1998, provided. such request shall be filed with (rii) Title of official signing the reCHAMPUS on or before the last day of port. the twelfth month following the close (xiii) Reporting date. of the hospitals' cost reporting period, (riv) The report shall contain a cerand shall cover the one-year period cor- tification statement that any changes responding to the hospital's Medicare

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the items in paragraphs cost-reporting period. The first such re- (a)(1)(iii)(G)(3)(vi), (vii), (viii), (iz), or quest may cover a period of less than a (x), which are a result of an audit of full year—from the effective date of the hospital's Medicare cost-report, the CHAMPUS DRG-based payment shall be reported to CHAMPUS within system to the end of the hospital's thirty (30) days of the date the hospital Medicare cost-reporting period. All is notified of the change. costs reported to the CHAMPUS con- (2) CHAMPUS mental health per diem tractor must correspond to the costs payment system. The CHAMPUS mental reported on the hospital's Medicare health per diem payment system shall cost report. An extension of the due be used to reimburse for inpatient mendate for filing the request may only be tal health hospital care in specialty granted if an extension has been grant- psychiatric hospitals and units. Payed by HCFA due to a provider's oper

ment is made on the basis of prospecations being significantly adversely af- tively determined rates and paid on a fected due to extraordinary cir- per diem basis. The system uses two cumstances over which the provider sets of per diems. One set of per diems has no control, such as flood or fire. (If applies to hospitals and units that have these costs change as a result of a sub- a relatively higher number of sequent audit by Medicare, the revised CHAMPUS discharges. For these hoscosts are to be reported to the hos- pitals and units, the system uses hospital's CHAMPUS contractor within 30 pital-specific per diem rates. The other days of the date the hospital is notified set of per diems applies to hospitals

and units with a relatively lower number of CHAMPUS discharges. For these hospitals and units, the system uses regional per diems, and further provides for adjustments for area wage differences and indirect medical education costs and additional passthrough payments for direct medical education costs.

(i) Applicability of the mental health per diem payment system.

(A) Hospitals and units covered. The CHAMPUS mental health per diem payment system applies to services covered (see paragraph (a)(2)(i)(B) of this section) that are provided in Medicare prospective payment system (PPS) exempt psychiatric specialty hospitals and all Medicare PPS exempt psychiatric specialty units of other hospitals. In addition, any psychiatric hospital that does not participate in Medicare, or any other hospital that has a psychiatric specialty unit that has not been so designated for exemption from the Medicare prospective payment system because the hospital does not participate in Medicare, may be designated as a psychiatric hospital or psychiatric specialty unit for purposes of the CHAMPUS mental health per diem payment system upon demonstrating that it meets the same criteria (as determined by the Director, OCHAMPUS) as required for the Medicare exemption. The CHAMPUS mental health per diem payment system does not apply to mental health services provided in other hospitals.

(B) Services covered. Unless specifically exempted, all covered hospitals' and units' inpatient claims which are classified into a mental health DRG (DRG categories 425 432, but not DRG 424) or an alcohol/drug abuse DRG (DRG categories 433 437) shall be subject to the mental health per diem payment system.

(ii) Hospital-specific per diems for higher volume hospitals and units. This paragraph describes the per diem payment amounts for hospitals and units with a higher volume of CHAMPUS discharges.

(A)(1) Per diem amount. A hospitalspecific per diem amount shall be calculated for each hospital and unit with a higher volume of CHAMPUS discharges. The base period per diem

amount shall be equal to the hospital's average daily charge in the base period. The base period amount, however, may not exceed the cap described in paragraph (a)(2)(ii)(B) of this section. The base period amount shall be updated in accordance with paragraph (a)(2)(iv) of this section.

(2) In states that have implemented a payment system in connection with which hospitals in that state have been exempted from the CHAMPUS DRGbased payment system pursuant to paragraph (a)(1)(ii)(A) of this section, psychiatric hospitals and units may have per diem amounts established based on the payment system applicable to such hospitals and units in the state. The per diem amount, however, may not exceed the cap amount applicable to other higher volume hospitals.

(B) Cap—(1) As it affects payment for care provided to patients prior to April 6, 1995, the base period per diem amount may not exceed the 80th percentile of the average daily charge weighted for all discharges throughout the United States from all higher volume hospitals.

(2) Applicable to payments for care provided to patients on or after April 6, 1996, the base period per diem amount may not exceed the 70th percentile of the average daily charge weighted for all discharges throughout the United States from all higher volume hospitals. For this purpose, base year charges shall be deemed to be charges during the period of July 1, 1991 to June 30, 1992, adjusted to correspond to base year (FY 1988) charges by the percentage change in average daily charges for all higher volume hospitals and units between the period of July 1, 1991 to June 30, 1992 and the base year.

(C) Review of per diem. Any hospital or unit which believes OCHAMPUS calculated a hospital-specific per diem which differs by more than $5.00 from that calculated by the hospital or unit may

apply to the Director, OCHAMPUS, or a designee, for a recalculation. The burden of proof shall be on the hospital.

(iii) Regional per diems for lower volume hospitals and units. This paragraph describes the per diem amounts for hospitals and units with a lower volume of CHAMPUS discharges.

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