Exploring Episode-Based Approaches for Medicare Performance Measurement, Accountability and Payment Final Report. Appendix D. Standardized Payment Methodology

02/01/2009

Average payments were standardized for each setting based on 2005 payment rates and payment policy to exclude variation in resource use due to geographic factors (i.e., area wages, geographic differences in medical liability costs, and urban/rural status) and policy considerations (i.e., indirect medical education (IME), and disproportionate share (DSH) payments for hospitals). This was done to make variations in standardized payments reflect differences in the services being delivered rather than differences in the cost of doing business where the services are delivered or policy considerations. Adjustments for high cost and low cost outliers were made for settings that identified outliers; outlier adjustment were made for acute care hospitals, long-term care hospitals, inpatient rehabilitation facilities, inpatient psychiatric facilities, home health care, and hospital outpatient services.  In order to more accurately reflect payments that would be paid by Medicare, we reduced standardized payments by setting-specific patient copayment percentage.  We did not adjust standardized payments for patient deductibles as these would vary based on the other services the beneficiary had previously received during the calendar year.  

Acute Care Hospital

Medicare PPS
Base rate (adjusted for area wages) * DRG weight + IME payment + DSH →       
(adjusted for transfers)1 = Payment (adjusted for high cost outliers)

 

RAND Standardized payment
Base rate * DRG weight → (adjusted for transfers)1 = Payment  (adjusted for high cost outliers)

1Transfer adjustment: Apply 2 times the per diem rate for the first day and the per diem for each additional day up to the full DRG rate. The per diem rate = Base DRG rate * weight / average LOS for a specific DRG

  • Include transfers to another acute care hospital or a post acute care setting for related care within 3 days
  • Length of stay (LOS) is at least one day less than the geometric mean LOS for the corresponding DRG
  • Limited to the DRGs that are subject to the transfer policy; for DRGs with a discharge date before 10/01/05, a list of 29 DRGs is used; for discharges after 10/01/05 a list of 182 DRGs is used
  • For special pay transfer DRGs (effective 10/01/05), hospitals receive 50 percent of the full DRG payment plus the single per diem for the first day of the stay and 50 percent of the per diem for the remaining days of the stay, up to the full DRG payment

Summary Comments:  The difference between the Medicare PPS payment and the RAND standardized payment is that we did not adjust the payment for IME and DSH as these reflect issues associated with achieving certain policy objectives. We did not adjust for area wages so that variations in standardize payments reflect differences in the number and types of admissions rather than differences in the cost of doing business where the services are delivered. We treated Critical Access Hospitals the same as acute care hospitals.

Skilled Nursing Facility (SNF)

Medicare PPS
SNF per diem base rate (adjusted for area wages) * RUG weight * LOS = Payment

 

RAND Standardized payment
(SNF per diem base rate * RUG weight)1 * LOS = Payment

1There are two SNF base rates, an urban base rate and a rural base rate rather than a more refined set of area wage adjustments as are used for many other provider settings.  We used the average of the case-mix adjusted urban and rural per diem rates to reach a blended rate.  This blending will remove variation in payments due to the geographic area in which care is being delivered.

Long Term Care Hospital (LTCH)

Medicare PPS
LTCH base rate (adjusted for area wages) * LTC DRG weight = Payment (adjusted for high cost or short stay outliers)

 

RAND Standardized payment
LTCH base rate * LTC DRG weight = Payment (adjusted for high cost or short stay outliers)

Summary Comments:  The difference between the Medicare PPS and RAND standardized payment method is that we did not adjust the payment for area wages. We did not adjust for area wages so that variations in standardized payments reflect differences in the number and types of LTCH admissions rather than differences in the cost of doing business where the services are delivered.

Inpatient Rehabilitation Facility (IRF)

Medicare PPS
IRF base rate (adjusted for area wages) * CMG weight = Payment (adjusted for high cost or short stay outliers)

 

RAND Standardized payment
IRF base rate * CMG weight = Payment (adjusted for high cost or short stay outliers)

Summary Comments: The methodology is the same for the Medicare PPS and the standardized payment except that we did not adjust the payment for area wages or outliers. We did not adjust for area wages so that variations in standardized payments reflect differences in the numbers and types of admissions rather than the cost of doing business where the services are being delivered.

Inpatient Psychiatric Facility (IPF)

Medicare PPS
IPF per diem base rate (adjusted for area wages) * PPS adjustment factor (DRG, age, comborbidity) * per diem adjusters + payment for ECT treatments = Payment (adjusted for high cost outliers

 

RAND Standardized payment
IPF per diem base rate * PPS adjustment factor (DRG, age, comborbidity) * per diem adjusters + payment for ECT treatments = Payment (adjusted for high cost outliers)

Summary comments:  The methodology is the same for the Medicare PPS and the standardized payment except that we did not adjust the payment for area wages. We did not adjust for area wages so that variations in standardized payments reflect differences in the numbers and types of admissions rather than the cost of doing business where the services are being delivered. In the Medicare PPS system, the per diem adjuster for the first day of the stay is different for facilities that do and do not have an emergency department.  We used an average of these two weights.

Home Health

Medicare PPS
Home health base rate (adjusted for area wages) * HHRG weight = Payment (adjusted for high cost or short stay outliers)

 

RAND Standardized payment
Home health base rate * HHRG weight = Payment (adjusted for high cost or short stay outliers)

Summary comments:  The difference in the methodology is that RAND did not adjust the payment for area wages. We did not adjust for area wages so that variations in standardized payments reflect differences in the frequency and types of home health care being delivered rather than differences in the cost of doing business where the services are delivered.

Ambulatory Surgical Center (ASC)

Medicare PPS
ASC Fee Schedule1

 

RAND Standardized payment
ASC Fee Schedule1

1The fee schedule only applies to the procedure with the highest payment rate, and the payments for other procedures on the same claim are reduced by 50%

Clinical Laboratory Services

Medicare PPS
Payment for the lab service = the lesser of the provider's charge, the carrier fee schedule
amount or the National Limit Amount (NLA is 74% of the median of fee schedule amounts set by 56 carriers)

 

RAND Standardized payment
Payment for the lab service = NLA

Summary comments:  We utilized the same methodology to reach the standardized payment as MedPAC used in the standardization of payments in the June 2006 Report to Congress, “Increasing the Value of Medicare”.  According to the MedPAC Payment Basics, most lab services are paid at the NLA rate.

Physician Services

Medicare PPS
Conversion factor * (Work RVU * Work GPCI + PE RVU * PE GPCI + PLI RVU * PLI GPCI) → Payment modifier1 → Adjustment for provider type2 → Geographic adjustment = Payment

 

RAND Standardized Payment
Conversion factor * (Work RVU + PE RVU + PLI RVU) → Payment modifier1 Adjustment for provider type2 = Payment

1Modifiers are used when physicians assist in a surgery, when multiple procedures are performed for the same patient on the same day, etc
2Payment is reduced 15% for nurse practitioners and physician assistants

Summary comments:  RAND utilized the same methodology as the Medicare PPS but excluded all geographic adjustments (e.g. area wages and medical liability costs). We did not include geographic adjustments so that variations in standardized payments reflect differences in services being delivered rather than differences in the cost of doing business where the services are delivered.

Anesthesia

Medicare PPS
Anesthesia conversion factor (adjusted for geographic area) * (base units + time units) = Payment1

 

RAND Standardized payment
Anesthesia conversion factor * (base units + time units) = Payment1

1Payment is reduced by 50% for CRNAs

Summary comments:  Unlike the Medicare PPS, we did not adjust the conversion factor for geographic area. We did not include geographic adjustments so that variations in standardized payments reflect differences in services being delivered rather than differences in the cost of doing business where the services are delivered.

Hospital Outpatient Services (including Part B drugs)

Medicare PPS
Conversion factor (adjusted for area wages and geographic factors) * APC relative weight + new technology pass-through payments + rural SCH add-on + hold harmless1 = Payment2 (adjusted for high cost outliers)

 

RAND Standardized Payment
Conversion factor * APC relative weight3 = Payment (adjusted for high cost outliers)

1Hold-harmless payments apply to cancer, children's and small rural hospitals.
2CMS pays for partial hospitalizations in hospital outpatient departments and community mental health centers on a per-diem basis rather than on a per service basis.  The per diem is the expected cost of care.
3The CMS website provides an APC fee schedule which is equivalent to the conversion factor * APC relative weight.

Summary Comments:  In calculating the standardized payment, we did not adjust for area wages, new technology pass-through payments (which represent no more than 2% of hospital outpatient costs), rural community hospital add-ons, or hold-harmless payments.  For partial hospitalization payments, we first calculated the average payment per unit of service by HCPCS code. The standardized payment for each patient hospitalization admission was then computed by multiplying the average payment per unit of service for the corresponding HCPCS code by the number of service units. We did not include geographic adjustments so that variations in standardize payments reflect differences in services being delivered rather than differences in the cost of doing business where the services are delivered.

Hospice

Medicare PPS
Daily base rate for 4 payment categories (adjusted for area wages: labor-related portion varies by payment category) = Daily payment

 

RAND Standardized payment
Daily base rate for each payment category = Daily Payment

Summary comment: The difference in the methodology is that RAND did not adjust the payment for area wages. We did not include area wage adjustments so that variations in standardize payments reflect differences in use and types of hospice services being delivered rather than differences in the cost of doing business where the services are delivered.

Durable Medical Equipment

Medicare PPS
Lesser of a) state-specific fee schedule (to capture geographic differences in price) or b) provider's charge for HCPC = Payment

 

RAND Standardized payment 
Average of fee schedule across states = Payment

Summary comment:  The difference in the methodology is that RAND took an average of the state-specific fee schedules to remove the adjustment for geographic differences in prices for equipment and did not reduce payment if the provider's charge was less than the fee schedule amount.

Ambulance Services

Medicare PPS
Conversion factor (adjusted for wage differences)* RVUadjusted for geographic factors =Payment

 

RAND Standardized Payment
Average of the urban and rural rate for each HCPC within each stateaverage for each HCPC across all states

Summary Comment: The difference in the methodology is that RAND did not adjust for wage and geographic differences and calculated average rates for each HCPCS first within each state, then across all states.

View full report

Preview
Download

"report.pdf" (pdf, 1.02Mb)

Note: Documents in PDF format require the Adobe Acrobat Reader®. If you experience problems with PDF documents, please download the latest version of the Reader®