John HarrisEveryone knows that urban teaching hospitals are “high cost” relative to community hospitals. So by avoiding these “high cost” hospitals, an accountable care organization (ACO) should save megabucks, right? 


Many ACOs are hoping to achieve savings by steering patients to lower-cost hospitals for inpatient services. However, Medicare's methodology for counting inpatient hospital costs under bundled payments and ACOs does not include all costs in those settings. Capital, Pass-thru, Indirect Medical Education (“IME”) and Disproportionate Share Hospital (“DSH”) payments are excluded from both the budget and the expenses in the ACO models. As a result, the variation in costs between hospitals is not as big as it would otherwise be.

Carole GrahamThe table below illustrates the difference. Under standard DRG payments, a high-cost hospital in our example is more than twice as expensive than a community hospital ($18,000 versus $7,800). However, when Capital, Pass-thru, IME, and DSH payments are excluded, the differential is reduced to 8 percent ($8,500 versus  $7,800). Most of this remaining differential is due to a different wage index at the urban teaching hospital. For hospitals with the same wage index, the differential is only about 2 percent.

Medicare Inpatient Payments and ACO Costs

If your hospital is perceived as high cost, you may want to take action to address the misperceptions.

If there are ACOs in your area (especially ACOs sponsored by physicians), be sure to educate them about the true costs of inpatient care under the ACO formula. You may be able to retain more cases than you think, especially if you can woo the ACO by doing a better job with care transitions that can avoid readmissions and other complications. 

If you have an ACO as part of your health system, don’t worry about the care provided at the “high-cost” hospital. It is probably not that expensive when calculated for an ACO.

Of course, there are other reasons a hospital-sponsored ACO should try to avoid admissions at outside hospitals. Keeping patients in your system should improve quality and continuity of care, and help backfill some of the capacity that is freed as your better care management reduces admissions overall. 

John M. Harris is a principal, DGA Partners, Bala Cynwyd, Pa., and a member of HFMA’s Metropolitan Philadelphia Chapter.

Carole J. Graham, RN, is a manager, DGA Partners, Bala Cynwyd, Pa.

Publication Date: Monday, July 01, 2013