Data for examples used in "Preparing for the New Landscape of Payment Reform," by Patricia Tyson, RN, MSA, are taken from the Medicare Provider Analysis and Review (MedPAR) file, which the Centers for Medicare & Medicaid Services updates annually based on the federal fiscal year. The file includes billing data for 100 percent of all Medicare fee-for-service claims (IPPS claims) for discharges during the 12 months ending Sept. 30, 2009.

The average payment is the amount paid to the hospital for the base MS-DRG. This amount does not include any capital pass-through amount or organ acquisition amount. It includes payments by Medicare (i.e., base MS-DRG payment, outlier payment, disproportionate share adjustment [DSH], indirect medical expense adjustments [IME], adjustments for certain transfers, etc.). It also includes amounts paid by or on behalf of the patient (e.g., deductibles or coinsurance) and amounts paid by third-party insurers. The average reported for a base MS-DRG is the total payment divided by its number of discharges.

Average costs are calculated for each patient on the basis of ratios of costs to charges for routine services and ancillary areas, in accordance with the cost allocation method used by American Hospital Directory (AHD). The average reported for a base MS-DRG is total allocated cost divided by its number of discharges.

Under AHD's cost allocation method, costs are allocated on a patient-by-patient basis. Each patient's bill contains charges by revenue center. These charges are coverted to costs using a cost-to-charge ratio (RCC) for each revenue center. The corresponding RCCs are derived from the hospital's cost report, as indicated below.

For example, if a patient had $300 in pharmacy charges and the hospital's RCC for pharmacy was 0.5000, then the cost would be allocated as $150 (300 x 0.5000 = 150).

Revenue center costs are then totaled to determine the total costs for each patient. Patients are subsequently summarized for reporting (e.g., by DRG and by medical service)

The following details how revenue (from patient bills) and cost-to-charge ratios (from hospital cost reports) are cross-referenced for cost allocations:

 Routine services  

  • Routine accommodations (private, semiprivate, and wards)
    - Revenue codes 11X, 12X, 13X, 14X, 15X
    - Cost center (Worksheet C, part I, line 25)


  • ICU/CCU accommodations
    - Revenue codes 20X, 21X
    - Cost center (Worksheet C, Part I, lines 26-30)

 Ancillary services  

  • Ambulance
    - Revenue code 54X
    - Cost centers (Worksheet C, Part I, line 65)


  • Ambulatory Surgery
    - Revenue codes 49X, 50X
    - Cost center (Worksheet C, Part I, line 58)


  • Anesthesia
    - Revenue code: 37X
    - Cost centers (Worksheet C, Part I, line 40)


  • Blood
    - Revenue codes 38X, 39X
    - Cost centers (Worksheet C, Part I, lines 46, 47)


  • Cardiology
    - Revenue codes 48X, 73X
    - Cost centers (Worksheet C, Part I, lines 41 [echocardiography only], 53)


  • Clinic
    - Revenue code 51X
    - Cost centers (Worksheet C, Part I, lines 60, 63.50-63.99)


  • Dialysis
    - Revenue codes 80X, 82X, 83X, 84X, 85X, 86X, 87X, 88X
    - Cost center (Worksheet C, Part I, line 57)


  • Durable Medical Equipment
    - Revenue codes 290, 291, 292, 293
    - Cost centers (Worksheet C, Part I, lines 66-67)


  • Emergency department
    - Revenue code 45X
    - Cost center (Worksheet C, Part I, line 61)


  • Lab
    - Revenue codes 30X, 31X, 74X, 75X
    - Cost centers (Worksheet C, Part I, lines 44 [except oncology], 45, 54)


  • Operating Room
    - Revenue codes 36X, 71X, 72X, 79X

    - Cost centers (Worksheet C, Part I, lines 37-39)



  • Organ Acquisition
    - Revenue codes 81X, 89X
    - Cost centers (Worksheet E, Part B, lines 3, 8)


  • Pharmacy
    - Revenue codes 25X, 26X, 63X
    - Cost centers (Worksheet C, Part I, lines 48, 56)


  • Physical/Occupational/Speech Therapy
    - Revenue codes 42X, 43X, 44X, 47X
    - Cost centers (Worksheet C, Part I, lines 50, 51, 52)


  • Radiology
    - Revenue codes 28X, 32X, 33X, 34X, 35X, 40X, 61X
    - Cost centers (Worksheet C, Part I, lines 41 [except echocardiography], 42, 43, 44 [oncology only])


  • Respiratory Therapy
    - Revenue codes 41X, 46X
    - Cost centers (Worksheet C, Part I, line 49)


  • Supplies
    - Revenue codes 27X, 62X
    - Cost centers (Worksheet C, Part I, line 55)


  • Other
    - Revenue codes 002-099, 22X, 23X, 24X, 52X, 53X, 55X, 56X, 57X, 58X, 59X, 60X, 64X, 65X, 66X, 67X, 68X, 69X, 70X, 76X, 77X, 78X, 90X, 91X, 92X, 93X, 94X, 95X, 99X
    - Cost centers (Worksheet C, Part I, lines 59, 62, 63, 64, 68 )


Technical Notes
Cost allocations are based on a hospital's cost reporting period most closely coinciding with the federal fiscal year of its Medicare claims data. Costs are not allocated for hospitals that do not have a recent cost report (i.e. a cost reporting period ending no more than 30 months prior to the federal fiscal year end of claims data) or that do not have sufficient data (i.e. a recent reporting period of at least six months with both costs and charges reported). If a departmental cost-to-charge ratio is zero, indefinable, or unreasonable then a national median ratio is used.


For more information, see Patricia Tyson's "Preparing for the New Landscape of Payment Reform," hfm, December, 2010.

Publication Date: Wednesday, December 01, 2010

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