Federal entities are beginning to pay closer attention to hospitals’ financial wellness.

Last week was Revenue Integrity Week, which marked an opportunity to acknowledge the work of the many people in health systems’ hospitals who help get a claim paid. I am always amazed that they can take our often-illegible medical records and the always incomprehensible Medicare billing guidelines and produce a claim.

I do not claim to be a payment expert and often have great difficulty trying to figure out why a claim was paid the way it was. But a recent notice about Congress paying attention to how hospitals are paid got my attention.

To that end, I want to talk a little bit about how hospitals are paid by the federal government without breaking down the payment system in too much detail. I know we are not supposed to talk about payment, because some think if you talk about payment, you are inevitably going to do something illegal to get a higher payment. But I think that is far from the truth. Hospitals cannot stay open if they cannot cover their expenses.

Congress and the Centers for Medicare & Medicaid Services (CMS) are well aware of this, and that is one reason critical access hospitals (CAHs) get paid based on costs, not on the diagnosis-related grouping (DRG) system. A hospital with an average census of four patients would not survive on the DRG system, and that would leave large swaths of our country without any hospitals.

But putting aside the critical access hospitals, there are many other hospitals throughout the country that are struggling to survive. Why is this happening? Most people know that hospital payments from Medicare for inpatient admissions are adjusted for teaching of medical students, residents, and fellows, for uncompensated care, and for a disproportionate share of underinsured patients. There are also special payments for other special classes of hospitals.

There is also an adjustment made for what Medicare calls the wage index. In simple terms, that is an adjustment made to compensate for the cost of employing people in the area. If wages are higher in a given community, the hospital will need to pay more to employ its staff.

In non-urban areas, wages are lower. The base wage index, of course, is 1.0. At the extremes, near Apple headquarters in northern California, for example, the wage index is 1.7312, and in rural Georgia, it is 0.7357. The wage index is applied to the base DRG payment and then the other payments are added to that amount to come up with the final payment to the hospital.

How does that translate to actual payment? An inpatient admission for a lower-weighted DRG such as syncope (which is often an “observation” diagnosis, but occasionally warrants inpatient admission) can result in a payment ranging from $4,800 in a low-wage index hospital without a teaching program to $10,900 for a high-wage index hospital with a teaching program.

But it is not only inpatient admissions that get adjusted based on the wage index; outpatient services also are adjusted. The 60 percent of the outpatient base payment for a service or bundle of services (an ambulatory payment classification) is adjusted either up or down depending on the wage index. That means payment for an observation stay where the base payment is $2,300 can vary from $1,900 to $3,400.

The wage index is also applied to the physician fee schedule, so while the cost of living in a rural area is lower, the payment differential to physicians can be substantial, driving physicians to seek employment in larger communities, leaving rural areas underserved. Substantial growth in the number of areas without a hospital and with a shortage of physicians is not a situation anyone wants to see.

Fortunately, this issue is finally getting attention at the U.S. Department of Health and Human Services (HHS), with Secretary Alex M. Azar II telling Congress he supports legislation to address it. Secretary Azar notes that it is “one of the most vexing issues in Medicare,” since budget neutrality must be maintained. It will be interesting to watch this as it proceeds through Congress, since budget neutrality may make the discussion get quite ugly.

Speaking of money, in my RACmonitor webinar last week, I discussed what to do with the patient who was improperly admitted as an inpatient. And part of deciding how and when to fix your mistakes does involve money. I have seen hospitals that never use a condition code 44 because they are such a hassle, instead leaving the admissions as inpatient and doing a self-denial instead. But while a self-denial is easier, you rarely have the opportunity to bill for any observation hours. And as a result, the payment for the self-denied inpatient admission can be up to $1,500 less than if you used condition code 44 – and you get paid much faster with the code 44 than with self-denial.

More money faster? I bet I know which your CFO would want. Want to learn more? You can watch the webinar on demand.

Program Note
Listen to Dr. Hirsch every Monday on Monitor Mondays, 10-10:30 a.m. ET.


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