Payments

Hospital bills for 100 most common diagnoses, 2011 and 2012, for US and each hospital.

Explanation of General Medicare Payment Formula for Hospitals
The explanation is based on information from

• CMS factsheet

• CMS web page

• CMS regulations

• Hartstein, Institute of Medicine

• Dalton+Slifkin, U of North Carolina
• Oklahoma Hospital Association factsheet

Many numbers change each year. There are links to Medicare's "home page" of each year at the bottom of the main CMS readmission page.

• From that home page follow the links for Tables (discussed below).
• There is also a link for Data Files which include the

1. Impact File (names of hospitals, size, categories, cost factors), 
2. Standardizing File (cost factors), 
3. Wage Index File, and 
4. Readmissions Supplemental File (numbers of readmissions).

DRG weight

• Each patient's hospital stay is put in one diagnosis-related group (DRG), which has a payment weight (Table 5), reflecting its relative cost, compared to other diagnoses. Weights are updated every year.

Hospital operating base or "Specific standardized amounts"

• The base for operating costs is $5-6,000 (Table 1), divided into labor-related $3-4,000) and nonlabor ($1-2,000) shares. The labor-related share of operations is multiplied by the wage index (Table 4 and Impact File) applicable to the area where the hospital is located, and in Alaska and Hawaii the nonlabor share of operations is multiplied by a cost of living factor (in Federal Register).

Hospital capital base

• The base for capital costs is $420-440 (Table 1D), multiplied by the capital wage index which is also called the capital geographic adjustment factor-GAF (Table 4 and Impact File) applicable to the area where the hospital is located. In Alaska and Hawaii the capital base is also multiplied  by the cost of living factor.

Both hospital bases are multiplied by the DRG weight (Table 5).

Readmission reduction for "excess" readmissions in past years, based on operating costs plus payments for new technology, but excluding capital, and adjusted for transfers.

DSH for poor people

• If the hospital treats a high-percentage of low-income patients (under either of two statutory formulas), the disproportionate share hospital (DSH) adjustment, provides for a percentage increase in Medicare payment. The DSH is about $12 billion per year, so it averages 12% of all inpatient payments in all hospitals.

IME for teaching

• If the hospital is an approved teaching hospital the indirect medical education (IME) adjustment for operating costs depends on the ratio of residents-to-beds, and for capital depends on the ratio of residents-to-average daily census. The IME is about $6 billion per year, so it averages 6% of all inpatient payments in all hospitals.

Outlier payments for very costly hospital stays cover 80% of hospital losses over $23,000 (90% for burns). These total about $16 billion per year and they average about 2.9% of payments for most procedures, including the procedures subject to readmission penalties. They are higher on a few other procedures.

Summary inpatient costs released by Medicare include DRG amount (operating + capital), disproportionate share, teaching, and outlier payments. Operating cost (the base for readmission penalties) is about 73% of these summary costs.

Transfers after short stay get lower payment

New technology add-on payment (NTAP) added if applicable

Large Urban Areas get extra factor, meaning Metro Statistical Areas over 1 million people and New England County Metro Areas over 970,000.

Organ acquisition is paid separately

Value-based purchasing VBP has adjustments, based on operating costs, not capital.

Sole community hospitals (SCH) are paid by other formulas if higher

Medicare dependent hospitals (MDH) are paid by another formula if higher

Low volume hospitals get more, by formula

Qualifying hospitals are in the bottom quartile of counties on Medicare spending per enrollee, and get more

Hospitals not reporting quality data get reduction