Cost Outliers: A Brief Explanation of DRG Outliers (Part 1)

What is the purpose of cost outlier payments?

Outlier payments are designed to compensate a facility for costs over and above normally expected costs. Remember that a DRG (diagnosis related group) payment is a reasonable estimate of what a single case (discharge) should cost. If a case becomes excessively expensive, then it makes sense that Medicare would consider this in its payment considerations.

There are several factors that Medicare considers in dishing out outlier payments:

  • The DRG payment weight
  • Indirect Medical Education (IME) and Disproportionate Share Factor
  • The cost outlier threshold
  • The operating cost-to-charge ratio
  • The capital cost-to-charge ratio
  • Marginal cost factor

What is an example calculation?

Please see the following link:

I will guide you through the calculation here, which is based on a generic hospital in the San Francisco, CA core based statistical area (CBSA).

1. Let’s start with the operating figures. If you would like to follow along, you may find your provider’s data accessible through the Impact File and Data Files accessible here for FY 2013:

More specifically, the Impact File contains the provider data, organized by provider name/number:

DRG Outlier Calculation - Operating Figures

DRG Outlier Calculation – Operating Figures

Providers are generally unable to directly control the following elements: (1) DRG weight, (2) labor amount, (3) non-labor amount, (4) CBSA Wage Index, (5) COLA, (6) labor and non-labor portions. This is because these factors are derived from data provided by other providers. The next several factors are hospital specific: (1) IME Operating Adjustment Factor, (2) DSH Operating Adjustment Factor, and (3) the operating cost-to-charge ratio.

Next time, we will discuss the elements comprising the capital costs.

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