CMS Pub. 100-04, ch. 3, § 20.1.2

§1886(d)(5)(A) of the Act provides for Medicare payments to Medicare-participating

hospitals in addition to the basic prospective payments for cases incurring extraordinarily

high costs. This additional payment known as an “Outlier” is designed to protect the hospital

from large financial losses due to unusually expensive cases. To qualify for outlier

payments, a case must have costs above a fixed-loss cost threshold amount (a dollar amount

by which the costs of a case must exceed payments in order to qualify for outliers), which is

published in the annual Inpatient Prospective Payment System final rule. The regulations

governing payments for operating costs under the IPPS are located in 42 CFR Part 412. The

specific regulations governing payments for outlier cases are located at 42 CFR 412.80

through 412.86.

The actual determination of whether a case qualifies for outlier payments is made by the

Medicare contractor using Pricer, which takes into account both operating and capital costs

and Medicare severity-diagnostic related group (MS-DRG) payments. That is, the combined

operating and capital costs of a case must exceed the fixed loss outlier threshold to qualify

for an outlier payment. The operating and capital costs are computed separately by

multiplying the total covered charges by the operating and capital cost-to-charge ratios. The

estimated operating and capital costs are compared with the fixed-loss threshold after

dividing that threshold into an operating portion and a capital portion (by first summing the

operating and capital ratios and then determining the proportion of that total comprised by

the operating and capital ratios and applying these percentages to the fixed-loss threshold).

The thresholds are also adjusted by the area wage index (and capital geographic adjustment

factor) before being compared to the operating and capital costs of the case. Finally, the

outlier payment is based on a marginal cost factor equal to 80 percent of the combined

operating and capital costs in excess of the fixed-loss threshold (90 percent for burn MS-DRGs). Any outlier payment due is added to the MS-DRG adjusted base payment rate, plus

any DSH, IME and new technology add-on payment. For a more detailed explanation on the

calculation of outlier payments, visit the CMS Web site at

http://www.cms.gov/Medicare/Medicare-Fee-for-Service-

Payment/AcuteInpatientPPS/index.html

The Medicare contractor may choose to review outliers if data analysis deems it a priority.

The IPPS outliers are not applicable to non-PPS hospitals. The Pricer program makes all

outlier determinations except for the medical review determination. Outlier payments apply

only to the Federal portion of a capital PPS payment.