An Observation about Observation Rates (and Other Notes)

Medlearn Media NPOS Non-patient outcome spending

Benchmark rates for observation depend on understanding your numerator and denominator.

First up, a shout-out goes to my friend Dr. Charles Locke in Maryland, an assistant professor of medicine at The Johns Hopkins University School of Medicine. Dr. Locke, Dr. Edward Hu at UNC Health, and I had several discussions about how Medicare calculates DRG payments to hospitals, all in preparation for a paper we had published, along with co-authors Dr. Ann Sheehy and Dr. Andrew Hughes, comparing payments in Maryland’s unique payment system to the DRG system.

For many years, the Centers for Medicare & Medicaid Services (CMS) had a pricer that could be downloaded and used to calculate DRG payments. Amazingly, until last year, that pricer worked only with computers that had COBOL, a programming language that was first used in 1959.

Then, in 2021, CMS finally developed a web-based system, entering the 21st century. But it turns out that when they moved the pricer from COBOL to the web, they made a mistake. They left out the daily pass-through payment to teaching hospitals. This resulted in calculations that were thousands of dollars less than the actual payments.

Well, somehow, Dr. Locke was able to contact the CMS programmers and talk their language, explaining their omission, and CMS actually updated the pricer. So now, if you use the web pricer, you will see the label “paid DRG with per diem,” and you can thank Dr. Locke. You can find all the CMS pricers at

Moving on, as you all know, providers have contracts with insurers to provide services to their patients at an agreed-upon rate. Of course, the payer will then do anything possible not to pay for the care, but I’ll skip that discussion for now. But denials are not the only way payers can increase their profits. The quarterly Cigna newsletter detailed a new tactic they have adopted. Cigna has in essence rented access to their provider network to Kaiser Permanente. This tactic is not new. I can recall facing such an unscrupulous arrangement in my private practice, circa 1998.

This “arrangement” means that when a Kaiser patient who is outside the normal Kaiser service area seeks emergency care, if that provider is contracted with Cigna, the patient will be considered to be at an in-network hospital, so the provider will be obligated to accept the same rates paid to Cigna patients and follow the Kaiser Permanente notification process. Kaiser wins in that it no longer has to pay out-of-network rates, and has the opportunity to deny payment if authorization is not obtained; Cigna wins in that you can be sure they are getting paid generously for renting that network access. And of course, the providers lose by having to follow a more onerous process – and get paid less than they would have prior to this collaboration. And Cigna is simply announcing this change with no option for providers to opt out. The ways payers find to increase profits never seems to stop.

Finally, we have talked over and over again about observation rates. Well, it came up again on the RAC Relief user group, with someone asking for the average rate for comparison. Linda Collins at TriHealth in Ohio almost instantaneously responded with a link to my article, describing how there is no benchmark (and why there is no benchmark), and others contributed. Now, of course, asking for the average rate is not the same as asking for a benchmark, but you can bet that if that person reported the average rate to their C-suite, it would be considered a benchmark.

But then I changed my mind. I decided that it was much easier to just name a number, rather than try to explain why one does not exist. And I decided that I should be the person to set that benchmark. I randomly chose 17.4 percent, based on absolutely no data whatsoever.

Others chimed in, with Dr. Phil Baker requesting a rate of 39.37543 percent to add precision, but Dr. Juliet Ugarte Hopkins recommended establishing a benchmark rate of 70 percent, so that no matter what rate you have in your hospital, the C-suite will think you are beating the benchmark.  

I have fun with benchmarks. In fact, I just returned from giving the keynote address at the New Jersey/Greater Philadelphia Healthcare Financial Management Association (HFMA) chapter’s annual conference, where I once refuted all the benchmarks used in utilization review (UR). I was also able to listen and smile as Caroline Znaniec from Protiviti presented on revenue integrity and displayed the “benchmarks” set by HFMA and the National Association of Healthcare Revenue Integrity (NAHRI). Caroline and I have debated about benchmarks in the past, and honestly, we are both right. But it is really all about understanding your numerator and denominator. If you don’t have those, the benchmark really is simply a random number.

Does anyone have more fun at work than I do? I doubt it.

Programming note: Listen to Dr. Ronald Hirsch every Monday when he makes his Monday Round live on Monitor Mondays, 10 Eastern and sponsored by R1-RCM.


Ronald Hirsch, MD, FACP, CHCQM, CHRI

Ronald Hirsch, MD, is vice president of the Regulations and Education Group at R1 Physician Advisory Services. Dr. Hirsch’s career in medicine includes many clinical leadership roles at healthcare organizations ranging from acute-care hospitals and home health agencies to long-term care facilities and group medical practices. In addition to serving as a medical director of case management and medical necessity reviewer throughout his career, Dr. Hirsch has delivered numerous peer lectures on case management best practices and is a published author on the topic. He is a member of the Advisory Board of the American College of Physician Advisors, a member of the American Case Management Association, and a Fellow of the American College of Physicians. Dr. Hirsch is a member of the RACmonitor editorial board and is regular panelist on Monitor Mondays. The opinions expressed are those of the author and do not necessarily reflect the views, policies, or opinions of R1 RCM, Inc. or R1 Physician Advisory Services (R1 PAS).

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