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There is nothing wrong with adjusting prices to fit your cost-to-charge ratio.

New technologies have always posed a financial challenge to hospitals. While they want to provide cutting-edge care to patients, unless a positive margin can be maintained, the costs of those technologies can quickly lead to significant financial losses.

For Medicare, inpatient admissions are paid based on the diagnosis-related grouping (DRG) system. The principal diagnosis that led to the inpatient admission and any secondary diagnoses drive the assignment to the appropriate DRG. Each year, the Centers for Medicare & Medicaid Services (CMS) uses the historical costs reported by hospitals for all admissions within each DRG to set the rate for future years. Outpatient services are paid by the ambulatory payment classification (APC) system, with services that are similar clinically and financially placed in the same APC.

When new technology, with costs that often run into the tens or hundreds of thousands of dollars, is introduced, that payment structure would result in significant financial losses for hospitals for several years, until the hospital cost reporting is completed and CMS is able to readjust the DRGs and APCs. As a result, CMS has developed special processes to provide additional payment for a short time, until the payment catches up to the costs. For inpatient admissions, the system is the new technology add-on payment, and for outpatient services, it is the new technology APCs and pass-through payments.

On the inpatient side, CMS has a formal process for interested parties to ask for designation as a new technology, wherein costs are not adequately covered by the appropriate DRG. If granted, that new technology is designated and an add-on payment rate established, set to a maximum of 65 percent of the actual cost of the technology. But since that payment covers only 65 percent of the cost, and the added cost can be tens of thousands of dollars, it often falls upon the outlier payment system to properly compensate hospitals, with the outlier payment covering 80 percent of the excess costs, past a fixed threshold set yearly by CMS. The outpatient system differs in that if there is no current APC that matches the services, clinically and financially, the service is assigned to the APC that most closely estimates the actual costs – or, in the case of a device, a set payment is established.

Now here is where careful attention must be paid to hospital costs and charges. The inpatient outlier payment is based on the total reported cost of the care provided for the inpatient admission. But when hospitals bill Medicare, they do not report costs, but instead bill the chargemaster charge for every service provided. The total cost is calculated by taking the reported charges on the claim and applying the hospital’s designated charge-to-cost ratio.

When a hospital adds a new technology to its chargemaster, even though there is a designated new technology add-on payment, they have to price that new technology on their chargemaster so that the charge-to-cost ratio gets applied properly. That means they must mark it up by the appropriate percentage. If they don’t do that, the calculated costs for the new technology will be artificially low, and not only will their add-on payment will be reduced, but their chance to get a compliant outlier payment will be lost.

One of the most notable examples is Chimeric Antigen Receptor T-Cell (CAR-T) therapy. Many have heard of CAR-T therapy for leukemia mainly because of the price tag; the hospital must pay the company that processes the blood at least $375,000 for each treatment, depending on the indication. CMS addressed this cost by establishing an add-on payment, which cannot exceed $243,750, in this case. In order for a hospital to get the proper add-on and outlier payment, they must post the cost of this treatment on their chargemaster and on the claim at a rate adjusted for their charge-to-cost ratio, which will mean for a hospital with a ratio of 0.3, a price of $1.25 million.

But not only does the proper pricing affect the reimbursement for that claim, each year, CMS collects every claim for these new technology services, and looks at what hospitals charged in order to assign it to a proper DRG (or establish a new DRG, if appropriate). CAR-T therapy is not common, so that means if only a few hospitals price it improperly, all hospitals performing CAR-T will literally be paying the price for many years to come, by the undervaluing of such admissions that CMS will set.

And while getting the financial aspects correct is crucial, hospitals must remember the downstream effects of the pricing system. Patients who receive CAR-T therapy will receive a statement from the hospital listing a single service with a $1.25 million charge. Preparing the patient financial services staff for the inevitable calls would be important.

For outpatient services, the 2020 Outpatient Prospective Payment System (OPPS) Final Rule provided two examples of the importance of proper charging for services. Fractional Flow Reserve derived from Computed Tomography (FFRCT) is a procedure that uses information from a CT scan to determine the degree of blockage in the coronary arteries. In 2018, CMS assigned this procedure to a new technology APC, with reimbursement at $1,450.50, based on a $1,500 price from the product developer. For 2020, CMS looked at all claims from 2018 for use of that procedure, and found 840 claims with the mean cost of $788. As a result, they proposed assigning it to a new technology APC, valued at $750.50. After commenters pointed out that the cost reported on those claims had to be faulty, CMS relented and assigned an APC valued at $950.50, which is still significantly below the actual cost of the test. This happened because hospitals did not properly mark up the price of FFRCT to accurately account for the cost-to-charge ratio.

In the case of one spine surgery, CPT code 22869, the insertion of interlaminar/interspinous process stabilization/distraction device without open decompression or fusion, CMS reviewed the cost reporting and found a 22 percent reduction in costs – and as a result, reassigned the procedure from APC 5116 to 5115, with a $4,000 reduction in payment. Once again, commenters blamed improper cost reporting on this drastic decrease in cost, but in this case, CMS could not be swayed, and kept the lower-weighted APC.

Hospitals did not design the pricing system, but must abide by it, and should be prepared to explain it if questioned. There is nothing wrong with adjusting prices to fit your cost-to-charge ratio. In fact, CMS seemed to prepare for such questions, noting in the Federal Register, “we believe that hospitals have the ability to set charges for items properly so that charges converted to costs can appropriately account fully for their acquisition and overhead costs.”

In the 2020 OPPS Final Rule, CMS made two references to cost-to-charge reporting. They stated that “we rely on hospitals to bill all CPT codes accurately, in accordance with their code descriptors and CPT and CMS instructions, as applicable, and to report charges on claims and charges and costs on their Medicare hospital cost reports appropriately. In addition, we do not specify the methodologies that hospitals must use to set charges for this or any other service.” Chapter 4 of the Medicare Claims Processing Manual reiterates that, stating “it is extremely important that hospitals report all HCPCS codes consistent with their descriptors; CPT and/or CMS instructions and correct coding principles, and all charges for all services they furnish, whether payment for the services is made separately paid or is packaged.”

Hospital pricing has been receiving a lot of attention recently due to the new price transparency regulations, and that may bring more scrutiny to proper pricing of new services, but proper pricing is crucial to maintaining the integrity of the CMS payment system. Ensuring that all new technologies are priced properly, and that all parties are aware of the relationship between the charge, the cost, and the payment, will be crucial to ensure the success of each hospital.

Programming Note: Listen live reports from Dr. Ronald Hirsch every Monday on Monitor Mondays, 10-10:30 a.m. EST.


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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