Excluded facility financial status and options for payment system modification - Hospital Payment: Beyond the Prospective Payment System

Health Care Financing Review, Winter, 1993 by John E. Schneider, Jerry Cromwell, Thomas P. McGuire

TEFRA SYSTEM

There are two generations of TEFRA that pertain to this study: the system that was in place during the years analyzed in this report (1986, 1987, and 1988); and the current system modified by OBRA 1990. The early TEFRA system is that outlined in section 101 of TEFRA and affects excluded hospitals and units after 1982 (Federal Register, 1990). In 1992, changes to the original TEFRA went into effect based on adjustments defined in OBRA 1990. The impact of these changes is not reflected in our cost report data that end in 1988. However, it is necessary to understand the current system because the simulations of alternative systems use the OBRA 1990 cost-sharing system as a baseline. That is, OBRA 1990 payment algorithms are simulated on 1988 costs to show how alternative sharing arrangements would have produced a different distribution of winners and losers.

The basic cost control mechanisms in TEFRA are referred to as target amounts. Target amounts represent a cost per discharge ceiling for Medicare patients of excluded facilities, calculated individually for each facility. This amount is based on facilities' average costs in their base year, trended forward each year based on an inflation factor. In general, a facility is reimbursed according to how their current average costs per Medicare discharge compare with their current target amount per discharge.

The original TEFRA (1982-91) made payments to hospitals based on the payment algorithms shown in Figure 1. If a facility's average costs (AC) in a given year were less than their target amount (T), the facility would be reimbursed their full average cost plus an incentive payment. The size of the incentive payment was set at 5 percent of the target amount if average costs were below 90 percent of the target. The size of the incentive payment was reduced to one-half the difference (between average costs and the target) if AC fell between 90 percent of the target and 100 percent of the target. Facilities with average costs above the target were reimbursed only the target amount; that is, there was no cost sharing in that range.

Under the OBRA 1990 provisions, one important change was made allowing some degree of cost sharing for facilities with average costs exceeding the target amount. The system reimburses the same way for facilities with AC less than the target. However, above the target, facilities are allowed to share some of their losses. Between 90 percent of the target and 120 percent of the target, facilities are reimbursed one-half the difference of AC and T. This creates a new effective ceiling, and payments cannot exceed 110 percent of the target amount.

One important methodological issue is the TEFRA system's exception policy. The Secretary of Health and Human Services is required by OBRA 1990 to provide a target amount exception to hospitals and distinct part units that can show that "events beyond the hospital's control, or extraordinary circumstances, including changes in case mix and volume," have changed their cost structure significantly. This includes increases in wages as well as changes in applicable technology that increase costs. Records of requests for exceptions and decisions on exceptions are not automated. In addition, there is a lag time before an exception appears as an increased target amount or payment amount on the cost report. Thus, it is difficult to accurately account for exceptions when analyzing cost report data. In general, one can assume that the losses shown later are overstated where facilities have received retrospective adjustments, but by how much is unknown. Of more concern is the dynamic divergence of costs and payments among providers prior to adjustments. This suggests further restructuring in order to avoid turning TEFRA into an exceptions-based system.