Medical Cost Trends

Study: Costs Vary Widely for Hospital Outpatient Surgeries

A WCRI study shows that states with cost-to-charge ratio fee regulations or fixed fee schedules see lower payments and slower growth of increased payments compared to other states.
By: | March 16, 2015

States that use percent-of-charge-based fee regulations or have no fixed fee schedules are paying a bundle for common hospital outpatient surgeries, suggests a new study. States with cost-to-charge ratio fee regulations or fixed fee schedules see lower payments and slower growth of increased payments compared to other states.

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The Massachusetts-based Workers Compensation Research Institute compared hospital outpatient costs for the most commonly used outpatient surgeries in workers’ comp for 33 states to develop its fourth Hospital Outpatient Cost Index for Workers’ Compensation. The study updates previous research and includes data from 2013.

“Hospital outpatient payments per surgical episode varied significantly across states, ranging from 71 percent below the 33-state median in New York to 115 percent above the 33-state median in Alabama in 2013,” according to the study. “In other words, the average payment for similar surgical episodes in the highest-cost study state, Alabama, was more than seven times the level paid in New York, the lowest-cost study state.”

The researchers organized the 33 states according to their approaches to regulate reimbursements for hospital outpatient services. The five categories they used were:

Fixed Amount Fee Schedules 

Hospital outpatient services are reimbursed according to fixed amount fee schedules. States using them include California, Colorado, Georgia, Illinois, Maryland, Massachusetts, Mississippi, Nevada, New York, North Carolina, Oklahoma, South Carolina, Tennessee, Texas, and West Virginia.

Percent-of-Charge-Based Fee Regulations

Instead of specifying a particular reimbursement amount, these states depend on provider charges and allow a pre-specified percentage of charges to be reimbursed. States with this type of system included Alabama, Florida, Kansas, Louisiana, Minnesota, and Nebraska.

Cost-to-Charge Ratio Fee Regulations

Kentucky, Michigan, and Oregon multiply cost-to-charge ratios to determine reimbursement amounts. The ratio is often calculated using Medicare or Medicaid Cost Reports. As WCRI explained, a hospital’s expenses typically are divided by revenues to compute the base ratio, which may be modified for hospital location or size, among other factors.

Other Fee Regulations

Pennsylvania has a fee regulation type system which combines features of a fixed amount fee schedule and a charge-based fee regulation.

No fee schedules

Eight States — Arizona, Connecticut, Indiana, Iowa, Missouri, New Jersey, Virginia, and Wisconsin — had no hospital outpatient fee schedule as of 2013. Connecticut requires hospitals to be reimbursed at their actual cost. “However, in reality, negotiations occur that may or may not result in actual costs being paid,” the report said.

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“States with no fee schedules for hospital outpatient reimbursement had higher hospital outpatient payments per episode compared with states with fixed-amount fee schedules — 60 to 141 percent higher than the median of the study states with fixed amount fee schedules,” the study said. “States with percent-of-charge-based fee regulations had substantially higher hospital outpatient payments per surgical episode than states with fixed amount fee schedules — 42 to 191 percent higher …. States with cost-to-charge ratio fee regulations had hospital outpatient payments per episode similar to states with fixed amount fee schedules.”

States with fixed amount fee schedules had generally lower payments, except Illinois and North Carolina, which “had significantly higher hospital outpatient payments per episode among states with fixed amount fee schedules,” according to the research. “In both states, fixed amount fee schedule rates are based on frozen historical hospital charges, resulting in two of the highest fee schedule levels.”

Illinois implemented a 30 percent fee schedule reduction in 2011. However, “the fee schedule rates in Illinois were still the highest among the fixed amount fee schedule study states,” the study said. “For example, for common arthroscopic shoulder surgeries, the hospital outpatient fee schedule rate in 2012 in the Chicago region, Illinois, was more than 40 percent higher than in Georgia, the next highest state with a fixed amount fee schedule after Illinois and North Carolina.”

The trends were similar when comparing growth rates among the states. States using percent-of-charge-based fee regulations that did not have updates to the reimbursable percentage of charges saw 157 to 286 percent faster growth in the payments than the median of the states with fixed amount fee schedules. Among the cost-to-charge ratio states, the rate of growth was slower or similar to the median fixed amount fee schedule state between 2006 and 2013.

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The growth rate among states with no fee schedules “was at least 124 percent higher and as much as 190 percent higher” than fixed amount fee schedule states with the exception of New Jersey. The researchers noted that New Jersey saw “an unusual” 130 percent increase in the share of payments made to in-network providers from 39 percent in 2006 to 90 percent in 2013.

Nancy Grover is the president of NMG Consulting and the Editor of Workers' Compensation Report, a publication of our parent company, LRP Publications. She can be reached at [email protected]

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The R&I Editorial Team can be reached at [email protected]