Tenet Strategies Prompt Federal ‘Crackdown’ on Medicare Pricing Strategies

CMS officials yesterday announced they have begun a "crackdown" on Medicare billing "irregularities" and will be paying greater attention to hospitals suspected of taking advantage of Medicare outlier payments through their billing practices, the San Francisco Chronicle reports. According to the Chronicle, the announcement was largely prompted by allegations that Tenet Healthcare, the nation's second-largest for-profit hospital system, has brought in "excessive profits" through outlier payments, special Medicare reimbursements that cover unusually costly procedures. Outlier payments make up approximately 10% of Medicare reimbursements at Tenet hospitals, or $763 million so far this fiscal year, compared to about 3.5% on average in other hospitals nationwide. Tenet is under HHS investigation for its "aggressive" pricing strategies, which boost outlier payments because the reimbursements are partially tied to a hospital's retail charges. CMS Administrator Tom Scully said, "While other hospitals do it, Tenet is by far the most noticeable. We know there are glitches in the system. But the strong message we're trying to send is, if you're gaming the system, look out, because you're going to have a lot of government auditors crawling all over your hospitals."

Under the new initiative, hospitals that receive "large amounts" of outlier payments are most likely to be audited. Any hospital found to have conducted practices that would prompt excessive outlier payments will face further investigation from the HHS Office of Inspector General. Tenet spokesperson Steven Campanini said his company supports the reform efforts, adding, "We see this as an opportunity to demonstrate that we have complied with CMS' own Medicare rules, and we will cooperate as necessary." Meanwhile, Scully said yesterday his agency will propose a new rule on outlier payments before the end of the year. A two-month public review session will be required before the new rule can take effect, the Chronicle reports (Holding, San Francisco Chronicle, 12/4).

In related news, Tenet officials yesterday announced the company has "slashed" earnings estimates for fiscal years 2003 and 2004 and outlined a new "restrained pricing philosophy" for its hospitals, the Wall Street Journal reports (Rundle, Wall Street Journal, 12/4). Earnings per share for fiscal year 2003 are expected to be between $2.38 and $2.78, down from earlier estimates of $2.93 per share. Fiscal year 2004 earnings are expected to be between $1.80 and $2.20 per share, the San Francisco Chronicle reports (Yi, San Francisco Chronicle, 12/4). Tenet's new pricing strategy "deemphasizes the role" of retail charges in determining reimbursements from private insurers (Wall Street Journal, 12/4). According to the New York Times, many of Tenet's contracts with private insurers have provisions that allow for additional reimbursements called stop-loss payments, similar to Medicare's outlier payments. Tenet officials said yesterday its new contracts with private insurers will "rely more on fixed payments and less" on stop-loss payments. Tenet has already negotiated a contract with Health Net of California with its new pricing strategies (Abelson, New York Times, 12/4). In addition, Tenet officials said the company is "freezing" its retail charges until at least next May and plans to charge uninsured hospital patients rates similar to those of HMO members.

Tenet officials said the new strategies will not affect its revenues. However, the Los Angeles Times reports that some analysts "worry" that Tenet may not be able to maintain its current revenue growth (White/Lee, Los Angeles Times, 12/4). According to consultant Joshua Nemzoff, Tenet's new pricing strategy and its contract with Health Net may prompt other health plans to reexamine contracts that call for "excessive" stop-loss payments, which could make for "tougher" negotiations with hospitals in the future. "Every managed care company in America is looking at this right now," Nemzoff said (New York Times, 12/4).