A self-funded hospital's expenses for providing health care benefits to its employees are included in Medicare's calculation of the Wage Index.

 

Due to this, the decisions a hospital makes (as the sponsor of its employee health benefit plan) have a significant impact on the hospital's reimbursement from Medicare for the care it provides to every Medicare recipient.

This happens because in Medicare's 'Provider Reimbursement Manual' section 4005.2 it allows a self-funded hospital that uses a Third Party Administrator ('TPA') to pay itself at a 'market rate' for the care it provides to its own employees (known as 'domestic care').

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PRM 4005.2

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Health Insurance and Health-Related Wage Related Costs:

 

The following are the allowable health insurance and health-related costs for the wage index.

 

1) Purchased Health Insurance:

 

     • Premium costs.

     • Costs paid to external organizations for plan administration.

 

2) Self (or Self-Funded) Health Insurance:

   • With a TPA.

 

• Amount the TPA pays to the hospital or other health care providers for services rendered under the plan. (For domestic claims, the hospital must provide documentation from its TPA to demonstrate that payments for services rendered to employees are based on a discount from full charges. Also, the payments must be reasonable; that is, the costs included for domestic claims must not exceed the amount that commercial insurers pay the hospital for the same services rendered to non-employees.)

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​This loophole allows a self-funded hospital to report to Medicare as its 'expense' (what it paid itself (from its own funds) for doing an MRI on its own employee at a rate that is 3 to 10 times higher than its actual cost.

 

In reality, the 'expense' the hospital incurs for doing an MRI on an employee is the same regardless of whether a TPA was used to transfer the internal funds of the hospital from one account to another or the hospital merely handled the 'payment' for that service as an internal accounting transfer (aka, 'self-administered').

 

Yet, Medicare policy allows self-funded hospitals using a TPA to pay themselves at a rate that  must not exceed the amount that commercial insurers pay the hospital for the same services rendered to non-employees." (PRM 4005.2).

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If you've ever written policy or regulations you would only say "must not exceed" if you wanted to allow the hospital/plan sponsor to charge their employees the highest percent of charges possible.

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Imagine if this regulation read: 

Also, the payments must be reasonable; that is, the costs included for domestic claims must not exceed the LOWEST amount that commercial insurers pay the hospital for the same services rendered to non-employees.)

 

Of course, since the hospital is paying itself from its own funds in either situation, there's no direct benefit to the hospital from 'paying' itself at 'market rate' rather than at 'cost'.

 

It's a total wash to the hospital since it is paying itself...except for its impact on The Wage Index.

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Here's How It Works:

By using a TPA, the hospital gets to report domestic care expenses at a higher rate than if the expenses had been reported at 'the cost to the hospital as would be required under the Related Party Rule.

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A 2011 OAS report determined that a single hospital in one CBSA paying itself at 'market rate' rather than 'at cost' resulted in Medicare paying the hospital $20.5 million more for services provided by the hospital to Medicare recipients than it would have (based on cost reports from 1999 to 2007) had domestic care expenses been reported 'at cost'.

 

This is because these 'phantom' increases in the hospital's domestic care expenses are then rolled up into the hospital's (and its CBSA's) Wage Index data, which, in time increases Medicare's PPS payment rates for all of the hospitals in that CBSA (thus the findings from OAS).​

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In addition, when a self-funded hospital uses a TPA it usually gets to decide how much to pay itself from its own funds. As an additional 'spike' to these 'phantom expenses', the hospital can pay itself the highest amount possible as long as the amount paid does "...not exceed the amount that commercial insurers [any and all] pay the hospital for the same services rendered to non-employees." (PRM 4005.2).

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Isn't the provision of Domestic Care subject to The Related Party Rule?

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At this point it does not appear that CMS is willing to apply The Related Party Rule to a self-funded hospital's domestic care related party transaction even though there is a PRRB ruling to this effect (stating that since the hospital is the supplier of the medical service to the employee and since the hospital (as the plan sponsor) is the primary purchaser of the medical service the transaction is between related parties and domestic care must be reduced to cost) as long as the hospital does not own the claims payer.

Here is my recent LinkedIn post on the matter:

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Medicare's Related Party Rule requires transactions between related parties to be reported at cost.

There is, however, an exception to The Related Party Rule provided in PRM 15-1, Section 1010

In order to meet the exception, 4 criteria must be met.

1. The organizations must be bona fide separate organizations.

2. A substantial part of the supplying organization’s business activity must be carried on with organizations not related to the provider.

3. Services, facilities, or supplies cannot be a basic element of patient care.

4. The charge to the provider is in line with the charge for such services in the open market and no more than the charge made under comparable circumstances to others by the organization for such services.

Question: When a self-funded hospital buys medical services from itself that it has provided to its own employee, who is the 'supplying organization' of that medical service?

Is the 'supplying organization' The Hospital?

Or, is the 'supplying organization' The Claims Payer that the self-funded hospital hired to provide claims administration services?

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Obviously, the 'supplying organization' is The Hospital.

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Put another way, if the medical procedure went wrong and the patient sued, the patient would not sue The Claims Payer because The Claims Payer was not the provider of the medical service.

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