Understanding HCAHPS Scores Part 2: Calculating the Value in the Hospital Value-Based Purchasing (VBP) Program

Before we start, let me first make the disclaimer that I am in no way a medical billing expert. This is my attempt to explain and illustrate the process in simple terms in which the value in VBP is determined. I am intentionally leaving out some of the minutia of the process as my intention is to give a general overview of a process, not to teach it in great detail. This can be dry, but it is nevertheless a foundational understanding of how CMS calculates payment, penalty, and reimbursement.

Hospital VBP is a very complex payment system designed by Medicare to reward or penalize healthcare organizations (HCOs) for the quality of care they provide. The program is funded by withholding 2% of Medicare severity diagnosis-related group (MS-DRG) payments over the course of the year. The amount an HCO receives is dictated by the HCOs Total Performance Scores (TPS) and how their TPS relates to all qualifying HCOs’ TPS in the given time period. TPS is made up of four equal parts or domains: clinical outcomes, person and community engagement (HCAHPS), safety, and efficiency and cost reduction; each of these domains makes up 25% of a hospitals Total Performance Scores (TPS). In Part 1 of this series on HCAHPS, we discussed how the person and community engagement or Patient Experience (PX) domain was calculated using HCAHPS. Here we will address how VBP value is determined for each hospital.

If you haven’t fallen asleep yet, read on.

The 2% VBP withholding of a particular hospital is calculated using a value known as the Base Operating Revenue. The Base Operating Revenue of a hospital is the total value of the Centers for Medicare and Medicaid Services’ (CMS) MS-DRG Payments in a given time period. To understand where your base operating comes from, we first need to have a basic grasp of MS-DRG classifications. An MS-DRG classification is given to each Medicare patient and is based on Principal Diagnosis (why the patient was admitted), comorbidities and complications (secondary diagnoses), surgical procedures, age, gender, and discharge destination (home, skilled nursing or long-term care, deceased). Coding diagnosis and procedures using ICD-10 nomenclature begins the process. From there one of the 740+ DRG categories, as defined by CMS, will be assigned to the patient. The MS-DRG value is determined by the average cost of treatment for all CMS patients in a particular DRG Group.

Clear as mud? Just wait there is more.  

Annually CMS makes adjustments to their MS-DRG classification system that factors in new treatments and technologies. They then assign a relative weight for each MS-DRG which is published annually in the Federal Register. As an example, an MS-DRG with a weight of 1.5000 indicates that charges were typically 1.5 times the national average or a weight of .7500 was about three quarters the national average.

Think we are done yet…not a chance.

MS-DRG payments must now be calculated. This means taking the relative weight and multiplying it by the hospital rate. The hospital rate is defined by federal regulations and is updated annually to reflect for inflation, wage variations, teaching hospital status, and if the hospital serves a disproportionate amount of the poor population. Finally, a labor rate established by the Standard Federal Rate broken down into a labor rate and a non-labor rate for this year is used to differentiate between large urban hospitals and other hospitals.

As an exercise to aid in understanding, let’s look at an example using whole numbers to illustrate how the calculation is done (costs and rates are generalizations for easy visualization):

Our Case:

A 55-year-old male was in a motor vehicle accident. He was taken by ambulance to “Chicago” Hospital. The patient is diagnosed with an open fracture of the upper right leg and has a history of COPD. “Chicago” Hospital is a teaching hospital that serves a high level of Medicare patients annually, has previously submitted quality data, and is a meaningful EHR user, entitling it to the highest reimbursement wage index threshold.

1. We must calculate the standard rate. The standard rate is broken into two pieces: the labor related portion and the non-labor related portion. Since “Chicago” Hospital is located in Chicago, it qualifies for the large urban rate. Let’s say the standard large urban rate for a hospital that has submitted quality data and is a meaningful user is $3,000.00 (labor related) and $1,250 (non-labor related).  

2. Now we need to adjust the labor portion by the wage index to account for cost-of-living differences in the country. These adjustment figures are set by the federal government and we will say that this year the adjustment for living in Chicago is 1.25. So, we multiply the $3,000.00 by 1.25 to get $3,750.00, then add the non-labor related portion of $1,250 to that to get $5,000.00. $5,000.00 would be “Chicago” Hospitals Adjusted Base Rate.

3. Next, we need to adjust for the DRG weight. Based on the ICD-10 coding this patient’s relative weight for a surgical procedure of upper leg with comorbidities is 1.75. We multiply the adjusted base rate of $5,000.00 by the 1.75 to get $8,750.00.

4. “Chicago” Hospital also serves a disproportionate share of Medicaid/Medicare patients so they get an additional adjustment of 1.15. We multiply $8,750.00 by the 1.15 to get $10,062.50.

5. “Chicago” Hospital also qualifies for an Indirect Medical Education Payment as they have a qualifying number of residents, beds, and discharges to meet the threshold. The adjustment factor here is 0.075. We multiply $10,062.50 by 1.075 and our new total is $10,817.19, this being the amount “Chicago” Hospital should expect in reimbursement for this case.  

6. Lastly there is an additional outlier adjustment that can be applied for on a case-by-case basis if a case exceeds a cost threshold. CMS sets the outlier rate year to year. 

Let’s Review: (See Flow Chart Below)

If you just read through all of that, reviewed the chart, and still feel lost, trust me you are not alone. There is a method to the overly complicated madness of assigning value to hospital care. While I cannot say I fully support the way in which it is calculated, I will concede that CMS currently has these rules in place to attempt to provide equity in reimbursement. The biggest takeaway I want you to feel is how complex this process is, remember we just reviewed one potential case, and I left out the entirety of coding to keep you all from falling asleep.

Back to calculating the VBP…

We now know how to calculate a cost for a visit, we now must do this for all Medicare patients in the designated year and add their total together. This total is then multiplied by 2% to get the total amount CMS will withhold. In actuality, they keep 2% case by case, but for argument’s sake the totals are relatively identical. So, if your hospital had a base operating revenue of $50 million, CMS would withhold $1 million. That $1 million would be broken down in quartiles dedicated to the four domains. For patient experience you would have $250k withheld and would need to earn that back. Each quartile is calculated separately, so you can lose money in some, while overachieving and receiving a bonus payment in others.

Long story short, to get a relative idea of VBP liability, the biggest variable you need to be aware of is the total number of Medicare patients. The more you see, the higher your VBP liability will be. Without knowing all the fancy math, if the one thing you remember from this is that Medicare patient volume dictates VBP liability, I will die a happy man.

Now that we know how to calculate PX Domain (Part 1) and how total VBP value is calculated (Part 2), in Part 3 we will take a look at how HCOs PX domain penalties or bonuses are identified.

To be continued…

Follow up questions may be emailed to: Paul.Reitano@hydracor.net

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