A BILLION-DOLLAR CALCULATION ERROR IS STILL A BILLION-DOLLAR ERROR

Healthcare reimbursement formulas can look like administrative details buried in spreadsheets and regulations. Until one of them is wrong.

In 2006, I discovered an error in the way Medicare calculated payment rates for hospitals across the country. It was understating payments by roughly $1 billion per year. What followed was years of appeals and litigation involving hundreds of hospitals before the matter was ultimately resolved.

That experience reinforced something I’ve believed for a long time: when a healthcare program operates at Medicare’s scale, there really is no such thing as a small mistake.

A calculation gets repeated across thousands of providers. It compounds over time. Eventually, something that may have started deep inside a reimbursement methodology becomes a very large financial problem.

And somebody has to notice it.

WHAT ARE MEDICARE REIMBURSEMENT CALCULATIONS?

Medicare reimbursement calculations are the formulas and methodologies used to determine how much healthcare providers are paid for services delivered to Medicare beneficiaries.

For hospitals, those payments can be influenced by numerous factors built into Medicare’s payment systems. The important point for the average person is simple: Medicare doesn’t sit down and negotiate the price of every individual hospital service. Payment methodologies are developed, published, updated, and then applied across a massive healthcare system.

That makes the accuracy of those methodologies extraordinarily important.

If a calculation is wrong and that calculation affects hospitals nationally, the consequences don’t remain confined to one hospital or one claim.

They multiply.

I FOUND AN ERROR THAT WAS COSTING HOSPITALS ABOUT $1 BILLION A YEAR

I have spent much of my career working in healthcare finance, reimbursement, and public policy.

In 2006, while examining Medicare hospital payment rates, I identified an error in the methodology. The impact was approximately $1 billion in understated hospital payments every year.

Think about that for a moment.

A billion dollars wasn’t disappearing because somebody approved a new program or Congress changed a spending law. Hospitals were being paid incorrectly because of how the payment calculation itself was being applied.

We raised the issue. Medicare resisted our position. So we appealed.

What I originally expected to involve roughly 100 to 125 hospitals eventually grew to 730 hospitals participating in the effort.

This was no longer an obscure technical disagreement. There was real money at stake for real healthcare organizations.

WE LOST BEFORE WE WON

People tend to clean up stories like this after the fact. They remember the discovery, the victory, and the money that was eventually recovered. There was an important part in the middle.

We lost.

After roughly two years, the D.C. District Court ruled against us. At that point we had two choices. We could decide the court had spoken and walk away, or we could go back through the case and determine whether we still believed we were right.

We did the latter. We reviewed our arguments, examined the government’s position, identified where we believed the problem was, and appealed.

Three years later, the D.C. Circuit Court ruled in our favor in a 3-0 decision.

The eventual payments associated with the matter were approximately $4 billion. That is a rather expensive calculation error.

WHY MEDICARE PAYMENT ACCURACY MATTERS BEYOND HOSPITALS

It would be easy to look at this as a dispute between Medicare and hospitals. I don’t.

Payment policy influences the healthcare system underneath it. Hospitals use revenue to employ people, operate facilities, purchase equipment, maintain services, invest in technology, and care for patients. When reimbursement is calculated incorrectly, the effects can extend well beyond an accounting department.

There is also a larger issue of accountability.

Medicare is enormous. That scale makes mistakes consequential, but it can also make them difficult to see.

A calculation can sit inside an extraordinarily complicated payment methodology. Most people will never look at it. Many people who do look at it will assume somebody else has already checked it.

That assumption is dangerous.

Complex systems still need people willing to ask a very basic question: Does this number actually make sense?

COMPLEXITY IS NOT AN EXCUSE FOR GETTING THE NUMBER WRONG

Healthcare policy has become remarkably technical.

We have formulas layered onto formulas, adjustments, classifications, payment systems, regulations, and years of policy changes sitting on top of one another. There are legitimate reasons for much of that complexity. Healthcare itself is complex. But complexity can also create cover for mistakes.

The more complicated a system becomes, the easier it is for people to stop questioning the mechanics and simply trust the output.

I’ve never been particularly good at doing that.

If the model says something should equal 10 and I believe it should equal 12, I want to know why. Sometimes I’m wrong. Sometimes the model is. The important thing is being willing to find out.

WHO SHOULD BE RESPONSIBLE FOR CATCHING MEDICARE PAYMENT ERRORS?

The obvious answer is Medicare. But healthcare organizations also need people who understand enough about reimbursement to recognize when something doesn’t look right.

That requires expertise inside hospitals and associations, thoughtful outside advisors, and leaders who are willing to challenge an answer simply because it came from an authoritative source.

The federal government employs some very talented people. They can still be wrong. So can consultants. So can hospital executives. So can I.

Good policy doesn’t depend on assuming anyone is infallible. It depends on having processes that allow mistakes to be questioned, identified, corrected, and disclosed.

THE BIGGER LESSON FROM A BILLION-DOLLAR MEDICARE ERROR

There is a tendency in healthcare to focus on the big policy announcements.

New laws. New payment models. New technologies. New programs. Those deserve attention.

But sometimes the enormous financial consequence is sitting several layers below the headline in a calculation almost nobody is talking about.

That was the lesson I took from this experience.

At Medicare’s scale, details become policy. A formula isn’t merely a formula when it determines what thousands of hospitals are paid. And an error isn’t merely an error when it is repeated year after year across the healthcare system.

If billions of healthcare dollars depend on the calculation, somebody better be checking the math.