The U.S. Department of Defense (DOD) is attempting to reduce active military and veteran health care costs by reducing reimbursement to sole community hospitals (SCHs) for inpatient services provided to TRICARE beneficiaries. The reduction comes by way of changes to the reimbursement methodology—which currently comprises a negotiated rate for network providers or billed charges for non-network providers—and is projected to save DOD more than $200 million annually once fully implemented.

Negotiated rates at network providers and billed charges for non-network providers are generally greater than the Medicare diagnosis-related group (DRG) rate, resulting in significantly higher payments to SCHs than what Medicare pays for equivalent care. The goal of the July 5 proposed rule is to transition TRICARE reimbursement to a methodology consistent with Medicare reimbursement to SCHs. These changes are applicable to all SCHs as defined by Medicare, except for Maryland hospitals paid by Medicare and TRICARE under a cost containment waiver.

Medicare reimburses SCHs for inpatient care at the greater of the Medicare DRG for all Medicare discharges, or the amount the SCH would have been paid if it were paid the average cost per discharge at that SCH in fiscal years 1982, 1987, 1992, 1996 or 2006, updated to the current year, for all Medicare discharges. DOD noted, however, that establishing a methodology exactly like Medicare is not practical. While the aggregate DRG reimbursement for all TRICARE discharges can be calculated, using the Medicare cost per discharge would not be appropriate for TRICARE because of differences in the TRICARE and Medicare beneficiary case mix. Also, applying an annual update to a TRICARE base-year average doesn’t make sense because of the relatively low number of TRICARE discharges in any given year—fewer than 20 at nearly half of SCHs. The average cost per discharge in any one year may not be a good measure of the average cost in future years.

As a result, DOD determined the most appropriate methodology will be to pay SCHs the greater of what the SCH would have been paid under the DRG method for all TRICARE discharges or an amount equal to the SCH’s specific cost-to-charge ratio (CCR), multiplied by the SCH’s billed charges for TRICARE services. To reduce the effect in any one year, the new methodology will be phased in, with a maximum 15 percent annual reduction allowed for non-network SCHs and 10 percent annual reduction allowed for network SCHs. For example, if a network SCH currently had a TRICARE allowed-to-billed ratio of 100 percent, that SCH would be paid 90 percent in Year One, 80 percent in Year Two, 70 percent in Year Three and so on, until it reaches the SCH’s CCR.

Final settlement of TRICARE claims will occur through submission of an annual cost report. New SCHs will be paid using the average CCR for all SCHs calculated in the most recent year until they file a Medicare cost report. SCHs with no previous inpatient TRICARE claims will be paid based on their Medicare CCR.

DOD anticipates the first-year impact of this change will result in a $31 million reduction of payments to SCHs. The change in reimbursement methodology is expected to take effect for discharges in federal fiscal year 2012, though the final rule has not been issued.

For assistance in measuring the impact of this change on your SCH, contact your BKD advisor.