Algorithms & Estimated Allowed Amounts

In many cases, hospitals can display their payer-negotiated rates as a dollar amount. For example, specific fee schedule amounts or a line item percent of charge for a particular service type can be detailed down to the penny. However, certain scenarios make it impossible to calculate a specific rate. These scenarios include:

Global Percent of Charge Rate: When the presence of a single service or code on a bill changes the entire claim payment methodology to a global percent of charge rate.
Algorithm-Based Pricing: When the price varies based on patient-specific factors like age, diagnosis codes, or length of stay.

In these situations, the rate can be displayed in the MRF using the algorithm column or the negotiated percentage column as required by CMS regulations effective 7/1/24.

Algorithms refer to the methodologies used to calculate healthcare service rates based on various factors. These factors can include patient demographics, clinical characteristics, length of stay, and other variables that influence the final payment amount. CMS requires the inclusion of detailed descriptions of these algorithms in the MRF.

Types of Algorithms

Patient-Specific Adjustments:

Age and Diagnosis Codes: Rates may vary depending on the patient's age and specific diagnosis codes. For example, a pediatric patient may have different rates compared to an adult patient for the same procedure.

Length of Stay: Longer hospital stays can influence the total cost of care, and algorithms may adjust rates based on the length of stay.

Complex Payment Methodologies:

Bundled Payments: Some services are paid through bundled payment methodologies, where a single comprehensive payment covers all services related to a specific treatment episode.

Percentage of Charge: In some cases, the payment may be calculated as a percentage of the total charges for the service.

Invoice-Based Costs: For items like implants, where payment is based on the invoice cost, the exact dollar amount may not be calculable in advance. These items are often reimbursed at a cost-plus or negotiated rate that is based on the supplier's invoice.

Unknown, Proprietary, or Non-Public Fee Schedules: Certain fee schedules are not publicly available or widely known, making it impossible to calculate exact dollar amounts. These schedules may be used in specific contracts or for specialized services.

Transfer and Outlier Payments: Payments can be affected by patient transfers to post-acute or other acute facilities, which is common in Medicare. These transfers impact the final reimbursement amount.

In addition, for DRGs, outlier payments may be made for exceptionally costly cases. These payments are additional to the standard DRG rate and are determined by factors not knowable at the time of service.

For services where algorithms determine the payment rates, it is essential to include detailed descriptions of these algorithms in the MRF. This ensures that the calculated rates are transparent and understandable for stakeholders. The algorithm field in the MRF should capture all relevant details, providing a clear explanation of how the rates are derived.

Estimated Allowed Amount

By 1/1/25, there is an additional requirement to calculate an estimated allowed amount. The estimated allowed amount is not just based on contracted rates but also on historical average reimbursement amounts for the service and payer.

To comply with this, hospitals must follow the CMS cell suppression policy, as documented below. This policy requires that data used to calculate the estimated allowed amount must be based on at least 10 cases to protect patient confidentiality and avoid the release of identifiable information. Turquoise uses six months or more of claims data to ensure the calculated average amounts meet this requirement.

Cell Suppression Policy
The CMS cell suppression policy stipulates that any data cell containing a value of 1 to 10 cannot be reported directly to protect confidentiality. Additionally, no value can be reported if it allows for a value of 1 to 10 to be derived from other reported data. This policy applies to all data outputs including tables and text describing beneficiaries, procedures, and diagnoses. Hospitals must ensure that their reported data adheres to these guidelines to comply with CMS regulations.

Turquoise follows the cell suppression policy to ensure that MRF data is both compliant, secure, accurate, and useful.