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Carve Outs - a Neat Way of Getting Something for Free

A note from our President, Sam Donio

Aug 2021

A major strategy that has been employed in managed care negotiations for years is to have carve-out provisions as part of the per diem contract rates. The thinking behind this has been that carve-outs protect hospitals from atypical supply and drug costs, which are not reflected in standard per diems. But do carve-outs really work or are they just another preprogramed way for the managed care providers not to pay hospitals?

Let’s look under the hood:

As we know, carve-outs are usually negotiated for high cost drugs, chemotherapy or medical equipment. Most carve-out language calls for the managed care payer to pay the invoice price plus a mark up to cover the administrative cost of providing the element. This requires the provider to supply separate documentation and separately generate a carve-out bill since most billing systems do not provide that flexibility.

There are several reasons why a care-out agreement is in fact in a managed care organization’s best interest. As I detail below, there are many ways for these carve-outs never to be billed, resulting in lost revenue and wins for managed care companies.

Of course you’re asking, how often does this scenario occur? More often than you think (hint: > 10% for high-dollar carve outs and > 20% for low-dollar carve outs). So pay attention! These aren’t rare events.

Each item on the carve-out list is an opportunity for it not to be billed. Why, you may ask? Well, let me explain. When the request for the implantable, the high cost drug or the chemotherapy comes into the pharmacy or central supply, it often occurs where employees aren’t aware that the element is paid separately from the other payers and needs to be monitored that way. So this scenario becomes the first opportunity for a hospital not to receive its agreed-upon carve-out revenue.

Second, when it comes time for billing, employees often don’t know what is and isn’t on the carve-out list, so they don’t reach out to pharmacy or central supply for the invoice. And even if they do, pharmacy or central supply may not always comply.

Third, once the bill is ready to be submitted, it’s possible that somebody catches the mistake. But now the bill needs to be held, the record needs to be found, the invoice has to be located and a new one needs to be created. This process affects Discharged Not Final Billed (DNFB) numbers, which may lead to some unhappy superiors. Many billers face tremendous pressure to get the bill out the door and unfortunately, sometimes expediency wins the day over being thorough.

But hopefully the biller is thorough and he or she decides to set aside the carve-out bill and move on to other pressing matters. Unfortunately we’ve seen scenarios where the biller never returns to the carve-out bill in a timely matter and lo and behold the managed care company never gets billed, or billed appropriately.

So, what can be done? Attempt to negotiate simplified case rates that included a Medicare type of cost weight, average cost, or a percent of charges for carve outs. If you meet resistance with case rates, get a longer window to bill the carve-out cases as compared to the typical billing window in your contract. That way you have a chance to do a retroactive review and catch any misses or billing issues.

Remember, managed care companies put a billing window in the contract to apply time pressure on you to force mistakes. It’s important to push back and give yourself time to get the needed information so that your facility can bill and get paid correctly.

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