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Using a Square Peg on a Round Hole, or how Managed Care Companies are Using Per Diem Medical Necessity Rules on Case Rates

A note from our President, Sam Donio

June 2021

One disturbing trend we are seeing, especially in the Managed Medicaid and Medicare area, is the use of per diem medical necessity rules on case rates. Back in the Stone Age, when we first went to a contracted per diem payment system, length of stay was the basis for payment, and managed care payers would use medical necessity rules to determine if all of the days in the stay were necessary. Then they payers evolved this strategy over time to also use level of care as an additional trap to deny payment.

Providers over time caught up with these strategies for avoiding payment and a common response has been to negotiate case rates instead of per diem rates in new managed care contracts. But far be it for managed care companies to not try to use a square peg in a round hole.

What they are now doing is applying medical necessity rules designed to evaluate length of stay as a way of reducing the case rate being paid to providers.


This is being done even though a case rate by its very nature is based on the incident of care not the amount of care; the provider is at risk for the amount of care they are giving. In addition, providers are also at risk for the amount of care they provide, because they supposedly are being paid a “CASE RATE,” which should be the same rate irrespective of the level of resources they spend or how long the patient is in the hospital. But the managed care companies are taking advantage of the irregularities of these payment mechanisms, looking to have their cake and eat it too by capping payment with a case rate and then whittling it down by denying days or downgrading care.

They are focusing on Medicaid and Medicare Managed patients, because, for most providers, these patients are still being viewed as if they are traditional Medicaid and Medicare patients and the billing staff does not know that these types of denials are inappropriate.

To add insult to injury, they are downgrading the DRGs these cases may be falling into, so that they can pay a lower case rate that they then deny part of – a great outcome for them, but for you…not so good. As with all things managed care, information is the key to turning this situation around, you need to know the extent of the problem, the specifics of the denials and how they are being managed. From there you can build a strategy to turn things around, but it’s detailed work, which requires combining analytics with clinical knowledge to build the right response.

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