Here's a brief case study on how hospital outpatient payment is different from "physician fee schedule" payment, and how sudden changes can occur in the former.

Way back in 2011, AMA CPT created a new FISH code 88121 specifically for urine FISH with 3-5 biomarkers. (Prior to this, FISH from any source was paid in multiples of the number of markers, and CPT felt that urine FISH with 5 biomarkers should be priced as a single service. This resulted in a significant price cut, something like 50%, for applicable services).

In the **non-facility setting**, a pathology code is priced by RVU's, physician materials and work units. **In the facility setting**, the technical component of the code is priced by **administrative assignment of the code to an "APC,"** an ambulatory payment category. This results in one price for any of a basket of services in that APC.

OK, so 88121 has been paid as **5673** "Level III Pathology' for **$333**. CMS found the median hospital charges calculate to **$175**. So CMS re-assigned 88121 down to **5672** "Level II Pathology" at **$162.**

This was a proposed rule in July 2022 and finalized in November 2022.

CMS received a number of protest letters, arguing that the APC Level II price was too low. CMS responded patiently that it prices hospital services by taking ** the geometric mean of claims charges (using a chart-to-cost deflation value)** and that gave median hospital values of $175 which fits an APC whose payment is $162.

The moral is, a successful and high enough APC assignment for a new code can decay into a lower APC reassignment based on CMS's annual review of incoming hospital claims and charges.

I've put the CMS discussion (87 FR 71871) in a cloud PDF here.

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Stakeholders argued the bottom-up cost accounting that sets the RVU price results in a technical component of $377 (RVU = 11.12). The physician interpretation fee is only $47 ("25 minutes.") The FISH kits themselves (only one of the resource inputs) are $355 in the current CMS accounting tables for Part B. There are about 20,000 Part B services per year (70,000 in 2011).

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Bonus. CMS reduces hospital charges to cost by a complex algebra that roughly divides by 3. CMS calculates mean price as "geometric mean." After getting the mean charge, CMS calculates Charge-to-cost is relatively simple to conceptualize. If a hospital has $1M in costs (salary, supplies, equipment, etc) and sends out $3M in charges, then it has a "charge to cost" ratio of 3. CMS will assume when it receives a charge from the hospital for, say, $3000, that the hospital had to have had a "cost" of $1000.

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I haven't explained CMS uses "geometric mean charge" as the input for charge-to-cost deflatoin. I asked **ChatGPT** to explain to me what **geometric mean, means.**

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*I do not understand the calculation of "geometric mean value" as opposed to "mean value." Can you please explain to me, assuming I am easily confused.*

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- Sure! The
**mean value**is simply the average of a set of values. To find the mean value, you add up all the values and then divide by the number of values. - The g
**eometric mean**, on the other hand, is a type of average that is used when working with sets of numbers that are being multiplied rather than added. The geometric mean is the nth root of the product of n numbers. In other words, it's the value that you would get if you multiplied all the numbers together and then took the nth root of that result. - For example, if you have a set of numbers {2, 4, 8}, the mean value would be 4 (the sum is 14, and 14 divided by 3 is 4.67, which is then rounded down to 4).
- The geometric mean of these same numbers would be 4, since 2 x 4 x 8 = 64 and the cube root of 64 is 4.
- So, in summary, the mean value is an average of a set of values obtained by summing up the values and dividing by the number of values, whereas the geometric mean is an average of a set of values obtained by multiplying the values and taking the nth root of the product.

**What are the differences? Why use either one?**

- The arithmetic mean and the geometric mean are both used to describe the central tendency of a set of numbers, but they have different strengths and weaknesses.
**Advantages of using the**__arithmetic mean__:- It is easy to understand and calculate, as it is simply the sum of the values divided by the number of values.
- It is sensitive to every value in the set, so it is a good indicator of the average value when the values are similar.
**Disadvantages of using the arithmetic mean:**- It can be misleading when working with skewed data sets, such as sets with extreme values (outliers).
- The presence of outliers can greatly influence the arithmetic mean, making it a poor indicator of the central tendency in these cases.
**Advantages of using the**__geometric mean__:- It is not sensitive to outliers, as the presence of a large value will not have a significant impact on the geometric mean.
- It is often used when working with rates of growth or exponential data, as it provides a more meaningful average in these cases.
**Disadvantages of using the geometric mean:**- It is not as easily interpretable as the arithmetic mean, as it is the
**nth root**of the product of**n**numbers. - It is
__not defined for negative or zero values__, as taking the nth root of a negative or zero value is not possible. **In conclusion,**the choice between the arithmetic mean and the geometric mean depends on the nature of the data and the purpose of the analysis. If the data is symmetrical and not skewed, the arithmetic mean is a good choice. However, if the data is skewed or if it involves exponential growth, the geometric mean is a more appropriate measure of central tendency.

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