Inpatient cost outliers, worked through one sample claim
Charges become cost, cost is compared with a threshold, and Medicare pays 80% of the excess. A $520,000 sepsis stay earns an $8,368.59 outlier in FY2027, and every extra $100,000 of charges adds $15,280.00.
- Applies to
- Inpatient discharges paid by MS-DRG
- Rates
- FY2027, fixed-loss amount $49,331
- Example
- MS-DRG 871, 8 days, $520,000 charges
On this page
How the outlier works
Most inpatient stays are paid a fixed amount for their MS-DRG, whatever they cost. A cost outlier is the exception for extraordinarily expensive stays, and it follows a fixed recipe:
Estimated cost = covered charges × the hospital’s cost-to-charge ratio, operating plus capital
Threshold = the stay’s DRG payment (operating and capital, with the teaching, low-income and uncompensated care amounts and any new technology add-on) + the fixed-loss amount, adjusted for local wages
Burn DRGs are paid at 90% instead of 80%. CMS sets the fixed-loss amount each year at the level it projects will make outlier payments 5.1% of inpatient operating payments. For FY2027 it is $49,331.
The claim
A sample sepsis stay, MS-DRG 871, at NewYork-Presbyterian Hospital (CCN 330101), discharged October 15, 2026 after eight days, with $520,000 in covered charges. The engine prices it at $37,872.18, including an $8,368.59 cost outlier.
Step by step
| Line | Step | Amount |
|---|---|---|
| 1 | Covered charges | $520,000.00 |
| 2 | × Cost-to-charge ratio, operating plus capital | 0.191 |
| 3 | Estimated cost | $99,320.00 |
| 4 | DRG payment counted toward the threshold: operating with teaching and low-income add-ons $23,223.17, capital $1,770.79, uncompensated care $652.46 | $25,646.42 |
| 5 | + Fixed-loss amount, $49,331 adjusted for local wages | $63,212.84 |
| 6 | Outlier threshold (4 + 5) | $88,859.26 |
| 7 | Estimated cost above the threshold (3 − 6) | $10,460.74 |
| 8 | Outlier payment: 80% of line 7 | $8,368.59 |
Two lines are worth a sentence each. The cost-to-charge ratio, 0.191, says this hospital’s costs run at about 19 cents per dollar charged, so $520,000 in charges is about $99,320 in cost. And the fixed-loss amount is not $49,331 at this hospital: like the base rate, it is adjusted for local wages, which at a wage index of 1.4269 makes it $63,212.84.
What each extra dollar of charges is worth
Above the threshold, every additional dollar of charges adds 80% of its estimated cost: 0.8 × 0.191 = 15.28 cents. So each extra $100,000 in charges adds $15,280.00, and at $620,000 the engine’s outlier is $23,648.59. Below the threshold, the charges do not change the payment at all. For this stay the outlier starts at about $465,232 in covered charges.
Below about $465,232 in charges, this stay pays the same whatever the hospital bills. Above it, each extra dollar billed adds 15.28 cents.
The same stay a day earlier
Discharged on September 30, 2026, the same stay falls in FY2026, when the fixed-loss amount was $40,397. At that year’s wage index (1.3697) it becomes $50,245.57, the threshold is $74,944.64 and the outlier is $19,500.29. The outlier started at about $392,380 in charges, roughly $72,851 lower than in FY2027. Our FY2027 rate article shows the whole claim side by side.
What to check on an outlier claim
- Covered charges only. Non-covered charges on the claim are not part of the cost estimate.
- The right ratios. Use the cost-to-charge ratios on the hospital’s provider record in force on the discharge date; they are updated during the year.
- Transfers. A transferred patient can still qualify; the fixed-loss amount is reduced along with the transfer payment (see the per-diem rule).
- Settlement. Medicare can reconcile a hospital’s outlier payments at cost report settlement when its actual cost-to-charge ratios turn out different, so the claim-level outlier is an estimate.
- Who pays. A Medicare Advantage plan paying a non-contracted hospital owes the outlier (why); a reference-based plan has to decide whether its multiple applies to it (how).
Questions
How is the outlier threshold calculated?
It is the stay’s DRG payment (operating and capital, including teaching, low-income and uncompensated care amounts and any new technology add-on) plus the fixed-loss amount adjusted for local wages. The FY2027 fixed-loss amount is $49,331.
What share of cost above the threshold does Medicare pay?
80%, or 90% for burn MS-DRGs.
Why are outliers smaller in FY2027?
The fixed-loss amount rose 22.1%, from $40,397 to $49,331, so the same charges clear a higher threshold by less, or not at all.
Does Medicare use charges or costs?
Costs, estimated by multiplying the covered charges by the hospital’s cost-to-charge ratios.
About these figures
Claim examples were priced in the cmswebpricer.com pricing engine on October 19, 2026, from published rates. They are Original Medicare totals before the patient’s deductible and coinsurance and before the 2% sequestration reduction, and are estimates, not claim determinations. The Original Medicare total includes the hospital’s per-diem pass-through ($3,860.56 here), which CMS’s pricer reflects but Medicare pays through interim payments settled on the hospital’s cost report, not on the claim, so a remittance or a plan’s base may leave it out. The outlier recipe follows CMS’s inpatient payment rules as summarized in the Medicare Payment Advisory Commission’s payment basics; the 0.191 ratio and the threshold are derived from two engine results rather than read from the hospital’s provider record.
Further reading: