Reference-based pricing at a percent of Medicare: how a TPA computes the number

Four steps from claim to payment

“150% of Medicare” sounds like one number. On an inpatient claim it is four decisions, and a repricer has to make each of them the same way every time.

1. Price the claim the way Medicare would on the discharge date: the MS-DRG, the hospital’s own factors, the cost outlier from the billed charges, and the transfer rule if the patient left early.
2. Decide which Medicare amount the percentage applies to. The plan document should say.
3. Apply the percentage.
4. Apply the plan’s limits, most often a lesser-of test against billed charges.

Member cost sharing comes last, under the plan’s own benefit design rather than Medicare’s deductible.

Step 1: price it like Medicare

Our example is a five-day sepsis stay, MS-DRG 871, at NewYork-Presbyterian Hospital (CCN 330101), discharged October 15, 2026. Original Medicare would pay $28,176.18. That figure already carries the hospital’s teaching and low-income add-ons, its capital payment, uncompensated care and a $482.57-a-day pass-through.

Getting it right takes the hospital’s CCN, the discharge date (which sets the rate year), the length of stay, the discharge status (for the transfer rule) and the covered charges (for the outlier). The claim file carries most of these; the CCN and the hospital’s payment factors come from elsewhere (see repricing an 837I).

Step 2: which Medicare?

The same claim produces different “Medicare” figures depending on what the plan counts:

The Original Medicare total and the MA amount are 27.0% apart at this teaching hospital and almost identical at a non-teaching one (see why an MA plan owes less). The middle base exists because the Original Medicare total includes the hospital’s per-diem pass-through ($2,412.85 here), which CMS’s pricer reflects but Medicare pays through interim payments settled on the hospital’s cost report, not on the claim. A plan that means “what Medicare pays on the claim” leaves it out.

Other choices to pin down: whether uncompensated care counts, whether the outlier sits inside the base, which rate year applies (Medicare uses the discharge date’s fiscal year), and whether “Medicare” is before or after the 2% sequestration reduction that comes off Medicare’s own claim payments. Outpatient claims add one more: percent-of-Medicare contracts inherit the site gap between hospital outpatient departments and ASCs (see the site-of-service gap).

“150% of Medicare” is $42,264.27, $38,645.00 or $30,870.18 for this claim. The plan document decides which.

Steps 3 and 4: the multiple and the lesser-of test

Original Medicare generally pays the DRG amount even when the hospital’s charge is lower. Many reference-based plans and percent-of-Medicare contracts add a lesser-of test: pay the computed amount or the billed charges, whichever is less. It binds only when the bill is lower than the computed amount.

At $40,000 billed, the 150% plan pays the bill, $2,264.27 less than its formula. The 140% plan comes in under the bill either way.

Outliers: multiply them or pass them through?

Now bill the same stay at $520,000 over eight days. Medicare pays $37,872.18, of which $8,368.59 is a cost outlier. The plan document has to say what 150% applies to:

The second design pays $4,184.29 less. Medicare’s outlier already pays 80% of the hospital’s estimated cost above the threshold, so at 150% the first design pays 120% of that cost. The worked outlier example shows where the threshold comes from.

Before the payment goes out

• Use the discharge date’s fiscal year, as Medicare does (which year’s rates apply).
• Apply Medicare’s transfer per diem before the multiple when the patient was transferred (the per-diem rule).
• Regroup the claim: the billed DRG drives everything (DRG validation).
• Keep the base definition, the percentage, the Medicare components and the lesser-of result with the claim, so the hospital can see how the number was built.
• Federal surprise-billing protections cover emergency care and some care at in-network facilities, and payment disputes on those claims follow a federal negotiation and dispute process, or a state one where it applies. A reference-based program needs a separate path for them.
• Outside those protections, a hospital with no agreement can bill the member the difference between its charges and the plan’s payment. A reference-based program needs a member-protection and appeal path (provider sign-on agreements, negotiated settlements, member advocacy) before it relies on the formula alone.