A TPA for a Reference Based Pricing plan was found repricing inpatient hospital claims at a % of billed charges instead using Medicare rates as the claim benchmark. When questioned the TPA sent the following email response:
“It’s impossible to reprice hospital claims to Medicare. Therefore, RBP repricing is approximated by paying a percentage of billed charges.”
“We reprice facility inpatient claims at approximately 70% off billed charges in situations where Medicare-based pricing is not operationally feasible, specifically for inpatient claims billed with revenue codes only. “
“Medicare does not publish a fee schedule for facility revenue codes, which makes it impossible to adjudicate these claims as a percentage of Medicare. “
“Medicare reimburses inpatient services using DRG codes, which are not the billing methodology hospitals use for commercial claims. In these circumstances, a percent-of-billed-charges methodology is used as a reasonable, industry-standard proxy to approximate Medicare-equivalent reimbursement.
We find this is interesting because that’s not been our understanding based almost two decades managing Reference Based Pricing plans.
Reference Based Pricing plans typically determine a Medicare base amount for inpatient hospital claims by using the Medicare DRG reimbursement amount as the baseline. They then multiply the Medicare DRG payment by the agreed percentage (e.g., 150% of Medicare) to derive an allowed amount.
Because Medicare does not price revenue codes, the TPA or repricer must take the ICD-10 diagnoses + ICD-10-PCS procedures and run them through a DRG grouper (MS-DRG or APR-DRG). That’s what Reference Based repricers do.
This is done using CMS MS-DRG logic (for Medicare-based RBP), or commercial groupers (3M APR-DRG is common). The DRG is derived, not billed-for-pricing purposes. Even if the hospital doesn’t populate the DRG field the repricer creates one.
CLAIM FLOW PROCESS:
- Hospital Inpatient Stay
Hospital submits UB-04 claim
• Revenue Codes (0120, 0300, etc.)
• ICD-10 Dx (principal + secondary)
• ICD-10-PCS procedures – Admit / discharge dates - TPA / RBP Repricer
• Apply MS-DRG or APR-DRG logic
• DRG is DERIVED, not relied on
Medicare Benchmark Calculation
• DRG Relative Weight
• Medicare Base Rate
• Wage Index Adjustment
• (Optional) IME / DSH / Outliers
= Medicare Allowed Amount - Reference-Based Pricing Formula : Allowed = Medicare × Plan Multiple
(e.g., 140% – 180% of Medicare) - Claim Adjudication & Payment
• Plan pays allowed amount
This standard Reference Based Pricing claim paying method is common among TPAs administering these plans. Paying off a % of billed charges isn’t.
ERISA ATTORNEY
You can buy Medicare pricing software at Walmart. See video (Shown above). We are all dumber now…
INSURANCE CONSULTANT
That is almost funny. I would say that a claim submitted in what I would consider an “incomplete” and “unclean” status should be denied as such. Providing a DRG for an IP claim is an industry standard and that argument doesn’t hold water as 30-40% of PPO contracts for IP care are based on a DRG methodology, with and without “carve-outs”
STOP LOSS INSURANCE REP
I talked with another TPA and he absolutely disagrees with this explanation. 70% of billed charges is very excessive and the Medicare equivalent would be in the range of roughly 20% of billed charges “per my contact”. Other TPA’s who work with in this space have established a method for taking revenue codes and converting them to DRG’s.
CHATGPT
How Do Reference Based Pricing Plans Apply Medicare Claim Benchmarking When Hospitals Submit “Revenue-Code-Only” Bills
Hospitals often issue “revenue-code-only” bills when billing non-Medicare payers, submitting to TPAs without DRG capability, or billing per diem, percent-of-charges, or case rate contracts. TPA’s cannot convert revenue-code-only bills to Medicare because revenue codes alone won’t suffice. TPAs need additional information which hospitals can provide.
Step 2: Assign the MS-DRG using a certified DRG grouper
Step 2 is the formal DRG grouping step: the TPA runs the hospital’s clinical codes through a CMS-certified grouper to assign a defensible MS-DRG and relative weight.
Once the TPA receives the missing clinical data from the hospital, this is what happens operationally.
A. Validate the data
The TPA (or its DRG vendor) checks that the hospital supplied:
- Principal ICD-10-CM diagnosis
- Secondary diagnoses (with CC/MCC potential)
- ICD-10-PCS procedure codes (if surgical)
- Patient age and sex
- Discharge disposition
- POA indicators (if available)
If anything is missing or inconsistent, the claim pauses again.
B. Run the claim through a CMS-certified grouper
The TPA uses one of the following:
- CMS MS-DRG Grouper (gold standard)
- 3M / Optum / TruCode (commercial implementations of CMS logic)
The grouper:
- Determines medical vs surgical DRG
- Identifies MCC / CC
- Assigns the final MS-DRG
- Outputs the relative weight
This step mirrors exactly how Medicare would group the case.
C. Lock the DRG (important for disputes)
Once assigned:
- The DRG becomes the payment anchor
- Any appeal or audit must address coding accuracy, not revenue codes or charges
This protects the plan in:
- ERISA disputes
- Balance billing challenges
- “You guessed the DRG” hospital arguments
D. Document the methodology
TPAs retain:
- Grouper version used
- Input diagnosis/procedure codes
- Date of grouping
- DRG output
This documentation is critical for defensibility.
How Step 2 feeds Step 3
Once the MS-DRG is assigned, the TPA can:
- Calculate Medicare allowed amount
- Apply RBP percentage (e.g., 140% of Medicare)
- Proceed to payment and EOB issuance
