A self-funded hospital's expenses for providing health care benefits to its employees are included in Medicare's calculation of the Wage Index.
Due to this, the decisions a hospital makes (as the sponsor of its employee health benefit plan) have a significant impact on the hospital's reimbursement from Medicare for the care it provides to every Medicare recipient.
This happens because in Medicare's 'Provider Reimbursement Manual' section 4005.2 it allows a self-funded hospital that uses a Third Party Administrator ('TPA') to pay itself at a 'market rate' for the care it provides to its own employees (known as 'domestic care').
PRM 4005.2
Health Insurance and Health-Related Wage Related Costs:
The following are the allowable health insurance and health-related costs for the wage index.
1) Purchased Health Insurance:
• Premium costs.
• Costs paid to external organizations for plan administration.
2) Self (or Self-Funded) Health Insurance:
• With a TPA.
• Amount the TPA pays to the hospital or other health care providers for services rendered under the plan. (For domestic claims, the hospital must provide documentation from its TPA to demonstrate that payments for services rendered to employees are based on a discount from full charges. Also, the payments must be reasonable; that is, the costs included for domestic claims must not exceed the amount that commercial insurers pay the hospital for the same services rendered to non-employees.)
This loophole allows a self-funded hospital to report to Medicare as its 'expense' what it paid itself from its own funds for doing an MRI on its own employee at a rate that is 3 to 10 times higher than its actual cost.
In reality, the 'expense' the hospital incurs for doing an MRI on an employee is the same regardless of whether a TPA was used to transfer the internal funds of the hospital from one account to another or the hospital merely handled the 'payment' for that service as an internal accounting transfer (aka, 'self-administered').
Yet, Medicare policy allows self-funded hospitals using a TPA to pay themselves at a rate that must not exceed the amount that commercial insurers pay the hospital for the same services rendered to non-employees." (PRM 4005.2).
If you've ever written policy or regulations you would only say "must not exceed" if you wanted to allow the hospital/plan sponsor to charge their employees the highest percent of charges possible.
Imagine if this regulation read:
Also, the payments must be reasonable; that is, the costs included for domestic claims must not exceed the LOWEST amount that commercial insurers pay the hospital for the same services rendered to non-employees.)
Of course, since the hospital is paying itself from its own funds in either situation, there's no direct benefit to the hospital from 'paying' itself at 'market rate' rather than at 'cost'.
It's a total wash to the hospital since it is paying itself...except for its impact on The Wage Index.
Here's How It Works:
By using a TPA, the hospital gets to report domestic care expenses at a higher rate than if the expenses had been reported at 'the cost to the hospital as would be required under the Related Party Rule.
A 2011 OAS report determined that a single hospital in one CBSA paying itself at 'market rate' rather than 'at cost' resulted in Medicare paying the hospital $20.5 million more for services provided by the hospital to Medicare recipients than it would have (based on cost reports from 1999 to 2007) had domestic care expenses been reported 'at cost'.
This is because these 'phantom' increases in the hospital's domestic care expenses are then rolled up into the hospital's (and its CBSA's) Wage Index data, which, in time increases Medicare's PPS payment rates for all of the hospitals in that CBSA (thus the findings from OAS).
In addition, when a self-funded hospital uses a TPA it usually gets to decide how much to pay itself from its own funds. As an additional 'spike' to these 'phantom expenses', the hospital can pay itself the highest amount possible as long as the amount paid does "...not exceed the amount that commercial insurers [any and all] pay the hospital for the same services rendered to non-employees." (PRM 4005.2).
Isn't the provision of Domestic Care subject to The Related Party Rule?
At this point (9/25/26) CMS (or its contractor, PalmettoGBA) has made this important policy decision.
The catch is that they don't want the public to know about it.
Based on the attached email from PalmettoGBA executive Ed Sanchez dated 7/22/24, two meetings were held in October and November of 2023 to discuss this issue.
According to the text of the email, the auditor who had earlier opined in writing to CMS that, in his opinion, the provision of medical services by a self-funded hospital (per the St. Francis ruling) was a Related Party Transaction was included in the meeting.
That document is attached below.
I obtained this email (and 1,300+ others) as a result of a FOIAs I submitted to CMS in '24 and '25.
Of note in the release is that the part of the email that summarizes what was decided at these important policy meetings is redacted citing B5 and B6.
Also of note is that the email is a 7/24 summary of meetings that were held in 10 and 11 of 2023...and this is the first written summary? (Anyone ever heard of 'taking minutes'?)
Think about all this for a minute: The government appears to have made a policy decision that affects every taxpayer in this country based on the recommendations of a contractor but the government does not want anyone in the public sector to know the details of the decision (citing B5 B6).
One would think that if the decision made by the members of this ad hoc committee were that PRM 4005.2 needed to be clarified there would have been no reason to redact the details of the decision. Further, there would have been subsequent documents resulting from their decision (eg, Federal Register notifications, etc.). But there were none.
That leads me to speculate that these 10/11 2023 meetings came to this undocumented/informal agreement ('off the record'): 'Let's don't change the policy. Rather, let's just tell Atrium that they need to sell MedCost and and tell them to stop taking advantage of this loophole.'
In the summer of 2025 Atrium sold MedCost after owning it for 20+ years.
That way the problem for PalmettoGBA goes away.
The kink in their plan (and the lesson to be learned if you work in the governmental sector) is if there's a citizen (like me) using FOIA to find out what went down.
On 9/25/2026 I received 1.397 documents. On 9/26/2026 I mailed my appeal for the release of the documents without the redactions that had been cited under B5 B6.
Stay tuned.