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For Georgia Medicare beneficiaries facing major trauma, severe burns, complex surgical complications, extended ICU stays, or other catastrophically expensive hospitalizations, hospital reimbursement depends critically on a Medicare payment mechanism most patients have never heard of: the cost outlier payment.
Authorized at Section 1886(d)(5)(A) of the Social Security Act and implemented at 42 CFR 412.80-412.86, the cost outlier payment is the IPPS payment safety valve that protects hospitals from catastrophic financial losses on extraordinarily high-cost cases. When a hospital's estimated case cost exceeds the standard DRG payment plus the annual fixed loss threshold (set each year in the IPPS final rule), Medicare provides an additional outlier payment equal to 80 percent of the excess cost (90 percent for burn cases).
The framework matters enormously for Georgia hospitals operating trauma programs, burn centers, transplant programs, neonatal intensive care units, and other high-acuity services. Grady Memorial Hospital's Level I trauma center, Emory University Hospital's complex tertiary care including transplants, Children's Healthcare of Atlanta's complex pediatric care including extensive NICU services, the Augusta University Medical Center burn center, and other Georgia high-acuity programs all depend on cost outlier payments to make Medicare reimbursement viable for the most catastrophically expensive cases.
This guide explains Section 1886(d)(5)(A), the 42 CFR 412.80-412.86 implementing regulations, the calculation methodology, the cost-to-charge ratio approach, the post-Tenet Healthcare outlier fraud reforms, and how major Georgia hospitals receive cost outlier payments through Palmetto GBA implementation. :::
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- Section 1886(d)(5)(A) SSA authorizes the Medicare cost outlier payment for extraordinarily high-cost inpatient cases beyond standard DRG payment
- The annual fixed loss threshold, set each year in the IPPS final rule, determines when outlier eligibility begins for a given case
- The hospital-specific cost-to-charge ratio (CCR) converts hospital charges into estimated case costs for outlier calculation
- The marginal cost factor is 80 percent for standard cases (90 percent for burn cases), applied to excess cost above the threshold
- 42 CFR 412.84 outlier reconciliation captures material differences between tentative and final CCRs, protecting against over- or underpayment :::
The Statutory Foundation: Section 1886(d)(5)(A) of the Social Security Act
Section 1886(d)(5)(A) of the Social Security Act provides the statutory authority for Medicare cost outlier payments. The provision authorizes the Secretary of Health and Human Services to provide additional payments for cases that incur extraordinarily high costs relative to standard DRG payments.
The Inpatient Prospective Payment System (IPPS) established by Section 1886(d) generally pays hospitals a fixed DRG payment for each Medicare inpatient case, regardless of the actual cost incurred. This payment approach creates strong incentives for cost efficiency, but it also creates risk for the hospital when individual cases incur costs vastly exceeding the DRG payment. Major trauma cases, severe burn cases, transplant complications, extended ICU stays, and other catastrophic cases can incur costs five, ten, or twenty times the standard DRG payment.
Without a mechanism to address these high-cost outliers, hospitals would face severe financial pressure to avoid accepting such cases. The cost outlier payment provides Medicare's safety valve, supplementing the DRG payment when actual case costs substantially exceed the standard payment. The framework protects hospital financial viability while preserving the cost efficiency incentives of standard DRG payment for typical cases.
Section 1886(d)(5)(A)(ii) specifies the outlier payment calculation methodology, requiring CMS to provide outlier payments based on an excess cost above a fixed loss threshold, multiplied by a marginal cost factor. Section 1886(d)(5)(A)(iv) requires that total outlier payments not exceed a statutory limit, currently set at 5 to 6 percent of total IPPS payments.
The statute also distinguishes operating and capital cost outlier components. Operating costs (labor, supplies, services) and capital costs (depreciation, interest on debt) are calculated separately, each subject to outlier payment provisions.
Section 4451 of the Balanced Budget Act 1997: Day Outlier Elimination
Section 4451 of the Balanced Budget Act of 1997 (Public Law 105-33) eliminated day outlier payments, retaining only cost outlier payments. Before 1997, Medicare had two outlier categories: cost outliers (for cases with extraordinarily high costs) and day outliers (for cases with extraordinarily long lengths of stay).
The day outlier elimination reflected several considerations. Day outliers and cost outliers often overlapped (long stays usually generated high costs), creating duplicative payment effects. Day outlier methodology was complex and required separate calculation. The IPPS framework's underlying logic emphasized cost (not length of stay) as the primary measure of resource intensity.
After 1997, only cost outliers remain. The 1997 reform consolidated and simplified the outlier framework, focusing entirely on cost-based outliers using charges and cost-to-charge ratios to estimate case costs.
42 CFR 412.80-412.86: Cost Outlier Implementing Regulations
The 42 CFR 412.80-412.86 regulations implement the cost outlier framework with detailed methodology. The key regulations include:
42 CFR 412.80: Cost Outlier Definition
Defines the cost outlier as a case where the estimated case cost (charges multiplied by the cost-to-charge ratio) exceeds the DRG payment plus the annual fixed loss threshold. Specifies operating and capital cost outlier components separately.
42 CFR 412.82: Adjustment to Operating Outlier Payment
Specifies the operating cost outlier payment as 80 percent of the excess cost above the threshold, with the 90 percent factor for burn cases. The marginal cost factor reflects that the outlier payment partially (not fully) covers the additional cost, preserving cost-control incentives.
42 CFR 412.84: Outlier Payment Determination and Reconciliation
Specifies the operational outlier payment determination process. Hospital-specific cost-to-charge ratios are applied to estimate case costs. The regulation establishes the reconciliation process for hospitals with material differences between tentative and final CCRs.
42 CFR 412.86: Outlier Calculation Components
Specifies the calculation details including the fixed loss threshold, the CCR methodology, the marginal cost factor application, and the hospital-specific calculations.
The regulations implement the statutory framework with sufficient detail to support consistent CMS and MAC application across all hospitals nationwide.
The Cost-to-Charge Ratio (CCR) Methodology
The cost-to-charge ratio (CCR) is the central methodology for estimating case costs from hospital charges. The CCR is hospital-specific and reflects the relationship between a hospital's costs and its charges.
A hospital with a CCR of 0.30 means that the hospital's costs are approximately 30 percent of its charges; a charge of $100,000 implies an estimated cost of $30,000. The CCR varies substantially across hospitals based on charge-setting practices, cost structures, and operational characteristics.
Hospital-Specific CCR
The hospital-specific CCR is calculated from the hospital's cost report data. Separate CCRs are calculated for operating costs and capital costs. The CCRs cover all relevant cost centers, weighted by the volume of services provided.
The hospital-specific CCR is updated as cost reports are filed and settled. Each fiscal year, the IPPS final rule specifies the CCR sources for outlier calculation. Hospitals with stable cost structures and consistent charge-setting practices generally show stable CCRs over time. Hospitals with major operational changes (mergers, new service lines, system reorganizations, charge-setting overhauls) may experience CCR fluctuations that affect outlier payment dynamics.
Cost report quality directly affects CCR accuracy. Hospitals invest considerable effort in accurate cost reporting given that the cost report drives multiple Medicare payment streams including outlier payments, DSH, IME, and bad debt reimbursement. Cost report preparation typically involves specialized reimbursement consultants, the hospital's internal finance department, and external auditors. The cost report is filed annually with the Medicare Administrative Contractor and undergoes review and settlement processes.
Tentative vs Final CCR
Historically, outlier calculations have used tentative CCRs (interim CCRs based on prior year cost reports or interim filings) for initial payment, with reconciliation at cost report settlement if material differences emerged. The Tenet Healthcare outlier fraud scandal (described below) demonstrated that tentative CCRs could be manipulated through aggressive charge inflation, prompting reform.
Statewide Average CCR for New Hospitals
For new hospitals without sufficient cost report history, statewide average CCRs are used until hospital-specific CCRs become available. This prevents new hospitals from artificially low or high CCRs in their initial period.
CCR Calculation Across Cost Report Periods
The CCR for outlier calculation is updated annually based on the most recent cost report data. Hospitals with changing cost structures (mergers, acquisitions, service line changes, charge-setting changes) see their CCRs adjust over time.
The Annual Fixed Loss Threshold
The annual fixed loss threshold is set in each year's IPPS final rule. The threshold determines how high case costs must exceed the standard DRG payment before outlier payments begin.
Threshold Magnitude
The fixed loss threshold varies year to year with IPPS rulemaking. The threshold is calibrated to keep total outlier payments within the statutory 5-to-6-percent range.
If the threshold is set too low, more cases qualify for outlier payments, pushing total outlier expenditures above the statutory target. If the threshold is set too high, fewer cases qualify, falling below it. CMS calibrates the threshold annually based on forecasts of case mix, charges, and CCRs.
Threshold Components
The fixed loss threshold is added to the DRG payment to determine the outlier threshold for a specific case. The DRG payment includes the standardized amount adjusted for wage index, plus IME, DSH, and other applicable adjustments. The outlier threshold equals this hospital-specific DRG payment plus the fixed loss threshold.
Threshold Updates
The fixed loss threshold is set each fiscal year in the IPPS proposed rule (April) and finalized in the IPPS final rule (August), effective October 1 of the new fiscal year. Hospitals plan around the published threshold for their internal financial forecasting.
The Marginal Cost Factor
The marginal cost factor determines the percentage of excess cost (above the threshold) that Medicare pays as the outlier payment.
Standard 80 Percent
The standard marginal cost factor is 80 percent for operating costs and 80 percent for capital costs. A case with $50,000 of excess cost above the threshold generates approximately $40,000 of outlier payment (80 percent × $50,000).
The 80 percent factor reflects the policy judgment that outlier payments should partially but not fully cover excess costs. Full coverage (100 percent) would eliminate cost-control incentives, encouraging hospitals to drive up costs for marginal cases. A 0 percent factor would provide no protection from catastrophic case costs. The 80 percent factor balances cost-protection and cost-control objectives.
Burn Case 90 Percent
For burn cases, the marginal cost factor is 90 percent. The higher factor reflects the extraordinary cost intensity of severe burns. Burn unit care can involve weeks or months of intensive treatment, multiple surgeries, complex wound care, and extensive rehabilitation. The 90 percent marginal cost factor provides enhanced outlier protection for burn programs.
The burn case treatment is hospital-specific; the case must be coded as a burn case (relevant DRGs and ICD-10 codes) to qualify for the 90 percent factor. Burn centers like Augusta University Medical Center's Joseph M. Still Burn Center receive substantial outlier payments at the 90 percent marginal cost factor for severe burn cases.
Marginal Cost Factor Policy Considerations
The marginal cost factor has been subject to periodic policy reconsideration. Hospital associations have advocated for higher factors (closer to 90-100 percent) to improve outlier payment adequacy. MedPAC and other policy analysts have generally supported the 80 percent factor as appropriate for preserving cost-control incentives. The factor has remained at 80 percent (with the burn case 90 percent exception) for many years.
The 5.1 Percent Outlier Pool
Section 1886(d)(5)(A)(iv) requires that total outlier payments fall within a statutory range. CMS calibrates the annual fixed loss threshold to keep total outlier payments within that range.
Pool Target
The statutory range (5 to 6 percent) represents a policy balance. Higher percentages would direct more Medicare spending to outlier cases at the expense of base DRG payments. Lower percentages would provide less outlier protection.
Standardized Amount Adjustment
To fund the outlier pool, the standardized amount (the basic DRG payment amount before adjustments) is reduced by a corresponding percentage each year. The annual IPPS final rule incorporates this adjustment.
Annual Calibration
CMS forecasts case mix, charges, and CCRs to set the fixed loss threshold at a level expected to generate the target outlier pool. Actual outlier payments may diverge from the target due to forecasting errors, case mix changes, charge changes, or CCR changes.
If actual outlier payments exceed the target in a fiscal year, CMS may adjust the following year's threshold upward to compensate. If actual payments fall short, CMS may adjust downward.
The Outlier Payment Calculation
The outlier payment calculation follows a specific sequence:
- Identify the case charges: Hospital total charges for the case
- Apply the CCR: Charges × hospital-specific CCR = estimated case cost
- Calculate the DRG payment: Including standardized amount, wage index, IME, DSH, etc.
- Calculate the threshold: DRG payment + fixed loss threshold
- Determine excess cost: Estimated case cost - threshold = excess cost
- Apply the marginal cost factor: Excess cost × 80% (or 90% for burns) = outlier payment
- Separate operating and capital components: Each component calculated independently
- Combine for total outlier payment: Operating outlier + capital outlier = total
The outlier payment is added to the standard DRG payment (plus IME, DSH, NTAP, and other adjustments) to determine total Medicare payment for the case.
Worked Calculation Example
Consider a case with:
- Hospital charges: $300,000
- Hospital CCR (operating): 0.30
- Estimated operating cost: $300,000 × 0.30 = $90,000
- DRG payment with IME/DSH: $50,000
- Fixed loss threshold: $35,000
- Outlier threshold: $50,000 + $35,000 = $85,000
- Excess cost: $90,000 - $85,000 = $5,000
- Operating outlier payment: $5,000 × 80% = $4,000
The outlier payment in this example is modest because the excess cost above the threshold is only $5,000. For cases with much higher charges or much lower CCRs, the excess cost (and corresponding outlier payment) would be substantially larger.
The Tenet Healthcare Outlier Fraud History
The Tenet Healthcare outlier fraud case fundamentally shaped the current outlier framework. In the early 2000s, Tenet Healthcare (a major for-profit hospital operator) systematically inflated hospital charges at certain facilities to trigger outlier payments. The inflated charges, applied through the CCR methodology, generated artificially high estimated case costs, qualifying many cases for outlier payments that would not have qualified under more typical charge-setting practices.
The scheme produced substantial inappropriate outlier payments according to government investigation findings. Tenet settled with the federal government in 2006 in one of the largest healthcare fraud settlements in history.
The Tenet case revealed structural vulnerabilities in the outlier framework. The tentative CCR methodology (using interim CCRs based on prior year data) allowed Tenet to dramatically increase charges in a current year while operating under an older, lower CCR. The high charges generated high estimated case costs; the older low CCR was not adjusted quickly enough to prevent the fraud.
FY 2003 Outlier Reform Final Rule
CMS responded to the Tenet outlier fraud with the FY 2003 outlier reform final rule, implementing several structural changes:
- Use of settled CCR rather than tentative CCR: For most hospitals, the outlier payment uses the most recently settled CCR, which is less manipulable than tentative CCRs based on current-year filings
- Statewide average CCR for new hospitals: New hospitals use statewide average CCRs until their own settled CCRs become available, preventing new entities from establishing artificial CCRs
- Reconciliation for material CCR differences: 42 CFR 412.84 reconciliation captures gaps between the CCR used for tentative payment and the final settled CCR, recouping inappropriate outlier payments and adding additional payments where appropriate
- Enhanced MAC oversight: MACs apply heightened scrutiny to outlier claims and CCR adjustments
The combined reforms substantially reduced the risk of Tenet-style outlier fraud. Modern outlier payments are more closely tied to actual hospital cost structures and less manipulable through aggressive charge-setting.
Ongoing Compliance Considerations
OIG continues to audit outlier payments, particularly at hospitals with unusually high outlier payment proportions or unusual charge structures. Compliance officers at major Georgia hospitals monitor outlier payments and CCR data to ensure consistency with regulatory requirements and avoid even appearance of charge inflation for outlier purposes.
The Tenet case also influenced broader hospital compliance practices. Modern hospital compliance programs include specific outlier monitoring, charge audit procedures, and internal controls around charge setting. The compliance focus extends beyond simple fraud prevention to assuring that hospital operations align with the spirit and letter of outlier framework regulations. Compliance officers, billing managers, and finance leaders coordinate to maintain integrity in outlier-related processes. The federal False Claims Act risks for outlier-related issues remain serious, with the Tenet settlement establishing the precedent that systematic outlier manipulation can trigger enormous civil liability.
The 42 CFR 412.84 Outlier Reconciliation Process
The outlier reconciliation process at 42 CFR 412.84 addresses material differences between tentative CCRs and final settled CCRs. The reconciliation prevents inappropriate outlier payments resulting from CCR changes.
Material CCR Difference Threshold
CMS specifies threshold criteria for triggering reconciliation. If a hospital's settled CCR differs materially from the tentative CCR used in interim outlier payments, reconciliation is triggered.
Reconciliation Calculation
The reconciliation calculation recomputes outlier payments using the settled CCR rather than the tentative CCR. The difference between the original outlier payment and the recomputed payment is either recouped (if the original was too high) or paid (if the original was too low).
Reconciliation Implementation
MACs (Palmetto GBA for Georgia hospitals) implement reconciliation through specific cost report processes. Hospitals receive notice of reconciliation determinations and may appeal through the PRRB if they disagree.
PRRB Appeals on Outlier Reconciliation
Hospitals may appeal outlier reconciliation determinations through the Provider Reimbursement Review Board (PRRB). Appeals typically focus on technical CCR calculations, threshold applications, or methodology disputes.
LTCH, IPF, and IRF Outlier Frameworks
Long-Term Care Hospitals (LTCHs), Inpatient Psychiatric Facilities (IPFs), and Inpatient Rehabilitation Facilities (IRFs) each have separate outlier payment frameworks under their respective PPS systems.
LTCH Outlier (Section 1886(m))
The LTCH PPS established by Section 1886(m) has its own outlier framework. LTCH cases involve patients with long average stays (often 25+ days), creating distinct outlier dynamics. The LTCH fixed loss threshold and marginal cost factor differ from IPPS levels.
IPF Outlier (Section 1886(b)(3)(B)(ii))
The IPF PPS has outlier provisions tailored to inpatient psychiatric care. IPF outliers protect against extraordinarily costly psychiatric cases involving complex comorbidities, extended stays, or intensive treatment requirements.
IRF Outlier (Section 1886(j))
The IRF PPS has outlier provisions for inpatient rehabilitation cases. IRF outliers protect against complex cases requiring extended rehabilitation, multiple comorbidities, or intensive therapy regimens.
Distinction from IPPS Outliers
The IPPS outlier framework applies only to short-stay acute care hospital cases. LTCH, IPF, and IRF outliers are separately calculated under their PPS frameworks, with different fixed loss thresholds, CCRs, and methodologies. Hospitals operating multiple types of programs (acute care plus rehabilitation, for example) calculate outliers separately for each program.
Specific Case Categories with High Outlier Potential
Certain case categories generate disproportionate outlier payments due to their extraordinary cost intensity.
Major Trauma
Level I trauma centers like Grady Memorial Hospital receive substantial outlier payments for major trauma cases. A polytrauma patient may incur weeks of ICU care, multiple surgeries, blood product transfusions, antibiotic therapy, and extensive rehabilitation. Trauma case charges often range from $100,000 to $500,000 or more; outlier payments help align Medicare reimbursement with these extraordinary costs.
Grady's Marcus Trauma Center is the only Level I trauma center serving metro Atlanta and one of only a small number of Level I trauma centers in Georgia (along with Memorial Health Savannah, Atrium Health Navicent in Macon, and AU Medical Center serving Augusta). Level I designation requires comprehensive trauma capability with in-house specialists across multiple specialties twenty-four hours a day, dedicated operating rooms, dedicated trauma intensive care, and academic teaching programs. The infrastructure required for Level I designation is enormously expensive, with outlier payments helping recover costs on the most catastrophically expensive trauma cases.
Severe Burns
Burn centers receive the highest marginal cost factor (90 percent) reflecting the extraordinary cost intensity of severe burn care. Augusta University Medical Center's Joseph M. Still Burn Center serves Georgia, Alabama, South Carolina, and beyond as a regional burn referral center. Major burn cases (over 30 percent total body surface area, inhalation injury) routinely involve months of treatment with charges into the millions of dollars.
The Joseph M. Still Burn Center is verified by the American Burn Association and operates one of the largest burn programs in the country. Severe burn care involves specialized burn intensive care including temperature-controlled environments, specialized wound care nursing, dedicated operating rooms for graft procedures, hyperbaric oxygen therapy, intensive nutrition support, infectious disease management for burn-associated infections, and integrated physical and occupational therapy throughout the hospitalization. The infrastructure and staffing requirements far exceed standard hospital programs, and the 90 percent marginal cost factor reflects this extraordinary intensity.
Major burn cases routinely produce hospital stays of three to six months or longer with charges of $1 million to $5 million or more. Without outlier payments at the 90 percent marginal cost factor, burn centers would face unsustainable losses on Medicare cases. The federal outlier framework is the financial structure that makes regional burn centers viable for Medicare-eligible burn victims.
Complex Surgical Complications
A complex surgical case (cardiac surgery, transplant, complex abdominal surgery) may proceed routinely or develop catastrophic complications. Cases with major postoperative complications (multi-organ failure, infections, surgical re-exploration, extended ICU stays) generate substantial outlier payments. The standard DRG payment for the index procedure may be vastly insufficient for the complicated case.
Extended ICU Stays
Patients with prolonged ventilation, multi-organ failure, or other ICU-dependent conditions accumulate enormous costs. Extended ICU stays of 30, 60, or 90+ days are not uncommon in tertiary care hospitals. Outlier payments substantially supplement DRG payments for these cases.
Solid Organ Transplants
Solid organ transplants (heart, lung, liver, kidney, pancreas, intestine) involve high baseline costs plus potential complications. Emory University Hospital, AU Medical Center, and other Georgia transplant programs receive outlier payments for cases with complications or extended hospitalization.
Emory's transplant program is among the largest in the country, with active programs across all solid organ types. Heart transplant, lung transplant, liver transplant, and kidney transplant cases each have specific DRG assignments with corresponding base payments. The base DRG payments are typically inadequate for complicated cases involving graft failure, severe rejection, infections, or other major complications. Outlier payments help align reimbursement with actual costs in the most challenging transplant cases.
Living donor kidney transplant, deceased donor kidney transplant, simultaneous pancreas-kidney transplant, and other transplant variants each have distinct case dynamics. The federal Organ Procurement and Transplantation Network (OPTN) governs transplant practice, while Medicare reimbursement through the IPPS framework (including outlier provisions) supports the financial viability of transplant programs serving Medicare beneficiaries.
Hematopoietic Stem Cell Transplants
Allogenic and autologous bone marrow/stem cell transplants involve high baseline costs plus potential graft-versus-host disease, infections, and other complications. Programs at Emory and other Georgia hospitals receive outlier payments.
NICU Cases
Pediatric NICU cases, particularly extremely premature infants or infants with severe congenital conditions, generate high outlier payments. Children's Healthcare of Atlanta receives substantial outlier payments through its Level IV NICU program.
Other Specialty Cases
Acute leukemia treatment, severe pneumonia with respiratory failure, status epilepticus, fulminant hepatic failure, and other catastrophic conditions can generate substantial outlier payments based on actual case costs.
Major Georgia Hospital Outlier Participation
Major Georgia hospitals participate in cost outlier payments based on their case mix and clinical programs.
Grady Memorial Hospital
Grady's safety-net mission, Level I trauma center, and burn services position it as a major outlier recipient. The hospital's outlier payments contribute meaningfully to its Medicare revenue, supporting the broader safety-net financial structure. Grady's trauma center serves patients from across metro Atlanta and beyond, with major trauma cases routinely generating outlier payments.
Grady operates as Atlanta's primary safety-net hospital under the Grady Health System governance structure, with academic partnerships with Emory and Morehouse Schools of Medicine. The combination of safety-net mission (high uncompensated care and Medicaid share), trauma center designation, and academic teaching mission creates a complex financial structure where Medicare outlier payments, DSH payments, IME payments, and other IPPS adjustments must work together to support hospital operations. Outlier payments specifically address the catastrophic case risk that all Level I trauma centers face.
Emory University Hospital
Emory's complex tertiary care including transplant program, advanced cardiac care, neurosurgery, and complex surgical programs generates substantial outlier payments. The Winship Cancer Institute's complex oncology care also contributes to outlier-eligible cases.
Emory University Hospital Midtown
Emory Midtown's specialty programs also generate outlier-eligible cases, though typically fewer than the main Emory University Hospital. The hospital's case mix includes high-acuity cases supporting outlier payments.
Memorial Health Savannah
Memorial Health's coastal Georgia tertiary care includes complex services generating outlier-eligible cases. The hospital serves a large coastal Georgia and South Carolina coastal region.
AU Medical Center
Augusta University Medical Center operates a major burn center (the Joseph M. Still Burn Center), generating outlier payments at the 90 percent marginal cost factor. The hospital also operates trauma services, transplant programs, and other high-acuity services. As Georgia's premier academic medical center serving the Augusta region and as a tertiary referral center for east Georgia and western South Carolina, AU Medical's case mix includes substantial outlier-eligible cases across multiple service lines. The combination of burn center, trauma center, and transplant capabilities makes AU Medical one of Georgia's most consistent outlier payment recipients.
Phoebe Putney Memorial Hospital
Phoebe Putney's rural Georgia tertiary care includes trauma services and other high-acuity programs generating outlier-eligible cases. As the primary tertiary care hospital for southwest Georgia, the hospital serves a wide rural service area. Rural tertiary centers like Phoebe Putney face particular outlier dynamics, with high-acuity cases somewhat less frequent than at urban centers but still significant for hospital operations. The outlier framework supports rural tertiary care viability, particularly important given rural hospital closure trends nationally.
Atrium Health Floyd
The northwest Georgia tertiary care hospital generates outlier-eligible cases for various complex services.
Northeast Georgia Medical Center
NGMC's North Georgia services include high-acuity programs generating outlier-eligible cases.
Wellstar, Piedmont, Northside Health Systems
Major Atlanta health systems with high-acuity programs generate outlier-eligible cases across their networks. The specific outlier-eligible services vary by hospital location and program portfolio.
Children's Healthcare of Atlanta
CHOA's complex pediatric care including Level IV NICU, pediatric transplant, pediatric oncology including the Aflac Cancer Center, and other specialty programs generates substantial outlier payments. The pediatric case mix differs from adult hospitals, but high-acuity pediatric cases regularly trigger outlier payments.
CHOA operates three hospital campuses (Egleston, Scottish Rite, and Hughes Spalding) along with extensive outpatient services. Most pediatric inpatient cases are Medicaid-covered rather than Medicare-covered, with Medicare cases involving children with specific disability qualifications or rare circumstances. However, the federal IPPS framework applies to CHOA's Medicare cases just as it does to adult hospitals, and the outlier framework provides essential support for the most catastrophic pediatric cases. CHOA's case mix includes extremely premature infants requiring 100+ day NICU stays, pediatric oncology patients with treatment complications, pediatric transplant patients with extended postoperative courses, and other high-acuity pediatric cases that routinely exceed standard DRG payment levels.
Regional Specialty Centers
Specialized facilities including burn centers, transplant centers, and trauma centers receive disproportionate outlier payments reflecting their concentrated high-acuity case mix.
Worked Example 1: Grady Trauma Outlier Case
Consider a hypothetical major trauma case at Grady Memorial Hospital. A 70-year-old Georgia Medicare beneficiary suffers polytrauma in a motor vehicle accident and is admitted to Grady's Level I trauma center.
Case characteristics:
- Length of stay: 35 days (4 days ICU initial trauma stabilization, 14 days ICU multi-organ support, 17 days step-down and acute rehab)
- Multiple surgeries (orthopedic, vascular, abdominal)
- Multiple blood product transfusions
- Extensive imaging and laboratory studies
- Multiple specialty consultations
Estimated costs and payments:
- Hospital charges: $625,000
- Grady CCR (operating, hypothetical): 0.28
- Estimated operating cost: $625,000 × 0.28 = $175,000
- DRG payment (with IME, DSH adjustments): $48,000
- Fixed loss threshold: $35,000
- Outlier threshold: $48,000 + $35,000 = $83,000
- Excess cost: $175,000 - $83,000 = $92,000
- Operating outlier payment: $92,000 × 80% = $73,600
Plus capital outlier calculated separately, plus DSH and IME adjustments to base DRG payment.
The outlier payment substantially supplements the standard DRG payment, helping align Medicare reimbursement with the hospital's actual cost. Without outlier payment, Grady would face approximately $127,000 in operating losses on this case alone ($175,000 cost minus $48,000 base DRG); with outlier payment, the operating gap narrows to approximately $53,400. The DSH and IME payments further reduce the gap.
Worked Example 2: Emory Complex Tertiary Outlier
Consider a complex transplant complication case at Emory University Hospital. A 68-year-old Georgia Medicare beneficiary undergoes liver transplant complicated by primary nonfunction requiring retransplantation, with multiple subsequent complications.
Case characteristics:
- Length of stay: 67 days
- Two transplant procedures (initial, retransplant)
- Multiple ICU admissions for infections and complications
- Extensive immunosuppression management
- Multiple secondary procedures (drainage procedures, surgical re-exploration)
Estimated costs and payments:
- Hospital charges: $1,250,000
- Emory CCR (operating, hypothetical): 0.32
- Estimated operating cost: $1,250,000 × 0.32 = $400,000
- DRG payment (liver transplant with complications, with IME, DSH): $95,000
- Fixed loss threshold: $35,000
- Outlier threshold: $95,000 + $35,000 = $130,000
- Excess cost: $400,000 - $130,000 = $270,000
- Operating outlier payment: $270,000 × 80% = $216,000
Plus capital outlier and other adjustments. The outlier payment is enormous, reflecting the extraordinary cost intensity of complex transplant complications.
Worked Example 3: CHOA Pediatric NICU Outlier
Consider a complex pediatric NICU case at Children's Healthcare of Atlanta. A 24-week premature infant is admitted to CHOA's Level IV NICU.
Case characteristics:
- Length of stay: 110 days
- Prolonged mechanical ventilation
- Multiple infections requiring antibiotic courses
- Necrotizing enterocolitis with surgical intervention
- Retinopathy of prematurity treatment
- Extensive feeding management
Estimated costs and payments (note: CHOA pediatric cases may be Medicaid not Medicare; this example assumes Medicare due to disability or family Medicare-eligibility complexity):
- Hospital charges: $850,000
- CHOA CCR (operating, hypothetical): 0.35
- Estimated operating cost: $850,000 × 0.35 = $297,500
- DRG payment (extreme prematurity with major complications, with DSH): $80,000
- Fixed loss threshold: $35,000
- Outlier threshold: $80,000 + $35,000 = $115,000
- Excess cost: $297,500 - $115,000 = $182,500
- Operating outlier payment: $182,500 × 80% = $146,000
The outlier payment is substantial, supporting CHOA's complex pediatric NICU program. (Most pediatric NICU cases are actually Medicaid-covered; the example illustrates the calculation methodology applicable when Medicare coverage applies.)
Worked Example 4: Burn Case 90 Percent Marginal Factor
Consider a severe burn case at the AU Medical Center burn center. A 72-year-old Georgia Medicare beneficiary sustains 45 percent total body surface area burns with inhalation injury and is admitted to the burn intensive care unit.
Case characteristics:
- Length of stay: 75 days
- Multiple debridement and grafting procedures
- Prolonged mechanical ventilation
- Multiple infections
- Extensive wound care
- Specialized rehabilitation
Estimated costs and payments:
- Hospital charges: $1,400,000
- AU Medical CCR (operating, hypothetical): 0.30
- Estimated operating cost: $1,400,000 × 0.30 = $420,000
- DRG payment (severe burn with major complications, with IME, DSH): $110,000
- Fixed loss threshold: $35,000
- Outlier threshold: $110,000 + $35,000 = $145,000
- Excess cost: $420,000 - $145,000 = $275,000
- Operating outlier payment at 90% (burn case): $275,000 × 90% = $247,500
The 90 percent marginal cost factor for burn cases generates approximately $27,500 of additional outlier payment compared to the 80 percent standard factor (which would have generated $220,000). The 90 percent factor materially supports burn center financial viability.
Worked Example 5: Step-By-Step Outlier Calculation
Consider a general high-cost case with parameters:
- Hospital charges: $400,000
- Hospital CCR (operating): 0.33
- DRG payment (base, with IME and DSH): $60,000
- Fixed loss threshold: $35,000
Step 1: Estimated operating cost = $400,000 × 0.33 = $132,000
Step 2: Outlier threshold = DRG payment + fixed loss threshold = $60,000 + $35,000 = $95,000
Step 3: Excess cost = Estimated cost - threshold = $132,000 - $95,000 = $37,000
Step 4: Operating outlier payment = excess cost × marginal cost factor = $37,000 × 80% = $29,600
Step 5: Total operating Medicare payment = DRG payment + outlier = $60,000 + $29,600 = $89,600
Capital outlier calculated separately (using capital CCR and capital threshold). The total Medicare payment for the case combines operating and capital components, plus any applicable IME, DSH, NTAP, and other adjustments.
Worked Example 6: Outlier Reconciliation Example
Consider a hospital where outlier reconciliation applies due to material CCR change.
Hospital scenario:
- Tentative CCR used in interim payments: 0.40
- Final settled CCR: 0.30
- Total interim outlier payments for the period: $5,000,000 across all cases
Reconciliation calculation (simplified):
Recompute outlier payments using settled CCR of 0.30 instead of tentative CCR of 0.40. The lower CCR generates lower estimated case costs, fewer cases qualifying for outliers, and lower outlier payments for cases that do qualify.
Hypothetically, recomputed outlier payments total $3,800,000 using the settled CCR.
Reconciliation amount: $5,000,000 (interim) - $3,800,000 (recomputed) = $1,200,000 recouped from the hospital.
The hospital owes Medicare $1,200,000 in recouped outlier payments, reflecting the CCR overstatement during the interim payment period. The hospital may appeal through PRRB if it believes the reconciliation calculation is incorrect.
Cost Report and MAC Implementation
The outlier payment framework operates through MAC implementation and cost report processes.
Palmetto GBA Implementation
Palmetto GBA serves as the Medicare Administrative Contractor for Georgia hospitals. The MAC processes claims, applies outlier calculations to qualifying cases, and reports outlier payments to hospitals and CMS.
The MAC applies hospital-specific CCRs and fixed loss thresholds for each fiscal year. Claims for cases potentially qualifying for outlier payments are flagged through the claims processing system; outlier payments are calculated and added to standard DRG payment.
Cost Report Worksheet S-10
The cost report Worksheet S-10 captures uncompensated care data, including information relevant to outlier calculation context. Worksheets E Part A and Part B address Medicare outlier payments and reconciliation. Hospitals must accurately complete these worksheets for outlier payments to be properly settled.
Outlier Documentation
Hospitals maintain documentation supporting outlier payments including:
- Patient medical records
- Billing/charge records
- Cost accounting documentation
- ICD-10 coding documentation
- DRG assignment documentation
The documentation supports outlier payment claims and prepares the hospital for MAC audits, OIG reviews, or PRRB appeals.
PRRB Appeals on Outlier Issues
Hospitals may appeal outlier payment determinations through the Provider Reimbursement Review Board. Common appeal topics include:
- CCR calculation disputes
- Threshold application questions
- Reconciliation determinations
- Burn case classification (for 90 percent marginal factor)
- DRG assignment affecting outlier eligibility
PRRB decisions may be appealed to the CMS Administrator and ultimately to federal court.
Beneficiary Cost-Sharing on Outlier Cases
The cost outlier payment affects hospital reimbursement; beneficiary cost-sharing follows separate rules.
Part A Inpatient Deductible
Beneficiaries owe the Part A inpatient deductible ($1,736 in 2026, indexed annually) at the start of each benefit period. The deductible is owed regardless of case cost; outlier payments do not change the beneficiary deductible.
Part A Coinsurance
For inpatient stays beyond 60 days, beneficiaries owe daily coinsurance ($434 per day for days 61-90 in 2026, $868 per day for lifetime reserve days 91-150). Extended hospitalizations for outlier-eligible cases may trigger substantial coinsurance.
Medicare Advantage Cost-Sharing
Medicare Advantage plans have their own cost-sharing structures, generally with maximum out-of-pocket limits. Beneficiaries in MA plans may face different cost-sharing than traditional Medicare beneficiaries.
Medigap Coverage
Medigap plans (depending on plan letter) cover Part A coinsurance, deductible, and/or other cost-sharing. Beneficiaries with Medigap may face minimal out-of-pocket costs on outlier cases.
Medicaid as Secondary Payer
Dual-eligible beneficiaries with Georgia Medicaid as secondary coverage have Medicare cost-sharing covered through Medicaid, eliminating most out-of-pocket exposure.
Charity Care and Hospital Financial Assistance
Hospital charity care programs and financial assistance policies may cover Medicare cost-sharing for low-income beneficiaries. Grady, Emory, and other Georgia hospitals operate financial assistance programs.
Beneficiary Access Implications
Cost outlier payments enable Georgia Medicare beneficiary access to catastrophic care.
Trauma Access
Without outlier payments, Level I trauma centers would face severe financial pressure on Medicare trauma cases. Outlier payments help align reimbursement with actual costs, supporting trauma center financial viability and beneficiary access. The Georgia Trauma Care Network Commission coordinates trauma system development across the state, with Level I, II, III, and IV designated trauma centers providing graduated levels of trauma care. The state's trauma system depends on Medicare and Medicaid reimbursement, with outlier payments specifically addressing catastrophic trauma case economics.
Burn Care Access
Burn center economics depend on outlier payments. The 90 percent marginal cost factor specifically supports burn programs. The American Burn Association maintains burn center verification standards, with verified burn centers receiving designation reflecting their capability for severe burn care. Georgia's verified burn centers (including the Joseph M. Still Burn Center at AU Medical and others) serve as regional referral centers for the Southeast. The federal outlier framework, particularly the 90 percent marginal cost factor, is essential to the financial viability of these specialized programs serving Medicare-eligible burn victims.
Transplant and Complex Surgical Access
Transplant programs and complex surgical programs accept high-cost cases knowing outlier payments will partially offset catastrophic costs when complications develop.
NICU and Pediatric Access
Level IV NICUs and complex pediatric programs depend on outlier payments to manage the financial risk of extremely premature or critically ill infants. CHOA's Aflac Cancer Center and other pediatric specialty programs benefit from outlier support. While most pediatric cases involve Medicaid rather than Medicare coverage, the Medicare framework affects CHOA's overall financial structure and the broader pediatric specialty care infrastructure across Georgia. The federal IPPS framework, including outlier provisions, shapes the operational and financial environment for pediatric specialty care even when individual cases are Medicaid-covered.
Rural Hospital Access
Rural hospitals receiving occasional catastrophic cases depend on outlier payments to manage financial risk. Without outlier payments, rural hospitals might financially decline to accept catastrophically complex cases, forcing patient transfers.
Compliance and Operational Best Practices
Best practices for outlier compliance and management include:
- Accurate CCR calculation: precise hospital-specific CCR development
- Charge integrity: consistent charge-setting practices
- Cost report quality: accurate Worksheets E and S-10
- Documentation rigor: medical record and billing documentation
- Burn case classification: appropriate use of burn DRGs and ICD-10 codes
- MAC engagement: communication with Palmetto GBA on outlier claims
- Reconciliation tracking: monitoring material CCR differences
- Audit preparation: documentation maintained for MAC and OIG audit
- PRRB awareness: appeal pathway understanding
- Internal review: hospital compliance program review of outlier patterns
- Charge transparency compliance: alignment with hospital transparency rules
- Financial modeling: outlier expectations in budget forecasting
- Coding accuracy: precise DRG assignment affecting outlier eligibility
- Staff training: regular training on outlier compliance
Common Issues and Considerations
Common issues in outlier implementation include:
- CCR fluctuations: hospital-specific CCR changing over time
- Tentative vs settled CCR gaps: reconciliation complexity
- Burn case classification disputes: 90 percent factor eligibility
- Coding errors: affecting DRG assignment and outlier eligibility
- Charge inflation concerns: post-Tenet compliance considerations
- Documentation gaps: inadequate clinical or cost documentation
- MAC interpretation differences: variation across MACs
- PRRB appeal complexity: technical disputes
- OIG audit findings: addressing identified issues
- Fixed loss threshold sensitivity: hospital impact of annual changes
- Capital outlier complexity: operating vs capital calculation
- Multi-hospital coordination: outlier across hospital systems
- Cost accounting capability: hospital ability to track case costs
- Industry advocacy: engagement with AHA on outlier reform
Reform Debate and Future Direction
The cost outlier framework remains subject to ongoing policy discussion.
MedPAC Analyses
MedPAC has periodically analyzed outlier payments, providing recommendations on:
- Fixed loss threshold methodology
- Marginal cost factor adequacy
- Outlier pool size
- Distribution of outlier payments across hospital types
MedPAC analyses inform IPPS rulemaking and broader Medicare policy. MedPAC's June and March reports to Congress regularly address Medicare hospital payment policy, with periodic specific focus on outlier dynamics. The Commission's analytical work examines outlier payment distribution, threshold calibration accuracy, and the relationship between outlier payments and hospital cost structures. Commission recommendations have historically supported maintaining the outlier framework while improving operational refinements like reconciliation accuracy and threshold calibration methodology.
AHA Position
The American Hospital Association supports outlier payments and advocates for:
- Adequate fixed loss threshold
- Maintained 80/90 percent marginal cost factors
- Streamlined reconciliation processes
- Continued protection from catastrophic case losses
The Georgia Hospital Association engages at the state level on outlier-related issues affecting Georgia hospitals. Hospital trade associations have testified before Congress and submitted comments on annual IPPS proposed rules addressing outlier policy, emphasizing the framework's importance for high-acuity programs and beneficiary access to catastrophic care. The AHA's annual analysis of Medicare hospital payments routinely addresses outlier dynamics across hospital types.
Industry Perspective
Hospital industry perspectives emphasize:
- Importance of outlier payments for catastrophic case access
- Operational complexity of CCR and reconciliation processes
- Need for predictable threshold setting
- Concerns about over-aggressive audit standards
Hospital finance leaders and reimbursement consultants emphasize the practical operational challenges of outlier compliance, particularly for hospitals with complex case mixes or system-wide cost structures. The reconciliation process can extend over multiple years, with hospitals unable to fully reconcile outlier payments until cost reports are settled and CCRs finalized. The financial planning challenges from this timing lag affect hospital budgeting and cash management.
Patient Advocacy
Patient advocacy organizations support outlier payments as essential for beneficiary access to catastrophic care. Trauma survivor organizations, burn survivor groups, and disease-specific patient groups have engaged with outlier policy. The Phoenix Society for Burn Survivors, American Trauma Society, and other patient advocacy networks have provided patient and family perspective in policy discussions about Medicare payment for catastrophic care. Patient access depends on hospital financial viability, and outlier payments are essential infrastructure for the hospital-side of that equation.
Future Trajectory
Cost outlier payments are expected to continue with annual IPPS final rule refinements. The fixed loss threshold will be adjusted annually to maintain the statutory outlier pool target. Marginal cost factors may be reexamined periodically. Reconciliation processes may be refined based on operational experience.
The cellular therapy and high-cost drug landscape may create new outlier dynamics, particularly as NTAP-funded therapies eventually phase out and become subject to standard DRG payment plus outlier provisions. The interaction between outlier payments and other IPPS mechanisms (NTAP, DSH, IME, IPPS update factor) will continue to evolve.
Several emerging issues may shape outlier policy. The rising cost of certain therapies (gene therapies, advanced biologics) may push more cases into outlier territory, requiring threshold recalibration. Hospital cost report data quality and timeliness affect CCR accuracy, with potential reforms to improve cost report standards. Charge transparency rules under Section 2718 of the Public Health Service Act and the hospital price transparency final rule may indirectly affect outlier dynamics by reducing variation in charge practices. The intersection of cost outlier payments with value-based purchasing programs (HRRP, HVBP, HACRP) creates complex interactions for hospitals operating high-acuity programs.
Ongoing policy attention focuses on outlier payment distribution across hospital types. Academic medical centers, safety-net hospitals, and specialty centers receive disproportionate outlier payments reflecting their case mix; community hospitals receive smaller proportions. Some policy analysts have suggested whether the outlier framework adequately accounts for the structural costs of high-acuity programs versus the case-by-case cost variation it was designed to address.
Frequently Asked Questions
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What is the Medicare cost outlier payment?
The Medicare cost outlier payment is an IPPS payment supplement providing additional Medicare reimbursement for cases with extraordinarily high costs relative to standard DRG payment. Authorized at Section 1886(d)(5)(A) of the Social Security Act, the outlier payment is added to the DRG payment when estimated case cost (charges times CCR) exceeds the DRG payment plus the annual fixed loss threshold.
What is the cost-to-charge ratio (CCR)?
The CCR is a hospital-specific ratio of costs to charges, used to estimate case costs from hospital charges. A CCR of 0.30 means the hospital's costs are approximately 30 percent of its charges. Hospital-specific CCRs are calculated from cost report data, with separate operating and capital CCRs.
What is the annual fixed loss threshold?
The fixed loss threshold is set in each year's IPPS final rule. It determines how high case costs must exceed the DRG payment before outlier payments begin. CMS calibrates the threshold annually to keep total outlier payments within the statutory range.
What was the Tenet Healthcare outlier fraud case?
In the early 2000s, Tenet Healthcare systematically inflated hospital charges to trigger outlier payments. The scheme generated substantial inappropriate outlier payments. Tenet settled with the federal government in 2006. The case prompted the FY 2003 outlier reform final rule, which introduced settled-CCR methodology and 42 CFR 412.84 reconciliation to reduce fraud risk.
How does outlier payment affect beneficiary cost-sharing?
Outlier payments affect hospital reimbursement; beneficiary cost-sharing follows separate Part A rules. Beneficiaries owe the Part A deductible ($1,736 in 2026) and applicable coinsurance regardless of outlier payment status. Supplemental insurance (Medigap, Medicare Advantage, Medicaid) may reduce out-of-pocket exposure. :::
How Brevy Helps Georgia Families Navigate Medicare Hospital Benefits and Catastrophic Care Access
Brevy at brevy.com is committed to helping Georgia families understand Medicare hospital benefits, hospital payment frameworks, and access to catastrophic care for elderly and disabled beneficiaries.
Brevy's eldercare guides cover Medicare Part A inpatient benefits, the IPPS framework including DRG payment plus DSH, IME, NTAP, outlier, and other adjustments, beneficiary cost-sharing and supplemental coverage options, hospital financial assistance programs, trauma and burn center access, transplant program access, NICU and complex pediatric care, and the broader landscape of catastrophic care access in Georgia.
Brevy also provides guides on Medicare-Medicaid dual eligibility, Medicare Savings Programs, Medigap and Medicare Advantage choices, and other supplemental coverage that can reduce beneficiary out-of-pocket exposure for catastrophic cases. The intersection of Medicare hospital benefits, Medicaid as secondary payer, and supplemental insurance creates complex coverage scenarios that Brevy helps families navigate.
Disclaimers
This guide describes Medicare cost outlier payment based on federal statute, regulation, and CMS guidance as of the date of publication. Outlier payment parameters including the fixed loss threshold and CCR data change annually through IPPS rulemaking. Hospital-specific outlier payment dynamics depend on numerous case-specific factors.
The information provided is general educational content, not legal, financial, or healthcare advice. Beneficiaries with specific cost-sharing or coverage questions should contact 1-800-MEDICARE, the GeorgiaCares SHIP at 1-866-552-4464, the Medicare Rights Center at 1-800-333-4114, or qualified counsel. Hospitals with specific outlier payment, CCR, or reconciliation questions should contact Palmetto GBA, their cost report preparer, or qualified healthcare reimbursement counsel.
Worked examples in this guide use hypothetical parameters for illustrative purposes; actual outlier payments depend on case-specific charges, hospital-specific CCRs, fiscal year-specific thresholds, and other operational factors.
Get Help with Medicare Hospital Benefits and Catastrophic Care Access in Georgia
For Medicare hospital benefit questions, cost outlier inquiries, beneficiary support, and broader catastrophic care access in Georgia:
::: cta Medicare and Federal Resources
- Medicare: 1-800-MEDICARE (1-800-633-4227)
- Palmetto GBA Customer Service (Georgia MAC): 1-866-238-9650
- CMS Provider Enrollment: 1-866-484-8049
- Medicare Rights Center: 1-800-333-4114
Georgia State Resources
- DCH Medicaid Member Services: 1-866-211-0950
- GeorgiaCares SHIP: 1-866-552-4464
- Georgia Department of Public Health: 404-657-2700
- Georgia Department of Community Health: 404-656-4507
Major Georgia Hospitals
- Grady Memorial Hospital: 404-616-1000
- Emory University Hospital: 404-712-7021
- Memorial Health Savannah: 912-350-8000
- AU Medical Center: 706-721-2273 (CARE)
- Children's Healthcare of Atlanta: 404-785-5437 (KIDS)
- Northside Hospital: 404-851-8000
- Piedmont Atlanta: 404-605-5000
- Wellstar Health System: 770-956-7827
Legal and Patient Advocacy Resources
- Atlanta Legal Aid: 404-377-0701
- Georgia Legal Services Program: 1-800-498-9469
- 211 Georgia: dial 211
- Eldercare Locator: 1-800-677-1116
Trauma and Burn Care
- Joseph M. Still Burn Center (AU Medical): 706-721-2273
- Grady Marcus Trauma Center: 404-616-1000
Beneficiaries facing catastrophic hospitalizations and their families should engage early with hospital social work, financial counseling, and patient navigation services. Many Georgia hospitals provide dedicated support to help families understand cost-sharing, identify financial assistance programs, and coordinate ongoing care needs. :::
Find personalized help navigating Medicare hospital benefits and catastrophic care access at brevy.com.