Pepper: An Effort to Reduce the National Payment Error

Vol. 16 •Issue 12 • Page 24
Pepper: An Effort to Reduce the National Payment Error

Specific target areas at high risk for payment errors are the focus of this Centers for Medicare and Medicaid Services program.

Related Table 1

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Related Table 3

PEPPER, the Program for Evaluating Payment Patterns Electronic Report, is an electronic data report containing hospital-specific data for a number of problem areas (specific DRGs and discharges) that have been identified by the Centers for Medicare and Medicaid Services (CMS) at a high risk for payment errors. The intent of PEPPER is to assist hospitals in their payment error reduction initiatives by providing hospital-specific and aggregate statewide claims data statistics for these CMS target areas. The PEPPER data allow hospitals to compare their performance to that of other short-term, acute-care prospective payment system (PPS) hospitals.

PEPPER cannot be used to identify the presence of payment errors but it can support hospital compliance initiatives and guide auditing and monitoring efforts to help hospitals identify and prevent payment errors. In addition, PEPPER can present the pattern of Medicare payments made to your hospital compared to the rest of the hospitals in your state.

Launching PEPPER

CMS launched the Payment Error Preven-tion Program (PEPP) in 1999 as part of the 6th Scope of Work (SOW) contract with the quality improvement organizations (QIOs). QIOs were responsible for implementing PEPP and proposed their own individual state-specific projects focusing on medical necessity of admissions and DRG/coding issues.

In the 7th scope of work, which began in 2002, the CMS Hospital Payment Monitoring Program (HPMP) replaced PEPP. While there were improvements to the program, the overall goal remains the same: to measure, monitor and reduce the incidence of Medicare fee-for-service payment errors for short-term, acute-care, inpatient PPS hospitals. To achieve this goal, QIOs work with hospitals by analyzing data, conducting audits, helping hospitals identify errors, sharing interventions and tools, and working with hospitals to implement system changes to prevent payment errors.

The TMF Health Quality Institute (formerly known as the Texas Medical Foundation) serves as the QIO support center (QIOSC) to support CMS and QIOs with the implementation of HPMP. As the QIOSC, they were asked to develop a tool that QIOs could utilize to identify hospitals that might benefit from QIO support and assistance. TMF developed the First-look Analysis for Hospital Outlier Monitoring (FATHOM), which is a cutting-edge data analytic tool that provides administrative hospital and state-specific data for specific CMS target areas to QIOs.

Development of PEPPER

PEPPER was developed by the QIOSC in response to the QIO community’s desire to be able to share the hospital-specific information in the FATHOM reports with the hospitals in their respective states. PEPPER provides hospitals with administrative claims data that can be used to prioritize areas in which to focus their efforts.

CMS Target Areas

PEPPER is a Microsoft Excel program that provides Medicare claims data statistics in a number of CMS-designated target areas. CMS selected the target areas based on historical knowledge, experience and analysis of payment errors related to medically unnecessary admissions, inappropriate readmissions and DRG coding errors. Results of the national analysis of payment errors identified these target areas as high risk in terms of dollars in error or proportion of payment errors. The current CMS target areas include:

  • One-day stays excluding transfers;
  • DRG 127 (heart failure and shock) 1-day stays;
  • DRG 143 (chest pain) 1-day stays;
  • DRG 182 and 183 (esophagitis, gastroenteritis and miscellaneous digestive disorders, age greater than 17 with or without CC) 1-day stays;
  • DRG 296 and 297 (nutritional and miscellaneous metabolic disorders, age greater than 17 with or without CC) 1-day stays;
  • DRG 014 (intracranial hemorrhage or cerebral infarction);
  • DRG 079 and 080 (respiratory infections and inflammations, age greater than 17 with or without CC);
  • DRG 243 (medial back problems) and 253 (fractures, sprains, strains and dislocations of upper arm and lower leg except foot, age greater than 17 with CC);
  • DRG 416 (septicemia);
  • Seven-day readmit to same facility elsewhere (reporting first admission);
  • DRG 089 (simple pneumonia and pleurisy, age greater than 17);
  • Complication and comorbidity (CC) pairs; and
  • Three-day skilled nursing facility (SNF) qualifying admissions.

    These target areas may change over time in response to changes in payment error trends. The HPMP QIOSC provides all QIOs with quarterly hospital-specific data for inpatient acute care PPS hospitals.

    Have You Used PEPPER?

    PEPPER data can be helpful for the hospital community in so many ways and can support QIOs in their HPMP efforts. Compliance officers can incorporate PEPPER information into their ongoing internal auditing and monitoring activities. PEPPER displays data tables and graphs comparing hospital data to statewide aggregate data for target areas. PEPPER allows the user to sort this data in a variety of ways, because the data is provided as an Excel spreadsheet. PEPPER reports are very useful for presentation to administration, physicians and for educational training activities. PEPPER can assist hospitals in the following ways:

  • Shows hospitals whether their facility is an outlier in any of the target areas and how their hospital ranks among all acute care hospitals within their state.
  • Helps hospital prioritize hospital-specific-findings based on the areas in which the hospital may want to focus on their on-going auditing tasks and monitoring efforts.
  • Identifies whether the hospital’s billing proportions have changed significantly in either direction from 1 year to the next. These changes may be due to changes in medical staff, services provided at the hospital, case management processes or coding staff.
  • Helps identify areas of potential DRG overcoding and undercoding as well as issues in regard to the medical necessity of admission.
  • Identifies target areas where length of stay is increasing and provides graphs of the data over fiscal years to allow trending and identify outliers.

    A Look at PEPPER

    PEPPER provides comparative data for each target area, including data, tables and graphs comparing hospital data to statewide aggregate data for the 10th percentile median, 75th and 90th percentiles to the target areas percents.

    PEPPER provides hospitals with their percentile value for each target area, as well as suggestions if the hospital is an outlier in any target area.

    Example #1: DRG 079

    If at or above the 75th percentile:

  • Could indicate coding or billing errors related to potential overcoding.
  • A sample of records for DRG 079 should be reviewed to see if coding errors exist.
  • Hospital may generate data profiles to identify DRG 079 cases with principal diagnosis of aspiration pneumonia (507.x), pneumonia due to other gram-negative pneumonia (482.83) or pneumonia due to other specified bacteria (482.89).

    If at or below 10th percentile:

  • Could indicate coding or billing errors related to undercoding.
  • A sample of records for other DRGs such as DRG 089 and 090 should be reviewed to see if coding errors exist.

    Remember: The physician must determine a diagnosis of pneumonia. The coder should not assign codes based on the laboratory or radiological findings without seeking clarification from the physician.

    Example #2: One-Day Stay

    If at or above the 75th percentile:

  • Could indicate unnecessary admissions related to inappropriate use of admission screening criteria or outpatient observation.
  • Review a sample of records to determine if inpatient admission was necessary or if care could have been provided on an outpatient basis.
  • Was the admission for procedure designated by CMS as “inpatient only”?

    If at or below 10th percentile:

  • A low proportion of 1-day stays do not indicate a problem; therefore, additional review is not necessary.

    PEPPER Data Tables

    PEPPER provides data tables for each target area, summarized over fiscal year and the current fiscal year to date. Please note that QIOs may select different numbers of time periods to include in PEPPERs; QIOs may choose to provide data for fiscal years or for fiscal quarters. The measures include the total number of discharges in the target area (numerator), the denominator count of discharges, the proportion of these two figures, and average length of stay and Medicare payment data. In addition, aggregate statewide data are provided for comparative purposes. For an example of this data table, go to our Web site at

    PEPPER Compare Worksheet

    The Compare Worksheet helps hospitals prioritize auditing and monitoring efforts by using the product of two factors: the number of discharges for area times the hospital’s “outlier value” for that area. The greater this value, the more emphasis the hospital should give to the target area with regard to auditing and monitoring. Positive outlier value findings identify possible overcoding errors, while negative values generally identify possible undercoding errors. An example of the PEPPER Compare Worksheet can be found on our Web site at Note that the “Per-cent” column is color-coded; red indicates the hospital’s percent is at or above the 75th statewide percentile, while green indicates the hospital’s percent is at or below the 10th statewide percentile.

    PEPPER Graphs

    PEPPER graphs provide a visual representation of the proportion for each target area over time. The graphs can assist hospitals in identifying trends in discharges from one year to the next. This could be a result of changes in the medical staff, coding staff, utilization review process or hospital services. Graphs are particularly useful in presentations where a picture is “worth a thousand words.” An example of a PEPPER graph can also be found at

    The PEPPER User’s Guide can assist you with interpreting the data in PEPPER. To review the PEPPER Users Guide, go to

    PEPPER for Success

    How can PEPPER benefit hospitals?

    Auditing and Monitoring

  • Use PEPPER data to identify areas of potential overpayments and underpayments that may require auditing and monitoring.
  • Conduct regular audits to ensure that medical necessity of admission, medical record documentation and the claims submitted for Medicare services are correct.
  • Continue to monitor and audit the risk area trends to ensure improvement and continued compliance.
  • Continuous monitoring and auditing allow you to target problem areas and to know where to dedicate your resources.
  • Utilize quality improvement processes (root cause analysis) to investigate the source cause(s) of payment errors.
  • Implement system changes that will prevent the occurrence of payment errors.

    Hospital System Comparison

  • Corporate compliance officers and/or hospitals within health care systems should compare data among sister hospitals to identify trends, patterns and differences. It may be possible to identify best practices that can be shared system-wide.
  • Analyze your own facility data and identify areas of potential risks that may require closer attention.
  • Compare your hospital performance to other hospitals within your state and look for variations over time. Again, use quality improvement methodologies to find the root causes of variation and implement system changes.

    Reach Out to Physicians

  • Help physicians understand how they can help prevent future errors, unnecessary admissions and miscoded diagnoses leading to incorrect DRG assignments. Work with them so they can improve documentation and determine when inpatient admission is necessary vs. outpatient observation.
  • A physician liaison may be very helpful in working with physicians.
  • Encourage coders to query physicians when needed.
  • Make sure the physician documents the diagnosis (the reason the patient was admitted) in the body of the medical record, as well as other conditions that were treated or that impacted the patient’s treatment.
  • Abnormal findings documented in the radiological reports must be clarified with the physician, if it is appropriate to add the diagnosis.

    Utilization Management

  • Select cases for review to determine whether the admission was medically necessary, and that a procedure or treatment was performed in the appropriate setting.
  • Identify areas that may be questionable in terms of medical necessity of admission.
  • Identify target areas where length of stay is increasing.

    Compliance Officers

  • Use specific-hospital data for target areas identified by CMS to determine if the hospital falls out as a negative or positive outlier.
  • Identify areas of potential overpayments and underpayments.
  • Use PEPPER to assist in guiding and prioritizing auditing and monitoring activities to reduce compliance risk.
  • Use PEPPER data, tables and graphs for hospital comparisons within your state.
  • Compare administrative data from previous years to identify changes/trends in billing practices.
  • Analyze your hospital’s data to identify DRGs that are high in volume or in total reimbursement to the hospital, and consider adding these to the list of areas to audit/monitor.

    HIM Professionals

    Review the medical record to:

  • Ensure that the diagnosis billed as principal meets the necessary requirements.
  • Determine if documentation was overlooked that could have resulted in a more accurate principal diagnosis.
  • Determine if all the secondary diagnoses, complications/comorbidities and procedures billed are supported and coded correctly.
  • Educate all coding staff and physicians on correct documentation and coding policies and procedures from a clinical and coding perspective, not just from the reimbursement point of view.

    Get Involved

    A payment error results when the medical record documentation does not support the medical necessity of the services received, when services should have taken place in a setting other than an acute level of care or when the assignment of ICD-9-CM codes is not supported by medical record documentation resulting in incorrect DRG assignment.

    While efforts to reduce payment errors have been a QIO priority for the past several years, improvements can only be attained with hospital involvement and assistance. It is critical that hospitals continue their commitment and efforts to work with the QIOs to reduce payment errors.

    PEPPER does not identify billing and payment errors; however it can flag areas that may have problems that require auditing and monitoring efforts. Use PEPPER to support your hospital compliance program, including current and future auditing and improvement activities.

    The QIO in your state is available to offer their expertise, experience and resources to support your use of PEPPER with the goal of reducing payment errors. Contact your QIO (see the QIO finder at for further assistance in using PEPPER; or to learn more about PEPPER you may also go to

  • For more information on PEPPER, visit our Web site at to access a list of Web sites and articles.

    Renato Estrella has been with IPRO Inc. (New York Quality Improvement Organization) for 7 years, where he is the director of HIM and serves as adjunct professor in allied health sciences at Molloy College in Rockville Center, NY.

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