HSCRC Rate System

1. HSCRC Rate System Arin Foreman Senior Associate - KPMG LLP arinforeman@kpmg.com Jennifer Hulvey Director of Reimbursement - Frederick Memorial Hospital jhulvey@fmh.org January 31, 2014

2. Discussion Topics • Overview – Revenue Methodologies • Rate Order • Annual Rate Order Adjustments • Unit Rate Compliance • Total Revenue Compliance • Reasonableness of Charges • Required Reporting • Terminology and Acronyms

3. Overview • HSCRC has developed methodologies to constrain healthcare costs in Maryland. • Hospitals currently elect one of the following: • Total Patient Revenue (TPR) System, • Charge per Case (CPC) System, or • Charge per Episode / Admission-Readmission Revenue (CPE / ARR)

4. Total Patient Revenue (TPR) • Inpatient and outpatient revenue is constrained by the TPR System • Implemented July 1, 2010 (Garrett County Memorial Hospital and Edward W. McCready Memorial Hospital transitioned to TPR prior to 07/01/10) • Approved revenue amount in a given year is a fixed cap • No adjustment for changes in volume • No adjustment for changes in Case Mix Index (CMI) • Available to sole community provider hospitals and hospitals operating in regions of the State that don’t share service areas with other hospitals

5. Charge per Case (CPC) • Inpatient Revenue is constrained by the Charge per Case system (CPC) • Fixed amount of revenue per inpatient case • Implemented July 1, 2005 • Each hospital's allowed CPC is based on their Case Mix Index (CMI) • CMI measures the complexity of a hospital's cases

6. Charge per Episode (CPE) • Admission-Readmission Revenue arrangement (ARR): • Fixed amount of revenue per inpatient episode • Under ARR, hospitals assume the risks and rewards of managing hospital readmissions. • No revenue increase for additional readmissions (penalty) • No revenue decrease for reduced readmissions (reward) • Implemented July 1, 2011 • Voluntary 3-year revenue constraint program replacing CPC • Excludes intra-hospital readmissions within 30 days • All cause readmissions • Each hospital's allowed CPE is based on Case Mix Index (CMI)

7. Which rate methodology is your hospital under? TPR CPE / ARR CPC

9. Rate Order • Revenue Center: Hospitals have different revenue centers depending on the services they provide • Service Unit: The service unit is the same for all hospitals (i.e. every hospital charges for Operating Room services by the minute) • Unit Rates: Unit rates (prices) vary by hospital • These rates must be charged to all payers - no contract negotiations

10. RVUs • RVUs relate to the complexity (time and cost) of tests and procedures • The service units for RVU's (relative value units) are defined by the HSCRC in Appendix D • For example, a chest x-ray, single view, has the same RVU at all MD hospitals

11. The patient charge becomes a calculation… 2 RVU's x $26.4154 = $52.83

12. Updates to Rate Orders • Hospitals receive an updated rate order once per year - effective July 1st • Unit rates are updated for:

13. History of Update Factors • The following chart displays the previous five years’ update/inflation factors that have been applied to hospitals’ rates:

14. Rate Realignment • Charges are related to the underlying cost of providing the service • This does not change a hospital's total revenue; it just reallocates it among revenue centers • Costs for FY 2012 were used to realign FY 2014 rates

15. Rate Realignment

16. Rate Realignment Using the M schedule from the most recent Annual Filing, the Revenue calculated in the previous step is realigned based on the Volume adjusted cost in each center. For example, if MSG has 15% of the costs, then 15% of the revenue will be allocated to that center.

17. UCC • Uncompensated Care includes charity care and bad debt • The UCC policy allows hospitals to charge additional amounts in their rates to all payors to cover the shortfall produced by providing uncompensated care • Blend of: • Three-year average • Predicted UCC

18. UCC • Three-year average is based on the Hospital’s 3 most recent year’s Annual Filings • Predicted UCC uses a linear regression model • Independent variable (x): Actual Uncompensated Care • Dependent variables (y): • Inpatient Medicaid, Self Pay, and Charity Charges as a % of Total Charges • Inpatient Charges from non-Medicare Admissions through the ER as a % of Total Charges • Outpatient Medicaid, Self Pay, and Charity Charges from the ER as a % of Total Charges • Outpatient Charges from non-Medicare ER Visits as a % of Total Charges

19. UCC • UCC Pool – since Statewide UCC % is built into all hospitals’ rates, the UCC Pool acts as a settlement methodology to account for hospitals that experience more or less UCC than the State

20. Volume Adjustment • Rates are adjusted for volume increases and decreases • FY 2014 rates adjusted for volume changes occurring in FY 2013 • Variable Cost Factor = 85% / Fixed = 15% • Volume increases - 15% of volume increase taken out of rates • Volume decreases - 15% is put into rates • Changes Effective Jan 1, 2014 • Adjustment will be made on a concurrent basis (during the year in which the volume change occurs) • Variable Cost Factor = 50% / Fixed = 50%

21. Volume Adjustment

22. Assessments • Two assessments pass through hospitals in order to support “medically uninsurable” patients and Medicaid expansion • MHIP (Maryland Health Insurance Plan) • Health Care Coverage Fund • Medicaid Budget Deficit Assessment • State total spread to hospitals based on % of total revenue • Payer portion put into rates (all-payers) 86% • Hospital portion paid by hospital throughout year 14% • NSP I (Nursing Support Program) – grant funding • Applied directly to admissions center

23. Application of Assessments This revenue produces the Rate Order Rates to be used in Unit Rate Compliance NSP I is applied directly to the Admissions Center Revenue after application of Current Year Price Variances and Penalties Applied based on % of Revenue in that center

24. Quality Based Reimbursement • Implemented – July 2008 • What’s Measured – • Source of Data – CMS QIO Clinical Warehouse • Measurement Period - Calendar Year • For example, results from CY 2013 will impact FY 2015 rates • % of Revenue at Risk: 0.5% (increasing to 1.0% in FY 2016 rates) • Other - Revenue Neutral - some hospitals "win" and some "lose“ • net result to the state is $0

26. Maryland Hospital Acquired Conditions (MHAC) • Implemented – July 2009 • What’s Measured - Potentially preventable complications (PPC's) • Diagnosis present on admission? If no, penalized • Source of Data - Quarterly discharge data submitted by hospitals • Measurement Period - Calendar year • For example, results from CY 2013 will impact FY 2015 rates • % of Revenue at Risk: 2.0% for attainment, 1.0% for improvement • Other - Revenue Neutral - some hospitals "win" and some "lose“ • net result to the state is $0

28. Population Adjustment • Relevant for TPR hospitals only • HSCRC calculates population growth for each hospital’s primary and secondary service area by age cohort • An adjustment is made to the TPR Cap in order to account for the increase or decrease in the population

29. Case Mix Index (CMI) • All Patient Refined Diagnostic Related Grouper • Each APR-DRG has a level of severity from 1 – 4 which is assigned based on in depth coding information such as age, weight, other pre-existing conditions, etc. • 3-Level Case Mix Calculation • Level I (CPC Included) – Hospital-specific change in CMI • Level II (Trim) and III (Exclusions) • Revenue pass-through for exclusions and trim revenue • Statewide CMI change based on Level III

30. Example: Calculation of Relative Weight and CMI State AverageState Average DRG 002 Severity 3 $10,000 DRG 390 Severity 2 $3,000 Total State Average $5,000 Total State Average $5,000 Relative Weight 2.0000 0.6000 Case Mix Index (CMI) • Calculation of Relative Weights • Establish Statewide Average Charge per Case (with remaining data set) • For each Cell (DRG by Severity)

31. Case Mix Index (CMI) Based on Mix of Services Provided (Case Mix Index)

32. Unit Rate Compliance Hospitals must be in compliance with approved unit rates on a monthly (except TPR) and YTD (7/1 - 6/30) basis

33. Unit Rate Compliance • Although rate orders are effective July 1, hospitals usually receive them in Oct/Nov • Still need to be in compliance by June 30th • Approved rate (per rate order) = $15.00 • Actual average charge for July-Dec = $10.00 • Average charge for Jan-June must = $20.00 to be in compliance by June 30

34. Supply and Drug Compliance

35. CPE/CPC Price Corridors Overcharges/undercharges that are within the allowed corridors go into next years rates (one time adjustment)

36. TPR Price Corridors • TPR unit rate compliance corridors are more relaxed • Hospitals are free to charge at levels up to 5% above / (below) the approved individual unit rates without penalty • This limit can be extended to 10% at the discretion of the Commission Staff

37. Penalties for Exceeding the Corridors • Penalties will be applied if rates exceed monthly corridors for consecutive periods (TPR excluded): • 6 consecutive months for Supplies (MSS) and Drugs (CDS) • 3 consecutive months for all other centers • Penalties are calculated at 20% of the sum (absolute value) of all charges in excess of the corridors • Penalties are subtracted from next years rates

38. Penalties for Exceeding the Corridors Cont. • Penalties will be applied if rates exceed year-end corridors • Penalties are calculated at 40% of the sum (absolute value) of all charges in excess of the corridors • Penalties are subtracted from next years rates

39. CPC and CPE Trim Exclusions • Trim • High charge cases • Exclusions • Zero and one day stay cases • Hospice Cases • Cases denied for medical necessity (when 100% of room and board charges denied) • Transplants (organ & bone) • Other Special Cases • Burn at Bayview • Chronic at Kernan • Shock Trauma • Special Oncology • Readmissions

40. Charge per Case (CPC) Compliance Can only adjust Inpatient Routine Centers to achieve CPC compliance

41. Charge per Episode (CPE) Compliance Can only adjust Inpatient Routine Centers to achieve CPE compliance

42. CPC/CPE Compliance Corridors • Overcharge Corridors: • 0% to 1.0% No Penalty • 1.0% to 1.5% 20% Penalty • 1.5% to 2.0% 30% Penalty • 2.0% and greater 40% Penalty • Undercharge Corridors: • 0% to 2.0% No Penalty • 2.0 to 3.0% 40% Penalty • 3.0% and greater 100% Penalty

43. Reasonableness of Charges • “ROC” is the acronym for the HSCRC’s Reasonableness of Charges • Currently, there is no efficiency measure in place (suspended) • HSCRC is developing a new efficiency measure • Several parts of the “ROC” will probably remain in the new efficiency measure including peer groups and charge adjustments to account for differences at each hospital.

44. Required Monthly Reporting

45. Required Quarterly Reporting

46. Required Annual Reporting

47. Terminology & Acronyms

48. Terminology & Acronyms

49. Terminology & Acronyms

50. Terminology & Acronyms