Arizona Health Care Cost Containment System DRG-Based Inpatient Hospital Payment System DRG Workgroup September 6, 2012

1. Arizona Health Care Cost Containment SystemDRG-Based Inpatient Hospital Payment SystemDRG WorkgroupSeptember 6, 2012 - DRAFT

2. Meeting Agenda • Workgroup Introductions / Purpose • Project Overview • Typical DRG Pricing Formulas • Overview of DRG Groupers • Key Payment Design Considerations • Preliminary Fiscal Impact Model • Discussion / Questions

3. Workgroup Introductions / Purpose

4. Workgroup Introductions / Purpose AHCCCS: • Jean Ellen Schulik • Jennie Yin • Shelli Silver • Beth Lazare Provider Representatives: • Jeff Zyla, St. Joseph's Hospital • John Neuner, Banner • Doug Kell, Carondelet • Craig McKnight, PCH • Scott Steiner, University Medical • Pete Finelli, CHS • Greg Kuzma, Northern AZ • Bret Hicks, TMC • Jim Dickson, Copper Queen • Carol Bailey, Abrazo • Neal Jensen, Cobre Valley • Jim Haynes, AZHHA • Vickie Clark – La Paz Hospital • David Godeman – Lasis Navigant Consulting: • Jim Pettersson • Ben Mori

5. Workgroup Introductions / Purpose • Workgroup Purpose • Workgroup is to Provide AHCCCS with technical assistance and input on designing a new inpatient hospital payment methodology for Medicaid system as a whole • Workgroup can communicate questions/concerns from the provider community and inform community of project status • Please note: • Ultimately AHCCCS, as the single state Medicaid agency, has responsibility for all rate methodology decisions within the context of legislative mandates • Decisions related to overall system funding levels are outside of the scope of this Workgroup

6. Project Overview

7. Project Overview • Arizona Revised Statutes Section 1. 36-2903.01.G.12: • “The administration shall obtain legislative approval before adopting a hospital reimbursement methodology consistent with title XIX of the social security act for inpatient dates of service on and after October 1, 2013.” • AHCCCS will present a summary report recommending a new hospital reimbursement methodology to the Arizona Legislature early in 2013

8. Project Overview Stakeholder Input is Key to Successful Design Process Overview of Design Framework Page 8

9. Project Overview

10. Project Overview

11. Project Overview

12. Typical DRG Pricing Formulas

13. Typical DRG Pricing Formulas Claim Payment DRG Base Payment Outlier Payment (If claim qualifies) = + DRG Base Payment DRG Base Rate DRG Relative Weight Optional Policy Adjustment Factors x = x Note: DRG base payment is sometimes reduced on transfer and partial eligibility claims.

14. Typical DRG Pricing Formulas Claim Payment DRG Base Payment Outlier Payment (If claim qualifies) = + ) ( Outlier Payment (if claim qualifies) Estimated Hospital Loss Outlier Threshold Marginal Cost Factor - x = Note: Outlier payments are only applied if hospital loss (or potentially hospital gain) is greater than the outlier threshold. Page 14

15. Typical DRG Pricing Formulas Example Calculation Note: Amounts and methodology shown in example are for illustrative purposes only

16. Overview of DRG Groupers

17. Overview of DRG Groupers APR-DRGs MS-DRGs CMS-DRGs AP or Tricare DRGs Per Stay/Per Diem/Cost Reimbursement/Other * Indicates Moving Toward ** Indicates Under Consideration ** * * * * ** * * * * **

18. Overview of DRG Groupers Source: Quinn, K, Courts, C. Sound Practices in Medicaid Payment for Hospital Care. CHCS: November 2010, updated with current information by Navigant.

19. Overview of DRG Groupers Source: Quinn, K, Courts, C. Sound Practices in Medicaid Payment for Hospital Care. CHCS: November 2010, updated with current information by Navigant.

20. Overview of DRG Groupers “The MS-DRGs were specifically designed for purposes of Medicare hospital inpatient services payment…We do not have comprehensive data from non-Medicare payers to use for this purpose. The Medicare program only provides health insurance benefits for people over the age of 65 or who are disabled or suffering from end-stage renal disease. Therefore, newborns, maternity, and pediatric patients are not well represented in the MedPAR data that we used in the design of the MS–DRGs. We simply do not have enough data to establish stable and reliable DRGs and relative weights to address the needs of non-Medicare payers for pediatric, newborn, and maternity patients. For this reason, we encourage those who want to use MS-DRGs for patient populations other than Medicare [to] make the relevant refinements to our system so it better serves the needs of those patients.” MS-DRGs designed for classification of Medicare patients … Source: CMS, “Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2008 Rates; Final Rule,” Federal Register 72:162 (Aug. 22, 2007): 47158

21. Overview of DRG Groupers Benefits of Migrating to APR-DRGs Enhances Homogeneity of Classifications – Superior Measurement of Resources Enhances Recognition of Resources Necessary for High Severity Patients Enhances Recognition of Acuity Related to Specialty Hospitals, Including Children’s and Teaching Hospitals Incorporates Age into Classification Process – Critical for Neonatal Cases Facilitates Measurement of Potentially Preventable Readmissions and Complications Reduces Occurrences of Outlier Cases

22. Key Payment Design Considerations

23. Key Payment Design Considerations

24. Key Payment Design Considerations Example Relative Weight Comparison Illinois-Specific Relative Weights

25. Key Payment Design Considerations

26. Key Payment Design Considerations

27. Key Payment Design Considerations

28. Key Payment Design Considerations

29. Preliminary Fiscal Impact Model

30. Preliminary Fiscal Impact Model • Preliminary “Baseline” Model • Note that at this time, no final decisions have been made or proposed by AHCCCS • These preliminary analyses have been prepared by Navigant for discussion purposes only, and do not necessarily reflect recommendations by AHCCCS or Navigant

31. Preliminary Fiscal Impact Model • Model Assumptions (see handout for additional detail) • Model based on FFY 2010 Arizona Medicaid FFS claims data and MCO encounter data collected from AHCCCS (dates of service from 10/1/2009 through 9/30/2010) • Includes in-state general acute providers, CAHs and select out-of-state providers • Excludes Medicare dual-eligibiles, 638/IHS providers, and cases with psychiatric, rehabilitation, substance abuse and “ungroupable” APR-DRG classifications

32. Preliminary Fiscal Impact Model • Model Assumptions (continued) • Model funding pool for new DRG system based on combined reported FFS claim and MCO encounter data reported payments, with adjustments for rate reductions • 0.9025 factor applied to reported payments to reflect 5% rate reductions that occurred on 10/1/2010 and 10/1/2011 • Does not include static payments at this time • Model designed such that simulated aggregate payments under new system are equal to total funding pool

33. Preliminary Fiscal Impact Model • Model Assumptions (continued) • Model based on APR-DRG version 29.0 classifications and 3M national weights (adjusted for Arizona case mix) • Model represents “baseline” version, without potential adjustments for service lines, population types or provider types • Per-discharge payments simulated under new system with following assumptions: • DRG base-rate based on statewide standardized amount, adjusted for Medicare wage index • Medicare-style outlier policy, with fixed-loss threshold set to achieve 6% outlier payments • Medicare-style standard transfer policy

34. Preliminary Fiscal Impact Model • Preliminary Model Results • See handout • Actual new payment system results may be significantly different from these preliminary projections due to payment methodology changes and future changes in patient volume and case mix • Model does not yet include estimated costs for benchmarking purposes – this is next step in modeling process

35. Questions and Discussion

36. Questions and Discussion Questions and comments may be addressed to Jean Ellen Schulik at JeanEllen.Schulik@azahcccs.gov (602) 417-4335 DRG Project Website: http://www.azahcccs.gov/commercial/ ProviderBilling/DRGBasedPayments.aspx