Proposed Changes to Medicaid Hospital Rates

1. Proposed Changes to Medicaid Hospital Rates

2. Presenters Claudia Sanders Sr. Vice President, Policy Development WSHA Will Callicoat Director, Financial Policy WSHA James Pettersson Navigant Consulting

3. Topics • History of issue • Process • Navigant proposal and impact • Hospital Issues • Legislative Outlook

4. History

5. Why revamp the system? • Hospitals unhappy about current system • Inadequate payments • Last updated in 2001 from 1998 costs • Concern about equity • State unhappy about the current system • 30 percent of its payments made on the basis of ratio of cost to charges • Legislative proviso to hire consultant

6. Children’s Empire Franciscan Good Samaritan Harborview Harrison Medical Center Multicare Providence – St. Peter Southwest Swedish University Valley Medical Yakima Regional Medical Yakima Valley Memorial Hospital Task Force Members

7. MAA Data: Hospital Total Costs (1998) for 2001 Conversion Factors

8. MAA Data: Hospital Operating and Capital Costs

9. Process • CEO and CFO Task Force Meetings • Round 1 • Fall 2004 and Winter 2005 • Fall 2005 following initial report • Round 2 • CFO meetings in summer and fall 2006 • CEO meeting in November 2006

10. Results of First WSHA Discussions – Winter 2005 • Agreement to stay together during 2005 session • Agreement to allocate increases differentially to hospitals below the line • Agreement to ask for restructuring of the system • Agreement on principles for a new Medicaid system

11. Principles for New System • Need to cover costs • Promote efficiency • Recognize differential costs beyond hospital’s control • Recognize cost of uncompensated care • Recognize needs of rural hospitals

12. Principles for a New Payment System (continued) • Cushion large changes in revenue • Simple to administer and frequent updates • Use federal dollars • Not overpay out-of-state hospitals

13. WSHA Recent Process • CFO task force for detailed work with Navigant Consultant • CFO/Specialist representation • Extensive input into process • Met 10 times with consultants • Many task force recommendations adopted • CEO task force for overall position

14. Navigant Proposal

15. Proposed Inpatient Prospective Payment System

16. Key Project Objectives • Update system to reflect more recent cost and claims data • Implement more current AP-DRG grouper version • Make rates more consistent for similar services • Reduce use of RCC-based payment method • Proposed system to be budget neutral • Implementation for claims effective July 1, 2007

17. Proposed Inpatient Prospective Payment System • Four Payment Methods for Different Types of Services • DRG-based payments • Per diem-based payments • Per case payments • RCC-based payments

18. Proposed Inpatient Prospective Payment System • Payment Depends on Type of Service • Specialty services • Psychiatric, rehabilitation, detoxification and CUP program services • All other services • Stable AP-DRG classifications • Unstable AP-DRG classifications • Transplant services • Bariatric surgery services

19. DRG-Based Payment Method • For payment of claims in stable AP-DRG classifications • Payment = Conversion Factor X Relative Weight • Outlier payments for qualifying claims

20. DRG-Based Payment Method (Cont’d) Example Payment Calculation: AP-DRG 165: Appendectomy W Complicated Principal Diag W/O CC Relative Weight = 1.3784 Conversion Factor = $5,672.89 Payment = 1.3784 X $5,672.89 = $7,819.51

21. DRG-Based Payment Method (Cont’d) • Conversion Factor • Statewide standardized average cost per discharge, adjusted for: • Regional wage differences • Facility-specific medical education costs • Relative Weights • Based on average costs of each AP-DRG • Stable weights based on statistical analysis

22. Per Diem-Based Payment Method • Claims In Unstable Classifications • Neonatal AP-DRGs • Burn AP-DRGs • Medical AP-DRGs • Surgical AP-DRGs • Specialty Cases • Psychiatric • Rehabilitation • Detoxification • CUP Program

23. Per Diem-Based Payment Method (Cont’d) Example Payment Calculation: AP-DRG 624: Neonate, BWT >2499G, with Minor Abdominal Procedure (Unstable Neonatal) Patient Length-of-Stay = 8 Days Unstable Neonatal Per Diem Rate = $2,127.66 Payment = $2,127.66 X 8 Days = $17,021.28

24. Per Diem-Based Payment Method (Cont’d) • Per Diem Rate Calculations • Statewide standardized average per diem cost, adjusted for: • Regional wage differences • Facility-specific medical education costs • Statewide averages rates for all per diem services, except for: • Burn cases – based on Harborview costs • Psychiatric services – facility-specific

25. Outlier Methodology • Outlier payment for claims with extraordinarily high costs compared to standard payment amount • Applies to qualifying DRG-based claims and per diem claims in unstable AP-DRG classifications • Outlier claims – estimated costs must exceed: • Outlier Threshold – 175% of calculated payment, and • $50,000

26. Outlier Methodology (Cont’d) • Outlier Payment: • (Costs – Threshold) X Marginal Cost Factor • Marginal Cost Factor: • 95% for neonatal and pediatric • 90% for burns • 85% for all other

27. Outlier Methodology (Cont’d) Example Outlier Calculation: Assumptions: Claim Charges = $150,000 Hospital Ratio of Costs-to-Charges = .42 Estimated claim costs = $63,000 ($150,000 X .42) Calculated DRG-Based Payment = $15,000 Outlier Threshold = $26,250 ($15,000 X 175%)

28. Outlier Methodology (Cont’d) Example Outlier Calculation (Cont’d): Estimated claim cost of $63,000 exceeds both the Outlier Threshold ($26,250) and $50,000. Outlier Payment = ($63,000 - $26,250) X .85 = $31,238 Total Payment = $15,000 + $31,238 = $46,238

29. Other Payment Methods • Bariatric Surgery – Per case rate based on average cost • Transplant Services – RCC-based payment • Transfer payments for DRG-based claims • Calculated average payment per day • Add one day of payment

30. Budget Neutrality • Payments under proposed system equal to current system, in aggregate • Adjusted calculated rates to achieve budget neutrality • Cost coverage same for each rate category • DRG-based, each per diem category, etc. • Payments in aggregate same as current system

31. Other Payment Policy Recommendations • Updating Rates in Future Periods • Update conversion factors and per diem rates annually using CMS Input Price Index • Review outliers annually • Rebase system every three years • Recalculate rates and weights using new cost and claims data • Implement new AP-DRG version

32. Other Payment Policy Recommendations (Cont’d) • Potential Transition Methodology • Transition for one-year period • Reduce projected increases and decreases • Apply only to hospitals with significant changes

33. Other Payment Policy Recommendations (Cont’d) • Payments to Out-of-State Hospitals • Identify hospitals critical to care for Washington residents • Ability to meet specific service needs • Historical utilization • Not based solely on geographic location • Treat “Critical” hospitals same as in-state • Pay all others at lowest in-state rates

34. Impact of Changes

35. Impact Model And Budget Neutrality • Developed impact model using SFY 2005 FFS Medicaid claims • Projected payments under proposed system • Compared projected payments to estimated costs • Compared projected payments to estimated payments under current system

36. Impact Model And Budget Neutrality (Cont’d) • Assumptions in Model • Increased SFY 2005 payments based on historical trends - approximately 6% per year • Increased SFY 2005 charges based on historical trends - approximately 8% per year • Increased SFY 2005 costs using CMS PPS Input Price Index - approximately 3% per year

37. Impact Of Changes Estimated State Fiscal Year 2008 Cost Coverage by Hospital: Weighted Average: 94.6%

38. Impact Of Changes (Cont’d) Estimated Payment Change Percentage:

39. Impact Of Changes (Cont’d) SFY 2008 Estimated Outlier Payments and Total Estimated Cost Coverage Estimated Outlier Payments Total Estimated Cost Coverage

40. WSHA Issues

41. Proposal vs. WSHA Principles • Meets many of the principles WSHA adopted • But, system is budget neutral • Redistribution of inadequate funds

42. Issues with Impact Assumptions • Navigant assumed the following increases: • Charges by 8% • Payments by 6.5% • Costs by about 3% • Cost coverage 92% to 95% • No volume or case mix changes • Hospitals need to look at the impact with their own data

43. Issues with Impact Assumptions • No assumption on change in Healthy Options payments • Hospitals and plans free to negotiate rates between the parties • Yet, 30 percent of Washington Medicaid hospital care is paid by Healthy Options plans • Hospitals may want to consider how this proposal will impact their rates from the plans

44. Hospital Issues with Navigant Proposal • Psychiatric services • Children’s services • Outlier cases • Limited transition

45. Legislative Outlook

46. WSHA’s Top Priority Budget Issue • Increase Medicaid hospital payments • $60 million in additional funds • To be used to remedy problems with Navigant proposal for inpatient payment • To be used to provide an inflation increase for inpatient and outpatient services

47. Chance for Success • We have a good chance to secure new funds but not if we each ask for our own solution • We need to support one common message to the legislature

48. We need your help! • Talk to legislators now about the general issue • Hospitals need a yearly increase to keep up with inflation – we have not had a significant increase since 2000 • While we support the general concepts of the new Medicaid inpatient payment proposal, some adjustments are needed

49. Next Steps • Navigant Consulting will help us examine some alternatives to the state’s proposal • Medicaid CFO task force meeting on December 11 and 20 • Medicaid CEO Task force meeting on January 5 • WSHA position by start of session, January 8

50. Questions?