BILL ANALYSIS                                                                                                                                                                                                    Ó




                   Senate Appropriations Committee Fiscal Summary
                           Senator Christine Kehoe, Chair

                                          SB 289 (Hernandez)
          
          Hearing Date: 01/19/2012        Amended: 01/04/2012
          Consultant: Brendan McCarthy    Policy Vote: Health 9-0
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          ____
          BILL SUMMARY: SB 289 requires the Department of Health Care 
          Services (DHCS), when developing the new diagnosis-related 
          groups (DRG) hospital inpatient reimbursement model, to take 
          into consideration whether outlier payments, policy adjusters, 
          or other special provisions are required to adequately reimburse 
          specified nationally-designated free-standing cancer centers.
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          ____
                            Fiscal Impact (in thousands)

           Major Provisions         2012-13      2013-14       2014-15     Fund
           
          Reporting costs        Minor and absorbable             General 
          /
                                                                  Federal
          _________________________________________________________________
          ____

          STAFF COMMENTS: SUSPENSE FILE. AS AMENDED ON 01/04/2012.
          
          This bill would require DHCS to consider whether outlier 
          payments, policy adjusters, or other special provisions are 
          required to adequately reimburse National Cancer Institute (NCI) 
          designated comprehensive cancer centers that are exempt from the 
          Medicare prospective payment system as the department develops 
          the new DRG reimbursement system for inpatient hospital stays 
          for fee-for-service Medi-Cal beneficiaries. In California, there 
          are only two of these exempt cancer centers: City of Hope 
          (sponsor of this bill) and University of Southern 
          California-Norris Comprehensive Cancer Center (USC-Norris).

          Any administrative costs to DHCS to consider these factors as 
          they develop the DRG system would be minor and absorbable. 
          Additionally, any ongoing administrative costs to potentially 
          reimburse these NCI-designated/Medicare PPS-exempt cancer 
          centers with a different methodology than other general acute 
          care hospitals would be minor and absorbable. 








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          While administrative costs would be absorbable, the actual rate 
          methodology that would be developed could result in higher 
          reimbursement rates for these cancer centers than would 
          otherwise be developed under existing law. This bill implies 
          that NCI-designated/Medicare PPS-exempt cancer centers would not 
          be "adequately reimbursed" by the DRG system and that DHCS 
          should consider whether or not to devise a more appropriate 
          payment methodology and higher reimbursement. 

          Costs to reimburse at a higher level than planned would result 
          in potentially millions of dollars in additional reimbursements 
          to these hospitals annually once the new system is in place-on 
          the date that the replacement Medicaid Management Information 
          System becomes fully operational, but no later than June 30, 
          2014. Costs would be shared 50 percent General Fund and 50 
          percent federal funds. 

          The DRG system works as follows: inpatient admissions are 
          divided into categories called diagnosis-related groups (DRGs), 
          which classify human diseases according to the affected organ 
          system, the procedure performed on the patient, morbidity, and 
          sex of the patient. Then, the DRGs "bundle" services (labor and 
          non-labor resources) that are needed to treat a patient with a 
          particular disease. Medicare hospitals are paid a flat rate per 
          case, based on the average cost to deliver care to a patient 
          with a particular disease. Thus, efficient hospitals are 
          rewarded for their efficiency, and inefficient hospitals have an 
          incentive to become more efficient.

          Currently, hospitals are reimbursed for fee-for-service Medi-Cal 
          claims through the Selective Provider Contracting Program run by 
          the California Medical Assistance Commission (CMAC) on a per 
          inpatient bed day basis. 182 hospitals, including City of Hope 
          and USC-Norris, contract with CMAC and provided 86 percent of 
          the total Medi-Cal inpatient acute care days in FY 2008-09. The 
          average CMAC per diem rate paid to contract hospitals was $1,369 
          on December 1, 2008, and $1,414 on December 1, 2009. Hospitals 
          without CMAC contracts are reimbursed with an interim rate, 
          which is later reconciled with actual cost reports. 

          SB 853-DRG Requirement
          SB 853 (Committee on Budget and Fiscal Review), Chapter 717, 
          Statutes of 2010, the health budget trailer bill of 2010, 








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          requires DHCS to develop and implement a Medi-Cal methodology 
          based on DRGs for hospital inpatient fee-for-service claims. It 
          exempted public hospitals, psychiatric hospitals, and 
          rehabilitation hospitals, and claims for psychiatric inpatient 
          days, rehabilitation inpatient days, Medi-Cal managed care 
          inpatient days, and swing bed stays for long-term care services. 


          SB 853 also required DHCS to evaluate alternative DRG 
          methodologies and to consider various factors in its evaluation. 
          This bill would add that DHCS would be required to consider 
          whether outlier payments, policy adjusters, or other special 
          provisions are required to adequately reimburse NCI-designated 
          comprehensive cancer centers that are exempt from the Medicare 
          prospective payment system. SB 853 permits DHCS to exclude or 
          include claims and services other than those specified as 
          necessary.

          The Governor's FY 2011-12 proposed budget requests 11 two-year 
          limited positions in DHCS for a total cost of $1.2 million 
          ($480,000 General Fund) to support the development of a DRG 
          system.

          Medicare DRG Background
          In 1982, in order to control rising Medicare costs for inpatient 
          hospitalizations, Congress mandated the creation of a DRG-based 
          prospective payment system (PPS). It exempted the following 5 
          types of specialty hospitals and two types of distinct-part 
          units within hospitals from the PPS methodology: rehabilitation, 
          psychiatric, long-term, and children's hospitals and cancer 
          centers and rehabilitation and psychiatric distinct-parts. 
          According to a 1992 report to Congress from the Prospective 
          Payment Assessment Commission (PPAC), the DRG system was an 
          inappropriate payment methodology for patients treated in 
          specialty facilities because their diagnoses are poor indicators 
          of resource use. Many of these patients are often chronically 
          ill, have a number of co-morbidities upon admission, and require 
          different types and amounts of treatments than patients treated 
          in an unspecialized general acute care hospital. In addition to 
          their diagnosis, resource use for these patients also depends on 
          the progression of the condition, functional status, and 
          expected outcomes.

          








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          The author's amendments adopted on January 4, 2012, limit the 
          scope of the bill to requiring the Department to include 
          information on claims and services excluded from the DRG 
          reimbursement model in currently required reports to the 
          Legislature. Providing this information within the existing 
          reports will impose no additional costs on the Department.