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 _________________________________________________________________ ____ 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. _________________________________________________________________ ____ 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. SB 289 (Hernandez) Page 1 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, SB 289 (Hernandez) Page 2 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. SB 289 (Hernandez) Page 3 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.