BILL ANALYSIS Ó ------------------------------------------------------------ |SENATE RULES COMMITTEE | SB 289| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ------------------------------------------------------------ THIRD READING Bill No: SB 289 Author: Hernandez (D) Amended: 1/4/12 Vote: 21 SENATE HEALTH COMMITTEE : 9-0, 4/6/11 AYES: Hernandez, Strickland, Alquist, Anderson, Blakeslee, De León, DeSaulnier, Rubio, Wolk SENATE APPROPRIATIONS COMMITTEE : 6-2, 1/19/12 AYES: Kehoe, Alquist, Lieu, Pavley, Price, Steinberg NOES: Walters, Emmerson NO VOTE RECORDED: Runner SUBJECT : Medi-Cal: inpatient hospital reimbursement methodology SOURCE : City of Hope DIGEST : This bill requires the Department of Health Care Services, when developing the new diagnosis-related groups 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. ANALYSIS : Existing law: CONTINUED SB 289 Page 2 1. Requires the Department of Health Care Services (DHCS) to develop and implement a Medi-Cal payment methodology based on diagnostic-related groups (DRGs), subject to federal approval, that reflects the costs and staffing levels associated with quality of care for patients in all general acute care hospitals in state and out of state. 2. Excludes from the DRG payment methodology public hospitals, psychiatric hospitals, and rehabilitation hospitals, which include alcohol and drug rehabilitation hospitals. 3. Requires the DRG-based payments to apply to all claims, except claims for psychiatric inpatient days, rehabilitation inpatient days, managed care inpatient days, and swing bed stays for long-term care services. 4. Excludes psychiatric and rehabilitation inpatient days, regardless of whether the stay was in a distinct-part unit of a hospital. Existing law additionally permits DHCS to exclude or include other claims and services, as determined during the development of the payment methodology. 5. Requires DHCS to evaluate alternative DRG algorithms for the new Medi-Cal reimbursement system, and requires the evaluation to include, but not be limited to, consideration of all of the following factors: A. The basis for determining DRG base price, and whether different base prices should be used taking into account factors such as geographic location, hospital size, teaching status, the local hospital wage area index, and any other variables that may be relevant; B. Classification of patients based on appropriate acuity classification systems; C. Hospital case mix factors; D. Geographic or regional differences in the cost of CONTINUED SB 289 Page 3 operating facilities and providing care; E. Payment models based on DRGs used in other states; F. Frequency of grouper updates for the DRGs; G. The extent to which the particular grouping algorithm for the DRG accommodates ICD-10 diagnosis and procedure codes, and applicable requirements of the federal Health Insurance Portability and Accountability Act of 1996; H. The basis for calculating relative weights for the various diagnosis-related groups; I. Whether policy adjusters should be used, for which care categories they should be used, and the frequency of updates to the policy adjusters; J. The extent to which the payment system is budget neutral and can be expected to result in state budget savings in future years; and K. Other factors that may be relevant to determining payments, including, but not limited to, add-on payments, outlier payments, capital payments, payments for medical education, payments in the case of early transfers of patients, and payments based on performance and quality of care. This bill requires 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 the 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 CONTINUED SB 289 Page 4 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. 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 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 the City of Hope and USC-Norris, contract with CMAC and provided 86 percent of the total Medi-Cal CONTINUED SB 289 Page 5 inpatient acute care days in fiscal year (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 (Senate Budget and Fiscal Review Committee), Chapter 717, Statutes of 2010, the health budget trailer bill of 2010, 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 adds 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 five 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. CONTINUED SB 289 Page 6 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. Background Medi-Cal hospital reimbursement methodology changing . The health budget trailer bill of 2010, SB 853 (Senate Budget and Fiscal Review Committee), Chapter 717, Statutes of 2010, requires DHCS, subject to federal approval, to develop and implement a Medi-Cal methodology based on DRGs. CMAC is the current state agency established for negotiating contracts with hospitals on behalf of the state for inpatient services under the Medi-Cal program through what is known as the Selective Provider Contracting Program (SPCP). Through CMAC, the state selectively contracts on a competitive basis with hospitals for inpatient services provided to Medi-Cal beneficiaries in the fee-for-service Medi-Cal program. Hospitals contracting with CMAC are generally paid a per diem rate (a daily rate) for each day a Medi-Cal beneficiary is in the hospital that is negotiated between CMAC and the hospital. Unlike the DRG reimbursement system, the per diem reimbursement rate does not typically vary by the type of diagnosis of each patient. Hospitals that do not contract with the state in the fee-for-service Medi-Cal program are known as non-contract hospitals. When non-contract hospitals bill Medi-Cal for services, they are initially paid an interim rate. Hospitals are then required to submit a cost report before the close of their fiscal period, and DHCS reviews each hospital's cost report and prepares a tentative settlement, which is a determination of the Medi-Cal allowable CONTINUED SB 289 Page 7 reimbursable reported costs for a hospital's fiscal period. DHCS compares what a hospital was paid in interim payments for the hospital's fiscal period, to the hospital's allowable reimbursable reported costs for that fiscal period. The difference may result in either an underpayment that is paid to the hospital or an overpayment that is recouped from the hospital. County and University of California hospitals are paid differently by Medi-Cal than other hospitals in that they are reimbursed based on their costs, and use their own funds (instead of state General Fund) to provide the state match to draw down federal funds. In FY 2008-09, the fee-for-service Medi-Cal program paid for approximately 2.6 million days of inpatient hospital acute care at contract and non-contract hospitals. Contract hospitals provided approximately 2.3 million patient days of care in FY 2008-09, representing 86 percent of the total inpatient acute care days provided to Medi-Cal beneficiaries. Non-contract hospitals provided the remaining 14 percent of total inpatient acute care days. The average per-day reimbursement received by the 183 general acute care hospitals (excluding county and UC hospitals) with CMAC per diem contracts on December 1, 2009 was $1,414, up from $1,369 on December 1, 2008. FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes Local: No According to the Senate Appropriations Committee: Fiscal Impact (in thousands) Major Provisions 2012-13 2013-14 2014-15 Fund Reporting costs Minor and absorbableGeneral/ Federal SUPPORT : (Verified 1/19/12) CONTINUED SB 289 Page 8 City of Hope (source) University of Southern California-Norris Comprehensive Cancer Center ARGUMENTS IN SUPPORT : This bill is sponsored by the City of Hope, which argues this bill is needed to protect free-standing cancer centers in the Medi-Cal program from the potentially detrimental impact of the new Medi-Cal DRG payment methodology. The City argues DRG-based systems are best suited for general acute care hospitals that have a wide variety of patients with a range of conditions and acuity levels because one of the intended features of the DRG system is the ability to offset the losses from one DRG with the net revenues from another. The City states that Medicare exempts NCI-designated comprehensive cancer centers from the DRG system as these centers focus almost exclusively on research, diagnosis and treatment of cancer, and treat the toughest cases, as a significant percentage of patients at these centers were referred by other institutions where they may have failed treatment. The City argues hospital stays for cancer patients requiring bone marrow transplantation or stem cell transplantation can often exceed 30 days, and the assumptions in typical DRG-based reimbursement systems do not necessarily apply to cancer centers where every patient requires an intensive level of care. The City believes a DRG system could have a significant impact on free-standing cancer centers that provide top-level, highly intense care, but do not have patients with other medical conditions that allow for cross-subsidization. The DRG system, then, could pose a significant financial threat to PPS-exempt cancer centers in the Medi-Cal program. This bill requires DHCS to consider whether the unique aspects of PPS-exempt comprehensive cancer centers such as City of Hope warrants special adjustments or other special provisions in order to ensure adequate reimbursement under a DRG system. USC-Norris writes in support that this bill is a narrow measure that requires DHCS to consider the unique and high costs of delivering care to cancer patients at comprehensive cancer centers. CTW:mw 1/19/12 Senate Floor Analyses CONTINUED SB 289 Page 9 SUPPORT/OPPOSITION: SEE ABOVE **** END **** CONTINUED