BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                      



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          |SENATE RULES COMMITTEE            |                   SB 289|
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                                 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:
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          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 

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                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 

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          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 

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          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. 

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          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 

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          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)


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          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 

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                         SUPPORT/OPPOSITION:  SEE ABOVE

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