BILL ANALYSIS �
Senate Appropriations Committee Fiscal Summary
Senator Kevin de Le�n, Chair
SB 645 (Nielsen) - Diagnosis-related group methodology.
Amended: As introduced. Policy Vote: Health 7-2
Urgency: Yes Mandate: No
Hearing Date: May 6, 2013 Consultant: Brendan McCarthy
This bill meets the criteria for referral to the Suspense File.
Bill Summary: SB 645, an urgency measure, would delay
implementation of the new diagnosis-related group methodology
for paying certain hospitals for inpatient care in the Medi-Cal
program, until certain conditions are met.
Fiscal Impact:
One-time costs, likely in the low millions over the next
one to three years to develop a methodology for the review
of payment rates and collect new data (General Fund). The
Department of Health Care Services does not yet have a
estimate of the administrative costs to develop a
methodology for reviewing payment rates, collecting
information, and training hospital staff. Based on the
existing staff working on the development of the diagnosis
related group methodology and the to collect and analyze new
claims information, costs are likely to be in the low
millions per year.
Annual costs of $142 million (50% General Fund, 50% federal
funds) due to lost budget savings until the diagnosis
related group methodology is adopted. Under current law, the
Department of Health Care Services is required to freeze the
rates paid to hospitals at 2012-13 levels in the 2013-14
fiscal year. This rate freeze will only occur once the
diagnosis related group methodology is implemented. By
delaying the implementation, the budget savings will not
occur until the methodology is adopted.
Background: The state's Medi-Cal program provides health care
coverage for low income children, their families, and certain
disabled residents of the state. Of the roughly 8.2 million
people enrolled in Medi-Cal, about 30% are served through the
fee-for-service program. In fee-for-service Medi-Cal, the
SB 645 (Nielsen)
Page 1
Department of Health Care Services pays providers, such as
private hospitals, for the costs of providing treatment to
program participants. Historically, payment rates to private
hospitals have been based on rates negotiated between the
individual hospitals and the state, based in part on actual
costs.
The 2010-11 budget health trailer bill (SB 853, Committee on
Budget, Statutes of 2010) requires the Department to develop a
new payment methodology for inpatient hospital care provided in
fee-for-service Medi-Cal. The new diagnosis-related group
payment methodology will provide payment for care based on the
patient's diagnosis, rather than the current per diem cost.
Under this new system, each inpatient stay is assigned to a
diagnosis-related group using an algorithm that takes into
account the patient's diagnosis, age, and other factors. The
intention of the new system is to move away from paying
hospitals on the volume of care (by paying per day) to paying
based on the level of patient acuity and the outcomes. In
theory, hospitals will be rewarded for providing quality care in
the most efficient manner.
Overall, the implementation of the diagnosis-related group
methodology is projected to be cost-neutral to the state, after
accounting for the payment rate freeze. While the impact to the
state and to hospitals overall is projected to be cost-neutral,
there will be winners and losers amongst the hospitals, based on
individual hospital costs, prior negotiated rates, and patient
mix. To minimize the disruption of this transition, the
Department will limit the annual change (either positive or
negative) to any given hospital to 5% per year, for three years.
The Department plans to implement the diagnosis-related group
methodology in July 2013.
Proposed Law: SB 645 would delay implementation of the new
diagnosis-related group methodology for paying certain hospitals
for inpatient care in the Medi-Cal program, until certain
conditions are met.
Specifically, the bill would:
Prohibit the Department of Health Care Services from
implementing the diagnosis-related group methodology until
the Department develops a methodology for hospitals to
SB 645 (Nielsen)
Page 2
review the base payment rates. The methodology for reviewing
base payment rates must include a process for appealing
changes to rates by hospitals;
Require the Department to begin collecting information on
diagnosis codes and procedure codes to establish a database
from which to develop new payment rates for the
diagnosis-related group methodology;
Require the Department to provide training for hospital
staff;
Work with hospitals to develop a new diagnosis-related
group methodology.
This bill is an urgency measure.
Staff Comments: In developing the current diagnosis-related
group methodology that is planned for implementation in July
2013, the Department has incurred a significant amount of staff
work. Should this bill pass, the Department will most likely a
significant amount of additional staff costs. For example, the
bill requires the Department to collect new data on diagnoses
and procedures to develop a new payment methodology. In
addition, the bill would provide opportunities to appeal
proposed payment rates.
Under current law, the Department of Health Care Services is
required to freeze the rates paid to hospitals at the 2012-13
levels in the 2013-14 fiscal year. This rate freeze will only
occur once the diagnosis related group methodology is
implemented. By delaying the implementation, the budget savings
will not occur until the methodology is adopted. (The rates paid
to hospitals by the Medi-Cal program influence managed care
rates as well. Thus the lost cost savings above include both
direct costs for fee-for-service payments to hospitals and
capitated payment paid to Medi-Cal managed care plans.)