BILL ANALYSIS �
SENATE HEALTH
COMMITTEE ANALYSIS
Senator Ed Hernandez, O.D., Chair
BILL NO: SB 289
S
AUTHOR: Hernandez
B
AMENDED: March 24, 2011
HEARING DATE: April 6, 2011
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CONSULTANT:
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Bain
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SUBJECT
Medi-Cal: inpatient hospital reimbursement methodology
SUMMARY
This bill requires the Department of Health Care Services
(DHCS), when evaluating alternative diagnosis-related group
algorithms for its Medi-Cal hospital inpatient
reimbursement system, to evaluate whether outlier payments,
policy adjusters or other special provisions are required
to adequately reimburse specified National Cancer
Institute-designated comprehensive cancer centers.
CHANGES TO EXISTING LAW
Existing law:
Requires 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. Existing law excludes from the DRG payment
methodology public hospitals, psychiatric hospitals, and
rehabilitation hospitals, which include alcohol and drug
rehabilitation hospitals.
Requires the DRG-based payments to apply to all claims,
Continued---
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except claims for psychiatric inpatient days,
rehabilitation inpatient days, managed care inpatient days,
and swing bed stays for long-term care services. Existing
law 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.
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:
� 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;
� Classification of patients based on appropriate acuity
classification systems;
� Hospital case mix factors;
� Geographic or regional differences in the cost of
operating facilities and providing care;
� Payment models based on DRGs used in other states;
� Frequency of grouper updates for the DRGs;
� 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;
� The basis for calculating relative weights for the
various diagnosis-related groups;
� Whether policy adjusters should be used, for which care
categories they should be used, and the frequency of
updates to the policy adjusters;
� The extent to which the payment system is budget neutral
and can be expected to result in state budget savings in
future years; and,
� 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.
STAFF ANALYSIS OF SENATE BILL 289 (Hernandez) Page
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This bill:
Requires DHCS, as part of its existing obligation to
evaluate alternative DRG algorithms for its Medi-Cal
hospital inpatient reimbursement system, to evaluate
whether outlier payments, policy adjusters or other special
provisions are required to adequately reimburse National
Cancer Institute (NCI)-designated comprehensive cancer
centers exempt from the Medicare prospective payment system
(PPS) for Medi-Cal hospital inpatient services.
FISCAL IMPACT
This bill has not been analyzed by a fiscal committee
BACKGROUND AND DISCUSSION
According to the author, in enacting the Medi-Cal DRG
statute, the Legislature exempted psychiatric and
rehabilitation hospitals, consistent with the federal
Medicare Prospective Payment System (PPS) statute.
However, unlike federal Medicare law, the state did not
also exempt National Cancer Institute-designated
comprehensive cancer centers from the planned
implementation of its Medi-Cal DRG system. The author
argues nearly all of the patients of these facilities have
a diagnosis of cancer, and often have other multiple,
complex medical conditions as well. A significant
percentage of patients at these centers were referred by
other institutions where they may have failed treatment.
Because of the unique nature of PPS-exempt cancer centers
and the patients they serve, either an exemption or other
special provisions must be granted in order for the
Medi-Cal DRG reimbursement system to adequately reimburse
these cancer centers. As proposed, any exemption or
special adjustment would affect only the City of Hope
National Medical Center and the USC Kenneth J. Norris
Cancer Hospital.
Medicare DRGs
When Medicare was established in 1965, Congress used a
"retrospective cost-based reimbursement" system to pay for
hospital services. Under this system, Medicare made interim
payments to hospitals throughout the hospital's fiscal
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year. At the end of the fiscal year, the hospital filed a
cost report and the interim payments were reconciled with
"allowable costs" which were defined in regulation and
policy. Medicare's hospital costs under this cost-based
payment system increased dramatically. Between 1967 and
1983, costs rose from $3 billion to $37 billion annually.
In 1982, Congress mandated the creation of a prospective
payment system (PPS) to control Medicare inpatient hospital
costs. Congress looked at the success of state rate
regulation systems in controlling costs and mandated the
implementation of a prospective payment system (PPS) model
that had been successful in several states. This system is
a per-case reimbursement mechanism under which inpatient
admission cases are divided into categories called
diagnosis-related groups (DRGs). The DRGs classify human
diseases according to the affected organ system, the
procedure performed on the patient, morbidity, and sex of
the patient. The DRGs "bundle" services (labor and
non-labor resources) that are needed to treat a patient
with a particular disease. The Centers for Medicare and
Medicaid Services creates a rate of payment based on the
"average" cost to deliver care to a patient with a
particular disease. In the Medicare DRG prospective payment
system, Medicare pays hospitals a flat rate per case for
inpatient hospital care so that efficient hospitals are
rewarded for their efficiency, and inefficient hospitals
have an incentive to become more efficient.
At the time PPS was established, five types of specialty
hospitals (rehabilitation, psychiatric, long-term,
children's, and cancer centers), and two types of
distinct-part units in general hospitals (rehabilitation
and psychiatric) were exempted from the PPS system (in
California, there are two NCI-designated comprehensive
cancer centers, the City of Hope and USC-Norris
Comprehensive Cancer Center). Congress excluded these
specialty facilities from PPS. According to a 1992 report
to Congress from the Prospective Payment Assessment
Commission (PPAC), the DRG patient classification system is
not an appropriate tool for grouping patients that are
treated in specialty facilities as diagnoses are poor
indicators of resource use among specialty facility
patients because these patients are often chronically ill,
present with a number of comorbidities, and require
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substantially different types and amounts of treatments
than patients treated in acute care hospitals. The PPAC
report argues that resource use for specialty facility
patients is dependent on patient characteristics other than
diagnosis, such as the progression of the condition,
functional status, and expected outcomes, and at the time
PPS was implemented, alternative classification systems
that would serve the same purpose as DRGs had not been
developed for these providers.
Because PPS was not appropriate, Congress decided that
payment for these facilities would continue to be based on
methods previously established under the Tax Equity and
Fiscal Responsibility Act of 1982 (TEFRA). Under this
method, excluded facilities receive their actual Medicare
allowable inpatient operating costs per discharge, subject
to an annual rate of increase limit. However, Congress
intended this to be a temporary measure pending development
of a more appropriate prospective payment system for
specialty hospitals and distinct-part units. In 1983,
Congress directed the Secretary of the federal Department
of Health and Human Services to study the feasibility of
paying specialty hospitals on a prospective basis. In a
1985 report, the Secretary concluded that a prospective
payment system was not feasible for some specialty
facilities and was inappropriate for the rest.
Medi-Cal hospital reimbursement methodology changing
The health budget trailer bill of 2010 (SB 853 (Committee
on Budget and Fiscal Review), Chapter 717, Statutes of
2010) requires DHCS, subject to federal approval, to
develop and implement a Medi-Cal methodology based on DRGs.
The California Medical Assistance Commission (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
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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
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 fiscal year 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 fiscal year 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.
DHCS staffing budget proposal for DRG system development
The Governor's 2010-11 proposed budget requests 11 two-year
limited term positions in DHCS at a total cost of $1.2
million ($480,000 General Fund) to support the requirement
for DHCS to develop and implement a new payment system for
hospital inpatient service-based DRGs, including a
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reconciliation process that will accelerate implementation
of DRG rates. The new DRG payment system will provide a
reimbursement level related to the recipient's assigned
diagnosis or diagnoses. DHCS indicates these positions
will assist it in developing the payment methodology to
move Medi-Cal from an inpatient per diem reimbursement
system to a DRG-based reimbursement system.
Prior legislation
SB 853 (Committee on Budget and Fiscal Review), Chapter
717, Statutes of 2010, the health budget trailer bill of
2010, requires DHCS, subject to federal approval, to
develop and implement a Medi-Cal methodology based on DRGs.
Existing law requires DHCS to evaluate alternative DRG
algorithms for the new Medi-Cal reimbursement system,
taking into account multiple factors. DHCS is required to
implement the new payment methodology in coordination with
the development and implementation of the replacement
Medicaid Management Information System (MMIS), and DHCS is
required to implement DRGs on the date that the replacement
MMIS becomes fully operational, but no later than June 30,
2014.
Existing law requires the evaluation of alternative DRGs to
be developed in consultation with recognized experts with
experience in hospital reimbursement, economists, CMS, and
other interested parties.
DHCS is authorized to contract, on a bid or nonbid basis,
for professional consulting services from nationally
recognized higher education and research institutions, or
other qualified individuals and entities not associated
with a particular hospital or hospital group, with
demonstrated expertise in hospital reimbursement systems.
Existing law requires the DRG rate-setting system to be
developed with all possible expediency, and existing law
exempts contracts entered into the DRG-related provisions
from the Public Contract Code, and allows DHCS to implement
the provisions through provider bulletins or similar
instructions, or through emergency regulations.
DHCS is required to four status reports on implementation
of the DRG requirement to the Legislature annually
beginning April 1, 2011.
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Arguments in support
This bill is sponsored by the City of Hope (COH), 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. COH 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. COH 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. COH 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. COH 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 would require 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.
The University of Southern California Norris Comprehensive
Cancer Center 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.
POSITIONS
Support: City of Hope (sponsor)
University of Southern California Norris
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Comprehensive Cancer Center
Oppose: None on file
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