BILL ANALYSIS �
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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 Le�n, 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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