THE MISSISSIPPI LEGISLATURE

The Joint Committee on

Performance Evaluation and Expenditure Review

Report # 530

Benefits and Limitations of an All Patient Refined-Diagnosis Related Groups Inpatient Hospital Services Payment Method for Mississippi Medicaid Patients

Executive Summary

Introduction

The Management and Financial Needs of the Medicaid Program

The Division of Medicaid (DOM) has used a payment method for years that has not sufficiently addressed the management and financial needs of the hospitals and the Medicaid program. A primary cause of this problem has been the use of a cost per diem payment method per day of client care that did not meet the necessary objectives for a sustainable, rational payment method.

This cost per diem method has depended on audited Medicare cost reports to make final payments, although these reports have created at least a two-year delay in the hospitals receiving final payments for the provided services. Also, the cost per diem method has not:

• enabled the DOM and hospital providers to perform timely financial planning and adjustments to cost reports and payment rates;
• rewarded efficiency in hospital care that minimizes the length of stay consistent with good patient care and allows the hospital to keep any cost savings generated through management or treatment efficiencies;
• geared payments for individual client cases to expected costs in order to reward the hospitals, regardless of bed size and location, with more payment dollars toward more expensive cases and fewer payment dollars toward less expensive cases;
• paid similar amounts for patients with a similar diagnosis receiving similar care, thus improving uniformity of payment to hospitals, regardless of their bed size and location--i. e., fairly (uniformly) distributing limited state resources to provide these services; and,
• enabled DOM to control payments and policy priorities of the Medicaid hospital in-patient services program.

The Payment Method Recommended by ACS

In 2004, the DOM decided to assess alternative payment methods that would help to resolve the problems noted above and better address the management and financial needs of the hospitals and the Medicaid program. The division asked its fiscal agent, ACS State Healthcare LLC1 (ACS), to analyze the division’s method of inpatient hospital payment and offer suggestions for improvement based on management goals set by the division.

ACS conducted a formal evaluation of five alternative payment methods in 2005 and recommended that the DOM use an All Patient Refined-Diagnosis Related Groups (APR-DRG) method. On October 1, 2005, the DOM established an interim cost-based per diem payment method until a new state DRG-based rate schedule could be determined and put into effect for inpatient services at eligible hospital facilities. Since that time, ACS has conducted payment simulations each year (except for 2008) using the previous year’s Medicaid cost data and has evaluated possible DRG-based rate schedules, including the Medicare DRG method as well as an APR-DRG method.

Problems with the Legal Interpretation of H. B. 71, Second Extraordinary Session of 2009

During its Second Extraordinary Session of 2009, the Mississippi Legislature directed the DOM as follows:

(I) The division shall develop and publish reimbursement rates for each APR-DRG proposed by the division at least equal to the prevailing corresponding Medicare DRG rate or a closely related Medicare DRG rate, applying to each hospital, the applicable federal wage index being used by CMS for the hospital’s geographic location, but the division shall not implement that rate schedule or APR-DRG methodology until after July 1, 2010. The PEER Committee shall study the benefits and liabilities of implementing an APR-DRG reimbursement rate schedule, and report its findings to the members of the Senate Public Health and Welfare Committee and the House Medicaid Committee on or before December 15, 2009.

This language required the following:

• Medicaid must develop and publish a set of payment rates that are at least equal to those allowed under Medicare for the identical or closely related Medicare DRG rate; and,
• the PEER Committee must report to the Senate Public Health and Welfare Committee and the House Medicaid Committee on the benefits and liabilities of moving to a Medicaid DRG method of reimbursement.

To comply with this language, the Division of Medicaid calculated a set of payment rates comprising whichever rate was higher, the original APR-DRG rate or the Medicare payment rate for the Medicare DRG that corresponded most closely to the specific APR-DRG. By definition, the resulting rates equal or exceed those utilized in the Medicare program. PEER notes that while such a model complies with the strict requirements of this provision, it could result in a payment schedule that would not comply with regulations of the Centers for Medicare and Medicaid Services (CMS), because CMS does not allow payments in excess of those allowed under Medicare.

Since PEER’s statutory mandate did not state which specific All Patient Refined-Diagnosis Related Groups (APR-DRG) rate schedule to study, in order to determine the actual benefits and limitations of the APR-DRG process in regard to the eligible Medicaid participants, providers, and the state as a whole, PEER’s study compares the following methodologies and the impact of their rate schedules:

• the current Medicaid cost-based per diem payment method;
• the Medicare DRG payment method; and,
• the ACS-recommended APR-DRG payment method.

Comparative Analysis of Payment Methods for Potential Use in the State’s Medicaid Program

The State of Mississippi should adopt the APR-DRG inpatient hospital services payment method because it is in the public interest to improve access to care, reward hospital efficiency, increase fairness to hospitals, improve purchasing clarity of hospital services, and reduce the administrative burden on the Division of Medicaid and hospitals. Funding must remain sufficient to ensure reasonable payment of provider costs to ensure that Medicaid beneficiaries have adequate access to medical services.

Criteria for Evaluation

The Division of Medicaid, working with its contractor ACS, established eight criteria that any new payment method should meet. In 2004, the DOM contracted with ACS to evaluate and determine an inpatient hospital services payment method that the state should use for the Medicaid inpatient services program in order to accomplish the following management goals of the division:

• to improve client access;
• to reward hospital efficiency;
• to increase fairness (uniformity of payment) to hospitals;
• to improve purchasing clarity of hospital services-(i.e., what services that the state is purchasing for clients); and,
• to reduce the administrative burden on the Division of Medicaid and the hospitals.

To determine the best payment method that would enable DOM to meet these goals, ACS conducted four different evaluation cost studies. The first study used the five DOM management goals above as criteria, in addition to the following:

• to determine how well the casemix adjustors capture the variation in hospital utilization;
• to determine the simplicity of the payment method; and,
• to pay the hospitals for providing higher quality care to clients.

ACS used these eight criteria to determine whether DOM should use a payment method similar to its current one or a DRG payment method (such as the Medicare DRG) or the APR-DRG payment method.

In May 2005, ACS strongly recommended that DOM use an APR-DRG payment method that is a per-client stay payment method with 1,258 APR-DRGs as the casemix adjustors. Each stay would be assigned to a single APR-DRG based on the physician’s diagnosis and procedures used to treat the patient. The payment for each stay would equal the assigned relative weight for the DRG multiplied by a statewide base price determined through available funding. Extraordinarily expensive cases would receive additional “outlier” payments for mental health--cost outlier payments for physical health cases and day outlier payments for mental health cases. In response to DOM’s direction, ACS would determine the actual statewide base price, the source for the APR-DRG relative weights, participation to out-of-state hospitals, and payment for transfer cases among hospitals, in the detailed design phase.

Comparison of Payment Methods

In this report, PEER compares the current Medicaid cost-based per diem payment method, the Medicare DRG payment method, and the ACS-recommended APR-DRG payment method in view of the above criteria, summarized as follows:

• the current Medicaid cost per diem payment method--The DOM current cost per diem payment method, as modified on October 1, 2005, does not meet five of the division’s management goals for a new payment method: to improve client access to hospitals; to reward hospital efficiency for reducing state costs through more efficient client treatment; to increase fairness to hospitals for revenue payments for client care, to improve purchasing clarity of client hospital services, and to reduce the administrative burden for final payments on the hospitals and the DOM. As a result, the current payment method should be replaced with a method that can meet these goals. (See pages 14 through 17 of the report for a summary evaluation of the current Medicaid cost per diem payment method.)
• the Medicare DRG payment method--Although a neutral third party developed the rate schedule for the Medicare DRG payment method, this method was designed to pay for inpatient hospital medical services primarily to an elderly population and would require significant modification. Also, according to CMS officials, use of this payment method would likely result in eliminating or reducing significantly the Medicare Upper Payment Limits payments to hospitals. (See pages 17 through 21 of the report for a summary evaluation of the Medicare DRG payment method.)
• the ACS-recommended APR-DRG payment method--While the state would develop the rate schedule for the APR-DRG payment method, an APR-DRG method is designed to pay for hospital inpatient medical services to the Medicaid population and would accomplish the DOM’s management goals for client care, hospitals, and program management. (See pages 21 through 24 of the report for a summary evaluation of the ACS-recommended APR-DRG payment method.)

The best interests of Mississippi’s Medicaid program as a whole should outweigh individual provider interests. Any payment method will favor some providers over other providers regardless of the payment methodology used.

Accountability Concerns Regarding the ACS-Recommended APR-DRG Payment Method

If funding for payment of inpatient hospital services does not keep pace with provider costs, participation by providers of these services could decrease and as a result, Medicaid beneficiaries’ access to care would decline. Therefore, it is vital that funding for the ACS-recommended APR-DRG payment method remain at a sufficient level to reimburse providers at a sufficient rate to ensure participation in the Medicaid program. Currently, on average, the per diem payment method pays hospitals at 91% of cost of services and, after including UPL payments, hospitals are reimbursed at 132% of inpatient costs.

What’s Next? Maintaining an APR-DRG Payment Method

The use of an APR-DRG inpatient hospital services payment method would be an improvement from the hospital-specific per diem payment method. PEER believes that although a budget-neutral payment method is acceptable for introduction of an APR-DRG payment method, it must be maintained and updated on a regular basis to meet federal guidelines and ensure that payments are reasonable and access to care is adequate.

Recommendations

1. Based on PEER’s evaluation of the Division of Medicaid’s current cost per diem payment method, the Medicare DRG payment method, and the ACS-recommended APR-DRG payment method, the Committee recommends that the Division of Medicaid finalize the development of the ACS-recommended APR-DRG payment method for implementation on July 1, 2010.
2. The APR-DRG payment method should be maintained and updated annually. Reviews should include, but not be limited to:
   
   
   • the DRG base price;
   • the DRG relative weights, including any adjustments for enumerated policy goals;
   • DRG cost and day outlier thresholds;
   • DRG length of stay benchmarks used in calculating transfer payments;
   • other provisions of the payment method as necessary;
   • levels and changes in client access to care, both overall and for specific services such as obstetrics, newborn care, and mental health;
   • Medicaid payments relative to the costs of efficiently and economically operated hospitals;
   • changes in hospital input costs;
   • the legislative appropriation;
   • other payments made to hospitals for the care of Medicaid clients that are separate from DRG payments;
   • changes in how hospitals bill for care using diagnosis codes, procedure codes, and other information on claim forms; and,
   • other factors that the division may specifically enumerate that affect the goals of efficiency, economy, quality, and access.
3. The Legislature should amend MISS. CODE ANN. Section 43-13-117 (I) (1972) to direct the Division of Medicaid to publish and implement an APR-DRG inpatient hospital services payment method that is acceptable to the Centers for Medicare and Medicaid Services. This payment method should comply with provisions of 42 CFR Part 447 regarding reasonableness and adequacy of rates. Such method should become effective after July 1, 2010.
   
   The Legislature should also require the Division of Medicaid to review the APR-DRG payment method and rates and make changes annually, where appropriate, in compliance with the public notice requirements and other requirements of the Mississippi Administrative Procedures Act.
   
   The Legislature should further delete from this provision any references to Medicare DRGs and the requirement that PEER report on the benefits and liabilities of an APR-DRG payment method.

1  ACS State Healthcare LLC (ACS) is the Division of Medicaid’s fiscal agent contractor that is responsible for processing claims, handling calls from providers, and maintaining the computer system for Medicaid in Mississippi. One of the services ACS provides is to assist Medicaid programs with analysis, design, and implementation of payment policy.

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