Budget Neutrality Adjustment Factors: Adjustments to Medicaid Rates

May 23, 2016

Date:  May 23, 2016
To:  Chief Financial Officers of PPS and CPE Hospitals
From:  Andrew Busz, Policy Director, Finance

Claudia Sanders, Senior Vice President, Policy Development

Tom Evert, Chief Financial Officer

Staff contact:  Andrew Busz, andrewb@wsha.org or (206) 216-2533
Subject:  Budget Neutrality Adjustment Factors:  Adjustments to Medicaid Rates


This bulletin provides hospitals with information about recent rate notification changes effective June 1stfrom the Washington State Health Care Authority (HCA).  It also provides information about additional rate changes that may be implemented over the next six months.

These changes apply to Prospective Payment System hospitals directly and to Certified Public Expenditure hospitals during the calculations of the hold harmless grant payments.

For inpatient and outpatient rates, WSHA believes hospitals will have additional opportunity to challenge the changes when HCA makes a further adjustment starting on October 1st.  We do not know if the current adjustments are appropriate or not, since we have not had sufficient time or been provided sufficient information to vet the changes.  We anticipate having better information prior to October 1st.  The rate notices also contain a change in the ratio of cost to charges.  Hospitals should review this change to make sure it is accurate for their facility.

On May 13, HCA issued notices informing hospitals of new payment rates effective on June 1, 2016. The notices reflect updates to the budget neutrality adjustment factor (BNAF).

  1. For inpatient rates, the notices show a decrease in rates based on changes in the budget neutrality adjustment factor.  The new rates show an 8.95 decrease from the rates previously in effect, and a return to the original rates developed for the inpatient system after rebasing.
    1. The new adjustment removes the positive adjustment factor that has been in place since February 1. This prior adjustment factor was put in place to correct two earlier rate cuts, one of just under 1 percent (from August 2015 to October 2015) and another of approximately 8 percent (from November 2015 to January 2016).  As we mentioned in our prior bulletin, we had anticipated the budget neutrality factor would return to about one on May 1, since it would no longer be necessary to provide a payback for the November 1 error.  HCA is making this adjustment now instead of implementing earlier.
  2. For outpatient rates, the notices show no changes in rates.
    1. HCA believes hospitals may be receiving more than they should in outpatient payments compared to the payment system in place prior to rebasing. If that finding holds, HCA may impose additional cuts in an upcoming adjustment. The agency, however, believes it needs additional data verification before it takes any action.
    2. For the ratio of cost-to-charges (RCC), the rate notices show an adjustment to rates based on the state updating its calculations. This is usually done on an annual basis.  HCA staff have informed us that Provider One has been using the new rates since early March.  This probably does not have a large impact, but would potentially change outlier payments as well as any DRGs paid on an RCC basis. HCA staff have told us they will not change any payments for hospitals where an increased RCC was loaded into the Provider One system.  They have also stated they plan a mass adjustment for hospitals where the new RCC loaded into the Provider One system dropped, since hospitals were not notified of the change.

Future Rate Changes
HCA and WSHA staff have had several conversations about the agency’s plans to make future rate adjustments.  Under the rules, HCA has a two-year measurement period, from July 1, 2014 to June 30, 2016 to measure the impact of the new system. HCA can make quarterly changes in the rates on a prospective basis to ensure the new system pays out the same amount as the prior system.  Based on the two-year measurement period, HCA will develop a budget neutrality factor that will be used on an ongoing basis for future periods.

HCA intends to use all claims, both fee-for-service Provider One claims and Medicaid managed care encounter visits, received during the two-year measurement period. They intend to analyze the payment amounts compared to the prior system and will implement any catch-up adjustments on October 1, 2016 for a three-month period through December 31, 2016.  Any catch-up adjustment is intended to ensure the prior two-year period stays within the plus or minus one percent parameters specified in the rules.  Starting January 1, 2017, there will be no more catch-up adjustments but there may be an ongoing adjuster if the new system is underpaying or overpaying compared to the prior system, outside a one percent, hold harmless band.

HCA is using a consultant, Navigant, to analyze and compare the claims paid under the current and prior system.  WSHA has engaged our own consultant, Bruce Deal, with Analysis Group, Inc. to attempt to verify the accuracy of the adjustments.  We have two significant concerns we are investigating:

Future Outpatient Adjustments.  The state’s current analysis shows an ongoing “overpayment” in outpatient claims of several percentage points.  This overpayment has not been addressed through a budget adjustment to date.  If the state pursues a catch-up adjustment for this overpayment, it would mean a 15 percent or higher rate cut in the period October to December and then an ongoing rate cut of about two to three percent.

The data to substantiate the rate cut has several major questions. Rate comparisons are made using the state’s fee-for-service rates and the information included on the claim and encounter data to model payments under the old and new systems. Rate comparisons between the rebased rates and the new rates show no significant difference for three of the four major Medicaid managed care plans. Effectively, all of the rate increases are attributed to one plan. This leads us to suspect that there may be information lacking on the encounter data submissions or some other problem for that one plan, but we are still investigating.  Bruce Deal is analyzing some data he has been able to obtain and we have asked for three of the major Medicaid hospitals to help review their specific data as well.

Future Inpatient Adjustments.  For inpatient comparisons there appears to be a significant comparative drop in inpatient payments compared to the prior system starting in October 1, 2015.  We are concerned that this may be attributable to interactions of coding with the new ICD-10 coding system.  If that is the case, it is our position that there would need to be an ongoing adjustment factor to increase rates in order to correct for this change.  While HCA and Navigant have noticed the October 1st change, the data right now are sparse and it is unclear if the change will be substantiated as more claims are analyzed.  There have not been specific discussions on correction proposals.

HCA implemented new payment systems for inpatient and outpatient services on July 1, 2014. At the time, HCA was concerned the new systems were more sensitive to coding entries, and the changes could result in hospitals being paid more than under the prior system for the same mix of patients. To ensure budget neutrality, HCA set up a system to compare the aggregate amounts paid under the new system to amounts that would have been paid under the old system. HCA then makes corrections through a budget neutrality adjustment factor (BNAF).

HCA makes quarterly comparisons and adjustments. The first comparison and adjustment was made August 1, 2015 for claims paid from July 1, 2014 through December 2014; the second was November 1, 2015 for claims paid through June 2015; the third was February 1, 2016 for claims paid September 30, 2015, and the latest on June 1, 2016.

For additional background, see our prior bulletins:




Next Steps
WSHA and Analysis Group will continue to work with HCA and Navigant to review the methodology and calculations for the budget neutrality adjustment factor. We will be working with a few selected member hospitals on inpatient and outpatient claims to determine if we can validate the data being used in the analysis.


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