Reduction in Medicaid PPS Rates Effective November 1

October 28, 2015

Date:              October 28, 2015

To:                  Chief Financial Officers of Prospective Payment System Hospitals
Hospital Legal Counsel

From:           Claudia Sanders, Senior Vice President, Policy Development
Tom Evert, Chief Financial Officer
Andrew Busz, Policy Director, Finance

Staff Contact: Andrew Busz,  (206) 216-2533

Subject:          Reduction in Medicaid PPS Rates Effective November 1

The purpose of this bulletin is to inform Prospective Payment System (PPS) hospitals of significant changes to their Medicaid hospital payment rates effective November 1. WSHA recommends they file a rate appeal with the Health Care Authority (HCA).

PPS hospitals paid with APR-DRG groups for Medicaid inpatient care and with EAPG groups for outpatient care.

HCA recently sent PPS hospitals notices of new Medicaid inpatient and outpatient payment rates, effective November 1, 2015.  The rates include a 8 percent reduction for inpatient rates and an 8 percent reduction for outpatient.  These changes are due to state calculations to assure budget neutrality.  We are investigating the reductions to determine if we believe the calculations have been done correctly. In the meantime, WSHA recommends that PPS hospitals appeal the new rates given the 30-day time limit to do so (WAC 182-502-0220).  This would preserve the right to have corrections made if it is determined the new rates are in error.

As part of the July 1, 2014 transition of hospital payment to a system based on inpatient APR-DRGs and outpatient EAPGS, HCA adopted a process to assure budget neutrality.  HCA was concerned the new system would result in an increase in payments because of coding changes.  While HCA originally proposed an across-the-board reduction to compensate for projected increases, HCA instead adopted a process based on measuring the actual payment changes.  Under the adjustment process, HCA compares payments under the new system to what those services would have paid under the prior methodologies and rates.  To maintain aggregate budget neutrality, HCA makes quarterly adjustments to inpatient and outpatient conversion factors. The adjustments are applied prospectively but correct for past overpayments or underpayments in the three-month time frame before the next adjustment, as well as seek budget neutrality going forward.  (The specifics of the process are provided in WAC 182-550-3850.)  This process was discussed during the state’s work to rebase rates with a WSHA task force, made up of finance staff from selected member hospitals.  The task force agreed that a series of prospective adjustments were preferable to mass reprocessing of past claims or an up-front reduction to payment.

The first payment adjustment occurred August 2015 based on all claims paid from July 1, 2014 through March 31, 2015. HCA applied a negative budget neutrality adjustment of about 1 percent to inpatient rates and a positive adjustment of about 8 percent to outpatient rates.

Recently, HCA sent out its rate notices to PPS hospitals based on a second adjustment. The new adjustment, effective November 1, uses claims and encounters incurred from July 1, 2014 through June 30, 2015.  The claims and encounters include the new services incurred March through June 2015, as well as a recalculation of services incurred for July 2014 through February 2015, including the runout for that period that had not been included in the prior adjustment analysis.  For inpatient payments, HCA will reduce hospital claims payment by about 8 percent. Our understanding from HCA is this includes about a negative 1.35 percent prospective adjustment, and an additional negative 6.75 percent “gross up” adjustment to compensate for higher than expected payments for the time period since July 2014. In addition, HCA determined that the cumulative aggregate outpatient payments under EAPGs for the time period July 2014-June 2015, compared to what they would have been under APCs for the same period were within the acceptable range according to the WAC. As a result the 8 percent budget neutrality increase for outpatient hospital services that was effective in August is removed as of November 1. The change results in an 8 percent decrease from the rates that were in place for August through October 2015.  A table detailing the changes is below.

Effective Date of Adjustment (Date of Service)   July 2014-
July 2015
  November 1, 2015
-February 2016
Inpatient Budget Neutrality Adjustment to Base APRDRG Conversion Factors   None   0.9915   0.9190
Outpatient Budget Neutrality Adjustment to Base EAPG Conversion Factors   None   1.0820   None
Time Period of Claims and Encounters Compared   July 1, 2014-
March 31, 2015
  July 1, 2014-
June 30,  2015

HCA has ascribed the recent reductions to the processing of complex claims from the earlier periods which are only now being captured in a more mature data set.

HCA will again evaluate changes in the adjustment factors effective March through May 2016 based on a comparison of claims and encounters for July 1, 2014 through September 30, 2015.  If there are no further increases in claims for prior periods, the adjustment factors should return to significantly smaller levels.  The adjustment factors are scheduled to last only for a two-year period while coding changes are in flux.

Next Steps
WSHA has requested that HCA and its consultant, Navigant, provide additional information regarding the calculations.  We have hired Analysis Group, WSHA’s consultant for the safety net assessment program, to review the methodology and calculations for reasonableness.  WSHA will inform members of the results of the review.  In the meantime, we believe hospitals should file a rate appeal with HCA.


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