| Los Angeles | San Francisco | San Diego | Washington D.C. | HEALTHCARE FINANCIAL MANAGEMENT ASSOCIATION 2013 Hospital Medicare Reimbursement Policy Update Presented by: JORDAN B. KEVILLE, ESQ. Hooper, Lundy and Bookman, P.C * The statements and opinions contained in this presentation represent only the views of Jordan B. Keville

Hooper, Lundy & Bookman, PC © Medicare IPPS

Hooper, Lundy & Bookman, PC © 3 General Overview  Final 2013 IPPS Rule released August 1, 2012; scheduled to be published in the Federal Register August 31, 2012  Continuation and refinement of a number of previously initiated policies  Some favorable changes – including 2.3% increase in operating payments  Rule takes effect for discharges after October 1, 2012

Hooper, Lundy & Bookman, PC © 4 Changes Affecting Medicare IPPS Payments to Acute Care Hospitals in FY 2012 FY 2012 Payment Changes  Mkt Basket+ 3.0%  ACA Adj.-0.1%  Doc. & Co.-2.9% = - 0.9%

Hooper, Lundy & Bookman, PC © 5 Components of FY 2013 IPPS Payment Changes Market Basket  Latest Market Basket Updates can be found on CMS Website at: MarketBasketData.asp#TopOfPage MarketBasketData.asp#TopOfPage  FY 2013 Proposed Rule Uses an Update of 3.0%

Hooper, Lundy & Bookman, PC © 6 Productivity Adjustment  Applied beginning in FY 2012, continues in 2013  Negative adjustment of 0.8%  10-year moving average of changes in the annual non-farm productivity, as determined by the Secretary  Can result in a market basket increase of less than zero

Hooper, Lundy & Bookman, PC © 7 Documentation and Coding Adjustments  Section 7(b)(1)(A) of Pub. L  Makes an adjustment to the average standardized amounts in order to eliminate the full effect of the documentation and coding changes on future payments.  Does not specify when CMS must apply the prospective adjustment, but merely requires CMS to make an “appropriate” adjustment.  Proposing adjustment of -1.9% for FY Will be final adjustment of this type and will fully offset original projected 5.4% impact  Section 7(b)(1)(B) of Pub. L  Requires CMS to make an adjustment in FYs 2010, 2011, and/or 2012  Determined a total recoupment of -5.8 percentage points  FY 2012: CMS applied adjustments of -2.9 percentage points  FY 2013: CMS eliminated the proposed 0.8% decrease adjustment for estimated overpayments in FY 2010, and restored the -2.9% adjustment applied in FY 2012  The total adjustment for FY 2013 is a +1.0% increase (-1.9 plus +2.0); worth about $800 million to the industry

Hooper, Lundy & Bookman, PC © 8 Value-Based Purchasing Hospital Value-Based Purchasing – ACA § 3001  ACA Requirements  Applies to discharges on and after 10/1/2012;  Funded through base operating DRG reductions, 1.0% in 2013, 1.25 % in 2014, 1.5 % in 2015, 1.75 % in 2016 and 2 % thereafter;  In FY 2011 and 2012 IPPS Rules, CMS adopted eligibility criteria, quality measures, quality performance standards and scoring methodology and other rules necessary to implement VBP in 2013 and 2014;  Incentive measures include ACI, HF, pneumonia, certain surgeries, patient experience of care (i.e., HCAHPS survey), hospital-acquired infections and spending per beneficiary;  Incentives distributed by performance score and vary based on score;  Certain hospitals excluded – cited for immediate jeopardy, or too few measures or cases; and  [cont’d]

Hooper, Lundy & Bookman, PC © 9 Value-Based Purchasing, cont’d Hospital Value-Based Purchasing – ACA § 3001 [ cont’d ]  2013 Final Rule  New measure must be posted on Hospital Compare website 1 year prior to implementation.  2013 Final Rule sets forth policies for calculating hospital-specific VBP incentive payment adjustment factors.  Factor would be applied to each hospital claim during FY 2013 to account for performance under VBP program  VBP adjustment factor applied to “base operating DRG payment amount” – wage adjusted DRG payment plus new technology add-ons; excludes DSH, IME adjustments, etcetera  Payments will be made beginning in January 2013 with respect to discharges occurring in FY 2013  Adds additional outcome measures and performance standards for the FY 2015 program  No significant changes for VBP between Proposed and Final Rule

Hooper, Lundy & Bookman, PC © 10 Hospital Readmissions Reduction ACA Provisions  Fiscal years commencing on and after 10/1/2012;  Conditions subject to measure are high value or high volume as selected by Secretary;  Law compares risk adjusted actual and expected readmissions;  Excludes readmissions unrelated to prior discharge or planned readmissions  Adjustment factor is the greater of: (a) 1 minus the ratio of payments for excess aggregate readmissions for a condition to the aggregate payments for such condition admissions (total, not just excess readmissions); or (b) a floor adjustment of.99 for FY 2013,.98 for 2014, for.97 for FY 2015 and thereafter;  FY 2013 proposed rule puts forth policies and data sources needed to calculate the “readmissions adjustment factor”  Applies to base operating DRG payment amounts  CMS estimates the program will result in a 0.3% decrease, or $280 million, in payments  No significant changes for VBP between Proposed and Final Rule

Hooper, Lundy & Bookman, PC © 11 Hospital-Acquired Condition Adjustments Payment Adjustment for HACS – ACA § 3008  Proposed FY 2013 Rule: Adds 2 new categories to 10 current HAC categories:  Surgical Site Infection Following Cardiac Implantable Electronic Device Procedures; and  Pneumothorax With Veinous Catheterization  Expands HAC diagnoses list by adding two new ICD-9 codes

Hooper, Lundy & Bookman, PC © 12 Hospital Inpatient Quality Reporting Program Hospital Inpatient Quality Reporting Program – IQR Program (formerly known as RHQDAPU)  No significant changes for FY 2013  CMS using 2013 rulemaking to refine IQR program for future years  For 2015, CMS will collect quality data on a total of 59 measures  17 process and outcome measures would be eliminated  2 claims-based readmission procedures, 1 claims-based surgical complication measure, and 1 chart-abstracted perinatal care measure will all be added  Current HCAHPS survey would be expanded  For 2016, CMS is proposing to retain all 2015 measures, plus add 1 measure for safe-surgery checklist use  Hospitals that participate successfully will receive a maximum payment increase of 2.8%

Hooper, Lundy & Bookman, PC © 13 Hospital Services Furnished Under Arrangement  In FY 2012, CMS clarified under arrangement for “Routine Services”  “Routine Services” cannot be provided under arrangement; only diagnostic or therapeutic services  If provided in the hospital, they are considered to be provided by the subject and subject to hospital quality controls  If provided outside the hospital, they are under arrangement and prohibited  FY 2013 Final Rule postpones operation of under arrangements “clarification” until FY 2014.

Hooper, Lundy & Bookman, PC © 14 Medicare Graduate Medical Education Requirements  For FY 2013, CMS adds labor and delivery beds in count for IME reimbursement purposes  “ Harmonizes” IME bed-counting policy with DSH bed- counting policy  Clarifies that hospitals must meet timely claims-filing deadlines in order to receive supplemental IME, GME and/or other education payments for Medicare Advantage enrollees  Updated policies related to ACA provisions allowing for redistribution of unused residency slots and preservation of slots from closed hospitals  Finalizes proposal to expand timeframe to establish a full-time equivalent (FTE) cap from 3 years to 5 years

Hooper, Lundy & Bookman, PC © 15 Outlier Payments FY 2013 Operating Outlier Threshold  CMS initially proposed to increase threshold by 22.5% from FY 2012 to $27,425 in FY 2013  Amount of increase tied to CMS “concern” about purported recent increase in inflation of hospital charges  Large increase to threshold would have significantly decreased number of cases eligible for outlier payments  On June 8, 2012, proposed threshold reduced to $26,337 based on recognition of data error in initial calculation  In response to feedback from industry, Final Rule moves forward with outlier threshold of approximately $21,000. Likely saved close to $1 billion for hospitals

Hooper, Lundy & Bookman, PC © Medicare OPPS REGULATORY UPDATE

Hooper, Lundy & Bookman, PC © 17 General Overview  Proposed OPPS Rule Released July 6, 2012  Like IPPS, no major or significant changes  Also like IPPS, CMS proposing overall increase to OPPS payments

Hooper, Lundy & Bookman, PC © 18 Changes Affecting Medicare OPPS Payments to Hospitals in 2012 Update to Base OPPS Rates  Proposed market basket update of +3.0%  Statutory “productivity” adjustment of -0.9%  Net change to base rates at +2.1%  Hospitals that fail to successfully participate in outpatient quality data reporting program subject to additional 2.0% reduction

Hooper, Lundy & Bookman, PC © 19 Changes Affecting Medicare OPPS Payments to Hospitals in 2012, cont’d Change in OPPS Payment Methodology  Relative payment weights under OPPS have historically been determined using median cost figures  CMS is proposing to now calculate weights based on geometric mean cost data  Per CMS, new methodology will more accurately reflect cost of services and be consistent with current IPPS payment methodology  Change must be budget-neutral and CMS is estimating the change will have negligible, if any, payment impact on the majority of hospitals

Hooper, Lundy & Bookman, PC © 20 Changes Affecting Medicare OPPS Payments to Hospitals in 2012, cont’d Drugs And Pharmacy Overhead  CMS is proposing to maintain current payment rate covering acquisition and pharmacy overhead cost of separately- payable drugs without pass-through status at average sales price, plus 6.0%

Hooper, Lundy & Bookman, PC © 21 Inpatient v. Outpatient Status Update to Part A and Part B Rebilling Demonstration  Relates to whether services are properly billed at inpatient or outpatient level  Demonstration project currently in effect through 2014 and allows hospitals to bill Medicare for Part B services, and to be paid at 90.0% of what otherwise would be allowable; hospitals in demonstration agreed to waive appeal rights  In Proposed Rule, CMS is seeking comments for ways of providing more clarity on proper patient status for Medicare reimbursement purposes  CMS concerned about increase in observation services; providers concerned about having inpatient admissions denied as not medically necessary

Hooper, Lundy & Bookman, PC © 22 Hospital Outpatient Quality Reporting Program  No new quality measures proposed for 2013, 2014 or 2015  CMS proposing to suspend data collection on certain already-established measures  CMS also proposing tweaks to program procedures impacting measure retirement, suspension and retention, as well as administrative forms

Hooper, Lundy & Bookman, PC © 23 CALIFORNIA BUDGET UPDATE

Hooper, Lundy & Bookman, PC © 24 Governor’s Budget Proposals Increase transfers to the General Fund from the QAF  “Redirect” $150 million of fee revenue in 2012 – 13 from managed care increases used for private hospital supplemental payments to children’s coverage  Redirect $95 million of fee revenue in 2013 – 14 from managed care increases used for private hospital ($75 million) and designated public hospital ($20 million) supplemental payments to children’s coverage  Eliminate $21.5 million in direct grants to designated public hospitals in 2013 – 14 and use for children’s coverage  Rationale: 81% of fee revenue would still be used to fund increased payments to hospitals

Hooper, Lundy & Bookman, PC © 25 Non-Designated Public Hospital (NDPH) Reimbursement  Changes Effective July 1, 2012 through at least December 31, 2013  NDPHs would be reimbursed for inpatient hospital services based on certified public expenditures (CPEs) like Designated Public Hospitals (DPHs) are currently  Eligible to receive safety net care pool payments for uncompensated care to extent additional federal funding is made available  Eligible to receive delivery system reform incentive pool (DSRIP) payments to extent federal funding is made available  Payments beginning July 1, 2012 shall continue under old reimbursement methodology as interim payments until federal approval is obtained

Hooper, Lundy & Bookman, PC © 26 NDPH Reimbursement, cont’d  Beginning January 1, 2014, continue CPE methodology for NDPHs certifying voluntary participation if federal approval is obtained and the Director of DHCS certifies continuation of the methodology would be cost beneficial to the state  Project $75 million General Fund savings in 2012 – 13  Proposal is that the general fund portion of NDPH payments that are discontinued will be offset by Safety Net Care Pool (SNCP) and DSRIP payments

Hooper, Lundy & Bookman, PC © 27 DPH Payments  State has asked CMS to roll over unspent Health Care Coverage Initiative (HCCI) payments  State to retain 50% of the federal funding attributable to the rollover, about $109 million  State can use DPH’s excess CPEs to extent necessary to achieve $400 million of General Fund savings anticipated in 2010 waiver from certain DPH programs but not realized