Senior Associate - KPMG LLP HSCRC Rate System Arin Foreman Senior Associate - KPMG LLP arinforeman@kpmg.com Jennifer Hulvey Director of Reimbursement - Frederick Memorial Hospital jhulvey@fmh.org January 31, 2014

Discussion Topics Overview – Revenue Methodologies Rate Order Annual Rate Order Adjustments Unit Rate Compliance Total Revenue Compliance Reasonableness of Charges Required Reporting Terminology and Acronyms

Overview HSCRC has developed methodologies to constrain healthcare costs in Maryland. Hospitals currently elect one of the following: Total Patient Revenue (TPR) System, Charge per Case (CPC) System, or Charge per Episode / Admission-Readmission Revenue (CPE / ARR)

Total Patient Revenue (TPR) Inpatient and outpatient revenue is constrained by the TPR System Implemented July 1, 2010 (Garrett County Memorial Hospital and Edward W. McCready Memorial Hospital transitioned to TPR prior to 07/01/10) Approved revenue amount in a given year is a fixed cap No adjustment for changes in volume No adjustment for changes in Case Mix Index (CMI) Available to sole community provider hospitals and hospitals operating in regions of the State that don’t share service areas with other hospitals

Charge per Case (CPC) Inpatient Revenue is constrained by the Charge per Case system (CPC) Fixed amount of revenue per inpatient case Implemented July 1, 2005 Each hospital's allowed CPC is based on their Case Mix Index (CMI) CMI measures the complexity of a hospital's cases

Charge per Episode (CPE) Admission-Readmission Revenue arrangement (ARR): Fixed amount of revenue per inpatient episode Under ARR, hospitals assume the risks and rewards of managing hospital readmissions. No revenue increase for additional readmissions (penalty) No revenue decrease for reduced readmissions (reward) Implemented July 1, 2011 Voluntary 3-year revenue constraint program replacing CPC Excludes intra-hospital readmissions within 30 days All cause readmissions Each hospital's allowed CPE is based on Case Mix Index (CMI)

Which rate methodology is your hospital under? TPR CPE / ARR Hospitals A-G CPC

Rate Order Slide 1

Rate Order Revenue Center: Hospitals have different revenue centers depending on the services they provide Service Unit: The service unit is the same for all hospitals (i.e. every hospital charges for Operating Room services by the minute) Unit Rates: Unit rates (prices) vary by hospital These rates must be charged to all payers - no contract negotiations

RVUs RVUs relate to the complexity (time and cost) of tests and procedures The service units for RVU's (relative value units) are defined by the HSCRC in Appendix D For example, a chest x-ray, single view, has the same RVU at all MD hospitals

The patient charge becomes a calculation… 2 RVU's x $26.4154 = $52.83

Updates to Rate Orders Hospitals receive an updated rate order once per year - effective July 1st Unit rates are updated for:

History of Update Factors The following chart displays the previous five years’ update/inflation factors that have been applied to hospitals’ rates:

Rate Realignment Charges are related to the underlying cost of providing the service This does not change a hospital's total revenue; it just reallocates it among revenue centers Costs for FY 2012 were used to realign FY 2014 rates

Rate Realignment

Rate Realignment Using the M schedule from the most recent Annual Filing, the Revenue calculated in the previous step is realigned based on the Volume adjusted cost in each center. For example, if MSG has 15% of the costs, then 15% of the revenue will be allocated to that center.

UCC Uncompensated Care includes charity care and bad debt The UCC policy allows hospitals to charge additional amounts in their rates to all payors to cover the shortfall produced by providing uncompensated care Blend of: Three-year average Predicted UCC

UCC Three-year average is based on the Hospital’s 3 most recent year’s Annual Filings Predicted UCC uses a linear regression model Independent variable (x): Actual Uncompensated Care Dependent variables (y): Inpatient Medicaid, Self Pay, and Charity Charges as a % of Total Charges Inpatient Charges from non-Medicare Admissions through the ER as a % of Total Charges Outpatient Medicaid, Self Pay, and Charity Charges from the ER as a % of Total Charges Outpatient Charges from non-Medicare ER Visits as a % of Total Charges

UCC UCC Pool – since Statewide UCC % is built into all hospitals’ rates, the UCC Pool acts as a settlement methodology to account for hospitals that experience more or less UCC than the State

Volume Adjustment Rates are adjusted for volume increases and decreases FY 2014 rates adjusted for volume changes occurring in FY 2013 Variable Cost Factor = 85% / Fixed = 15% Volume increases - 15% of volume increase taken out of rates Volume decreases - 15% is put into rates Changes Effective Jan 1, 2014 Adjustment will be made on a concurrent basis (during the year in which the volume change occurs) Variable Cost Factor = 50% / Fixed = 50%

Volume Adjustment

Assessments Two assessments pass through hospitals in order to support “medically uninsurable” patients and Medicaid expansion MHIP (Maryland Health Insurance Plan) Health Care Coverage Fund Medicaid Budget Deficit Assessment State total spread to hospitals based on % of total revenue Payer portion put into rates (all-payers) 86% Hospital portion paid by hospital throughout year 14% NSP I (Nursing Support Program) – grant funding Applied directly to admissions center

Application of Assessments This revenue produces the Rate Order Rates to be used in Unit Rate Compliance NSP I is applied directly to the Admissions Center Revenue after application of Current Year Price Variances and Penalties Applied based on % of Revenue in that center

Quality Based Reimbursement Implemented – July 2008 What’s Measured – Source of Data – CMS QIO Clinical Warehouse Measurement Period - Calendar Year For example, results from CY 2013 will impact FY 2015 rates % of Revenue at Risk: 0.5% (increasing to 1.0% in FY 2016 rates) Other - Revenue Neutral - some hospitals "win" and some "lose“ net result to the state is $0

Maryland Hospital Acquired Conditions (MHAC) Implemented – July 2009 What’s Measured - Potentially preventable complications (PPC's) Diagnosis present on admission? If no, penalized Source of Data - Quarterly discharge data submitted by hospitals Measurement Period - Calendar year For example, results from CY 2013 will impact FY 2015 rates % of Revenue at Risk: 2.0% for attainment, 1.0% for improvement Other - Revenue Neutral - some hospitals "win" and some "lose“ net result to the state is $0

Population Adjustment Relevant for TPR hospitals only HSCRC calculates population growth for each hospital’s primary and secondary service area by age cohort An adjustment is made to the TPR Cap in order to account for the increase or decrease in the population

Case Mix Index (CMI) All Patient Refined Diagnostic Related Grouper Each APR-DRG has a level of severity from 1 – 4 which is assigned based on in depth coding information such as age, weight, other pre-existing conditions, etc. 3-Level Case Mix Calculation Level I (CPC Included) – Hospital-specific change in CMI Level II (Trim) and III (Exclusions) Revenue pass-through for exclusions and trim revenue Statewide CMI change based on Level III

Example: Calculation of Relative Weight and CMI Case Mix Index (CMI) Calculation of Relative Weights Establish Statewide Average Charge per Case (with remaining data set) For each Cell (DRG by Severity) DRG 002 Severity 3 $10,000 DRG 390 Severity 2 $3,000 Total State Average $5,000 Total State Average $5,000 Relative Weight 2.0000 0.6000 State Average State Average Example: Calculation of Relative Weight and CMI

Based on Mix of Services Provided (Case Mix Index) Case Mix Index (CMI) Based on Mix of Services Provided (Case Mix Index)

Unit Rate Compliance Hospitals must be in compliance with approved unit rates on a monthly (except TPR) and YTD (7/1 - 6/30) basis

Unit Rate Compliance Although rate orders are effective July 1, hospitals usually receive them in Oct/Nov Still need to be in compliance by June 30th Approved rate (per rate order) = $15.00 Actual average charge for July-Dec = $10.00 Average charge for Jan-June must = $20.00 to be in compliance by June 30

Supply and Drug Compliance

CPE/CPC Price Corridors Overcharges/undercharges that are within the allowed corridors go into next years rates (one time adjustment)

TPR Price Corridors TPR unit rate compliance corridors are more relaxed Hospitals are free to charge at levels up to 5% above / (below) the approved individual unit rates without penalty This limit can be extended to 10% at the discretion of the Commission Staff

Penalties for Exceeding the Corridors Penalties will be applied if rates exceed monthly corridors for consecutive periods (TPR excluded): 6 consecutive months for Supplies (MSS) and Drugs (CDS) 3 consecutive months for all other centers Penalties are calculated at 20% of the sum (absolute value) of all charges in excess of the corridors Penalties are subtracted from next years rates

Penalties for Exceeding the Corridors Cont. Penalties will be applied if rates exceed year-end corridors Penalties are calculated at 40% of the sum (absolute value) of all charges in excess of the corridors Penalties are subtracted from next years rates

CPC and CPE Trim Exclusions High charge cases Exclusions Zero and one day stay cases Hospice Cases Cases denied for medical necessity (when 100% of room and board charges denied) Transplants (organ & bone) Other Special Cases Burn at Bayview Chronic at Kernan Shock Trauma Special Oncology Readmissions

Charge per Case (CPC) Compliance Can only adjust Inpatient Routine Centers to achieve CPC compliance

Charge per Episode (CPE) Compliance Can only adjust Inpatient Routine Centers to achieve CPE compliance

CPC/CPE Compliance Corridors Overcharge Corridors: 0% to 1.0% No Penalty 1.0% to 1.5% 20% Penalty 1.5% to 2.0% 30% Penalty 2.0% and greater 40% Penalty Undercharge Corridors: 0% to 2.0% No Penalty 2.0 to 3.0% 40% Penalty 3.0% and greater 100% Penalty

Reasonableness of Charges “ROC” is the acronym for the HSCRC’s Reasonableness of Charges Currently, there is no efficiency measure in place (suspended) HSCRC is developing a new efficiency measure Several parts of the “ROC” will probably remain in the new efficiency measure including peer groups and charge adjustments to account for differences at each hospital.

Required Monthly Reporting

Required Quarterly Reporting

Required Annual Reporting

Terminology & Acronyms What It Represents What It Means % Occ % of Occupancy Calculated by dividing total patient days by (# of beds x 365 days). ACS Ambulatory Care Services Services rendered to persons who are not confined overnight in a healthcare institution. Often referred to as “O/P” (Outpatient) services. ACO Accountable Care Organization Are groups of doctors, hospitals, and other health care providers, who come together voluntarily to give coordinated high quality care to the Medicare patients they serve. ADC Average Daily Inpatient Census Average number of I/Ps (Inpatients) (based on the daily inpatient census) present each day of a given period of time. ADM Admission Formal acceptance by an institution of a patient who is provided with room and board, continuous nursing service and other institutional services while lodged in the institution. APG Ambulatory Payment Group Classification system used to group ambulatory cases.

Terminology & Acronyms What It Represents What It Means ALOS Average Length of Stay Average number of days of service rendered to each I/P discharged during a given period. AOB Average Occupied Beds Total Inpatient Days divided by 365. APR-DRG All Payer Refined-Diagnosis Related Group System used by 3M Health Information Systems as the basis of all-payer hospital payment system; used by many hospitals in the US to analyze comparative hospital performance. ARR Admission Readmission Revenue Inpatient revenue measurement on a per episode basis. ARMS Alternative Rate Setting Methods When a hospital is permitted to accept financial risk for the provision of services under certain conditions and circumstances. CMI Case Mix Index Measure of complexity of patient population and/or treatment provided by an institution; tells how complex patients and services are.

Terminology & Acronyms What It Represents What It Means CMS Center for Medicare and Medicaid Services The federal agency that runs the Medicare program. In addition, CMS works with the states to run the Medicaid program. CMS works to make sure that the beneficiaries in these programs are able to get high quality health care. CON Certificate of Need Formal state application and approval process for adding new beds and services. CPC Charge Per Case Inpatient revenue measurement on a per case basis. CPT Current Procedural Terminology Numeric coding system maintained by the American Medical Association (AMA). Coding scheme for outpatient procedures and services.

Terminology & Acronyms What It Represents What It Means DME Direct Medical Education Direct expenses (salaries, benefits, etc.) related to qualified intern, residents and fellows in teaching- related programs. DSH Disproportionate Share Providing services to a disproportionately large share of low-income patients. Under Medicaid, states augment payments to hospitals with high DSH. Medicare inpatient hospital payments are also adjusted for this added burden. EIPA Equivalent Inpatient Admission Statistic that combines inpatient admissions and total outpatient visits as one unit of measure. EIPD Equivalent Inpatient Days Statistic that combines inpatient days and outpatient ambulatory visits in a weighted method. EIPC Equivalent Inpatient Cases Statistic that combines inpatient cases and outpatient ambulatory visits in a weighted method.

Terminology & Acronyms Calculation of EIPAs: Total Inpatient Revenue $ 63,304.8 A Total Inpatient Admissions 6,637 B Inpatient Unit Revenue 9.54 C = A / B Total Outpatient Revenue $ 29,845.7 D Total Outpatient Visits 47,274 E Outpatient Unit Revenue 0.63 F = D / E Inpatient / Outpatient Unit Ratio 15.11 G = C / F H Outpatient Visits 3,129 I   EIPAs 9,766 J = H + I

Terminology & Acronyms What It Represents What It Means E & M Evaluation and Management Universal codes to bill for patient visits or consultations conducted at a clinic, emergency room or physician’s office. FS Financial Statements Balance sheet, income statement, funds statement, statement of changes in financial position or any supporting statement or other presentation of financial data derived from accounting records. FTE Full Time Equivalents An objective measurement of the personnel employment of an institution in terms of full time labor capability. HSCRC bases FTEs on # of hours worked. Medicare bases FTEs on # of hours paid.

Terminology & Acronyms What It Represents What It Means GL General Ledger A ledger containing accounts in which all the transactions of a business enterprise or accounting unit are classified either in detail or in summary form. GME Graduate Medical Education Generally defined as the clinical training following graduation from medical school. This clinical training, which ranges from three to seven years in length (internship and/or residency), has traditionally taken place in teaching hospitals or academic medical centers (AMCs). This is funded in Maryland’s rate-setting system and is the cost of graduate medical education (GME) generally for interns and residents trained in Maryland hospitals. HCPCS Healthcare Common Procedure Coding System Alpha numeric billing codes used to identify and bill for items and services not included in the CPT Codes.

Terminology & Acronyms What It Represents What It Means HIPAA Health Insurance Portability and Accountability Act Designed for patient confidentiality, data security and standardization. HMO Health Maintenance Organization A health care provider or group of medical service providers who contracts with insurers or self-insured employers to provide a wide variety of managed health care services to enrolled workers through participating panel providers. HSCRC Health Services Cost Review Commission Rate-regulating and rate-setting body in the State of Maryland. I/P Inpatient Patient who is provided with room and board, and continuous general nursing services in a hospital. Defined as an admission and an overnight stay. ICC Inter-Hospital Cost Comparison Cost comparison methodology used in full rate application process.

Terminology & Acronyms What It Represents What It Means ICD-9 International Classification of Diseases – 9th Revision Clinically Modified Classification of codes that represent diagnoses, conditions and symptoms. ICD-10 International Classification of Diseases – 10th Revision Clinically Modified Classification of codes that represent diagnoses, conditions and symptoms. October 2014 IME Indirect Medical Education Indirect Medical Education expenses are generally described as those additional costs incurred as a result of the teaching process (e.g., extra tests ordered by interns / residents or the extra costs of supervision). MCO Managed Care Organization A type of Medicare managed care plan where a group of doctors, hospitals and other health care providers agree to give health care to Medicare beneficiaries for a set amount of money from Medicare every month. You usually must get your care from the providers in the plan. MHA Maryland Hospital Association State organization of Maryland hospitals.

Terminology & Acronyms What It Represents What It Means MHCC Maryland Health Care Commission An independent regulatory agency whose mission is to plan for health system needs, promote informed decision-making, increase accountability and improve access in a rapidly changing health care environment by providing timely and accurate information on availability, cost and quality of services to policy makers, purchasers, providers and the public. MHIP Maryland Health Insurance Plan State-managed health insurance program for Maryland residents who are unable to obtain health insurance from other sources. Each hospital is assessed at 1% of its net patient revenue to operate the program. NOR Net Operating Revenue Operating gross revenue less any contractual or other revenue deductions.

Terminology & Acronyms What It Represents What It Means NSP Nursing Support Program Nursing Support Program developed to help address the nursing workforce shortage. Each rate-regulated hospital is eligible for a percentage of rate increase to help pay for programs to recruit and / or retain nurses (NSPI and NSPII). O/P Outpatient Patient involved in an emergency visit, diagnostic test or clinic visit procedure or service and is not admitted to the hospital. Permanent Revenue Total Allowed Revenue Permanent revenue represents revenue that a hospital is entitled to on a permanent and ongoing basis. The opposite of permanent revenue is one-time revenue which is only approved for a one year period. PIP Periodic Interim Payment When a hospital receives cash payments from third- party payers (Usually Medicare) in constant amounts each period. The total of these payments received over a year is an estimated cost of providing services to patients covered by the plan. PLF Price Leveling Factor Factor used to inflate and / or adjust charges from a historical / current period to a current / future period.

Terminology & Acronyms What It Represents What It Means RAC Recovery Audit Contractor Approved CMS contractors who have been commissioned to review the Medicare claims of acute care facilities to deem if services were necessary or appropriate. ROC Reasonableness of Charges (Suspended) HSCRC’s Reasonableness of Charges Report. This report is the Commission’s tool for assessing the reasonableness of each hospital’s charges on a per case basis relative to their peer group. RVU Relative Value Unit Index number assigned to various procedures based upon the relative amount of labor, supplies and capital needed to perform the procedure. Predominantly for ancillary activities and clinic visits (by time and complexity).

Terminology & Acronyms What It Represents What It Means TPR Total Patient Revenue An agreement which establishes a revenue cap for qualifying hospitals. A qualifying hospital is typically located in a rural area and has a well-defined catchment area with a stable population. UB-04 Uniformed Billing 2004 Standard form used for the billing of facility-based / inpatient services, effective July 2007. UCC Uncompensated Care Care provided for which compensation is not received (bad debts and charity care). W&S Wage & Salary Report Job-specific pay information for hospitals. This is used in the calculation of the Labor Market Adjustment for HSCRC ROC and Full Rate Settings. QBR Quality Based Reimbursement New HSCRC reimbursement methodology which adjusts reimbursement for identified quality measurements.

Terminology & Acronyms What It Represents What It Means PPC Potentially Preventable Complications 64 Complications that are highly preventable as defined by 3M. PPR Potentially Preventable Readmissions Readmission scenarios deemed preventable. MHAC Maryland Hospital Acquired Conditions Subset of PPC. Considered as “never events”. P4P Pay for Performance Initiative which gives incentive to provider to improve quality of care. ODS Zero and One-Day Length of Stay Patients admitted and discharged by a hospital with a length of stay less than or equal to one. CPE Charge per Episode An ARR hospital’s approved revenue constraint as determined by dividing approved included revenue by the count of ARR Episodes of Care

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