1. Arizona Health Care Cost Containment System DRG-Based Inpatient Hospital Payment System Project Overview June 14, 2012

2. Meeting Agenda Page 2  Introductions  Project Overview  Key Payment Methodology Components  Stakeholder Input

3. Project Overview

4. Overview of Design Framework Page 4 Evaluate System Component Options Against Evaluation Criteria Evaluation Criteria Considers AHCCCS Proposed Principles and Other Identification of Options for Fiscal Modeling Determine System Components Based on Evaluation Base Rates / Conversion Factors Relative Weights Treatment of Outlier Cases Other System Components Simulate Payments Using Comprehensive and Recent Encounter Data Compare Simulated to Legacy Payments By Provider, by Service Line, by Plan and in Aggregate Finalize System Recommendations Base Rates / Conversion Factors Relative Weights Treatment of Outlier Cases Other Components Stakeholder Input is Key to Successful Design Process

5. Project Steps Page 5 Step 1: Develop Standardized Evaluation Criteria Step 2: Research and Determine Optimal DRG Model Step 3: Identify and Evaluate Other Payment System Components Step 4: Develop Conceptual Design and Documentation

6. Project Steps Page 6 Step 5: Prepare Inpatient FFS and Encounter Claims Data for Analyses Step 6: Create Dataset of Necessary Medicare Rate Components Step 7: Estimate the Costs of Services, Claim by Claim Step 8: Determine DRG Relative Weights

7. Project Steps Page 7 Step 9: Develop Payment Simulation ModelStep 10: Determine DRG Base Prices Step 11: Determine Targeted Policy Adjustors, as Necessary, Based on Simulation Model Results Step 12: Adjust System Parameters, as Necessary, Based on Simulation Model Results

8. Key Project Dates (Preliminary) Page 8  Preliminary payment rate calculations and payment simulation modeling: June 2012 - December 2012  Presentation of Summary Report to Arizona Legislature: January 2013 - March 2013  Target DRG system implementation date: To be determined

9. Evaluation Criteria Page 9 Evaluation Criteria will Include:  Establishing appropriate incentives for cost effectiveness  Maintaining or enhancing access to high-quality care  Establishing or maintaining equity of payment among providers for similar services  Recognizing measurable differences in resource requirements  Enhancing predictability and stability of resulting payments, for the providers and for the State  Maintaining transparency in the rate-development and payment processes  Creating simplicity in program administration

10. Key Payment Methodology Components

11. DRG Model Selection Page 11 What Are Other State Medicaid Programs Doing? APR-DRGs MS-DRGs * * * CMS DRGs AP or Tricare DRGs * Other Per Stay/Per Diem/Cost Reimbursement/Other * * ** * Indicates Moving Toward ** Indicates Under Consideration **

12. DRG Model Selection Page 12 Source: Quinn, K, Courts, C. Sound Practices in Medicaid Payment for Hospital Care. CHCS: November 2010.

13. DRG Model Selection Page 13 Source: Quinn, K, Courts, C. Sound Practices in Medicaid Payment for Hospital Care. CHCS: November 2010.

14. DRG Model Selection  Consideration of MS-DRGs for Medicaid Payment:  Designed for Classification of Medicare Patients… Source: CMS, “Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2008 Rates; Final Rule,” Federal Register 72:162 (Aug. 22, 2007): 47158 Page 14 “The MS-DRGs were specifically designed for purposes of Medicare hospital inpatient services payment… We simply do not have enough data to establish stable and reliable DRGs and relative weights to address the needs of non-Medicare payers for pediatric, newborn, and maternity patients. For this reason, we encourage those who want to use MS-DRGs for patient populations other than Medicare [to] make the relevant refinements to our system so it better serves the needs of those patients.”

15. DRG Model Selection Page 15 Benefits of Migrating to APR-DRGs Will Facilitate Measurement of Potentially Preventable Readmissions and Complications Enhances Recognition of Acuity Related to Specialty Hospitals, Including Children’s and Teaching Hospitals Enhances Recognition of Resources Necessary for High Severity Patients Reduced Occurrence of Outlier Cases Incorporates Age into Classification Process – Critical for Neonatal Cases Enhanced Homogeneity of Classifications – Superior Measurement of Resources Enhanced Homogeneity of Classifications – Superior Measurement of Resources

16. Other Methodology Components Page 16 Design ComponentOptions/Comments Base Rates / Base Prices Statewide Standardized Amount (with or without adjustments) Adjust for wage differences? Peer Group (with or without adjustments) Hospital Specific DRG Relative Weights Adopt national weights Calculate State-specific weights Outlier Payment Policy Adopt “Medicare-like” model Incorporate “low-resource” outlier policy Transfer Payment Policy Adopt “Medicare-like” model Incorporate Medicare post-acute transfer policy?

17. Inpatient Options – Other Design Considerations Page 17 Illinois-Specific Relative Weights

18. Other Methodology Components Page 18 Design ComponentOptions/Comments Payment for Specialty Services Include in DRG payment method Establish separate payment policies (i.e., per diem) Adjust for Acuity Graduate based on length-of-stay (Medicare model) Rural and Critical Access Hospitals Targeted policy adjustors Separate base rates Alternative payment methods Targeted Policy Adjustors Potential adjustors for: Targeted service lines Specific age groups Targeted hospitals

19. Other Methodology Components Page 19 Design ComponentOptions/Comments Establishing Budget Neutrality Establishing targeted expenditures Adjustments for inflation and utilization trends Adjustment for Expected Coding and Documentation Improvements Expected and appropriate response Need strategy to mitigate risk to State and to providers ICD-10 Compatibility DRG model must be compatible Need strategy to mitigate risk to State and to providers

20. Stakeholder Input

21. Formation of Advisory Groups Page 21 AHCCCS Final Design Decisions Consultants Providers Plans Community Forum System Implementation

22. Questions and Discussion