Maryland
Rate Regulation Overview
and
Potential Impact of Healthcare Reform
Michael A. Zito, Jr.
Managing Director
KPMG LLP
March 30, 2012
Discussion Topics
1. Overview of HSCRC
2. Medicare Waiver Test
3. Current Regulatory Environment
4. Impact of Healthcare Reform
5. Q&A
1
The Formation of the HSCRC
1971 – Initial legislation enacted by the General Assembly
 Independent body within the Department of Health and Mental Hygiene
 HSCRC given the authority to establish hospital rates
1974 – HSCRC began setting unit rates for hospitals after 3 yr phase in
 Authority extended only to non-federal insurers
1977 – Maryland granted temporary “waiver” by federal govt. to test
alternative payment approaches
 Exempted the state from national Medicare and Medicaid reimbursement
requirements
1980 – Medicare exemption became permanent (with stipulations) in
Maryland
 Continue to be the only state with this “waiver”
2
The Medicare Waiver is the “lynch-pin” of the
Maryland HSCRC System
First negotiated effective 7/1/77
“Waives” payment under the national PPS System and allows Medicare
and Medicaid to pay under HSCRC rates
Continues today under special provisions of the Social Security Act which
require the Maryland System to:
 Cover substantially all non-federal acute hospitals
 Treat all payors “equitably”
 Pass a “Rate of Increase Test” whereby the Maryland rate of increase in
payments per discharge remains below the national average rate of increase
since a CY 1980 Base Period
3
The HSCRC Mandate
Ensure Equity / Fairness / Stability
 All-Payor system
 Charges related to costs
Maximize Access to Care
 Uncompensated Care
Contain Hospital Costs / Total Costs are Reasonable
 Charge per Case / TPR
 Waiver Test
Provide Accountability
 The “ROC”
 Annual Rate Adjustments
 Disclosure of Information and Performance
4
Regulatory Jurisdiction (Rates)
Includes
 Inpatient services
 Outpatient services “at the hospital” (See HSCRC Criteria – next page)
Excludes
 Physician/Professional Fee/Part B Activity
 Other operating revenue
 Non-operating revenue
 Certain services (O/P renal, Home Health, SNF)
5
HSCRC Published “At The Hospital” Criteria
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Location of entrances
Location and signage of parking
Location and language of signage at entrances, within buildings, on the campus and in parking
areas, effectively alerting the public that a given building or service is either at or not “at the
hospital”
Location of registration, changing and waiting areas
Whether billing reflects clearly that the service is regulated or not rate regulated
Whether any physical connection from an unregulated facility to the hospital will be restricted in
order to ensure that patients and visitors do not have access to the unregulated facility from the
hospital
Whether there is any duplication of unregulated services within the hospital in order to avoid
inappropriate patient steering
Whether there is any inappropriate mixing of regulated and unregulated services in the same
building, which would tend to have the effect of confusing patients on the regulated or nonregulated status of a given service being provided
Whether any Medicare Part B physician’s service being provided in an unregulated building also
includes components of a Medicare Part A hospital service that would be reasonably expected by a
patient to fall under Commission rate setting jurisdiction
6
“All Payor” Hospital Rate Setting System Unit Rates
HSCRC
 Establish and approve rates for each unit of service (Room and Board,
imaging, lab, etc…)
– Hospital specific
Unit rates are to be reasonably related to underlying costs
– Including social costs of uncompensated care (bad debt / charity)
Hospitals
 Required to charge all payors at HSCRC approved unit rates
Payors (All)
 Required to pay hospitals based on each hospitals approved unit rates
– Payors given the ability to deny payment of care for lack of medical
necessity
7
Charge per Case (CPC)
Rate system developed in 1999 – 2000
 Inpatient charges are monitored based on a fixed amount per case
 Case-mix adjusted
 Includes approximately 95% of hospitals’ inpatient charges
– Exclusions for certain types of cases and extremely high and low charge
cases
Incentives
 Increase cases / decrease utilization / control costs
8
Total Patient Revenue (TPR)
Rate System developed in early 80’s (Redefined and Initiated in 2010)
 Only 10 hospitals on TPR
– Until 2010 only McCready and Garrett were on TPR
 Fixed revenue cap for 100% of approved revenue
– No adjustment for volume or case-mix change
 Typically a rural hospital methodology
 Annual adjustments for inflation, population and mark-up
 Incentives
– Maintain / reduce volumes
– Control costs
9
Admission – Readmission Revenue (ARR)
Rate System developed in 2011
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Addresses all cause (not just preventable) readmissions
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Rewards for reduction in readmissions (30-day)
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Allowed charges per episode
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Investment required and funded by HSCRC (with payback)
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Incentives
– Reduce readmissions
– Reduce related costs
10
Unit Rate Order
All rate systems include Unit Rates / Approved Rate Order
 Effective rate year – July 1 – June 30 for all hospitals
 Unit rate compliance monitored throughout the rate year by the HSCRC
staff
 All payors are charged equal rates
– Allowed minor payment discounts: 2% - 6% depending on payor
 Rates are adjusted annually for update factor (inflation + or - ) and changes
in mark-up (uncompensated care and payor mix)
 By June 30 or each rate year, compliance is dually measured:
– CPC/ARR and unit rates
– TPR and unit rates
11
Evolution of Cost and Utilization Controls in Maryland
1980
1990
2000
2010
2012
TPR (1980 – Current)
GIR (1985 – 2000)
CPC/CPV
(2000 – Current)
ARR (2011)
PBR (2012?)
Unit Rates (1974 – Current)
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Discussion Topics
1. Overview of HSCRC
2. Medicare Waiver Test
3. Current Regulatory Environment
4. Impact of Healthcare Reform
5. Q&A
13
The Medicare Waiver is the “lynch-pin” of the
Maryland HSCRC System
The “Waiver Test” is based on the average Medicare Payment per
Inpatient Discharge
 The “Test” compares the rate of growth at Maryland hospitals
collectively, versus the rate of growth at National hospitals collectively
– NOT, relative position of absolute payment per discharge
– Acute hospitals only
– No adjustments for case mix or other factors
 Compares the current period versus a “base” period (1980), as defined by
Federal Law
The “Waiver Test” does not measure outpatient payments
14
Waiver Cushion Forecast
 The Waiver Cushion is projected to decline substantially from FY2010 –
FY2012.
 The last official Waiver Letter for the period ending September 30, 2010
reflected a Waiver Cushion of 9.55%.
 However, since 2010, the Maryland Payment per Discharge has grown rapidly
through 2011. This trend is expected to continue through at least 2012.
– From FY2010 – FY2011, the Maryland Payment per Discharge grew 6.10%.
– From FY2011 – FY2012, the Maryland Payment per Discharge is expected
to grow by 7.8%.
 Conversely, the National Payment per discharge grew 0.92% in FY2011, and it
is expect to increase by only 0.43% in FY2012.
 As a result, the Waiver Cushion is expected to be below 0.0% beginning in
March 2012.
 The Chart on the next page reflects this projection.
15
Waiver Cushion Forecast
Waiver Test Cushion
(No Adjustment for MSP Zero Pay Discharges)
16.00%
14.00%
12.00%
Forecast
Actual
9.55%
10.00%
8.00%
6.00%
4.00%
Estimated
Current
Position
12/31/11
Waiver
Letter
9/30/10
2.00%
1.20%
0.00%
-2.00%
-2.11%
-4.00%
-1.94%
Waiver Cushion (Unadjusted)
16
Discussion Topics
1. Overview of HSCRC
2. Medicare Waiver Test
3. Current Regulatory Environment
4. Impact of Healthcare Reform
5. Q&A
17
Current Regulatory Environment
 Change in HSCRC Leadership: New Chairman and New Executive
Director
 First and Foremost: The deterioration of the Waiver Test is driving current
decision making.
– Shift from Inpatient rates to Outpatient rates
– Limited or no Update Factor
– Relook at the Medicare Payment differential
– Ultimate Re-design of The Waiver Test
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Current Regulatory Environment (cont’d)
 State Budget Issues
– Medicaid Assessments
 How much should be funded through rates
 Numerous Rate Methodologies
 Capital Funding
 Quality Initiatives
– Are we measuring the right things?
 Complexity and Timeliness of annual rate adjustments
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Discussion Topics
1. Overview of HSCRC
2. Medicare Waiver Test
3. Current Regulatory Environment
4. Impact of Healthcare Reform
5. Q&A
20
Transformation…
“The delivery of healthcare services will undergo much
transformation in the era of healthcare reform. Those hospitals
and health systems who can plan multi-year strategies and
effectively change their business models and culture should be
most able to adapt. Growth strategies, physician alignment and
greater efficiencies, along with effective management and
governance, will be integral in positioning the organization for
payment reform.”
-Moody’s Investors Service, “Transforming Not-for-Profit
Healthcare in the Era of Reform,” May 2010
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Components of the Act Applicable to Providers
Expanded
Access
New
Payment Structures
Individual Mandate
Employer Coverage
Public Program Expansion
State Programs
Medicare
Medicaid
Value Based Purchasing
Reduced Payment Updates
Reduced DSH payments
Reductions for Hospital Acquired
Conditions
Reductions for Readmissions
Changes to
Private Insurance
Temporary High Risk Pool
Medical Loss Ratio Floors
Insurance through Exchanges
Expanded Dependent Coverage
Financing Reform
and Accountability
Independent
Payment
Advisory Board
Innovation
New Care
Delivery Models
Accountable Care Organizations
Medical Homes
Bundled Payments for Episodes of Care
Prohibits Pre-existing Condition
Exclusions in Children
Prohibits Rescissions
Limits Coverage Waiting Periods
Community Benefit
Requirements
Potential Tort Reform
Tax Changes
Quality Bonus Incentives
Covers Preventive Services
Prohibits Lifetime Limits
Prohibits Annual Limits
Significant Increase in
Funds to Identify Fraud and
Abuse
Medicare and Medicaid Center for Innovation
Multiple entities focused on quality, outcomes, and prevention: Patient-Centered Outcomes Research; Interagency
Working Group on Health Care Quality; National Prevention, Health Promotion and Public Health Council
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Current and Potential Impacts of Reform on Maryland
Expanded Access
 Increase in Medicaid Coverage
– Averted Bad Debts; UCC Policy revision
 Increased Coverage (General)
– Future Volume Adjustments: Variability
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Current and Potential Impacts of Reform on Maryland
New Payment Structures
 Reduced Payment Updates
– Minimal / No Update Factor in MD
– Impact on Waiver; Waiver Test Redesign
 Value Based Purchasing
– Increased weight on HSCRC’s Quality Initiatives
 Reductions for Readmissions
– HSCRC ARR Methodology
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Current and Potential Impacts of Reform on Maryland
New Care Delivery Models
 ACO’s, Medical Homes
– Total Patient Revenue (TPR) System
– Population-Based Reimbursement (Future?)
 Bundled Payments
– Alternative Rate Agreements; Physician Regulation?
– Gain Sharing
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Current and Potential Impacts of Reform on Maryland
Financing Reform and Accountability
 Identification of Fraud and Abuse
– RAC Audits
 HSCRC Education
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Current and Potential Impacts of Reform on Maryland
Other Transformation Initiatives
 Meaningful Use and ICD-10
– How will HSCRC react to new ICD-10 coding transition
 Case-Mix
 Dual Coding
 Hospital Costs
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Conclusion
 Rate regulation in Maryland has withstood the test of time
since the early 70’s.
 The HSCRC has successfully lived by its mandate: Equity /
Access / Reasonable Costs / Accountability
 Maryland is currently faced with its biggest challenges ever:
The Waiver Test and Reform.
 Maryland hospitals and the HSCRC have been and must
continue to be proactive regarding the current and future
transformation of healthcare in America.
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Q&A
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