SD11 - Medicaid-Financed Hospital Services in Virginia

  • Published: 1993
  • Author: Joint Legislative Audit and Review Commission
  • Enabling Authority: Senate Joint Resolution 180 (Regular Session, 1991)

Executive Summary:
The Virginia Medicaid program provides a wide range of health care services on behalf of qualified indigent persons. In fiscal year (FY) 1991, Virginia Medicaid purchased health care for 428,650 individuals at a total cost of about$1.3 billion (including administrative expenses). Half of this cost was financed with State general funds. Between FY 1987 and FY 1991, annual Medicaid spending increased by approximately 85 percent, and the annual number of Medicaid recipients increased by about 35 percent.

In response to the rapidly escalating costs of the Medicaid program, the General Assembly passed Senate Joint Resolution (SJR) 180 during the 1991 session. SJR 180 directed the Joint Legislative Audit and Review Commission (JLARC) to conduct a comprehensive review of the Virginia Medicaid program as well as the indigent care appropriations to the State's medical teaching institutions.

The first in the series of reports on the Medicaid program examined the feasibility of using a private insurer for the program. The second report in the series, "Review of the Virginia Medicaid Program" (February 1992), provided an overview of the program and addressed issues related to access to primary care, eligibility, and the Medicaid forecast and budget process. Other reports in the series will address Medicaid ambulatory care, Medicaid long-term care, and coordination of the State's indigent health care programs.

In Virginia, Medicaid inpatient and outpatient hospital care is not extravagant. The program is conservatively managed and the services provided are, with only a few exceptions, those required by federal law. In fact, hospital providers have claimed that reimbursement has been overly conservative. In 1986 the Virginia Hospital Association (VHA) filed a lawsuit against the Commonwealth seeking to increase inpatient reimbursement rates.

As a result of a 1991 settlement agreement, no changes can be made to the hospital reimbursement systems until July 1996, except under specific circumstances. Moreover, this review did not identify problems which require immediate changes to the reimbursement systems. But the General Assembly can begin to prepare now for the possibility of reimbursement reform. Specifically, the General Assembly can set the goals of the Virginia Medicaid program and the hospital reimbursement systems to ensure that they: (1) promote access to quality health care for recipients, (2) provide adequate reimbursement for providers, and (3) are cost-effective for the Commonwealth.

This report is intended to bring to the attention of the General Assembly the salient issues related to the funding and administration of Medicaid hospital care. While many of the issues cannot be addressed in the short term due to the lawsuit settlement agreement, careful planning now will ensure that Medicaid hospital care can be provided in a cost-effective manner in the future.

Program administration as it relates to inpatient and outpatient hospital care is the focus of this review. In keeping with the requirements of SJR 180, and in recognition of the General Assembly's role in guiding Medicaid policy, this report addresses:

(1) the cost-effectiveness and sufficiency of hospital reimbursement,

(2) implementation of federal program requirements in the hospital setting,

(3) implications of limiting Medicaid hospital services,

(4) implications of adjusting recipients' contributions to their care,

(5) effectiveness of current utilization review procedures, and

(6) exploration of alternative administrative methods for implementing program requirements and options.

This is not the first time JLARC has examined the Medicaid program in hospitals. In 1979, JLARC published a series of reports on health care, including inpatient and outpatient hospital care. This report also serves as an update to changes in the hospital industry and the Medicaid program in hospitals since that time.

Medicaid Hospital Spending Cannot Be Controlled Through Medicaid Policy Alone

Hospital services are a major component of the Virginia Medicaid program. Medicaid spending for hospital services reached $367.4 million in FY 1991, accounting for 29 percent of total Medicaid spending for medical services. Roughly half of these expenditures were financed with State general funds. Spending for both inpatient and outpatient hospital services has increased at a faster rate than total Medicaid spending for medical services, and this growth is expected to continue in the future.

The growth in Medicaid hospital spending has been driven by multiple factors, including increases in the price of hospital care, increases in the number of Medicaid recipients, and increases in utilization of hospital services. To a limited extent, the State can control increases in Medicaid hospital spending by maintaining cost-effective reimbursement systems, by limiting services and requiring co-payments, by imposing financial control mechanisms on the reimbursement process, and by closely examining utilization of hospital services.

However, because Medicaid hospital spending is largely a function of the cost of hospital care, hospital costs must be contained if the growth in Medicaid hospital spending is to be controlled. Virginia Medicaid is a relatively minor source of revenues for most hospitals, averaging only seven percent of hospital revenues statewide. As a result, the price of hospital care cannot be controlled through Medicaid reimbursement policy alone.

Reimbursement for Inpatient Hospital Services Has Been Generally Cost Effective, But Improvements Could Be Made

In 1979, JLARC recommended that the State adopt a prospective payment system for inpatient reimbursement in order to help contain inpatient hospital costs. Under prospective payment, hospitals are paid based on pre-determined rates rather than the reported cost of providing care. Such a system was implemented in 1982, and has been in place since that time. JLARC staff analysis indicates that the inpatient reimbursement system has been cost effective for the State, although there are concerns about specific elements of the system. JLARC staff analysis also indicates that reimbursement rates have been sufficient to provide access to hospital care for Medicaid clients.

However, providers have been dissatisfied with inpatient reimbursement rates, asserting that rate increases have not been sufficient to cover the necessary costs of providing care to Medicaid clients. In 1986, the VHA filed suit against the State, claiming that inpatient reimbursement rates did not meet minimum federal requirements. In February of 1991, the VHA and the State reached an out-of-court settlement, in which the State agreed to make additional payments to hospitals through FY 1996. This settlement agreement also required the establishment of a task force by January 1995 to evaluate the existing inpatient reimbursement system.

Given the magnitude of Medicaid hospital spending, the possibility of future legal challenges, and the possibility of reimbursement reform, it is important that the General Assembly become actively involved in the future of Medicaid reimbursement. Four concerns deserve the attention of the General Assembly.

The State Should Prepare for Reimbursement Reform. Virginia's hospitals will likely demand higher Medicaid payment rates in the future. The recent history of provider lawsuits in Virginia and other states indicates that the State may have to prove to the courts that the rates it pays to hospitals are sufficient to meet the costs of efficiently and economically operated facilities. Currently, the Department of Medical Assistance Services (DMAS) and the Health Services Cost Review Council (HSCRC) are both developing efficiency indicators to measure hospital performance. However, these initiatives are being conducted independently and with limited General Assembly involvement. Considering the importance of this issue, the General Assembly should provide policy direction in the development of hospital efficiency indicators.

Special Treatment of State Teaching Hospitals Inflates the Medicaid Budget But Reduces Total General Fund Commitments. Under the current inpatient reimbursement system, the State's two teaching hospitals are reimbursed at significantly higher rates than the other acute care hospitals. However, the State is able to share the increased cost with the federal government, thereby reducing its total commitment of general funds to these institutions. In the snort-term, this policy has allowed the State to conserve funds during a time of fiscal stress. The long-term implications of this policy are currently unclear, and will be reviewed in a forthcoming JLARC study on indigent health care.

Interpretation of the Federal Disproportionate Share Adjustment Policy Has Led to Higher Reimbursement than Required. Federal regulations require states to provide additional payments (disproportionate share adjustments) to hospitals that serve a relatively large percentage of Medicaid or low-income patients. Virginia has adopted a more generous disproportionate share payment policy than federal regulations require. The General Assembly may wish to address the policy question of whether to implement a federal requirement in the least costly manner, or continue to provide support beyond federal requirements to hospitals which serve large numbers of Medicaid patients.

Medicaid Reimbursement Could Be Designed to Support Certain Rural Hospitals. In 1990, the Joint Subcommittee on Health Care for All Virginians (now the Joint Commission on Health Care) identified some rural hospitals which appeared to be experiencing fiscal stress. JLARC staff analysis indicates that some of these same rural hospitals do not fare as well as other hospitals under Medicaid's inpatient reimbursement system. The General Assembly could consider providing additional support to certain rural hospitals through Medicaid reimbursement policy.

Recommendations. In anticipation of the revision of the Medicaid inpatient reimbursement system which is to begin in 1995, the General Assembly may wish to:

• ensure that legislative direction is given to DMAS and the HSCRC in the development of hospital efficiency indicators;

• clarify its intent for the continuation of special reimbursement policies for the State teaching hospitals, pending additional information provided in a separate JLARC report on indigent health care programs;

• clarify its intent for the continuation of a more generous disproportionate share adjustment policy than is required by federal law; and

• consider special payment rates for some rural hospitals, within budgetary constraints.

In addition, the task force on inpatient reimbursement should:

• consider elements of other states' reimbursement systems which could accomplish the General Assembly's objectives for Medicaid reimbursement;

• examine alternative methods for reimbursing capital costs; and

•. Examine alternative methods for classifying hospitals into peer groups for the purpose of reimbursement.

Reimbursement for Outpatient Hospital Services Has Ensured Access, But Could Be More Cost Effective

Outpatient reimbursement rates have been sufficient to enlist a broad base of hospital providers. However, the outpatient reimbursement system does not provide adequate incentives for hospitals to contain costs. DMAS pays cost-based reimbursement rates for most outpatient hospital services. Under this system, providers are assured of receiving payment at the full Medicaid-allowable cost of providing the service, even if that service is provided inefficiently.

While DMAS has taken steps to improve the cost effectiveness of outpatient reimbursement, implementation of a prospective reimbursement system could lead to additional cost savings. Under prospective reimbursement, providers would receive a predetermined payment amount which would create additional incentives to contain costs.

Recommendation. The Department of Medical Assistance Services should implement a prospective reimbursement system for Medicaid outpatient hospital services as soon as the VHA lawsuit settlement agreement will permit.

There Is Minimal Opportunity for Cost Savings From Limiting Services or Increasing Co-Payments

The State has been modest in its coverage of Medicaid hospital services. The State has also implemented a demanding co-payment requirement. As a result, there is minimal opportunity for additional cost savings from limiting services or increasing co-payments without raising serious health policy implications. Thus, any proposals for further limits will need to be studied carefully using standard assessment criteria.

Recommendation. The Department of Medical Assistance Services should ensure that both the executive and legislative entities involved in health policy decision-making are consulted in any future proposals for service or co-payment policy changes. In addition, in its proposals DMAS should address specific issues such as cost savings, recipient and provider impacts, and legislative intent.

Utilization Review Has saved Money, and Could Be Expanded

The current hospital utilization review program administered by DMAS has resulted in substantial cost savings and cost avoidances for the State. However, national studies indicate that there are still a significant number of unnecessary hospital procedures which increase the cost of hospital care. At the same time, utilization of outpatient services is growing rapidly. In light of these trends, DMAS should take steps to expand its utilization review activities.

Recommendations:

• The Department of Medical Assistance Services should study the feasibility of implementing prospective utilization review in coordination with its current utilization review activities.

• The Department of Medical Assistance Services should increase its utilization review activities for outpatient hospital services.

• If Virginia decides to modify its Medicaid hospital reimbursement methods, the Department of Medical Assistance Services should evaluate its utilization review strategies to ensure that they continue to be compatible with the incentives created by the inpatient and outpatient reimbursement systems.

The Cost Settlement and Audit Process Should Be Improved

During the cost settlement and audit process, DMAS ensures that hospitals are reimbursed based on the approved costs for the services they provided during the previous year. These reimbursements are based on the payment rates and the principles of reimbursement established for inpatient and outpatient services. During this review, JLARC staff found evidence that six hospitals may have been over-reimbursed by as much as $1.2 million in FY 1986 and FY 1987because federal regulations were not implemented in the least costly manner. Although additional over-reimbursements may have occurred, DMAS records were not organized to allow a full evaluation during the course of this review.

Recommendations:

• The Department of Medical Assistance Services should immediately begin an examination of historical hospital cost reports and cost settlements to determine: (1) which hospitals may have been over-reimbursed, (2) the amount of over-reimbursement, and (3) the collectability of all identified over-reimbursements. The Department should report its findings to the General Assembly by March31, 1993.

• The Department of Medical Assistance Services should develop appropriate policies and procedures for automated cost settlement and audit record keeping.

In the 1979 JLARC review of inpatient care, several recommendations were made concerning improvements to the cost settlement and audit process. Some of these have been implemented, but the process remains lengthy -- typically taking more than a year to complete. There is one recommendation ·in this area:

Recommendation. The Department of Medical Assistance Services should take steps to expedite the hospital cost settlement and audit process. In addition, DMAS should reconsider the recent regulatory change that lengthens the timeframe for setting the interim inpatient reimbursement rate for hospitals.

In 1979, JLARC also recommended that additional field audits of hospitals be conducted. This recommendation has not been implemented. DMAS currently relies on the Medicare Intermediary to conduct field audits of hospitals. Hospitals selected are those with high Medicare utilization and not necessarily those with high Medicaid utilization. Therefore, some hospitals with high Medicaid utilization are not being field audited.

The few field audits that have been conducted have resulted in cost savings for the State. The five field audits reviewed by JLARC staff resulted in approximately $300,000 in additional Medicaid savings. Audits of additional hospitals with high Medicaid utilization could be expected to result in additional savings. Additional field audits could also provide the State with accurate data on hospital operating costs, which could be important if the State decides to modify Medicaid reimbursement methods.

Recommendation. The Department of Medical Assistance Services should complete an analysis of the costs and methodology for conducting additional field audits of hospitals.

The Joint Commission on Health Care Should Focus on Hospital Cost Containment as One Way to Control Medicaid Spending

To the extent that hospital cost increases are contained, Medicaid hospital spending may also be controlled. The General Assembly, by establishing the Joint Commission on Health Care, has created an entity which can direct a comprehensive examination of all of the factors that drive hospital costs. Further, the Joint Commission can identify public policies that may help contain these costs.

Recommendations. In the interest of containing the price of hospital care for all purchasers including Virginia Medicaid, the Joint Commission on Health Care may wish to:

• Direct a study to identify the full range of factors driving hospital costs in Virginia, as well as public policies which might help to control these factors;

• Establish a technical advisory group on hospital data collection to ensure the availability of adequate data for policy analysis; and

• Continue to promote the development of a patient-level database for Virginia which could be used to educate providers about overutilization of services, and to aid the Department of Medical Assistance Services in establishing Medicaid reimbursement rates.