The Department of Health Care Services (DHCS) is providing this final notice regarding Medi-Cal payment reductions mandated by Welfare and Institutions Code (W & I Code), Sections 14105.19 and 14166.245, which are scheduled to take effect on July 1, 2008. A previous notice concerning these payment reductions was published in the California Regulatory Notice Register on March 28, 2008 (Volume No. 13-Z, page 492). A supplemental notice containing more detailed information on the ten percent reduction in provider payments for hospital inpatient services and some nursing facility services was published in the California Regulatory Notice Register on June 6, 2008 (Volume 23-Z, pages 917-919). Information about these changes has also been published on the Medi-Cal Web site and Medi-Cal provider bulletin. Final public notice regarding the payment reductions for non-contract hospital inpatient services and some nursing facility services is also scheduled for publication in the California Regulatory Notice Register on June 27, 2008. The Department intends to implement the payment reductions discussed below as well as the other ten percent payment reductions mandated by W & I Code, Section 14105.19 effective for dates of service on or after July 1, 2008.

Following is a description of the methodology that will be used in establishing payments for non-contract hospital inpatient services and some nursing facility services for dates of service on or after July 1, 2008. The justification for these provider payments is also described below.

Non-Contract Hospital Inpatient Services
The Medi-Cal reimbursement policy for hospital inpatient services rendered by hospitals not under contract is applied to each hospital according to its own fiscal period. Each hospital decides upon its own fiscal period, with fiscal periods ending on December 31 and June 30 being the most common. When non-contract hospitals bill for services, they are initially paid an interim rate, which is stated as a percentage of the hospital’s charges. W&I Code Section 14166.245 does not change the current Medi-Cal policy for calculation of a hospital’s interim rate. Thus, a hospital’s interim rate may go up or go down in accordance with current interim rate policy subsequent to implementation of Section 14166.245. However, effective for dates of service on or after July 1, 2008, the payments made to a hospital pursuant to the interim rate in effect at any particular time will be reduced by 10 percent.

Hospitals are required to submit a cost report within five months of the close of their fiscal period. DHCS reviews each hospital’s cost report and prepares a tentative settlement, which is a determination of the allowable reimbursable reported costs for a hospital’s fiscal period. DHCS compares what a hospital was paid in interim payments for the hospital’s fiscal period, to the hospital’s allowable reimbursable reported costs for that fiscal period. The difference may result in either an underpayment that is paid to the hospital or an overpayment that is recouped from the hospital. The methodology that DHCS uses for determining a hospital’s allowable reimbursable reported costs at tentative settlement is not being changed. However, because of W&I Code Section 14166.245, subdivision (c), DHCS intends to use 90 percent of a hospital’s allowable reimbursable reported costs for days of care on or after July 1, 2008, in determining at tentative settlement whether there is an underpayment owed to a hospital or an overpayment that must be recouped from a hospital. Taking such action is consistent with the intent of the statute and the failure to take such action would likely necessitate much greater recoupment of money from hospitals at the final cost settlement phase of the process discussed below.

Sometime after a tentative cost settlement for a particular hospital’s fiscal period, the DHCS Financial Audits Branch completes a field audit of the hospital’s reported costs. After DHCS completes an audit of a hospital’s reported costs for its fiscal period, it issues an audit report concerning the hospital’s allowable costs in accordance with Medicare standards and principles of cost-based reimbursement. Providers may request an administrative hearing to contest the audit findings, per W&I Code, Section 14171.

The final reimbursement payable to a non-contract hospital for inpatient services provided during a hospital’s fiscal period is referred to as the peer grouping inpatient reimbursement limitation (PIRL), which is the lesser of the hospital’s (1) customary charges, (2) audited allowable costs in accordance with Medicare standards and principles of cost-based reimbursement, (3) an all-inclusive rate per discharge limitation (ARPDL), or (4) peer grouping rate per discharge limitation (PGRPDL). (California Code Regulations, Title 22, Sections 51545, subd. (a)(70) and 51546.) The DHCS Hospital Recoupment Unit (HRU), Safety Net Financing Division, calculates the ARPDL and PGRPDL for a hospital’s fiscal period sometime after the Financial Audits Branch issues its audit report as to what the hospital’s allowable costs were. The ARPDL and PGRPDL are not calculated for rural hospitals and new hospitals.

W&I Code Section 14166.245, subdivision (c) modifies item 2 of the PIRL calculation with respect to non-contract hospital inpatient services provided on or after July 1, 2008. When calculating a hospital’s final cost report settlement for days of service on or after July 1, 2008, DHCS will limit item 2 of the PIRL to 90 percent of audited allowable costs in accordance with Medicare standards and principles of cost-based reimbursement. Thus, when calculating the amount of final reimbursement a hospital would be entitled to under item 2 of the PIRL for a hospital’s fiscal period that includes any dates of service on or after July 1, 2008, the amount shall be limited for Medi-Cal covered inpatient days on or after July 1, 2008, to 90 percent of the hospital’s audited allowable costs per day for those services, multiplied by the number of such days within the hospital’s fiscal period. Final reimbursement under item 2 of the PIRL for days of service prior to July 1, 2008, will continue to be 100 percent of audited allowable costs. There will be no change in the current Medi-Cal policy for determining the other components of the PIRL (i.e., customary charges, ARPDL and PGRPDL).

DHCS is mandated by state law to implement the above change in reimbursement. Thus, DHCS is also mandated by Article III, Section 3.5 of the California Constitution to implement this change in reimbursement. DHCS has considered the impact of this reimbursement to providers and Medi-Cal beneficiaries. The DHCS assessment is that reimbursement will continue to compensate a high percentage of hospital costs and that recipients will continue to have access to hospital inpatient services consistent with title 42, United States Code, section 1396a(a)(30)(A).

Nursing Facility Services
For nursing facility services, the Medi-Cal program establishes a per diem rate of reimbursement for each day of Medi-Cal covered service rendered by a provider. Rates are established for each rate year, which runs from August 1 through July 31. Thus, the rates currently being paid are those established for the 2007/2008 rate year that runs from August 1, 2007 through July 31, 2008. W&I Code Section 14105.19 mandates that rates for the following nursing facility services will be reduced by 10 percent effective for dates of service on or after July 1, 2008.

• Freestanding Nursing Facility Services (Level A)
• Nursing Facility Services in a distinct part of a hospital (Level B)
• Adult Subacute Care Services in a distinct part of a hospital
• Pediatric Subacute Care Services in a distinct part of a hospital

DHCS will implement Section 14105.19 by reducing the rate that would otherwise be paid for these services under the current rate methodology by 10 percent, effective for dates of service on or after July 1, 2008. Thus, for dates of service during July 2008, the rate paid will be the rate established under the current rate methodology for the 2007/2008 rate year, reduced by 10 percent. For dates of service on or after August 1, 2008, the rate paid will be the rate established for the 2008/2009 rate year, reduced by 10 percent.

DHCS is mandated by state law to implement the above change in reimbursement. Thus, DHCS is also mandated by Article III, Section 3.5 of the California Constitution to implement this change in reimbursement. DHCS has considered the impact of this reimbursement on providers and Medi-Cal beneficiaries. The DHCS assessment is that reimbursement will continue to compensate a high percentage of costs incurred for these nursing facility services and that Medi-Cal recipients will continue to have access to these services consistent with title 42, United States Code, section 1396a(a)(30)(A).

Public Comments
The Department has reviewed and considered public comments that it has received up to and including June 25, 2008. Having considered these public comments, the Department has determined that the reimbursement reductions are justified for the reasons described in this notice. Therefore, the payment reductions discussed in this notice and the other ten percent payment reductions mandated by W & I Code, Section 14105.19 will be implemented effective for dates of service on or after July 1, 2008.