* In claims from 2001, the average medical payment paid per claim in Texas was $9,314, which is 38.3% higher than the median for the 12 states mentioned above. (WCRI, February 2004)

* Medical costs and the quantity of medical care in Texas were among the highest of the four states studied. Despite that, outcomes achieved by Texas workers, who received more medical care, were much lower than the outcomes achieved by workers in Massachusetts and Pennsylvania where average medical costs per claim were 58% and 31% lower respectively than in Texas. (WCRI, Outcomes for Injured Workers in California, Massachusetts, Pennsylvania and Texas, December 2003)

The Medicare reimbursement system has primarily progressed from a retrospective fee for service reimbursement system to a prospective payment system (PPS). Under the Medicare PPS, facilities receive a fixed amount for treating patients in certain diagnostic and/or procedural categories. Reimbursement is based on specific diagnostic and/or procedural groupings, resource utilization, national and regional averages, and costs specific to the facility. The Medicare ASC reimbursement methodology prospectively establishes a set payment amount for each type of facility service that CMS has determined may be reimbursed in an ASC setting; each of these services falls into one of nine specific categories, or ASC groups.

Currently for ASC services (which are primarily surgeries and items incident to surgery), Medicare reimburses using the ASC case rate methodology. Payment is determined based on the surgeries performed, the associated grouping(s), payment rates for each surgery, and the geographic wage index of the facility. The adopted rule applies this Medicare ASC grouping reimbursement methodology for ASC facility services within the Texas workers' compensation system.

Medicare reimburses ASCs for the facility fee when a covered surgical procedure is billed. The coverable surgical procedures are approved by CMS. In general, items that are bundled or integral to the service performed are included in the facility fees and are not reimbursed separately. A single payment is made to an ASC that encompasses all "facility services" furnished by the ASC, as published by CMS in its Medicare Carriers' Manual. However, additional reimbursement is made for a number of items and services covered under other Medicare fee schedules. Examples of such "non-facility" items and services include certain prosthetic devices (whether implanted, inserted, or otherwise applied by a covered surgical procedure), physician services, and certain durable medical equipment items. Further, Medicare sets both ASC locality specific (specific to a facility's geographic location, in accordance with Medicare payment policy) and other Part B fee schedule reimbursement amounts, such as Durable Medical Equipment, Prosthetics, Orthotics and Supplies (DMEPOS) and the physician's fee schedule. In order to remain consistent with the Medicare reimbursement policy DMEPOS Part B schedule, certain prosthetics devices would be appropriately reimbursed according to the commission's corresponding §134.202, 2002 Medical Fee Guideline, which applies a 125% of Medicare multiplier.

Medicare applies the uniform Healthcare Common Procedure Coding System (HCPCS) for reporting professional services, procedures and supplies, which are separately reimbursable. Most services, procedures and supplies have a corresponding HCPCS code, that are specific and available for ASC facilities to use to bill the items for separately reimbursable items. There may be a few miscellaneous HCPCS codes available for ASC facilities to use to bill the items that do not have a code specifically describing the item, and Medicare allows reimbursement of 100% of the cost with an invoice submitted upon bill submission. These are addressed by the commission's 2002 MFG.

The term "benchmarking" as used with respect to fees in the health care industry is often misunderstood. As commonly used in the industry, and in this preamble, a benchmark is nothing more than a relevant point of reference. Saying that something is a benchmark does not mean that it is the standard or goal which one should strive to achieve. Nor does it mean that it, in and of itself, establishes the presumptive starting point, without evaluation of relevant similarities and differences.

There has been considerable discussion related to whether use of Medicare fees as a benchmark in workers' compensation is appropriate. The commission has determined that it is, for several reasons. Because of HB-2600's extensive emphasis on the Medicare system, it is appropriate to benchmark to the Medicare reimbursement system. HB-2600 requires the commission to adopt the most current reimbursement methodologies, models, and values or weights used by the federal HCFA to achieve standardization, including applicable payment policies relating to coding, billing, and reporting; the commission may modify documentation requirements as necessary to meet the requirements of §413.053 of the Act (relating to Standards of Reporting and Billing). The statute also states that this section of the law does not adopt the Medicare fee schedule, and that the commission shall not adopt conversion factors or other payment adjustment factors based solely on those factors as developed by the federal HCFA. Use of Medicare as a benchmark, or point of reference, does not violate these statutory provisions. As required by the statute, the commission has considered economic indicators in health care and the requirements of §413.011(d).

Although the Medicare system was established primarily to serve the needs of the elderly population, the program is a main component of the national health care system and has become a standard and benchmark for development and operation for many commercial and governmental health care programs. Medicare's payment policies largely define "main stream medicine." Furthermore, as noted by WCRI, workers' compensation policymakers have been showing increased interest in Medicare as a benchmark. (WCRI: Benchmarks for Designing Workers' Compensation Medical Fee Schedules, 1995-96, May 1996)

Complete information concerning all Medicare reimbursement methodologies for facilities can be found at the CMS website (www.cms.hhs.gov), Code of Federal Regulations, and the Federal Register.

In June 2001, the commission entered into a professional services agreement with Ingenix, Inc. (Ingenix), a professional firm specializing in actuarial and health care information services, to assist the commission in developing new fee guidelines to address fees for health care services provided in inpatient and outpatient facilities and ASCs. Ingenix reviewed Medicare payment policies and reimbursement methodologies in reference to the Texas workers' compensation system to make recommendations to the commission for achieving standardization and adoption of the most current reimbursement methodologies, models, and values or weights used by the CMS, including applicable payment policies relating to coding, billing, and reporting, as mandated by Texas Labor Code §413.011. Ingenix also considered the additional statutory mandates of §413.011, which are described in the Introduction section of this preamble.

Ingenix analyzed hospital inpatient and outpatient, and Ambulatory Surgical Center (ASC) services separately. In general, the following steps were performed for each service type. The specific process used, as well as the methodology, data, and data sources is detailed in the Ingenix Final Report, which has been and remains available for review from the commission.

Ingenix considered certain economic indicators in health care, which it took into account in developing its recommendations concerning conversion factors or payment adjustment factors to be adopted by the commission. Ingenix recognized that the Medicare system reviews cost inputs in the overall health care industry, including ASCs, and updates ASC reimbursement on an annual basis. Further, in defining the market, Ingenix utilized commercial payer information that is reflective of the current reimbursement for the various payer types such as health maintenance organizations, preferred provider organizations, point of service plans, and traditional fee for service health plans (indemnity). Commercial reimbursement reflects, for the most part, negotiated rates based on both carriers' and providers' business plans. The combined Medicare market data and commercial market data reflects the actual reimbursement for services provided in the health care market; Ingenix considered all of these economic indicators of health care in its analysis and resulting recommendations.

To ensure that its recommended payment adjustment factors would not result in fees that exceed those paid by or on behalf of individuals with an equivalent standard of living to that of injured employees, Ingenix interpreted the statutory term, "equivalent standard of living," as including families with working or self-employed individuals and families that include Medicare enrollees. Medicaid enrollees were excluded since eligibility for Medicaid coverage generally occurs because of a significantly lower economic circumstance. This interpretation is supported by "A Standard of Living Comparison Between the Working Population, the Medicare Population, and the Managed Care Population," published in March of 1997 (addendum to report April 2001) and previously considered by the commission in establishing reimbursement levels. The commission has recognized that Medicare recipients have a similar standard of living as the general working population. In the study prepared by Research and Planning Consultants, the standard of living of the population covered by the Medicare program was found to exceed that of the population covered by the Act. The study further found that the standard of living of the population covered by managed care plans was at least as high as the population covered by the Act. Consequently, Medicare reimbursement is an appropriate standard for comparison to workers' compensation reimbursement.

Although Medicare is an appropriate benchmark, the commission has also used other benchmarks in setting the fees in this adopted fee schedule. As required by the statute, the commission has developed conversion factors or other payment adjustment factors in determining appropriate fees, taking into account economic indicators in health care. This includes the commercial private payer market and the median of that market. As stated by WCRI, it would be difficult to justify a fee schedule as a major cost containment tool if it exceeded what providers elect to receive, on average, in the free market.

Reimbursement rates used in the market to pay providers include an additional amount to account for the fact that providers are not always reimbursed fully for all services. Ingenix stated, that because of the workers' compensation benefit structure and the financial stability of workers' compensation payers, providers are expected to receive payment of the proper reimbursement amounts for their goods and services that are medically necessary for the treatment of injured employees and this security of payment alleviates the need to increase reimbursement rates for possibilities of non-payment in the market.

Recognizing the statutory mandate that the commission establish guidelines that provide the assurance of quality medical care together with achieving effective medical cost control, Ingenix observed that "reimbursement levels must therefore must be sufficiently high to ensure access to quality care, sufficiently low to achieve medical cost control, and not in excess of fees paid by or on behalf of individuals with an equivalent standard of living." Ingenix's recommended range for ASC reimbursement within the Texas workers' compensation system successfully achieves these goals.

In developing the recommended range, Ingenix used the following process:

* Estimate the number of covered lives and utilization for Medicare and for each type of commercial insurance contract;

* Determine historical Texas payment levels for Medicare and for commercial insurance by type of contract;

* Adjust the Medicare and commercial contract history to a workers' compensation mix of services;

* Trend forward the historical payment levels;

* Project the 2004 payment level currently in place for TWCC payers; and

* Establish a recommended range for reimbursement as a percent of Medicare.

Additionally, Ingenix reviewed and analyzed the current market using Medicare, commercial, and commission historical medical claims reimbursement information. Ingenix also reviewed other states' workers' compensation facility reimbursement in comparison to Medicare reimbursement, but was unable to develop comparisons because each state approached its reimbursement methodology differently. Taking into account relevant health care economic indicators, Ingenix made recommendations concerning Medicare reimbursement methodologies and payment adjustment factors (PAFs) to be used in determining appropriate reimbursement and estimated system impact. Ingenix further provided recommendations regarding minimal modifications to Medicare reimbursement methodologies and payment policies necessary to meet occupational injury requirements.

Historical commission medical claims data provided a Texas workers' compensation mix of services for use in the analysis. This utilization pattern was applied to the commercial market (health maintenance organization, preferred provider organization, point of service, and indemnity plans) and Medicare reimbursement levels, establishing an estimated reimbursement for a workers' compensation case mix. This reimbursement was expressed as a percent of charges and as a percent of Medicare reimbursement. Information considered by Ingenix in the development of its analysis included:

* Commission historical claims data available for the years 1999 through 2002;

* The Mercer/Foster Higgins National Survey of Employer-Sponsored Health Plan 2001, which summarized enrollment and market share information for commercial managed care plans in Texas;

* Texas commercial indemnity and managed care reimbursement rates from Ingenix Employer Group for the years 1999, 2000 and 2001;

* Ingenix proprietary national managed care payer data regarding volume of services, charged and allowed reimbursement amounts to estimate the level of ASC business compared to outpatient, and ASC allowed-to-charge ratios compared to outpatient allowed-to-charge ratios, from 2001 data;

* National Center for Health Statistics and Bureau of the Census data to estimate the covered lives in the 2002 Texas commercial insurance/managed care market;

* Data published in 2001 by InterStudy Publications, which provided national commercial managed care reimbursement rates;

* Data published by the American Hospital Association from 1997-2001, which provided hospital outpatient charges per service;

* Source Book of Health Insurance Data for 2002; and

* Medicare reimbursement amounts, from 1999 for hospital outpatients and 2001 for ASCs.

ASC market reimbursement percentages were based on a mix of services that were equivalent to the Texas workers' compensation mix of services and reimbursement rates trended forward to 2003, and ultimately 2004. Ingenix also trended forward the Medicare ASC reimbursement rates to 2004. Ingenix concluded, as a result of its market analysis, that if current reimbursement trends continue, in 2004 Texas workers' compensation ASC claims will be reimbursed at approximately 320% of 2004 Medicare reimbursement. Ingenix also projected that 2004 commercial market reimbursement for the same mix of claims would be approximately 274% (not including indemnity plans) to 293% (including indemnity plans) of 2004 Medicare reimbursement.

In setting the recommended PAF range, Ingenix considered whether to include indemnity experience in the commercial market experience. While Ingenix found no difference in standards of living between people with commercial indemnity experience and injured workers, there are several reasons to consider excluding indemnity experience:

* Commercial indemnity represents only about 4% to 5% of the combined Medicare and commercial market. Removing commercial indemnity from the analysis removes experience that is higher than 95% of the payment levels for people of a similar standard of living.

* Payments for commercial indemnity plans are disproportionately higher than payments for the rest of the market, indicating that commercial indemnity payments are atypical of the commercial market experience.

* Statutory requirements set forth in §413.011 mandate that payment be made no higher than would be paid by or for people with similar standards of living.

* No cost controls are in place in the commercial indemnity market, and the Texas workers' compensation law mandates that in setting the fee structure, consideration be given to cost control.

Although commercial indemnity plans provide coverage for individuals with standards of living similar to the rest of the commercial market, including the data from these plans would increase the PAF because more weight would be placed on commercial reimbursement rates, thus reducing the impact of the lower Medicare payments. In contrast, the indemnity market share currently represents a small, decreasing fraction of the overall market, with payment levels far exceeding those in other commercial policy types, suggesting that they are uncharacteristic of the commercial market and, therefore, should be excluded. Excluding indemnity plans would decrease the PAF because less weight would be placed on commercial reimbursement rates, thus increasing the impact of the lower Medicare payments.

In order to provide the most comprehensive range of fair and reasonable reimbursement rates, and address the statutory requirement for cost control and prohibition against paying higher than would be paid by or for persons with similar standards of living, Ingenix excluded the indemnity experience at the lower end of the range and included it at the higher end of the range.

Ingenix initially recommended a 2003 range of 230% (not including indemnity plans) to 250% (including indemnity plans). Upon the commission's request for 2004 projections, Ingenix recommended the 2004 PAF range of 237% (not including indemnity plans) to 264% (including indemnity plans) of Medicare for ASC reimbursement. However, Ingenix's recommended reimbursement range did not contain an explicit reduction for security of payment or for extraordinary encouragement of medical cost control related to reimbursement rates.. Consequently, Ingenix indicated that if the commission were to choose a different balance of the statutory objectives, implementation of the ASC rule with PAFs outside the recommended ranges (i.e., 90% of the 237% low endpoint, up to 110% of the 264% of the high endpoint within the ASC recommended range) would be appropriate and meet the statutory standards.