The Texas Department of Insurance (Department), Division of Workers' Compensation (Division) proposes new §134.403, concerning Hospital Facility Fee Guideline--Outpatient and new §134.404, concerning Hospital Fee Facility Guideline--Inpatient. These new sections are necessary to comply with the requirements of the Labor Code §413.011, which requires the commissioner to adopt fee guidelines that are fair and reasonable, designed to ensure the quality of medical care, and achieve effective medical cost control. Additionally, Labor Code §413.012 requires the commissioner to review and revise the fee guidelines every two years to reflect fair and reasonable fees.

In developing fee guidelines, Labor Code §413.011 requires the commissioner to adopt health care reimbursement policies and guidelines that reflect the standardized reimbursement structures found in other health care delivery systems, using the most current methodologies, models, values or weights used by the Centers for Medicare and Medicaid Services (CMS) in order to achieve standardization.

Additionally, Labor Code §413.011 requires the commissioner to develop one or more conversion factors or other payment adjustment factors in determining appropriate fees, taking into account economic indicators in health care. The guidelines may not provide for payment of a fee in excess of the fee charged for similar treatment of an injured individual of an equivalent standard of living and paid by that individual or by someone acting on that individual's behalf, and may not adopt conversion factors or other payment adjustment factors based solely on those factors as developed by CMS. Labor Code §413.012 is also applicable to the proposed new rules as it requires the commissioner to review and revise the fee guidelines every two years to reflect fair and reasonable fees. Labor Code §413.0511(b)(1) also requires consultation with the Medical Advisor in establishing the conversion factors. These requirements have been taken into consideration in the development of this proposal.

There is currently no fee guideline that addresses outpatient hospital services. Instead, hospital outpatient services are currently reimbursed on a fair and reasonable basis, as provided by §134.1 of this title (relating to Medical Reimbursement). Proposed new §134.403 provides an outpatient hospital fee guideline, which uses the Medicare system as a framework for the billing and reimbursement methodology and establishes standardized formats used in the group health and Medicare systems.

Reimbursements for acute care inpatient hospital services are currently established by §134.401 of this title (relating to Acute Care Inpatient Hospital Fee Guideline), effective August 1, 1997. Section 134.401 provides instruction for calculating reimbursement amounts for health care provided in acute care inpatient hospitals to injured employees in Texas. The reimbursement amounts in the current rule provide different methods of reimbursement based on the specific classification of the hospital and the type of services and total charges related to the admission. These methodologies include per diem reimbursement, stop-loss reimbursement, and when required, fair and reasonable reimbursement as initially determined by the carrier. Proposed new §134.404 is necessary because current §134.401 was adopted prior to significant statutory changes enacted in 2001 by House Bill (HB) 2600, 76th Legislative Session. HB 2600 amended Labor Code §413.011, creating the requirement that fee guidelines be based on current Medicare reimbursement methodologies. Proposed new §134.404 provides a new inpatient hospital fee guideline that applies reimbursement methodologies that reflect current Medicare prospective payment practices, including a Medicare-based outlier methodology to replace the previous charge-based stop-loss methodology. The structure set out in proposed new §134.403 and §134.404 uses the Medicare system as a framework for the billing and reimbursement methodology and establishes fee guidelines that use standardized formats used in the group health and Medicare systems.

MEDICARE

The CMS regulates the Medicare and Medicaid programs. CMS has established a Medicare prospective payment system (PPS) for hospital/facility-based services, which include inpatient and outpatient hospital care, ambulatory surgical services, and other facility-based services such as, but not limited to, rehabilitation, psychiatric, and long term care units. Medicare requires a deductible and co-pay from the patient, until the patient reaches a certain level of expenditures. When setting reimbursement amounts, Medicare considers and includes this deductible and co-pay. CMS has directed an enormous amount of research into determining facility reimbursements. Reimbursements are based on a facility's expected cost to provide a service rather than charged amounts, thus reimbursements differ by facility type. CMS establishes a predetermined amount of reimbursement which bundles or packages services; therefore, financial risk is assumed by the health care facility, which encourages efficient delivery of care. CMS updates reimbursements periodically based on a variety of factors, including weights (e.g., intensity), clinical issues, costs, inflation, and federal budget constraints. Reimbursement is based on national average costs with adjustments for geographic and facility specific factors. In addition, billed claims are subject to clinical coding edits Medicare has developed.

Diagnosis Related Groups (DRGs) were adopted by CMS (at that time named the "Health Care Financing Administration") in the early 1980s for the reimbursement of hospital inpatient services, and the methodology is widely used by other payors. Approximately 536 DRG groups are based on clinically similar diagnoses requiring similar amounts of resources. Each inpatient stay is grouped into a single DRG, and each stay is reimbursed at a predetermined per discharge rate for the DRG, regardless of billed amount or length of inpatient stay, though CMS makes adjustments called "outliers" to the reimbursement to reflect extraordinarily high cost cases. To determine outliers, the base payment rates are multiplied by individual DRG weights and adjusted for local market conditions, or geographic adjustments. Adjustments for local market conditions are accomplished through the wage index, the Capital Geographic Adjustment Factor, and the large urban add-on. The operating and capital payment rates are increased for facilities that operate an approved resident training program, and for facilities that treat a disproportionate share of low-income patients. For some transfer cases, rates are reduced; and for extraordinarily costly cases, outlier payments are added. Separate Medicare payments, unrelated to payment for individual discharges, are made for Direct Graduate Medical Education expenses and Medicare bad debts. In addition, a separate reimbursement is allowed for new technology. Rural and other defined hospitals are exempt from payments under the Inpatient Prospective Payment System (IPPS) and have special payment provisions.

In setting the payment rates in the Outpatient Payment Prospective System (OPPS), CMS covers hospitals' operating and capital costs for the services they furnish. Ambulatory Payment Classifications (APCs) were adopted by CMS in August 2000, and this APC methodology is not as widely used by other payors. There are more than 808 APCs based on clinically similar items and services requiring similar amounts of resources. An outpatient visit may include multiple APCs, each APC having a predetermined rate. CMS determines the payment rate for each service by multiplying the APC relative weight for the service by a conversion factor. The relative weight for an APC measures the resource requirements of the service and is based on the median cost of services in that APC. CMS makes outlier adjustments to reflect unusually high cost cases. Additional payments to the facility are made for pass-through items based on hospital specific cost information (e.g., drugs and implantables). Some outpatient services (e.g., physical therapy, occupational therapy, durable medical equipment, laboratory) are reimbursed using the Medicare physician fee schedules rather than being grouped into an APC.

One exception to CMS's method for setting payment rates is the new technology APCs. CMS assigns services to new technology APCs on the basis of cost information collected from applications for new technology status. New technology APCs encompass cost ranges from $0-$10 to $9,500-$10,000. CMS sets the payment rate for a new technology APC at the midpoint of its cost range.

Hospitals can also receive three payments in addition to the standard OPPS payments: (1) pass-through payments for new technologies; (2) outlier payments for unusually costly services; and (3) hold-harmless payments for cancer and children's hospitals and rural hospitals with 100 or fewer beds that are not sole community hospitals.

USE AND COLLECTION OF DATA

Division Data

In maintaining a medical billing database, the Division requires carriers to submit billing and reimbursement information to the Division on a regular basis. The Division implemented a new reporting format in late 2006 to facilitate collection of medical billing and reimbursement data from carriers in conjunction with new electronic billing reporting requirements. The new electronic reporting format is the International Association of Industrial Accident Boards and Commission's (IAIABC) 837 format. Carriers submitted calendar year (CY) 2005 charged and paid data in this new format and the Division has based the primary components of its analysis on CY 2005 information. When the data was made available for use, CY 2005 data was determined to be the most complete set of mature claims data available. The Division prepared a series of reports to have an improved understanding of the inpatient and outpatient types of hospital services provided to injured employees and to understand the billing and reimbursement calculations associated with those services. The Division was also able to review charge and payment activity for specific types of admissions. These admissions were further organized to focus on hospital measures followed by carriers' measures. These measures include trauma admissions, burn admissions, surgical admissions, and charges and payments for "carve-outs," including implanted surgical devices. Additionally, the Division's CY 2005 data showed similarities with comparable Texas Health Care Information Collection/Center for Health Statistics data for CY 2005, as described below.

Hospital services account for a significant portion of the medical benefits paid in the Texas workers' compensation system. Payments to hospitals for CY 2005 services totaled approximately $205 million, which represents approximately 20 percent of total medical payments. These payments were split relatively evenly between inpatient services ($93 million) and outpatient services ($111 million).

Although inpatient services account for a significant portion of hospital reimbursement, there were less than 10,000 inpatient discharges reported with services provided by 578 hospitals in CY 2005. A little more than a third of the inpatient admissions were made to 23 hospitals that each had more than 100 admissions. On the other end of the spectrum, 411 hospitals had ten or fewer Texas workers' compensation admissions in CY 2005. Hospitals with more than 100 admissions were responsible for 47 percent of inpatient charges and 45 percent of inpatient reimbursements.

Texas Health Care Information Collection/Center for Health Statistics (THCIC)

The THCIC is an entity within the Texas Department of State Health Services, and is governed under the rules and regulations of the State Health and Safety Code. The THCIC develops a statewide health care data collection system to collect health care charges, utilization data, provider quality data, and outcome data to facilitate the promotion and accessibility of cost-effective, quality health care. THCIC data does not build on and does not duplicate other data collection required by state or federal law, by an accreditation organization, or by board rule, and the center works with appropriate agencies to review public health data collection programs in this state and recommend, where appropriate, consolidation of the programs and any legislation necessary to effect the consolidation. Additionally, THCIC is designed to assure that public use data is made available and accessible to interested persons with defined processes for providers to submit data.

The Division obtained public use data sets from THCIC for CYs 2003, 2004, and 2005. The data includes detailed information regarding every inpatient discharge in Texas. Specific identifiers for low volume providers are summarized to protect patient confidentiality. The Division developed numerous queries of the data, and provided summary analysis to the Data Methodology Committee, a committee described later in this preamble. For example, the following queries were run from the data:

* All workers' compensation discharges for 2004 and 2005;

* Top 25 workers' compensation DRGs for 2004 and 2005;

* All discharge by quarter for the top 5 DRG codes;

* Average dollar amount of charges by quarter for the top 5 DRG codes;

* All discharges for the top 25 Texas workers' compensation DRGs for 2004 and 2005; and

* Average dollar amount of charges, average length of stay by payor type.

The data was further segregated by discharges to separately identify trauma codes, discharges with billed charges less than $40,000, and discharges with billed charges more than $40,000. Additionally, further extractions were made to identify the estimated impact based on revenue codes of "carve-out" payments made under current §134.401.

Milliman Consultants and Actuaries

In July 2007, the Division entered into a professional services agreement with Milliman, a leading consultant to the health insurance and health maintenance organization (HMO) industries. Specifically the agreement sought Milliman's expertise for indexing Texas workers' compensation system inpatient and outpatient facility reimbursement to Medicare facility reimbursement. Milliman has extensive experience in designing and pricing insurance products; helping HMOs, preferred provider organizations (PPOs), and insurance carriers set up managed care networks; researching and analyzing health care systems' claims data and reimbursement analysis and rate setting; developing fee guidelines/schedules; and working with governmental and regulatory entities and projecting financial results for clients.

The Division provided Milliman with the 837 data set for CY 2005, which included information on approximately 12,000 inpatient billing lines and 166,000 hospital outpatient billing lines.

Based on the analysis of the Division's 837 data, Milliman estimated that Texas workers' compensation reimbursement for CY 2005 inpatient hospital stays represented approximately 115 percent of 2007 Medicare allowable levels. This percentage varies significantly by type of service, case, payor, and provider. Most notable is the difference in the percentage between hospital stays with low and high billed charge amounts. For hospital stays with less than $40,000 in billed charges, the Texas workers compensation payments represented 66 percent of Medicare allowable amounts. For hospital stays with $40,000 or more in billed charges, the Texas workers' compensation payments represented 160 percent of Medicare allowable amounts.

Milliman's report included information on surgically implanted devices as a percentage of inpatient reimbursement for all cases and as a percentage of reimbursement for cases with surgically implanted devices. For all cases, surgically implanted devices represented 25 percent of the total reimbursement. For cases with surgically implanted devices, the reimbursement for those devices was 36.5 percent of reimbursement for cases with an implantable.

Milliman's analysis of CY 2005 outpatient hospital data included 54 percent of the Texas workers' compensation payments for hospital outpatient services. These payments, however, totaled over $60 million. Based on those claims with sufficient data to be analyzed and re-priced using CMS' methodology, Milliman estimated that CY 2005 Texas workers' compensation outpatient facility reimbursement represented approximately 186 percent of Medicare allowable levels for outpatient services. As noted in the inpatient results, this percentage varies significantly by type of service, case, payor, and provider.

Milliman's report included information on surgically implanted devices as a percentage of outpatient reimbursement for all cases and as a percentage of reimbursement for surgical cases. For all cases, surgically implanted devices represented 8.6 percent of the total reimbursement. For cases with surgically implanted devices, the reimbursement for those devices was 36.5 percent of total reimbursement for inpatient admissions with charges for implantables.

MARKET REIMBURSEMENT

Texas Hospital Association (THA) Survey

The Division requested the assistance of the THA in coordinating the collection of billing and reimbursement information for services currently provided by Texas hospitals in the Texas workers' compensation system. THA's survey results are available from the Division upon request, at a cost for reproduction.

The Division provided THA with a list of Medicare DRGs most frequently billed in the Texas workers' compensation system. The DRG list was based upon THCIC's public data file. The Division asked THA to survey its members to provide detailed aggregate charges and reimbursements for these DRGs by payor type in order to have a better understanding of the general reimbursement relationships between Medicare, HMOs, PPOs, commercial indemnity and Texas workers' compensation plans.

Below are some of THA's inpatient survey results represented in percentages of payments to charges for CYs 2005 and 2006 by payor type:

* CY 2006: Inpatient HMOs and PPOs combined reflected a ratio of 42 percent of payments to charges, Medicare a ratio of 25.4 percent, and workers' compensation a ratio of 35.3 percent. The ratio of payments to charges for all implants and carve-outs reflected for HMOs and PPOs combined was 28.9 percent, for Medicare a ratio of 21.4 percent, and for workers' compensation a ratio of 38 percent.

* CY 2005: Inpatient HMOs and PPOs combined reflected a ratio of 39 percent of payments to charges, Medicare a ratio of 26.1 percent, and workers' compensation a ratio of 35.9 percent. The ratio of payments to charges for all implants and carve-outs reflected for HMOs and PPOs combined was 27.4 percent, for Medicare a ratio of 20.8 percent, and for workers' compensation a ratio of 35.4 percent.

The same type of outpatient survey results are as follows:

* CY 2006: Outpatient HMOs and PPOs combined reflected a ratio of 39 percent of payments to charges, Medicare a ratio of 16.4 percent, and workers' compensation a ratio of 46.3 percent. The ratio of payments to charges for all implants and carve-outs reflected for HMOs and PPOs combined was 8.7 percent, for Medicare a ratio of 13.3 percent, and for workers' compensation a ratio of 10.3 percent.