In adopting PAFs for use in §134.403 and §134.404, the Division has conducted extensive research to understand hospital reimbursement in the current Texas workers' compensation system, including: reimbursement rates, the reimbursement rates as compared to Medicare reimbursement, and the reimbursement rates as compared to non-workers' compensation reimbursement for hospital services.

The Division has also considered economic indicators for hospitals that are particularly relevant to the analysis process. Hospital Medicare margins and hospital market basket information reflect the general increasing costs of hospital care over time.

Overall, CY 2005 Texas workers' compensation reimbursement rates for inpatient and outpatient services as a percentage of billed charges are 33 percent and 37 percent respectively. Additionally, Milliman has reviewed Texas workers' compensation facility utilization and reimbursement. The report prepared by Milliman did not recommend a PAF, however, it did estimate that for CY 2005 services facilities were paid on average 115 percent of Medicare for inpatient services and on average 186 percent of Medicare for outpatient services. Reimbursement rates at these levels would generally maintain overall system costs at CY 2005 levels.

The Division, however, must consider additional factors in setting the PAFs. The ratio of Medicare reimbursement to reimbursement made by other payors is an important and necessary comparison in order to comply with §413.011. In adopting a PAF, the Division has noted and considered the recommendations made by system stakeholders. Those recommendations range from 100 percent to 170 percent of Medicare for inpatient services, and 100 percent to 266 percent of Medicare for outpatient services. These rates were paired with various adjustments to the overall Medicare reimbursement methodology. Additionally, the Division has considered information provided by Ingenix relating to the market share of inpatient and outpatient services for Medicare, HMO, PPO, POS, and commercial indemnity payor groups and the reimbursement rates of those payors when indexed to Medicare payments. This set of reimbursement rate recommendations and observations provides a general range of rates that is reflective of the current hospital market to consider in adopting a PAF.

The Division considered the issues of medical cost containment as prescribed by Labor Code §413.011. The Division balanced changes in the reimbursement rate with high medical costs per claim and access to care. Research conducted by the Workers' Compensation Research Institute concludes that hospital inpatient payments per episode and hospital outpatient payments per claim in Texas were lower than the 13-state median studied. (Workers' Compensation Research Institute, Baselines for Evaluating the Impact of the 2005 Reforms in Texas and an Early Look at the Impact of the 2003 Fee Schedule Changes: The Anatomy of Worker's Compensation Medical Costs and Utilization, (Summary of Major Findings for Texas) 6th Edition, xiii, February 2007))

Medicare's methodology does not include a separate reimbursement for surgically implanted devices, with the exception of new technology; however, separate reimbursement for surgically implanted devices is used in some instances in the commercial market. This fee guideline is developed to both use the most current methodologies, models, values, or weights used by the CMS but also to consider economic indicators in health care and reflect the commercial market's use of separate reimbursement for surgically implanted devices. These fee guidelines adopt separate reimbursement for surgically implanted devices in order to ensure injured employees have access to quality medical care, including surgery where surgically implanted devices are medically necessary. The modification establishes two PAFs in each adopted section. For the Inpatient Hospital Fee Guideline, the adopted PAFs are 143 percent and 108 percent of Medicare. The adopted PAFs for the Outpatient Hospital Fee Guideline are 200 percent and 130 percent of Medicare.

Hospitals will have the option to choose the higher or lower PAF for each guideline. The higher PAF contemplates the inclusion of reimbursement for surgically implanted devices as a part of the DRG. If the hospital chooses the lower PAF, the surgically implanted device(s) will be reimbursed separately at cost plus an administrative expense fee. The administrative expense fee is set at 10 percent or $1,000 per item add-on, whichever is less, but will not exceed $2000 in add-on's per admission. If the hospital is reimbursed the lower PAF, the cost of the surgically implanted device(s), including the administrative expense fee, will not be considered in determining eligibility for outlier payments.

The Division's adopted PAFs take into consideration Milliman's estimate that Texas workers' compensation reimbursement for CY 2005 inpatient hospital stays represented approximately 115 percent of 2007 Medicare allowable levels and the difference in the percentage between hospital stays with low- and high-billed charge amounts.

For inpatient hospital stays with less than $40,000 in billed charges, Milliman estimated Texas workers' compensation payments represented 66 percent of Medicare allowable amounts. For inpatient hospital stays with $40,000 or more in billed charges, Milliman estimated Texas workers' compensation payments represented 160 percent of Medicare allowable amounts.

In determining the adopted PAFs for inpatient hospital stays, the Division adjusted the reimbursement for hospital stays with less than $40,000 to reflect reimbursement at 100 percent of Medicare. This adjustment changes Milliman's estimated Texas workers' compensation reimbursement for CY 2005 inpatient hospital stays reimbursed less than $40,000 from 115 percent to 131 percent of Medicare's allowable reimbursement.

Similarly, reimbursement for inpatient hospital stays with billed charges greater than $40,000 was reviewed. Reimbursement at 160 percent of Medicare allowable reimbursement approximated 35 percent of billed charges. If the commercial standard of approximately 40 percent of billed charges is met for these inpatient hospital stays, overall reimbursement increases to 143 percent of Medicare allowable reimbursement. The Division used this standard as the benchmark for reimbursement.

The estimated reimbursement for all inpatient hospital stays, those with reimbursement less than $40,000, and reimbursement greater than $40,000, changes from 115 percent to 143 percent of Medicare's allowable reimbursement.

In setting a PAF for inpatient hospital stays with a separate reimbursement for surgically implanted devices, the surgically implanted device costs are removed from the higher proposed PAF, 143 percent. To determine the amount of reimbursement to be removed from this PAF, the Division analyzed reimbursements for surgically implanted devices as a percentage of total reimbursement.

Milliman's report included information on surgically implanted devices as a percentage of inpatient reimbursement for all inpatient hospital stays and as a percentage of reimbursement for inpatient hospital stay with surgically implanted devices. For all cases, surgically implanted devices represented 25 percent of the total reimbursement. For cases with surgically implanted devices, the total implantable reimbursement for those devices was estimated to be 28.7 percent of total estimated Medicare inpatient reimbursement.

The Division considered actual implantable reimbursement in determining the offset. Actual reimbursement for inpatient hospital stays with implantables was 35 percent of Medicare's allowable reimbursement. This dollar amount represents reimbursement on a cost-plus basis and the same methodology is carried over the reimbursement methodology. Therefore, the Division's adopted PAF for inpatient stays with separate reimbursement for surgically implanted devices is 35 percentage points less than the higher PAF. This adjustment should insulate hospitals for potential losses as a result of high cost implants by assuring that if costs for an implant exceed 35 percent of the DRG, the hospital has the option of recovering the total cost of the implant.

Milliman's report on outpatient reimbursement indicated CY 2005 Texas workers' compensation reimbursement is approximately 186 percent of Medicare allowable reimbursement. Milliman's report also noted that one workers' compensation payor reimbursed at a significantly lower rate than the average payor. Adjusting for this anomaly, reimbursement moves to approximately 211 percent of Medicare allowable reimbursement. The Division also compared the general benchmark of 40 percent of billed charges which was equal to approximately 200 percent of the Medicare allowable reimbursement. This benchmark is based upon THA survey data.

In determining the PAFs for outpatient hospital stays, the Division considered Medicare's methodology for reimbursing device-dependent services. Medicare establishes a device offset to recognize the average implantable cost as it relates to reimbursement for a specific APC. Milliman's report indicated five APCs with an average implantable devices offset of 70 percent. The entire list of APCs identified as device-dependent by Medicare indicates an average implantable device offset of 75 percent. Since CMS identified the relative reimbursement for these devices, the Division was able to directly remove the 70 percent offset from the overall outpatient reimbursement PAF of 200 percent, resulting in a second PAF of 130 percent for use when billing implantables separately.

Based on all of these factors, the Division adopts PAFs of 143 percent and 108 percent of Medicare reimbursement for use in determining Texas workers' compensation inpatient facility service reimbursement. The Division adopts PAFs of 200 percent and 130 percent of Medicare reimbursement for use in determining Texas workers' compensation outpatient facility service reimbursement.

In response to comments from interested parties, the Commissioner has adopted these sections with some changes to the proposal as published.

§134.403. In subsection (b)(2)(D) and (E), respectively, additional language, "and" as well as "related equipment necessary to operate, program, and recharge the implantable" are changes from proposal as a result of public comments to clarify that implant-related equipment necessary to operate, program, and re-charge the actual implantable device should be billable and reimbursable along with the actual implant devices. In subsection (g), additional language, "per billed item, add-on" is a change from proposal as a result of public comment to clarify that the $1,000 limit can potentially extend to multiple implantable items. This limit allows for the recognition of the administrative cost but discourages the unbundling of implantables associated with expensive items. Further, additional language in subsection (g) "but not to exceed $2,000 in add-on's per admission" is also a change from proposal. The limit of per admission should cover the administrative charges in most cases, and prevent an excessive administrative add-on for any individual item. Consequently, in the interests of effective medical cost control, the limit of $2,000 per admission is included in the adopted rules. As proposed, subsection (g) included (g)(4), however, as adopted, the Division changes (g)(4) to new subsection (h) as applicable to the entire section and not just the subsection and re-numbers the subsequent subsections accordingly.

§134.404. In subsection (b)(2) (D) and (E) respectively, additional language, "and" as well as "related equipment necessary to operate, program, and recharge the implantable" are changes from proposal as a result of public comments to clarify that implant-related equipment necessary to operate, program, and re-charge the actual implantable device should be billable and reimburseable along with the actual implant devices. In subsection (g), additional language, "per billed item, add-on" is a change from proposal as a result of public comment to clarify that the $1,000 limit can potentially extend to multiple implantable items. This limit allows for the recognition of the administrative cost but discourages the unbundling of implantables associated with expensive items. Further additional language in subsection (g) "but not to exceed $2,000 in add-on's per admission" is also a change from proposal. The limit of per admission should cover the administrative charges in most cases, and prevent an excessive administrative add-on for any individual item. Consequently, in the interests of effective medical cost control, the limit of $2,000 per admission is included in the adopted rules.

Adopted new §134.403(a) describes the applicability of the section. Adopted new §134.403(a)(1) states that the section applies to medical services provided in an outpatient acute care hospital on or after March 1, 2008. Adopted new §134.403(a)(2) notes that the section does not apply to professional medical services billed by a provider not employed by the hospital, except for a surgical implant provider as described in the section; and, that it is not applicable to services provided through a workers' compensation health care network certified pursuant to Insurance Code Chapter 1305, except as provided in Insurance Code Chapter 1305.

Adopted new §134.403(b) provides definitions for words and terms that are used in the section. Adopted new §134.403(b)(1) defines the term "acute care hospital" to mean a health care facility appropriately licensed by the Texas Department of State Health Services that provides inpatient and outpatient medical services to patients experiencing acute illness or trauma. Adopted new §134.403(b)(2) defines the term "implantable" to mean an object or device that is surgically implanted, embedded, inserted, or otherwise applied, and, includes related equipment necessary to operate, program and recharge the implantable. Adopted new §134.403(b)(3) defines "Medicare payment policy" to mean reimbursement methodologies, models, and values or weights including its coding, billing, and reporting payment policies as set forth in the CMS payment policies specific to Medicare. Adopted new §134.403(b)(4) defines the term "outpatient" to mean the patient is not admitted for inpatient or residential care, and includes observation in an outpatient status provided the observation period complies with Medicare policies. Adopted new §134.403(b)(5) defines the term "surgical implant provider" to mean a person that arranges for the provision of implantable devices to a health care facility and that then seeks reimbursement for the implantable devices provided directly from an insurance carrier.

Adopted new §134.403(c) clarifies that a surgical implant provider is subject to Chapter 133 of this title and is considered a health care provider for purposes of the section and the sections in Chapter 133 of this title (relating to Benefits--Medical Benefits).

Adopted new §134.403(d) requires that for coding, billing, reporting, and reimbursement of health care covered in the section, Texas workers' compensation system participants shall apply Medicare payment policies in effect of the date a services is provided with any additions or exceptions specified in the section. Adopted new §134.403(d)(1) provides that specific provisions contained in the Texas Labor Code or the Texas Department of Insurance, Division of Workers' Compensation (Division) rules, including this chapter, as taking precedence over any conflicting provision adopted or utilized by the CMS in administering the Medicare program. Adopted new §134.403(d)(2) provides that Independent Review Organization (IRO) decisions regarding medical necessity made in accordance with Labor Code §413.031 and §133.308 of this title (relating to MDR by Independent Review Organizations), which are made on a case-by-case basis, as taking precedence in that case only, over any Division rules and Medicare payment policies. Adopted new §134.403(d)(3) provides for the stated inclusion that whenever a component of the Medicare program is revised and effective, use of the revised component shall be required for compliance with Division rules, decisions, and orders for services rendered on and after the effective date, or after the effective date or the adoption date of the revised Medicare component, whichever is later.

Adopted new §134.403(e) establishes that regardless of billed amount, reimbursement shall be determined in the following order. The first method is in §134.403(e)(1) and indicates the amount for the service is the amount included in a specific fee schedule set in a contract that complies with the requirements of Labor Code §413.011. The second method is in §134.403(e)(2) and states that if no contracted fee schedule exists that complies with Labor Code §413.011, the maximum allowable reimbursement (MAR) amount is as described under subsection (f) of the section, including any applicable outlier payment amounts and reimbursement for implantables. The last method is in §134.403(e)(3) and states that if no contracted fee schedule exists that complies with Labor Code §413.011, and an amount cannot be determined by application of the formula to calculate the MAR as outlined in subsection (f) of the section, then reimbursement shall be determined in accordance with §134.1 of this tile (relating to Medical Reimbursement).

Adopted new §134.403(f) requires that the reimbursement calculation used for establishing the MAR shall be the Medicare facility specific amount, including outlier payment amounts, determined by applying the most recently adopted and effective Medicare OPPS reimbursement formula and factors as published annually in the Federal Register, with the minimal modifications noted in the following paragraphs. Adopted new §134.403(f)(1) indicates that the sum of the Medicare facility specific reimbursement amount and any applicable outlier payment amount shall be multiplied by 200 percent, unless a facility or surgical implant provider requests separate reimbursement in accordance with subsection (g) of this section, in which case the facility specific reimbursement amount and any applicable outlier payment amount shall be multiplied by 130 percent. Adopted new §134.403(f)(2) establishes that when calculating outlier payment amounts, the facility's total billed charges shall be reduced by the facility's billed charges for any item reimbursed separately under subsection (g) of this section.