* CY 2005: Outpatient HMOs and PPOs combined reflected a ratio of 41.4 percent of payments to charges, Medicare a ratio of 17.0 percent, and workers' compensation a ratio of 49.2 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 12.6 percent, and for workers' compensation a ratio of 9.8 percent.

Ingenix, Inc.

The previous Texas Workers' Compensation Commission (Commission) entered into a professional services agreement with Ingenix in June 2001, and again in the summer of 2005, to benchmark workers' compensation payments to current health care market reimbursement rates. Ingenix is a professional firm specializing in actuarial and health care information services, and assisted the Commission in developing §134.402, which addresses facility fees for health care services provided in an ambulatory surgery center facility.

When conducting its research, Ingenix analyzed hospital inpatient and outpatient services and ASC services separately. In defining the market, Ingenix utilized commercial payor information that is reflective of the current reimbursement for the various payor types such as HMOs, PPOs, point of service (POS) plans, and traditional fee for service health plans (indemnity plans). 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 reflected the actual reimbursement for services provided in the health care market.

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 (HMO, PPO, POS, and indemnity plans) and Medicare reimbursement levels, establishing an estimated reimbursement for a workers' compensation case mix.

In a report dated August 29, 2005, Ingenix provided actuarial data regarding the mix of insured people by coverage type (Medicare, HMO, POS, PPO, and indemnity plans); the relative utilization factors for each payor group; and the relative reimbursement for each payor type as a percent of Medicare reimbursement. The combination of covered population and utilization rates yields a market share for each type. When this market share information is combined with relative reimbursement rates, a weighted average for the market is calculated. Depending on the definition of the market, i.e., either including or excluding specific payor types, a range of reimbursement for the market may be developed. Additional analysis provided the ratio to Medicare of each coverage type's payment levels for each year from 2003 through 2008. Based on the information included in the Ingenix reports, the Division estimated the inpatient market between 112 percent and 147 percent of Ingenix projected 2008 Medicare rates. Additionally, the Division estimated the outpatient market between 163 percent and 217 percent of Ingenix projected 2008 Medicare rates.

The Division has not included the payment adjustment factors recommended in the Ingenix original 2002 report due to the age of the recommendations and because the recommendations were specific to the draft proposal inpatient and outpatient guidelines being developed in 2002. However, in preparing the currently proposed rules the Division has considered the applicable market information and projections through 2008 contained in the August 2005 Ingenix update report.

ECONOMIC INDICATORS

Medicare Payment Advisory Commission (MedPAC)

MedPAC is an independent federal body established by the Balanced Budget Act of 1997 to advise the U.S. Congress on issues affecting the Medicare program such as access to care, quality of care, and other issues affecting Medicare. MedPAC meets publicly to discuss policy issues and formulate its recommendations to the Congress.

Two reports, issued in March and June each year, are the primary outlet for MedPAC recommendations. In its March 2007 Medicare Payment Policy report to the Congress, MedPAC included a section in Chapter 2 on hospital inpatient and outpatient services which pointed out trends in Medicare margins and data analysis showing that costs have risen faster than the market basket (a group of products or services used specifically to track the progress of inflation in a specific market) in recent years. According to MedPAC, the overall Medicare margin (calculated as payments minus costs, divided by payments) has trended downward since 1997 falling to -3.3 in 2005. However, the 0.2 percentage point decline from 2004 to 2005 was the smallest in the last five years. The Medicare inpatient margin decreased by 0.4 percentage point in 2005 to -0.9 percent while the outpatient margin improved for the second year in a row, though it is still lower than the inpatient margin. MedPAC estimates that the Medicare margin in 2007--reflecting 2008 payment policies other than updates--will be -5.4 percent. According to MedPAC, the key factor explaining the forecasted decline in margin for 2007, in addition to policy changes, is preliminary evidence that the rate of growth in hospitals' unit costs will exceed the forecasted growth in the hospital market basket index (inflationary measure of the costs and goods of services purchased by hospitals).

MedPAC states that the weighted average of Medicare inpatient and outpatient costs, unadjusted for changes in case mix, increased by 5.3 percent in 2004 and by 5 percent in 2005. Lowering the number to take reported case-mix increases into account, the weighted average cost increase was 4.6 percent in 2004 and 3.7 percent in 2005. The 3.7 percent rate of cost growth in 2005 was slightly more than the 3.3 percent operating update hospitals received from Medicare in 2005. Looking at inpatient costs separately, MedPAC reports that unadjusted inpatient costs per discharge increased by 5.6 percent in 2004 and 5.1 percent in 2005. Case-mix-adjusted inpatient costs rose 5.4 percent in 2004 and 4.0 percent in 2005. Medicare outpatient cost per unit of service (adjusted for case-mix change) has been relatively low, increasing by only 1.2 percent in 2004 and 2.4 percent in 2005. Data are available on case-mix-adjusted Medicare costs through 2005 but are not yet available for 2006. However, MedPAC reports that a survey sponsored by CMS and MedPAC of about 600 hospitals indicates that unadjusted costs per unit of service grew by approximately 5.2 percent in the fiscal year ending June 2006, slightly higher than the rate of 4.8 percent in the prior year. MedPAC also reviewed financial reports from six large publicly traded hospitals that show that their unadjusted growth in cost averaged 6.4 percent per year in the nine months ending September 2006, relative to 4.8 percent in 2005. MedPAC projected that if one averages data from these two samples, costs per discharge appear on pace to grow roughly 1 percent faster in 2006 than in 2005.

MedPAC explains that one reason 2006 differs from 2005 is that capital costs are increasing more rapidly. According to MedPAC, a second reason is that patient volume grew more slowly than hospital employment in the first half of the year; in contrast to 2005. Additionally, MedPAC provides extensive justification for these two reasons.

In its analysis of Medicare cost report data from CMS and CMS's rules for the acute IPPS, MedPAC reports that costs have risen faster than the market basket in recent years. MedPAC examined cost growth during three periods 1986-1992, 1993-1999 and 2000-2004 and concluded that the rate of increase tended to follow trends in private payor profitability in the same three periods. MedPAC reports that during the first cycle (1986 through 1992) most insurers still paid hospitals on the basis of their charges, with little price negotiation or selective contracting and hospital margins on private payor business increased rapidly. MedPAC further states that in the mid-1990's, HMOs and other private insurers negotiated better and most insurers switched to paying for inpatient services on the basis of DRGs or flat per diem amounts for broad types of services. MedPAC then explains that the payment, cost-to-cost ratio for private payors, declined by 17 percentage points from 1993 through 1999. MedPAC reports that by 2000, hospitals had regained the upper hand in price negotiation due to consolidations and consumer backlash against managed care, rates for private payors rose rapidly and their payment-to-cost ratio rose by 11 percentage points from 2000-2004 and from 2001-2004, increases in private payor profitability were accompanied by hospital costs rising at a rate faster than the market basket. MedPAC saw the trend in private payor profit margins leveling off in 2005 and cost growth returning to a level close to the market basket increase.

According to MedPAC, the private sector is not the only potential source of financial pressure on hospitals; Medicare payment rates can also influence cost growth. The report further states that in recent years, Medicare inpatient payments have increased at a rate higher than the hospital market basket (reflecting updates equal to the market basket plus a small additional increase due to case-mix change), but payments have not risen fast enough to accommodate the rapid increase in hospital costs. MedPAC reports that by not fully accommodating growth in hospital costs, Medicare can put some pressure on hospitals to constrain costs.

MedPAC concluded in its report that most of its indicators of payment adequacy for hospital services are positive, although Medicare margins are low and recent cost trends suggest they will fall in 2007. At the same time, MedPAC suggests that hospitals with consistently high costs and low margins that have contributed to the industry-wide Medicare margin falling below zero are a fairly small percentage, fewer than a fifth, and opined that Medicare should put pressure on hospitals to control their costs rather than accommodate the current rate of costs growth. Balancing those considerations, MedPAC recommended that Congress should increase payment rates for the acute inpatient and outpatient PPS in 2008 by the projected rate of increase in the market basket index, concurrent with implementation of a quality incentive program. The inpatient update would apply to fiscal year 2008 and the outpatient update would apply to CY 2008. As of MedPAC's March 2007 Report, CMS' latest forecast of the hospital operating market basket index for fiscal year 2008 is 3.1 percent; it will update the forecast twice before using it to update payments in 2008.

SYSTEM PARTICIPANT INPUT AND RECOMMENDATIONS

Data Methodology Committee

In March 2007 a Data Methodology Committee was established and comprised of members recommended by the hospital and insurance industries to assist the Division with technical aspects of development of the hospital fee guidelines. The committee's focus was on data analysis and modeling as it impacts or explains the use of Medicare methodologies in the Texas workers' compensation system.

The Data Methodology Committee met over the course of five months (March - July) and reviewed and discussed numerous issues, including:

* the research of other states' (California, Colorado, New York, Nebraska, and South Carolina) hospital reimbursement systems, including any noted provisions for surgical implants, or implantables;

* spreadsheets developed by THA that included adjusted base calculations and the range of the adjusted base calculations for Texas hospitals;

* Medicare's outpatient pass-through concept for collecting data over the years to set APCs similar to DRGs used for inpatients, as well as hospitals' cost-to-charge ratios; and

* complexities of implantable devices and the difficulties surrounding hospitals' charge compressions.

The committee also met to hear a presentation by Access MediQuip, L.L.C., a national provider of implantable and specialty surgical devices, who described their working relationship as the go-between for certain carriers, hospital systems, and other states in facilitating the procurement of implantable devices and managing the preauthorization and billing processes.

The Division, as recommended by the committee, conducted research of other states' fee schedules, as well as those states' separate reimbursement methodologies for implantables, and used concepts from that research in the development of the proposed rules. Additionally, the Division invited members from Access MediQuip to meet with the committee members for further rule development concepts.

"Recommendations for a Texas Inpatient Hospital Fee Guideline" Report

Texas Mutual Insurance Company and several other workers' compensation insurance carriers commissioned Research & Planning Consultants, LP (R&P) for the purpose of developing a report that provided information, analysis, and recommendations for use in the rulemaking process. R&P's report, at the cost for copying, is available at the Division upon request. As described in the report's section entitled, "Organization of the Report," the study includes a detailed description of the Medicare IPPS and discusses the methodology used by Medicare to calculate payment rates with all adjustments to the basic payment rates and any applicable add-on payments included. The report additionally covers:

* types of facilities and services that are subject to special payments or excluded;

* an examination and comparison of payment adjustment factors in four states (California, North Dakota, Ohio, and South Carolina) who have preceded Texas in implementing a Medicare-based inpatient hospital fee guideline;

* description of data sets used to formulate recommendations contained in the report;

* analysis of DRG weights and other considerations, and differences in relative costs by DRGs between workers' compensation and Medicare patients; and

* a series of recommendations, which include: (1) adoption of Medicare's transfer payment policy and the three-policy-based adjustments; (2) a single payment adjustment factor of 105.9 percent applied to Medicare that simply adjusts for the difference between the Medicare payment rates and the costs incurred by hospitals treating workers' compensation patients; and (3) an alternate set of payment adjustment factors that allows for a carve-out for high implant charge DRGs (114.9 percent), and a re-distributed payment adjustment factor of 100.8 percent for all other DRGs.

The R&P Report, including the overview of Medicare's IPPS and data analysis, were utilized for comparative purposes in the development of the proposed rules. Much of the Division's analysis and the proposed payment adjustment factors for §134.404 showed similarities with comparable R&P analysis and recommendations.

Hospital Fee Schedule Proposal by Renaissance Healthcare Systems, Inc. (Renaissance)

Renaissance, a network of community health systems, provided the Division with a "Hospital Fee Schedule Rules Proposal" that described its research of other states' hospital fee guidelines, with a focus on Tennessee, Florida, and California. Renaissance gathered information and determined the percentage of Medicare reimbursement by taking the operating room and administrative costs to Renaissance for outpatient services. Additionally, Renaissance added patient day costs for the inpatient calculations. With this determination, Renaissance compared the information to Renaissance actual Medicare reimbursements for each of those services and arrived at the percentage of Medicare that Renaissance determined would provide a 15 percent net profit margin in order to serve health care to the community. Consequently, for inpatient hospital fee reimbursements, Renaissance recommended a range of 155-170 percent of Medicare, and for outpatient hospital fee reimbursements, a range of 225-255 percent of Medicare. Additionally, for inpatient services, Renaissance recommended the adoption of stop-loss provisions to be paid at 75 percent of billed charges, less the charges for implantables, when total billed charges exceed $50,000, after the removal of the charges for implantables.

Other States Research

In preparing for the revision and development of the facility fee guidelines, the Division researched the payment methodologies and reimbursement rates of other states workers' compensation programs. Of primary interest was the general topic of other states use of the Medicare system as a basis for reimbursement. Although many states refer to the Medicare program, each state's unique legislative requirements result in a diverse set of rules and procedures. Per Diem reimbursement, cost-to-charge ratios, discounts from billed charges and DRG based reimbursements are being used. Some states invoke Medicare and quickly diverge from the Medicare model. Consequently, direct comparisons of the various states to Texas are difficult and may lead to erroneous conclusions. The states that seem to have significantly embraced a Medicare based system are California, South Carolina, North Dakota, and Ohio. The inpatient allowable for these states ranges from 115 percent to 140 percent of Medicare reimbursement. Still each of these states has unique variations that ultimately modify the specific reimbursement for each admission.

Payment for outpatient services reflects the same diversity. Discounts from billed charges and cost-to-charge ratios reimbursement are common. Payment based on Medicare's OPPS is used in California, North Dakota, South Carolina, Tennessee, and Washington. Reimbursement rates vary among these five states. Tennessee is at the upper end of the range with a fee schedule set at 150 percent of Medicare.

For both the inpatient and outpatient settings, states have a wide variety of rules that modify their general payment approach. These include carve-outs for specific items, stop-loss reimbursement, and various other payment exclusions or restrictions.

HOSPITAL FEE GUIDELINES RESULTS/CONCLUSIONS AND EXPLANATIONS

In developing the proposed hospital fee guidelines, the Division has carefully and fully analyzed all of the statutory and policy mandates and objectives and all the facts and evidence gathered and submitted, as well as all informal system participants' input and comments received throughout the development process. The Division has utilized the information gathered and submitted, along with its expertise and experience, to develop these hospital fee guidelines in a way that best balances the statutory mandates, including the mandate to ensure that injured employees receive the quality health care reasonably required by the nature of their injury, the mandate to ensure that fee guidelines are fair and reasonable, and the mandate to achieve effective medical cost control.

Setting Payment Adjustment Factors (PAFs)

In proposing 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.