1. “Reaching across Arizona to provide comprehensive quality health care for those in need” AHCCCS Transition to Inpatient DRG Payment Methodology

2. “Reaching across Arizona to provide comprehensive quality health care for those in need” Authority Arizona Revised Statutes Section 1. 36-2903.01.G.12: “The administration shall obtain legislative approval before adopting a hospital reimbursement methodology consistent with title XIX of the social security act for inpatient dates of service on and after October 1, 2013.” AHCCCS will present a summary report recommending a new hospital reimbursement methodology to the Arizona Legislature early in 2013.

3. “Reaching across Arizona to provide comprehensive quality health care for those in need” Model Selection to Implementation Qualitative Evaluation – Preliminary Conceptual Design 1. Develop standardized evaluation criteria 2. Research and determine optimal DRG model 3. Identify and evaluate other payment system component options 4. Develop conceptual design and documentation Preparation of Analytical Datasets 5. Prepare inpatient FFS and encounter claims data for analyses 6. Create dataset of necessary Medicare rate components 7. Estimate the cost of services, claim by claim 8. Determine DRG relative weights Quantitative Evaluation – Final Design 9. Develop payment simulation model 10. Determine DRG base prices 11. Determine targeted policy adjustors, as necessary, based on simulation model results 12. Adjust system parameters, as necessary, based on simulation model results

4. “Reaching across Arizona to provide comprehensive quality health care for those in need” Guiding Principles Cost EffectivenessIs the option aligned with incentives for providing cost effective care? AccessDoes the option promote access to quality care, consistent with federal requirements? Equity Does the option promote equity of payment through appropriate recognition of resource intensity and other factors? Resource Recognition Does the option recognize measurable differences in resource requirements? PredictabilityDoes the option provide predictable and transparent payment for providers and the State? Transparency and Simplicity Does the option enhance transparency, and contribute to an overall methodology that is easy to understand and replicate? QualityDoes the option promote and reward high value, quality-driven healthcare services?

5. “Reaching across Arizona to provide comprehensive quality health care for those in need” Design Considerations Budget NeutralityFunding is not unlimited – goal for design is to be budget neutral. Adaptability Does the option promote adaptability for future changes in utilization and the need for regular updates? Forward Compatibility Is the option flexible enough to support payment structures in anticipated future service models? PolicyIs the option consistent with State and Federal policy priorities?

6. “Reaching across Arizona to provide comprehensive quality health care for those in need” Benefits of APR-DRGs Facilitates Measurement of Potentially Preventable Readmissions and Complications Enhances Recognition of Acuity Related to Specialty Hospitals and Children’s Hospitals Enhances Recognition of Resources Necessary for High Severity Patients Reduces Occurrences of Outlier Cases Incorporates Age into Classification Process – Critical for Neonatal Cases Enhances Homogeneity of Classifications – Superior Measurement of Resources Enhances Homogeneity of Classifications – Superior Measurement of Resources

7. “Reaching across Arizona to provide comprehensive quality health care for those in need” Workgroup Purpose Workgroup is to Provide AHCCCS with technical assistance and input on designing a new inpatient hospital payment methodology for Medicaid system as a whole Workgroup can communicate questions/concerns from the provider community and inform community of project status Please note: Ultimately AHCCCS, as the single state Medicaid agency, has responsibility for all rate methodology decisions within the context of legislative mandates Decisions related to overall system funding levels are outside of the scope of this Workgroup

8. “Reaching across Arizona to provide comprehensive quality health care for those in need” Project Overview Evaluate System Component Options Evaluation Criteria Considers AHCCCS Proposed Principles Identification of Options for Fiscal Modeling Determine System Components Based on Evaluation Base Rates / Conversion Factors Relative Weights Treatment of Outlier Cases Other System Components Simulate Payments Using Comprehensive and Recent Encounter Data Compare Simulated to Legacy Payments By Provider, by Service Line, by Plan and in Aggregate Finalize System Recommendations Base Rates / Conversion Factors Relative Weights Treatment of Outlier Cases Other Components Stakeholder Input is Key to Successful Design Process

9. “Reaching across Arizona to provide comprehensive quality health care for those in need” Pricing Considerations IssueOptions/Comments Targeted Policy Adjustors Potential adjustors for: Targeted service lines Specific age groups Targeted hospitals Consideration to be based on simulation model results Outlier Payment Policy Adopt “Medicare-like” stop-loss model Include a single fixed-loss amount, or consider multiple Incorporate symmetrical “high resource” and “low- resource” outlier policies If no “low-resource” parameter, consider charge cap on individual claims Targeted Service Exclusions Consideration of current episodic payment for transplant services Other exclusions?

10. “Reaching across Arizona to provide comprehensive quality health care for those in need” Pricing Considerations IssueOptions/Comments Transfer Payment Policy Adopt “Medicare-like” model for acute transfers Incorporate Medicare post-acute transfer policy? Partial Eligibility Similar to transfer calculations Charge Cap Include or exclude? If “low-resource” outlier policy is selected, charge cap may not be necessary Interim Claims Allow or disallow If allowed – Payment amount Minimum length-of-stay

11. “Reaching across Arizona to provide comprehensive quality health care for those in need” Pricing Considerations IssueOptions/Comments Payment Adjustments for Differing Provider Cost Structures Rural hospitals Teaching hospitals High Medicaid volume hospitals Designated trauma providers Payment for Specialty Services (Psychiatric, Rehabilitation, Other) Include in DRG payment method? Establish separate payment policies (i.e., per diem) Adjust for Acuity Graduate based on length-of-stay (Medicare model)

12. “Reaching across Arizona to provide comprehensive quality health care for those in need” Implementation Considerations IssueOptions/Comments Adjustment for Expected Coding and Documentation Improvements Expected and appropriate response Need strategy to mitigate risk to State and to providers Transition Period Question of necessity Time frame and method of integration Establishing Budget Neutrality Establishing targeted expenditures Adjustments for inflation and utilization trends ICD-10 Compatibility DRG model must be compatible Need strategy to mitigate risk to State and to providers

13. “Reaching across Arizona to provide comprehensive quality health care for those in need” Typical Pricing Formula APR-DRG Base Payment Outlier Payment (If claim qualifies) Claim Payment += Hospital Relative Weight APR-DRG Base Payment APR-DRG Base Rate X = X Optional Policy Adjustment Factors Note: DRG base payment is sometimes reduced on transfer and partial eligibility claims.

14. “Reaching across Arizona to provide comprehensive quality health care for those in need” Outlier Payment (if claim qualifies) = Loss Threshold Marginal Cost Factor Estimated Hospital Loss x - () Typical Pricing Formula Page 14 Note: Outlier payments are only applied if hospital loss (or potentially hospital gain) is greater than the outlier threshold. APR-DRG Base Payment Outlier Payment (If claim qualifies) Claim Payment +=

15. “Reaching across Arizona to provide comprehensive quality health care for those in need” Questions? Questions and comments may be addressed to Jean Ellen Schulik at JeanEllen.Schulik@azahcccs.gov (602) 417-4335 DRG Project Website: http://www.azahcccs.gov/commercial/ ProviderBilling/DRGBasedPayments.aspx