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Impact Analysis – Proposed Hospital Fee Schedule Change Adjustment of Rates for Hospital Fees in Workers’ Compensation Cases

November 18, 2008 Agency: North Carolina Industrial Commission Contact: Meredith Henderson – (919) 807-2674 Rule Title: Hospital and Ambulatory Surgical Center

Section 14 NCIC Hospital Fee Schedule State Impact: Yes Local Impact: Yes Substantial Economic Impact: Yes Small Business Impact: Yes

Summary of the Proposed Hospital Fee Schedule Changes:

Introduction/Background: The Industrial Commission’s Hospital Fee Schedule provides guidelines for the reimbursement rates or amounts that workers’ compensation insurance carriers and self-insured employers pay for various hospital-based services in workers’ compensation cases. The Hospital Fee Schedule needs to be updated with respect to certain reimbursement rates. The Industrial Commission appointed a task force to make recommendations to the Industrial Commission on this issue. The task force was composed of representatives from various stakeholders, including the North Carolina Hospital Association (NCHA), North Carolina Chamber, North Carolina Home Builders Association, insurance carriers, and employee representatives. The task force has recommended a compromise as described below, while the task force and Industrial Commission continue to address additional steps to increase the efficiency of the workers’ compensation system and lower the cost of claims.1 Statutory Authority for the Hospital Fee Schedule changes: G.S. §§ 97-26(a) & (b); 97-80(a) Proposed Hospital Fee Schedule Changes: For inpatient hospital services, the current reimbursement rate is guided by inpatient diagnostic-related grouping (“DRG”) methodology, with payments made at the established DRG rate, subject to a payment corridor from 77.07% to 100% of charges. The proposed fee schedule change would reduce the lower end cap from 77.07% to 75% of charges for hospitals other than critical access hospitals. Critical access hospitals are defined by federal law and are the smallest hospitals in the State, located in rural areas. The lower end cap for those hospitals would remain at 77.07% of charges. For outpatient hospital services, the current reimbursement rate is 95% of charges. The proposed fee schedule change would reduce this reimbursement rate to 79% of charges for all

1 See attached November 10, 2008 letter from Henry N. Patterson, Jr., who serves as chair of the task force.

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hospitals except critical access hospitals. For critical access hospitals, the proposed fee schedule change would reduce the reimbursement rate to 87% of charges. For ambulatory surgical centers, the current reimbursement rate is 100% of charges. The proposed fee schedule change would reduce this reimbursement rate to 79% of charges, consistent with the proposed outpatient fee schedule. Any proposed fee schedule changes would not take effect until six months after adoption by the Industrial Commission, i.e., rates would take effect approximately July 1, 2009. This timeline would afford hospitals ample time to revise their budgets and prepare for the reduction. Note: Pursuant to G.S. § 97-26(b), a hospital may enter into a contract with an insurer, managed care organization, or self-insured employer for reimbursement at rates other than those set out in the Hospital Fee Schedule.

Economic Impact:

Although the workers’ compensation system comprises only a very small percentage of the total health care system in North Carolina, adjusting the reimbursement rates for hospital fees will result in an economic impact to the State, as well as to some of the stakeholders in the workers’ compensation system. Overall, the ultimate goal of the proposed changes is to reduce payments for hospital services for workers’ compensation claims and thus lower claims costs for employers and insurers.

• Cost estimates

o The proposed fee schedule changes would affect state, local, and private sector-owned hospitals and ambulatory surgical centers by decreasing their revenues for inpatient and outpatient services provided in workers’ compensation cases.

o Reducing the amount that hospitals are reimbursed for certain services would presumably decrease those hospitals’ willingness to treat workers’ compensation cases. Hospitals would not be expected to continue providing services that are no longer profitable, and some may decline to take workers’ compensation insurance. Therefore, some of the direct costs to hospitals would, in fact, be passed on to the worker seeking medical services. Those workers may incur search costs to locate a hospital that is willing to perform treatments covered by workers’ compensation insurance. A 1998 survey-based study performed by the Hawaii Legislative Reference Bureau indicated that when Hawaii lowered the rates at which health care providers were reimbursed for workers’ compensation cases, health care providers began treating fewer workers’ compensation patients.2 This effect could have been limited to smaller health care providers, however, and it is less likely that an entire hospital would decline to take workers’ compensation insurance. The value of search costs incurred by workers is difficult to determine and likely minor, and is therefore not quantified in this fiscal note.

2 Martin, Pamela (1998). “The Medical Fee Schedule under the Workers’ Compensation Law.” Legislative Reference Bureau, State of Hawaii. Accessed 11/13/08, available at: < http://hawaii.gov/lrb/rpts98/fee.pdf>.

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o For inpatient charges, it is estimated that the proposed 2.07% reduction in the lower end of the payment corridor could result in a total decrease in hospital revenues of up to $3,220,635.00 for FY 2009-10.3 A hospital may currently negotiate additional discounts with an insurer or self-insured employer. Those additional discounts, which are proprietary, are not reflected in this analysis.

o For outpatient services, it is estimated that the proposed 16% reduction in the reimbursement rate would result in a total decrease in hospital revenues of $28,370,847.00 to hospitals in FY 2009-10.4

o For ambulatory surgical center services, it is estimated that the proposed 21% discount would result in a total decrease in revenues of $3,847,484.00 to these centers, a number of which are owned by hospitals.

o These cost estimates are based on the following estimated total amounts for hospital charges in workers’ compensation cases for FY 2009-105:

� Total hospital inpatient charges: $155,586,248.00 � Total hospital outpatient charges: $177,317,796.00 � Total ambulatory surgery center charges: $ 18,321,354.00

o Note: The NCHA, along with other task force participants advising the Industrial Commission on the proposed changes, support the implementation at this time of the proposed changes. The two representatives of insurers, American Insurance Association and Key Risk Insurance Company, do not support the proposed changes and advance additional changes which they believe will result in further reductions in hospital rates.

o No significant ongoing administrative cost to hospitals and ambulatory surgical centers is anticipated in order to comply with the proposed fee schedule changes because the fee schedule is applied to hospital charges by the Industrial Commission or any approved contractors.

• Benefit estimates

o The proposed fee schedule changes would create a benefit for all employers, including hospitals, and for workers’ compensation insurers in North Carolina in the form of savings on hospital-based medical expenses in workers’ compensation claims.

� Both the State of North Carolina, as an employer, and many local government entities, as employers, are self-insured for workers’ compensation and would see direct savings. Private sector self-insurers and workers’ compensation insurance companies would similarly benefit from the proposed changes, even though some support even lower reimbursement rates than those proposed, as mentioned above. Employers that purchase workers’ compensation insurance from other companies will

3 No separate cost determination was made for critical access hospitals because their inpatient workers’ compensation charges represent 0.25% of the total inpatient hospital charges. 4 No separate cost determination was made for critical access hospitals because their outpatient workers’ compensation charges represent 0.7% of the total outpatient hospital charges. 5 Please see the attached memorandum from the NCHA explaining the basis for the FY 2009-10 charge figures. The NCHA determined these figures based on data collected by Thomson Reuters, all of which is reported to the Department of Health and Human Services, and extrapolated this data to FY 09-10.

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be able to pay lower premiums as insurance companies pass on the lower cost of reimbursements.

� More indirectly, it is anticipated that a reduction in the cost of hospital services will have a positive effect on the workers’ compensation system and benefit North Carolina’s workers because some employers and insurers may be more willing to authorize hospital-based services and procedures at a lower cost, thus eliminating some litigation. It is unclear whether the proposed changes would have any beneficial effect on future workers’ compensation premium rates, but there is no anticipated detriment.

o The estimated benefit of the proposed hospital fee schedule changes to government and private sector employers, as well as workers’ compensation carriers, mirrors the estimated costs of the changes:

� $3,220,635.00 in savings on charges for inpatient services. � $28,370,847.00 in savings on charges for outpatient services. � $3,847,484.00 in savings on charges for ambulatory surgical services. � Total estimated savings for FY 2009-10 � $35,438,593.00.

• Impacts to Private Sector, State Government, and Local Governments

o Benefits: Employers, who either pay insurance premiums or self-insure, will benefit from this rule change. It is a reasonable assumption that an employer’s share of the total benefits of this rule change is equal to that employer’s share of total NC employment. As Federal employees are not covered by this rule change, this benefits calculation excludes federal employees. The calculations below use data from the Employment Security Commission.

� State Government. The State provided 4% of total non-federal NC employment in 2007, and therefore, the State will receive this same proportion of the annual benefits of this rule change, or $2 million.

� Local Governments. Using similar logic, local governments will receive $4 million in annual benefits.

� Private Sector. 85% of non-federal employment in NC is in the private sector, and therefore, we expect that $30 million of benefits will accrue to private sector employers and insurers.

o Costs: The distribution of costs between state-owned hospitals, local government-affiliated hospitals, and privately owned hospitals is estimated to be 6%, 36%, and 58%, respectively.6 This estimate was derived from the share of the $141 million of inpatient workers’ compensation claims at hospitals of each ownership type in FY 2006-07. The distribution of all workers’ compensation insurance charges is expected to be similar to inpatient charges.7 Local governments will not actually be paying the costs that accrue to local government-affiliated hospitals, as these hospitals are mostly operated financially

6 These percentage estimates were provided by the NCHA. 7 This estimation methodology seems robust; estimating the distribution by the share of hospital employment by ownership type, according to the Employment Security Commission, yields a similar distribution (8%, 36%, and 57%).

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independent of the counties or cities with which they are affiliated. Nonprofit corporations operate many local government-affiliated hospitals, and hospital authorities, which are governmental units that are independent of the city or county, operate others. The losses sustained by these 43 hospitals because of the proposed rate reduction would generally have little, if any, impact on county or city governments. Also, as VA/military hospitals (owned by the federal government) do not accept workers’ compensation insurance, they are excluded from the analysis of costs.

� State Government. The State will incur approximately $2 million in annual costs.

� Local governments. Local governments will not incur the costs of this rule change that will accrue to hospitals with local government affiliation.

� Private Sector. Private sector hospitals will incur $33 million in annual costs, including $13 million in annual costs to local government-affiliated hospitals that are included as part of the private sector. Also, there will be some search costs incurred by individual workers seeking medical care at hospitals that take workers’ compensation insurance (see above).

o Small Business Impact: It is anticipated that small businesses are more likely to see benefits (through lower insurance premiums) than to see costs.

• Alternatives

o Alternatives to the proposed medical fee schedule changes include maintaining the status quo or adopting different reimbursement rates, either higher or lower than those proposed.

o Although alternative reimbursement rates certainly could be proposed, the proposed rates represent a compromise of the task force members and an immediate significant reduction in hospital-based medical expenses for workers’ compensation claims. This reduction would occur while the task force and the Industrial Commission continue to study the reimbursement system for hospital services with the objective of bringing about greater efficiencies and bringing costs down further.

• Risk Analysis

o The proposed medical fee schedule changes are straightforward rate reductions that will provide a predictable level of cost and savings depending on the amount of charges for hospital-based services in workers’ compensation claims in the future.

o Although the proposed reimbursement rate reductions represent a cost to both public and private sector hospitals, the NCHA’s support of the proposed changes signifies that the financial effects or risks to North Carolina’s hospitals have been considered and deemed acceptable.

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Data Summary:

Summary Table I

FY 05-06 FY 06-07 FY 09-109 Inpatient charges $138,562,017 $141,442,044 $155,586,248 Outpatient surgery (hospital) 102,243,309 103,227,490 113,550,239 ED (no inpatient admission) 41,699,247 43,316,143 47,647,757 Est. nonsurgical outpatient (10%) 14,394,256 14,555,945 16,119,800 Total Outpatient charges $158,336,812 $160,115,397 $177,317,796 Ambulatory surgery charges $16,318, 186 $16,655,776 $18,321,354

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Summary Table II

FY 09-10 Cost/Savings Cost/Savings Difference (Current Rates) (Proposed Rates) Inpatient charges $155,586,248 $35,675,927 $38,896,562 $3,220,635 (using lower end cap) Outpatient charges $177,317,796 $8,865,890 $37,236,737 $28,370,847 Ambulatory-surgery $18,321,354 $0 $3,847,484 $3,847,484 charges

9 Determined using an estimated inflationary figure of 10% over a 3-year period. See attached NCHA memorandum.

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Appendix A:

November 10, 2008

Honorable Pamela Thorpe Young, Chair North Carolina Industrial Commission 4319 Mail Service Center Raleigh, NC 27699-4319

Re: Workers’ Compensation Hospital Fee Schedule Study Committee

Dear Chair Young: Please treat this letter as an informal interim report from the Hospital Fee Schedule Study Committee which I chair. This informal report confirms the position of the Committee which I previously communicated to you. Members of the Committee include Joe Abriola of Key Risk Insurance Company, James Andrews of the NC State AFL-CIO, Mike Carpenter of the North Carolina Home Builders Association, Lewis Ebert of the North Carolina Chamber, Ray Farmer of the American Insurance Association, Linwood Jones of the North Carolina Hospital Association, Ann Lore of Duke University, and Bob Seehausen of Novant Health. John McAlister of the North Carolina Chamber has been participating for Lewis Ebert as a member of the Committee. Scarlette Gardner from the North Carolina Medical Society also has been meeting with the Committee. There is a general consensus among the members of the Committee, except representatives of the American Insurance Association and Key Risk Insurance Company, that the Commission should adopt the present proposals from the North Carolina Hospital Association for revision of the “hospital fee schedule.” These are characterized by the Hospital Association “as an interim step.” This action would result in significant savings while the Commission and Committee continue their efforts, in the Hospital Association’s words, “to address cost issues, hospital concerns about system inefficiencies, utilization issues, and other issues of common interest.” The adoption of these changes, therefore, would be made with the understanding that the Commission and the Committee will continue to address the reimbursement system for hospital services with the objective of addressing system inefficiencies and bringing costs down. The representative of Key Risk Insurance expressed his appreciation for the efforts of the Hospital Association in putting together its proposals. Representatives of Key Risk Insurance Company and the American Insurance Association, however, are

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not in support of the Hospital Association’s present proposals because they believe these proposals do not adequately address their concerns. There will be an opportunity for the American Insurance Association, Key Risk Insurance Company and other parties in the workers’ compensation system to present their views at the hearing required to consider such changes as the Commission may propose. The present North Carolina Hospital Association proposals for changes in the schedule of maximum fees are as follows: � Outpatient hospital services. Outpatient hospital claims presently are

reimbursed at 95% of charges. This reduction will be reduced to 79% percent of charges for all hospitals except critical access hospitals as designated pursuant to the Social Security Act. The outpatient rates for critical access hospitals will be reduced to 87% of charges.

� Ambulatory surgery centers. Ambulatory surgical center services presently are reimbursed at 100% of charges. Reimbursement for these services will be reduced to 79% of charges.

� Inpatient hospital services. Inpatient hospital services are reimbursed according to the DRG fee schedule duplicating State Health Plan contract amounts as of June 30, 2001. The payment, however, is subject to end caps when the DRG allowance falls below charges or when the DRG allowance exceeds charges. The payment presently may not be more than a maximum of 100% of the hospital’s itemized charges as shown on the UB-92 claim form or less than 77.07% of the hospital’s charges on this form. The minimum end cap or “outlier” will be reduced to 75% under the North Carolina Hospital Association’s proposal. Therefore, the payment will not be more than a maximum of 100% of the hospital itemized charges nor less than 75% of these charges on the UB-92 form. The Act requires that a hospital’s itemized charges on the UB-92 claim form for workers’ compensation services shall be the same as itemized charges for like services for all other payers.

� Effective date. The changes will not take effect until six months from the time they are adopted by the Industrial Commission.

It is important to note that under the Act a hospital or ambulatory surgery center may agree by contract with an insurer or employer to accept an amount or reimbursement methodology different from the schedule established by the Commission. Please let me know if the Committee can be of assistance to the Commission at this time.

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Respectfully, Henry N. Patterson, Jr. HNPjr/bo cc: Members of the Workers’ Compensation Hospital Fee Schedule Study Committee John McAlister, North Carolina Chamber Scarlette Gardner, North Carolina Medical Society

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Appendix B:

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