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STATE OF CONNECTICUT HOSPITAL PAYMENT MODERNIZATION TRANSITION TO APR-DRGs MARCH 31, 2014 Hartford, Connecticut

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2012 Mercer (US) Inc. Agenda Welcome and introductions. Goals and objectives. Background and guiding principles. Methodology overview. Data overview. Next steps. 1 March 31, 2014

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Medicaid Reform Strategies March 31, 2014 2

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What is our conceptual framework? DSS is motivated and guided by the Centers for Medicare and Medicaid Services (CMS) Triple Aim: improving the patient experience of care (including quality and satisfaction) improving the health of the population reducing the per capita cost of health care March 31, 2014 3

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We are also influenced by a value-based purchasing orientation. The Centers for Medicare and Medicaid Services (CMS) define value- based purchasing as a method that provides for: Linking provider payments to improved performance by health care providers. This form of payment holds health care providers accountable for both the cost and quality of care they provide. It attempts to reduce inappropriate care and to identify and reward the best-performing providers. March 31, 2014 4

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Improving the Patient Experience Of Care Issues PresentedDSS StrategiesAnticipated Result Individuals face access barriers to gaining coverage for Medicaid services ConneCT MAGI income eligibility Integrated eligibility process with Access Health CT Streamlined eligibility process that optimizes use of public and private sources of payment Individuals have difficulty in connecting with providers ASO primary care attribution process and member support with provider referrals Support for primary care providers (PCMH, EHR, ACA rate increase) DSS will help to increase capacity of primary care network and to connect Medicaid beneficiaries with medical homes and consistent sources of specialty care Individuals struggle to integrate and coordinate their health care ASO predictive modeling and Intensive Care Management (ICM) Duals demonstration Health home initiative Individuals with complex health profiles and/or co- occurring medical and behavioral health conditions will have needed support March 31, 2014 5

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Improving the Health of Populations Issues PresentedDSS StrategiesAnticipated Result A significant percentage of Connecticut residents do not have health insurance Medicaid expansion Integrated eligibility determination with Access Health CT Increased incidence of individuals covered by either Medicaid or an Exchange policy Many Connecticut residents do not regularly use preventative primary care Primary Care Medical Home (PCMH) initiative in partnership with State Employee Health Plan PCMH Increased regular use of primary care; early identification of conditions and improved support for chronic conditions Many health indicators for Medicaid beneficiaries are in need of improvement, and Medicaid has the opportunity to influence other payers Behavioral health screening for children Rewards to Quit incentive-based tobacco cessation initiative Obstetrics and behavioral health P4P initiatives Improvement in key indicators for Medicaid beneficiaries; greater consistency in program design, performance metrics and payment methods among public/private payers March 31, 2014 6

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Reducing the Per Capita Cost of Care Issues PresentedDSS StrategiesAnticipated Result Connecticuts historical experience with managed care did not yield the cost savings that were anticipated Conversion to managed fee- for-service approach using ASOs Administrative fee withhold and performance metrics DSS and OPM will have immediate access to data with which to assess cost trends and align strategies and performance metrics in support of these Connecticut Medicaids fee-for-service reimbursement structure promotes volume over value PCMH performance incentives Duals demonstration performance incentives and shared savings Evolution toward value-based reimbursement that relies on performance against established metrics Connecticut Medicaids means of paying for hospital care is outmoded and imprecise Conversion of means of making inpatient payments to DRGs and making outpatient payments to APCs DSS will be more equipped to assess the adequacy of hospital payments and will be able to move toward consideration of episode- based approaches March 31, 2014 7

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Issues PresentedDSS StrategiesAnticipated Result Connecticut expends a high percentage of its Medicaid budget on a small percentage of individuals who require long-term services and supports; historically, this has primarily been in institutional settings Consumers strongly prefer to receive these services at home Strategic Rebalancing Initiative (State Balancing Incentive Payments Program, Money Follows the Person, nursing home diversification funding, workforce analysis, My Place campaign) Duals demonstration payments for care coordination Connecticut will achieve the stated policy goal of making more than half of its expenditures for long-term services and supports at lower cost in home and community-based settings Reducing the Per Capita Cost of Care (cont'd.) March 31, 2014 8

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2012 Mercer (US) Inc. Hospital Payment Modernization The State of Connecticuts Medicaid fee-for-service (FFS) payment systems are aging and becoming less useful. At the same time, they are assuming increasing importance with the move to the Administrative Services Organization (ASO) model. With everything FFS, it is important that those schedules are fair, rational, well understood by all parties, and easily updateable. Need to support policy initiatives to improve incentives and link pay to performance. The current systems have been stressed by the move to ASO and the rate meld process. Major stakeholders like the Connecticut Hospital Association have suggested the same kind of modernization anticipated in this project. March 31, 2014 9 9

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2012 Mercer (US) Inc. Project Goals and Objectives Implement payment methods that can support quality health outcomes and efficiency. Create systems that establish a sound financial basis for the changing environment, including state and federal policy goals. Stakeholder communication should be of a shared vision of equity and transparency. Design, develop, and implement a complete rebuild of both hospital payment systems. Implement new prospective payment systems that are international statistical classification of diseases and related health problems (ICD-10) capable. Systems that are more precise in the recognition of acuity for both inpatient and outpatient hospital services. Provide payment structures that promote proper delivery of health care in the most appropriate setting. Promote more predictable and transparent payment processes for hospitals. 10 March 31, 2014

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2012 Mercer (US) Inc. Guiding Principles Maintain a long-term commitment to goals of improved accuracy, predictability, equity, timeliness, and transparency of hospital payments for all Medicaid beneficiaries in the State of Connecticut however, expedite short-term focus on technology and mechanics of payment. 11 March 31, 2014

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2012 Mercer (US) Inc. Guiding Principles (contd) Focus on method of payment, not level of payment: Project modeling will be based on state budget neutrality. Initial implementation will target revenue neutrality for each hospital. 12 March 31, 2014

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2012 Mercer (US) Inc. Guiding Principles (cont'd.) Anticipate need for a phased-in approach with respect to various aspects of implementation. 13 March 31, 2014

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2012 Mercer (US) Inc. Guiding Principles (cont'd.) Over arching policy direction of consistency with industry standard payment practices and, specifically, Medicare payment policy. 14 March 31, 2014

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2012 Mercer (US) Inc. Guiding Principles (cont'd.) Use the best available data for system development: Rely on complete and accurate data sets for analysis and payment administration. Modify data requests and requirements, as necessary, to provide robust analytics. 15 March 31, 2014

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2012 Mercer (US) Inc. Guiding Principles (cont'd.) Be mindful of the need to update payment systems as soon as possible, yet coordinate with other Connecticut Department of Social Services (DSS) priorities, such as implementation of ICD-10 in October 2014. 16 March 31, 2014

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2012 Mercer (US) Inc. Guiding Principles (cont'd.) Develop the most robust and comprehensive system possible while allowing flexibility to handle exceptions in an equitable and efficient manner. 17 March 31, 2014

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2012 Mercer (US) Inc. Project Phases Phase One: Inpatient. Phase Two: Outpatient. The focus for this presentation is Phase One: Inpatient. 18 March 31, 2014

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2012 Mercer (US) Inc. Inpatient Timeline 19 March 31, 2014

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2012 Mercer (US) Inc. Methodology Overview APR-DRG Payment Methodology All Patient Refined Diagnosis Related Groups (APR-DRG) Grouper: Consistent with project goals and guiding principles. ICD-10 capable. Promotes more predictable and transparent payment processes for hospitals. Supports quality health outcomes and efficiency. Aligns with industry standard payment practices and, specifically, Medicare payment policy. Allows flexibility updates for new technology and phase-in capability. 20 March 31, 2014

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2012 Mercer (US) Inc. Methodology Overview (contd) APR-DRG Rate Setting 21 March 31, 2014 TopicApproach Included hospitals.General acute care hospitals. Excluded hospitals.Rehabilitation, psychiatric, long-term acute care, critical access hospitals, other specialty hospitals. Out-of-state and border hospitals.DRGs based on statewide average. Claim period for rate setting.CY 2012 paid claims. Base rate determination.Hospital-specific base rates with revenue neutral targets. Capital and operating costs.Capital and operating costs will be combined and included in base rates. Outlier methodology.Cost outlier with statistical basis with minimum threshold. Same day stays/short stay outliers.Average per diem for DRG. Indirect medical education factor.Rate adjustment factor based on Medicare formula.

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2012 Mercer (US) Inc. Methodology Overview (contd) APR-DRG Weight Setting 22 March 31, 2014 TopicApproach DRG grouper.APR-DRGs. Claim period for weight setting.CY2012 paid claims. DRG weight determinations for low-volume DRGs. Based on 3M standard APR-DRG weights. Cost reports to estimate costs.Medicare cost report with period ending in CY2012, adjusted to a common point. Estimated cost of each claim.Revenue code-specific per diems and CCRs based on provider crosswalks. Time limit to identify readmissions as part of the initial admission. Claims with readmission within three days are combined into a single claim.

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2012 Mercer (US) Inc. Methodology Overview (cont'd.) Hospital Revenue Map Revenues included in APR-DRG payment: Current case rate payments. Capital pass through. Burn pass through. 23 March 31, 2014

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2012 Mercer (US) Inc. Methodology Overview Hospital Revenue Map (cont'd.) Revenues not included in APR-DRG payment: Physician payments for hospital based physicians. Indemnity payments. Heart and liver transplants. Organ acquisition. Graduate medical education direct. Adult behavioral health. Childrens behavioral health. All supplemental payments (disproportionate share hospital, etc.). 24 March 31, 2014

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2012 Mercer (US) Inc. Data Overview DRG Reimbursement Data sources: Cost reports. Claim set. Costing process: Routine line items. Ancillary items. Weight setting: Average cost per DRG versus overall average cost. Basic DRG payment example: Inlier formula. Outlier formula. March 31, 2014 25

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2012 Mercer (US) Inc. Data Overview (cont'd.) State of Connecticut Cost Reports March 31, 2014 26

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2012 Mercer (US) Inc. Data Overview (cont'd.) Data Set Claim Filters Claims from 1/1/201212/31/2012 27 March 31, 2014 Medicaid Number Medicare NumberName Beginning Claim Count Discharge Status 30Ungroupable Psych and Rehab DRGs Final Claim Count 404161270001Hospital of Saint Raphael2,7756613842,324 404162070002Saint Francis Hospital8,03086128347,098 404163870003Day Kimball Hospital1,336343251,004 422180070004Sharon Hospital179 -2 -177 404165370005Waterbury Hospital3,37315 5432,800 404166170006Stamford Hospital3,27142222462,961 404167970007Lawrence & Memorial Hospital3,2446763332,838 404168770008Johnson Memorial Hospital5771 -126450 404170370010Bridgeport Hospital5,859120114905,238 404171170011Charlotte Hungerford Hospital1,154132183956 404172970012Rockville General Hospital2671 -1265 404175270015New Milford Hospital297 - - - 404176070016Saint Mary's Hospital3,2741552113,043 404177870017Midstate Medical Center2,2542071052,122 404178670018Greenwich Hospital4462 -2442 404179470019Milford Hospital284 - - - 404181070020Middlesex Hospital2,405493172,075 404182870021Windham Community Memorial Hospital967 -41962 404183670022Yale-New Haven Hospital18,763292471,76116,663 404185170024William W. Backus Hospital2,3552622312,096 404186970025Hartford Hospital8,8798191,8766,913 404188570027Manchester Memorial Hospital2,1193346241,458 404189370028Saint Vincent's Medical Center4,89590281,1103,667 404190170029Bristol Hospital1,6273103211,293 404192770031Griffin Hospital1,282 -21091,171 404193570033Danbury Hospital3,28454112372,982 404194370034Norwalk Hospital3,0462031242,899 404195070035Hospital of Central Connecticut4,51926102834,200 404196870036John Dempsey Hospital2,25410512621,886 415996073300Connecticut Children's Medical Center3,50847 -123,449 Total96,5231,23222711,05184,013

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2012 Mercer (US) Inc. Data Overview (cont'd.) Cost of Claims Hospital provided revenue code crosswalk used if available. Routine cost centers used per diems for revenue codes less than 220. Ancillary cost centers used CCRs for revenue codes greater than or equal to 220. Claim costs inflated to common period. March 31, 2014 28

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2012 Mercer (US) Inc. Data Overview (cont'd.) Revenue Code Crosswalk Example 29 March 31, 2014

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2012 Mercer (US) Inc. Data Overview (cont'd.) Costing Example 30 March 31, 2014

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2012 Mercer (US) Inc. Data Overview (cont'd.) DRG Weight Setting Table Weights determined using average cost of inlier claims. Standard 3M APR-DRG weights used for low-volume DRGs. Weight set normalized after inclusion of external low-volume DRG weights. Clinical cohesiveness addressed for DRG severity of illness mismatches. Statistical cost outlier. March 31, 2014 31

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2012 Mercer (US) Inc. Data Overview (cont'd.) DRG Statistics 32 March 31, 2014

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2012 Mercer (US) Inc. Data Overview DRG Statistics (cont'd.) 33 March 31, 2014

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2012 Mercer (US) Inc. Data Overview (cont'd.) Basic DRG Payment Parameters Inlier DRG: Hospital base rate. Indirect medical education. DRG weight. Outlier: Billed charges. CCRs. Outlier threshold. Outlier payment percentage. 34 March 31, 2014

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2012 Mercer (US) Inc. Data Overview (cont'd.) DRG Payment Example 35 March 31, 2014 DRG Payment Determination Hospital base rate$5,710.54 IME adjustmentX1.153205 DRG weightX7.3086 DRG payment=$48,130.22 Outlier Add On Determination Total charges$500,000.00 Non-covered charges-$3,000.00 Allowed charges$497,000.00 Hospital cost to charge ratioX0.289271 Estimated cost=$143,767.69 DRG outlier threshold-$129,050.22 Marginal cost=$14,717.47 Outlier payment percentageX80% Outlier add on=$11,773.98

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2012 Mercer (US) Inc. Next Steps Operational changes. Timeline. Website. Questions. 36 March 31, 2014

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2012 Mercer (US) Inc. Next Steps (contd.) Operational Changes Physician billing number requirements. Elimination of interim claims. Reduced need for annual cost settlement. 37 March 31, 2014

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2012 Mercer (US) Inc. Next Steps (contd.) Inpatient Timeline 38 March 31, 2014

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2012 Mercer (US) Inc. Next Steps (contd.) Reimbursement Modernization Website Connecticut Department of Social Services website: http://www.ct.gov/dss/cwp/view.asp?a=4598&q=538256 39 March 31, 2014

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40 March 31, 2014 Questions?

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Please address any additional questions in writing to: Kate McEvoy, DSS Medicaid Director 25 Sigourney Street Hartford, CT 06106-5033 41 March 31, 2014

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Services provided by Mercer Health & Benefits LLC.