Adopting Medicare Fee Schedules Considerations for the California Workers’ Compensation Program Barbara O. Wynn INSTITUTE FOR CIVIL JUSTICE Prepared for the California Commission on Health and Safety and Workers’ Compensation The research presented in this report was prepared for the California Commission on Health and Safety and Workers’ Compensation. This research was conducted by RAND’s Institute for Civil Justice. RAND is a nonprofit institution that helps improve policy and decisionmaking through research and analysis. RAND ® is a registered trademark. RAND’s pub- lications do not necessarily reflect the opinions or policies of its research sponsors. Published 2003 by RAND 1700 Main Street, P.O. Box 2138, Santa Monica, CA 90407-2138 1200 South Hayes Street, Arlington, VA 22202-5050 201 North Craig Street, Suite 202, Pittsburgh, PA 15213-1516 RAND URL: http://www.rand.org/ To order RAND documents or to obtain additional information, contact Distribution Services: Telephone: (310) 451-7002; Fax: (310) 451-6915; Email: order@rand.org © Copyright 2003 RAND All rights reserved. No part of this book may be reproduced in any form by any electronic or mechanical means (including photocopying, recording, or information storage and retrieval) without permission in writing from RAND. Library of Congress Cataloging-in-Publication Data Wynn, Barbara O. Adopting medicare fee schedules : considerations for the California workers’ compensation program / Barbara O. Wynn. p. cm. “MR-1776.” Includes bibliographical references. ISBN 0-8330-3476-6 (pbk.) 1. Medical fees—California. 2. Medicare—California. 3. Workers’ compensation— California. [DNLM: 1. Fee Schedules—economics—California. 2. Medicare—economics— California. 3. Economics, Hospital—California. 4. Patient Care—economics—California. 5. Workers’ Compensation—economics—California. W 74 AC2 A239 2003] I.Title. R728.5.W96 2003 368.4'2'009794—dc22 2003016718 - iii - RAND Institute for Civil Justice The mission of the RAND Institute for Civil Justice (ICJ) is to improve private and public decisionmaking on civil legal issues by supplying policymakers and the public with the results of objective, empirically based, analytic research. The ICJ facilitates change in the civil justice system by analyzing trends and outcomes, identifying and evaluating policy options, and bringing together representatives of different interests to debate alternative solutions to policy problems. The Institute builds on a long tradition of RAND research characterized by an interdisciplinary, empirical approach to public policy issues and rigorous standards of quality, objectivity, and independence. 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Greer II (Chair) Sheila L. Birnbaum, Skadden Arps Slate Meagher & Flom James L. Brown, Center for Consumer Affairs, University of Wisconsin–Milwaukee Kim M. Brunner, State Farm Insurance Lawrence V. Burkett, Jr., MassMutual Financial Group Alan Charles Robert A. Clifford, Clifford Law Offices N. Lee Cooper, Maynard, Cooper, & Gale John J. Degnan, The Chubb Corporation Kenneth R. Feinberg, The Feinberg Group, LLP Paul G. Flynn, Los Angeles Superior Court Kenneth C. Frazier, Merck & Co., Inc. William B. Gould IV, Stanford Law School Terry J. Hatter, Jr., United States District Court Deborah R. Hensler, Stanford Law School Patrick E. Higginbotham, United States Court of Appeals Douglas G. Houser, Bullivant Houser Bailey Roberta R. Katz, Katz Family Foundation Jeffrey B. Kindler, Pfizer, Inc. Steven J. Kumble, Lincolnshire Management, Inc. Joseph D. Mandel, University of California, Los Angeles Christopher C. Mansfield, Liberty Mutual Insurance Company Charles W. Matthews, Jr., Exxon Mobil Corporation Margaret McKeown, U.S. Court of Appeals, Ninth Circuit Paul S. Miller, Kaye Scholer Robert S. Peck, Association of Trial Lawyers of America Robert W. Pike, Allstate Insurance Paul M. Pohl, Jones, Day, Reavis & Pogue Thomas E. Rankin, California Labor Federation, AFL-CIO Robert T. Reville, RAND Bradford W. Rich, United Services Automobile Association Charles R. Schader, American International Group Raymond I. Skilling, Aon Corporation Larry S. Stewart, Stewart Tilghman Fox & Bianchi Wayne D. Wilson, Farmers Insurance Group - v - Neal S. Wolin, Hartford Financial Services Group, Inc. California Commission on Health and Safety and Workers’ Compensation Appointed by the Governor of California Jill A. Dulich, Marriott International, representing employers Leonard C. McLeod, California Correctional Peace Officers Association, representing labor Darrel “Shorty” Thacker, Bay Counties District Council of Carpenters, representing labor John C. Wilson, Schools Excess Liability Fund, representing employers Appointed by the Speaker of the California Assembly Allen Davenport, Service Employees International Union California State Council, representing labor Robert B. Steinberg, Law Offices of Rose, Klein and Marias, representing employers Appointed by the Senate Rules Committee Tom Rankin, California Labor Federation, AFL-CIO, representing labor Kristen Schwenkmeyer, Gordon and Schwenkmeyer, representing employers Executive Officer Christine Baker - vi - - vii - Preface In response to concerns about rapidly increasing medical costs in the California workers’ compensation program, the California Commission on Health and Safety and Workers’ Compensation (CHSWC) is recommending changes in the current fee schedule that determines the amounts health care providers are paid for medical services given to the state’s injured workers. Specifically, the CHSWC proposes that the fee schedule be linked to Medicare fee schedules. This report describes research funded by the Commission to examine issues that would arise if such a link were to occur. The study addresses policy issues emanating from the differences between the two fee schedules, describes modifications that are likely to be necessary to tailor the Medicare fee schedules to California’s injured workers, and explores the implications of automatic annual updates to those fee schedules. The research for this study was conducted by the RAND Institute for Civil Justice. The summary of this report is intended for a broad audience of policymakers and others interested in this issue. The main body of the report should be of most interest to those concerned with technical issues regarding health care provider reimbursement under California’s workers’ compensation program. - ix - Contents Preface vii Tables xiii Figures xv Summary xvii Acknowledgments xxxv Acronyms xxxvii 1. INTRODUCTION 1 Background 1 Study Purpose and Approach 6 Organization of This Report 7 2. HOSPITAL INPATIENT FEE SCHEDULE 9 Overview of the Current OMFS Fee Schedule 9 Analysis of CWCP Inpatient Records 10 Data Sources 10 Methodology 11 Results 15 Process for Updating the PPS for Hospital Inpatient Services 15 Establishing the Annual Update Factor 16 Applying an OMFS Multiplier to the Medicare PPS Rate 18 Pass-Through for Hardware Used in Back and Spinal Procedures 24 Temporary Add-On Payments for New Technology 26 Options for Further Consideration 27 Payments for Extraordinarily High-Cost Cases 29 Payments for Exempted Services 31 Special Payment Protections for Sole Community Hospitals 35 Payments to Medicare-Exempt Hospitals 35 Acute Care Hospitals 35 Long-Term Care Hospitals 36 Rehabilitation Hospitals 37 Psychiatric Hospitals 38 Other Hospitals Exempted from the OMFS 38 Summary of Findings 39 3. PHYSICIAN AND OTHER PROFESSIONAL SERVICES 41 Overview of Medicare RB-RVS Fee Schedule 41 Geographic Adjustment Factor 44 Site-of-Service Differential 46 Option 1: Adopt the Medicare Fee Schedule Policies for All Services 49 Option 2: Adopt the Medicare Fee Schedule Policies Only for Services for Which Facility Fees Are Payable Under the OMFS 50 Option 3: Continue Current OMFS Policy 50 Anesthesia Services 51 Conversion Factor 53 Establishing the Level of the Conversion Factor 54 Option 1: Determine a Budget-Neutral Single Conversion Factor 56 Option 2 : Apply a Single Multiplier to the Medicare Conversion Factor 58 - x - Option 3: Develop Cost-Neutral Conversion Factors by Type of Service 58 Transitional Payment Policies 60 Option 1: Establish Floors and Ceilings on Maximum Annual Changes in Service- Specific Conversion Factors 60 Option 2: Use Blended CFs with Progressively Decreasing Percentage of Cost-Neutral Service-Specific CF and Progressively Increasing Percentage of New CF 61 Option 3: Establish a Hold-Harmless Policy for Conversion Factor Estimated to Exceed the Cost-Neutral Conversion Factor Within a Specified Period 63 Update Factor 63 Option 1 to Determine the Update Factor: Medicare Economic Index 65 Option 2 to Determine the Update Factor: Producer Price Index 67 Option 3 to Determine the Update Factor: Statewide Average Weekly Wages 67 Update and Refinement Process 67 Dates 68 Refinement Process 68 Operational Issues 68 Other Issues 69 Payments for Non-Physician Practitioners 69 Surgery 70 Physical Medicine 72 Items and Supplies Furnished in Conjunction with Procedures 73 Program-Specific Procedure Codes 74 Summary of Findings 75 4. HOSPITAL OUTPATIENT AND AMBULATORY SURGERY CENTER FACILITY SERVICES 77 AB 749 Requirements 78 Overview of Medicare Payment Systems 81 Hospital Outpatient PPS 81 ASC Fee Schedule 83 Approved Procedures 84 Site-of-Service Differentials 86 New Technology 90 Deciding on a Conversion Factor 91 OPPS for HOPD Services 91 ASC Facilities Services 92 Deciding on an Update Factor 93 Update Process 93 OPPS 93 ASC Fee Schedule 94 Summary of Findings 94 5. OTHER ITEMS AND SERVICES 97 Diagnostic Clinical Laboratory Tests 97 Durable Medical Equipment, Prosthetics, Orthotics, and Supplies 98 Skilled Nursing Services 99 Home Health Agency Services 100 Ambulance Services 100 Summary of Findings 101 6. FINDINGS AND AREAS FOR FURTHER CONSIDERATION 103 A. DRG CLASSIFICATION CHANGES AFFECTING THE PAYMENT SIMULATIONS IN CHAPTER 2 109 [...]... need to be addressed if the OMFS were linked to Medicare fee schedules, including: • issues that are likely to arise from existing differences between the two fee schedules • issues surrounding the modifications that might be necessary to tailor the Medicare fee schedules to CWCP patients • issues regarding the implications of automatic annual updates of fee schedules Prior research by other organizations... recommending that California consider linking the OMFS to Medicare s fee schedules for all services other than pharmaceuticals Medicare is the federal health insurance program for the aged, the disabled, and persons with end-stage renal disease Medicare is administered by the Centers for Medicare and Medicaid Services (CMS) With few exceptions, Medicare uses fee schedules that are regularly updated to pay for... issues regarding how Medicare- unique codes or new codes without an established Medicare fee schedule amount should be handled Overall, using the Medicare fee schedules would provide a mechanism for updating the codes and fee schedule amounts on an annual basis A comparison between the aggregate maximum allowable amounts that would be allowed under the current OMFS and the Medicare fee schedule has not... payments Under Medicare, different fee schedules apply to services provided in hospital outpatient departments and services provided in ASCs California Assembly Bill 749 (2002) authorized the establishment of a fee schedule for ambulatory surgical services but imposed a number of requirements that will postpone a fee schedule for a number of years An alternative would be to adapt the Medicare fee schedules. .. local fees and is typically the controlling payment amount As with other fee schedules, CMS has an established process for updating the fee schedule on an annual basis However, the fee schedule has been frozen several times since it was first established, most recently between 1998 and 2002 If the OMFS is linked to the Medicare fee schedule, one decision to be made will be whether to adopt the Medicare. .. acupuncturists and family therapists • Linking the OMFS to the Medicare fee schedules shifts the administrative burden of ongoing fee schedule refinement and updates to the CMS Medicare fee schedules are updated on a regular basis with opportunity for public comment An independent commission is charged with reviewing and making recommendations concerning Medicare payment policies In addition, other advisory... whether Medicare rules concerning rental versus purchase of equipment and other special policies should be adopted at the same time Paid claims data would need to be analyzed to determine the impact of adopting the special policies as well as the Medicare fee schedule The DMEPOS fee schedules are updated on a quarterly basis in order to implement fee schedule amounts for new codes and to revise any fee. .. Medicare program For Medicare payment purposes, patients are assigned to one of 44 resource utilization groups (RUGs) based on the patient’s service needs and expected resource requirements One issue that should be reviewed before linking the OMFS fee schedule to Medicare fee schedules is whether Medicare s payment for skilled nursing care is appropriate for the levels of care covered by the CWCP Medicare s... other organizations has explored many of the issues that need to be considered in adopting the Medicare fee schedules Given the limited amount of time available for this study, RAND drew heavily from this previous work and from other information to identify the policy options and potential impact if the link to Medicare fee schedules were to occur Except for limited analyses of readily available hospital... Other workers’ compensation programs have adopted the structure of the Medicare fee schedules, with different multipliers, to the Medicare payment rates The experience of these programs and their modifications for workers’ compensation–specific services could inform the decisions the DWC would need to make in adapting the Medicare fee schedules for the CWCP • At least 17 states, the District of Columbia, . automatic annual updates of fee schedules. Prior research by other organizations has explored many of the issues that need to be considered in adopting the Medicare fee schedules. Given the limited. emanating from the differences between the two fee schedules, describes modifications that are likely to be necessary to tailor the Medicare fee schedules to California’s injured workers, and. persons with end-stage renal disease. Medicare is administered by the Centers for Medicare and Medicaid Services (CMS). With few exceptions, Medicare uses fee schedules that are regularly updated