On October 22, the New York State Department of Health (DOH) hosted the final meeting of the Hospital Rate-Setting Technical Advisory Committee (TAC). DOH Commissioner Richard F. Daines, M.D., and several colleagues presented the Department’s preliminary recommendations for rebasing and modernizing the Medicaid inpatient fee-for-service payment methodology. The Commissioner is expected to present his final recommendations to the New York State Legislature on November 1, 2008.

Rebasing
Under its rebasing proposal, DOH would update the base year for the Medicaid inpatient rate-setting system from 1981 to 2005—a change that the hospital industry supports. In that context, DOH also proposed to reduce aggregate inpatient payments by $300 million and to reinvest that funding in higher hospital-based ambulatory service rates. While the hospital industry strongly supports greater investment in ambulatory services—indeed, New York hospitals lose $2 billion a year providing ambulatory services to the Medicaid population—it urges caution in using inpatient payments as a funding source. Caution is needed for several reasons:

• The funding that DOH would reprogram is already supporting other policy initiatives, most notably workforce recruitment and retention. New York hospitals still have critical shortages in nursing and other professions.
• The State’s need to close an unprecedented budget deficit of $8–$10 billion next year may supplant other policy priorities.
• The potential redistribution of funding among hospitals adds more uncertainty to hospitals’ ability to prepare their 2009 budgets, which is already severely encumbered by the prospect of deficit-related Medicaid cuts on top of revenue losses and cost increases associated with the collapse of the financial services industry. Hospitals are already planning for service reductions to pay for the higher cost of borrowing and increased funding required for medical liability insurance and pension plans in the wake of sharply reduced investment income.

Recommended Payment Methodology
The State would replace the current methodology with an approach similar to the Medicare inpatient prospective payment system. There would be a single statewide rate that would be adjusted by a diagnosis-related group (DRG) weight, for regional differences in input prices, and for indirect medical education costs. The State would also change the patient classification system to All Patient Refined DRGs (APR-DRGs), which provides greater severity adjustment than the current system. Finally, DOH is considering whether an outlier policy is needed in the context of severity-adjusted DRGs. Direct medical education and capital-related costs would continue to be reimbursed on a hospital-specific basis. GNYHA is modeling and carefully studying the merits and impact of DOH’s proposals in close collaboration with the Healthcare Association of New York State and DOH staff.