Bulletin 95-18
November 8, 1995

Hospital Fee Schedule Hearings Scheduled

The Administrative Director of the Division of Workers' Compensation has scheduled hearings in December on a proposed fee schedule for inpatient hospital services. Adoption of this fee schedule is one of the final implementation tasks given to DWC in the 1993 Reform legislation.

The hearings are scheduled on December 18, 1995, at 10:00 a.m. in Los Angeles at 107 S. Broadway in Room 1138, and on December 21, 1995, at 11:00 a.m. in San Francisco at 505 Van Ness Avenue in the Public Utilities Commission Auditorium.

The proposed fee schedule is based on the Medicare fee schedule in order to take into account the cost and service differentials of various facilities, as directed by the applicable statute. Medicare reimburses each hospital differently depending on a number of factors which impact on the hospital's costs and services, so using the basic Medicare structure eliminates the need to create a separate, unique mechanism to pay for hospital care for workers' compensation patients.

DWC will make available the data necessary to calculate the maximum payment under the schedule for each hospital for each applicable diagnostic related group (DRG). The maximum payment will be 1.2 times the product of a factor calculated by DWC annually for each hospital using data published by the Federal Health Care Financing Administration (HCFA) and a "DRG weight" reflecting the amount of resources a hospital can be expected to use in providing services for that particular diagnosis. Each year, DWC will publish the hospital factors, applicable DRG weights and other information necessary to make payments under this fee schedule at least 45 days before any changes take effect.

HCFA also publishes DRG weights, which will be used in all but the 48 most common DRGs in workers' compensation. For these common workers' compensation DRGs, which account for nearly 80% of workers' compensation hospital stays, special revised weights have been calculated to reflect the fact that the workers' compensation population is a younger, more active, healthier population than the Medicare population. On average, the weights for these DRGs have been reduced by 11 percent based on a special study conducted for this purpose by the Institute for Health Policy Studies at the University of California at San Francisco.

In order to allow employers and insurers maximum flexibility to manage hospital costs, contracts for alternative payment arrangements with hospitals will take precedence over the fee schedule. Thus, for example, if an employer or insurer wants to contract for inpatient services on a per diem basis as part of a broader effort to manage care and contain costs, this schedule will permit such an arrangement.

The precise impact on hospital costs is difficult to project. As part of their study, the Institute for Health Policy Studies at the University of California at San Francisco was asked to determine how current workers' compensation payments for hospital services compare to Medicare payments. Because of unanticipated data problems, they were unable to reach a conclusion in which they have a high degree of confidence. The usable data suggested current workers' compensation payments are 157% of Medicare payments if the revised DRG weights are used, but this is likely a high estimate.

If the UCSF analysis is accurate, the overall rate level in the proposed schedule is equivalent to about 110% of Medicare's reimbursement to hospitals (i.e., with unrevised Medicare DRG weights). Two other states currently have workers' compensation fee schedules based on the Medicare schedule. Pennsylvania pays at 113% of Medicare rates and Hawaii pays at 110% of Medicare rates.

It is proposed that the hospital fee schedule go into effect for hospital admissions on or after July 1, 1996 in order to give the workers' compensation community sufficient time to adjust to the new schedule.

Please Note: A copy of the Notice of Hearing and the regulations proposing the Hospital Fee Schedule can be obtained by calling the Division of Workers' Compensation at 415.972.0700.