Bulletin 97-6
March 17, 1997

Clarification of "Contract Exception" In Inpatient Hospital Fee Schedule

The new workers' compensation inpatient hospital fee schedule will apply to admissions starting April 1, 1997. As the implementation date nears, a question had arisen concerning whether the fees set forth in the fee schedule are the maximum that may be charged for hospital services, or whether the "contract exclusion" in the fee schedule permits contracts above the fee schedule rates.

The law requires DWC to promulgate a maximum fee schedule for hospital services. (Labor Code Section 5307.1) During the schedule's development, DWC was urged by both payers and hospitals to allow them to continue to contract for hospital services. There was considerable sentiment expressed that contracting on a per diem basis would be administratively simpler and less costly than the Medicare method of paying for hospital services based on the diagnosis of the patient and the expenses of the particular hospital facility. The new fee schedule is based on the Medicare method because of certain statutory requirements.

The desire to continue contracting led DWC to include a contract exclusion in the regulations: “Inpatient services for admissions where an agreement fixing the amounts to be paid for inpatient services has been made between the institutions rendering such service and the employer or insurer or an agent acting on their behalf.” (CCR Section 9792.1 (b)(1)).

This exclusion must be read in light of the statute, however, which provides that the fee schedule is to establish maximum fees. The current confusion apparently arises because the regulation does not state that contract fees cannot exceed the maximum. No such provision was included in order to provide the kind of contracting flexibility requested, allowing payers and hospitals to enter into per diem contracts where, for example, the fee for any particular admission calculated on a per diem basis may be higher or lower than the fee calculated under the fee schedule methodology. Requiring an admission-by-admission comparison would defeat the goal of contracting flexibility.

The regulations were constructed such that the statutory requirement that fees not exceed the fee schedule can be satisfied by either of these two scenarios: (1) the reimbursement for each hospital bill does not exceed the amount allowed under the fee schedule, or (2) the reimbursement amount for all hospital stays under an alternative payment system (such as per diems) does not exceed the reimbursement that would have been paid if all hospital stays had been paid using the DRG system.

DWC assumes that where parties contract for negotiated rates they will act in economically rational ways. Thus, where a contract uses alternative negotiated rates, it is assumed that the payer will not agree to pay amounts under a contract which, in the aggregate, are expected to exceed the amounts that would be paid using the new fee schedule.

The goal of the contract exclusion was to allow payers and providers to negotiate rates and methods of payment that are mutually more advantageous than using the Medicare type of fee schedule that had to be adopted because of the statutory restrictions. The contract exclusion was not intended to allow hospitals to unilaterally preserve favorable contracts negotiated prior to the adoption of the new maximum inpatient hospital fee schedule.