Maryland Rate Regulation Overview and Potential Impact of Healthcare Reform

1. MarylandRate Regulation OverviewandPotential Impact of Healthcare Reform Michael A. Zito, Jr. Managing Director KPMG LLP March 30, 2012

2. Discussion Topics • Overview of HSCRC • Medicare Waiver Test • Current Regulatory Environment • Impact of Healthcare Reform • Q&A

3. The Formation of the HSCRC 1971 – Initial legislation enacted by the General Assembly • Independent body within the Department of Health and Mental Hygiene • HSCRC given the authority to establish hospital rates 1974 –HSCRC began setting unit rates for hospitals after 3 yr phase in • Authority extended only to non-federal insurers 1977 –Maryland granted temporary “waiver” by federal govt. to test alternative payment approaches • Exempted the state from national Medicare and Medicaid reimbursement requirements 1980 –Medicare exemption became permanent (with stipulations) in Maryland • Continue to be the only state with this “waiver”

4. The Medicare Waiver is the “lynch-pin” of the Maryland HSCRC System First negotiated effective 7/1/77 “Waives” payment under the national PPS System and allows Medicare and Medicaid to pay under HSCRC rates Continues today under special provisions of the Social Security Act which require the Maryland System to: • Cover substantially all non-federal acute hospitals • Treat all payors “equitably” • Pass a “Rate of Increase Test” whereby the Maryland rate of increase in payments per discharge remains below the national average rate of increase since a CY 1980 Base Period

5. The HSCRC Mandate Ensure Equity / Fairness / Stability • All-Payor system • Charges related to costs Maximize Access to Care • Uncompensated Care Contain Hospital Costs / Total Costs are Reasonable • Charge per Case / TPR • Waiver Test Provide Accountability • The “ROC” • Annual Rate Adjustments • Disclosure of Information and Performance

6. Regulatory Jurisdiction (Rates) Includes • Inpatient services • Outpatient services “at the hospital”(See HSCRC Criteria – next page) Excludes • Physician/Professional Fee/Part B Activity • Other operating revenue • Non-operating revenue • Certain services (O/P renal, Home Health, SNF)

7. HSCRC Published “At The Hospital” Criteria • Locationof entrances • Locationand signageof parking • Locationand language of signage at entrances, within buildings, on the campus and in parking areas, effectively alerting the public that a given building or service is either at or not “at the hospital” • Location of registration, changing and waiting areas • Whether billing reflects clearlythat the service is regulated or not rate regulated • Whether any physical connectionfrom an unregulated facility to the hospital will be restricted in order to ensure that patients and visitors do not have access to the unregulated facility from the hospital • Whether there is any duplication of unregulated serviceswithin the hospital in order to avoid inappropriate patient steering • Whether there is any inappropriate mixing of regulated and unregulated services in the same building, which would tend to have the effect of confusing patients on the regulated or non-regulated status of a given service being provided • Whether any Medicare Part B physician’s service being provided in an unregulated building also includes components of a Medicare Part A hospital service that would be reasonably expected by a patient to fall under Commission rate setting jurisdiction

8. “All Payor” Hospital Rate Setting System Unit Rates HSCRC • Establish and approve rates for each unit of service (Room and Board, imaging, lab, etc…) • Hospital specific Unit rates are to be reasonably related to underlying costs • Including social costs of uncompensated care (bad debt / charity) Hospitals • Required to charge all payors at HSCRC approved unit rates Payors (All) • Required to pay hospitals based on each hospitals approved unit rates • Payors given the ability to deny payment of care for lack of medical necessity

9. Rate system developed in 1999 – 2000 Inpatient charges are monitored based on a fixed amount per case Case-mix adjusted Includes approximately 95% of hospitals’ inpatient charges Exclusions for certain types of cases and extremely high and low charge cases Incentives Increase cases / decrease utilization / control costs Charge per Case (CPC)

10. Rate System developed in early 80’s (Redefined and Initiated in 2010) Only 10 hospitals on TPR Until 2010 only McCready and Garrett were on TPR Fixed revenue cap for 100% of approved revenue No adjustment for volume or case-mix change Typically a rural hospital methodology Annual adjustments for inflation, population and mark-up Incentives Maintain / reduce volumes Control costs Total Patient Revenue (TPR)

11. Rate System developed in 2011 Addresses all cause (not just preventable) readmissions Rewards for reduction in readmissions (30-day) Allowed charges per episode Investment required and funded by HSCRC (with payback) Incentives Reduce readmissions Reduce related costs Admission – Readmission Revenue (ARR)

12. All rate systems include Unit Rates / Approved Rate Order Effective rate year – July 1 – June 30 for all hospitals Unit rate compliance monitored throughout the rate year by the HSCRC staff All payors are charged equal rates Allowed minor payment discounts: 2% - 6% depending on payor Rates are adjusted annually for update factor (inflation + or - ) and changes in mark-up (uncompensated care and payor mix) By June 30 or each rate year, compliance is dually measured: CPC/ARR and unit rates TPR and unit rates Unit Rate Order

13. Evolution of Cost and Utilization Controls in Maryland 2000 1990 2012 1980 2010 TPR (1980 – Current) CPC/CPV (2000 – Current) ARR (2011) GIR (1985 – 2000) PBR (2012?) Unit Rates (1974 – Current)

14. Discussion Topics • Overview of HSCRC • Medicare Waiver Test • Current Regulatory Environment • Impact of Healthcare Reform • Q&A

15. The Medicare Waiver is the “lynch-pin” of the Maryland HSCRC System The “Waiver Test” is based on the average Medicare Payment per Inpatient Discharge • The “Test” compares the rate of growth at Maryland hospitals collectively, versus the rate of growth at National hospitals collectively • NOT, relative position of absolute payment per discharge • Acute hospitals only • No adjustments for case mix or other factors • Compares the current period versus a “base” period (1980), as defined by Federal Law The “Waiver Test” does not measure outpatient payments

16. The Waiver Cushion is projected to decline substantially from FY2010 – FY2012. The last official Waiver Letter for the period ending September 30, 2010 reflected a Waiver Cushion of 9.55%. However, since 2010, the Maryland Payment per Discharge has grown rapidly through 2011. This trend is expected to continue through at least 2012. From FY2010 – FY2011, the Maryland Payment per Discharge grew 6.10%. From FY2011 – FY2012, the Maryland Payment per Discharge is expected to grow by 7.8%. Conversely, the National Payment per discharge grew 0.92% in FY2011, and it is expect to increase by only 0.43% in FY2012. As a result, the Waiver Cushion is expected to be below 0.0% beginning in March 2012. The Chart on the next page reflects this projection. Waiver Cushion Forecast

17. Waiver Cushion Forecast

18. Discussion Topics • Overview of HSCRC • Medicare Waiver Test • Current Regulatory Environment • Impact of Healthcare Reform • Q&A

19. Current Regulatory Environment • Change in HSCRC Leadership: New Chairman and New Executive Director • First and Foremost: The deterioration of the Waiver Test is driving current decision making. • Shift from Inpatient rates to Outpatient rates • Limited or no Update Factor • Relook at the Medicare Payment differential • Ultimate Re-design of The Waiver Test

20. Current Regulatory Environment (cont’d) • State Budget Issues • Medicaid Assessments • How much should be funded through rates • Numerous Rate Methodologies • Capital Funding • Quality Initiatives • Are we measuring the right things? • Complexity and Timeliness of annual rate adjustments

21. Discussion Topics • Overview of HSCRC • Medicare Waiver Test • Current Regulatory Environment • Impact of Healthcare Reform • Q&A

22. Transformation… “The delivery of healthcare services will undergo much transformation in the era of healthcare reform. Those hospitals and health systems who can plan multi-year strategies and effectively change their business models and culture should be most able to adapt. Growth strategies, physician alignment and greater efficiencies, along with effective management and governance, will be integral in positioning the organization for payment reform.” • Moody’s Investors Service, “Transforming Not-for-Profit Healthcare in the Era of Reform,” May 2010

23. Components of the Act Applicable to Providers Expanded Access New Payment Structures New Care Delivery Models • Value Based Purchasing • Reduced Payment Updates • Reduced DSH payments • Reductions for Hospital Acquired Conditions • Reductions for Readmissions • Accountable Care Organizations • Medical Homes • Bundled Payments for Episodes of Care Changes to Private Insurance Financing Reform and Accountability • Medicare and Medicaid Center for Innovation • Multiple entities focused on quality, outcomes, and prevention: Patient-Centered Outcomes Research; Interagency Working Group on Health Care Quality; National Prevention, Health Promotion and Public Health Council Innovation

24. Current and Potential Impacts of Reform on Maryland Expanded Access • Increase in Medicaid Coverage • Averted Bad Debts; UCC Policy revision • Increased Coverage (General) • Future Volume Adjustments: Variability

25. Current and Potential Impacts of Reform on Maryland New Payment Structures • Reduced Payment Updates • Minimal / No Update Factor in MD • Impact on Waiver; Waiver Test Redesign • Value Based Purchasing • Increased weight on HSCRC’s Quality Initiatives • Reductions for Readmissions • HSCRC ARR Methodology

26. Current and Potential Impacts of Reform on Maryland New Care Delivery Models • ACO’s, Medical Homes • Total Patient Revenue (TPR) System • Population-Based Reimbursement (Future?) • Bundled Payments • Alternative Rate Agreements; Physician Regulation? • Gain Sharing

27. Current and Potential Impacts of Reform on Maryland Financing Reform and Accountability • Identification of Fraud and Abuse • RAC Audits • HSCRC Education

28. Current and Potential Impacts of Reform on Maryland Other Transformation Initiatives • Meaningful Use and ICD-10 • How will HSCRC react to new ICD-10 coding transition • Case-Mix • Dual Coding • Hospital Costs

29. Conclusion • Rate regulation in Maryland has withstood the test of time since the early 70’s. • The HSCRC has successfully lived by its mandate: Equity / Access / Reasonable Costs / Accountability • Maryland is currently faced with its biggest challenges ever: The Waiver Test and Reform. • Maryland hospitals and the HSCRC have been and must continue to be proactive regarding the current and future transformation of healthcare in America.

30. Q&A