A New Inpatient Hospital Payment Method
for Rhode Island Medicaid
The Rhode Island Department of Human Services plans to move to a new Medicaid method of paying for
hospital inpatient services based on All Patient Refined Diagnosis Related Groups (APR-DRGs). Our
goals are to implement a new payment method that is sustainable, increases fairness, reduces
administrative burden, rewards economy and improves transparency.
This document provides questions and answers about the new method. We invite additional questions and
we welcome suggestions. The Department is working with a hospital finance advisory group on questions
of payment policy, implementation and provider education.
Please note that details of the payment method shown in this document remain subject to change before
the implementation date.
1. When will the new method be implemented?
The target date is April 1, 2010, based on legislation passed by the 2009 Rhode Island Legislature.
2. What change is being made?
The Department plans to change its current payment method, a retrospective, cost-based method known
as “Maxicap,” to a new method based on All Patient Refined Diagnosis Related Groups (APR-DRGs).
3. What providers and services will be affected?
The new method will apply to almost all stays provided by acute care hospitals. This new method will
apply to both general hospitals and specialty hospitals (e.g., psychiatric, rehabilitation) as well as to
Within these hospitals, inpatient payment methods will not change for Medicare crossover stays and sub-
Payment methods also will not change for the Eleanor Slater Hospital.
4. How much money is affected?
In the Rate Year 2008 dataset that was used for analysis purposes, Medicaid fee-for-service payments to
hospitals totaled $126.9 million, including the expected impact of year-end settlement. This figure
excluded payments for some incomplete stays, Medicare crossover claims, payments for RIte Care
patients, and supplementary “DSH” payments to disproportionate share hospitals.
5. How does the current payment method work?
The Department’s current method dates from 1971. Each year Medicaid and the hospital industry
negotiate an overall percentage increase in hospital costs for serving Medicaid beneficiaries. In principle,
the “Maxicap” is a starting place for hospital-specific budget agreements, but since 1993 the Maxicap
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percentages have usually been applied across the board to each hospital. Since hospitals are paid per
claim, and claims do not have cost information, interim payments are made at a percentage of charges. A
settlement process then reconciles interim payments with the negotiated budgets. Adjustments are made
only if Medicaid volumes or the ratio of cost to charges differ from agreed-upon expectations.
6. Why change to the new payment method?
An important advantage will be that the payment method could be more easily yet appropriately sustained
over time, with adaptations to promote access to quality care. Medicaid also will pay hospitals more
fairly (similar pay for similar care). Transparency (how much Medicaid pays for care) will be much
improved over the current situation. Under the new payment method, the administrative burden of annual
negotiations and the year-end settlement process will be eliminated. Lastly, the case-based new method
will financially incentivize hospitals to provide cost-efficient care.
7. How will payment be calculated?
For most stays, payment will be calculated very straightforwardly as the DRG relative weight times the
DRG base price, which is known as the DRG base payment. In addition, special payment calculations
will be made in the following special situations.
• Transfer adjustment. If the patient is transferred to another acute care setting (discharge statuses 02,
05, 07) then the stay will be checked for applicability of a transfer adjustment. The DRG base
payment will be divided by the nationwide average length of stay for that DRG to yield a per diem
amount. The per diem amount will be multiplied by the actual length of stay plus one day (to reflect
additional hospital costs associated with admission). If the calculated amount is less than the DRG
base payment, then the calculated amount will be paid. Otherwise, the DRG base payment will be
paid. Unlike Medicare, the Department will not have a post-acute transfer policy.
• Cost outlier payments. For exceptionally expensive physical health cases, a cost outlier payment will
be added, using the same model that Medicare uses. The cost of the stay will be estimated by
multiplying charges on the claim by the hospital-specific ratio of cost to charges. The hospital’s
estimated loss will be calculated as the estimated cost minus the DRG base payment. If the estimated
loss exceeds the cost outlier threshold, then a cost outlier payment will be made. The payment will
equal the estimated loss in excess of the threshold times a marginal cost percentage of 50%.
• Day outlier payments. For exceptionally expensive mental health cases, a day outlier payment will
be added. For every covered day that exceeds the day outlier threshold, the hospital will receive a per
diem outlier payment. Payment will be subject to prior authorization.
• Prorated eligibility. In situations where the patient has Medicaid eligibility for fewer days than the
length of stay, payment will be prorated. That is, the DRG payment (DRG base payment plus outlier
payments) will be divided by the national average length of stay to yield a per diem amount. The
hospital will receive the lower of the DRG payment and the per diem amount times the number of
• Interim claims. If a stay exceeds 29 days, a hospital could receive an interim payment based on
submission of an interim claim. The interim payment will be a flat per diem rate times the number of
covered days for the claim. When the patient is discharged, the hospital will adjust or void the
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8. How will the DRG base price be set and updated?
Implementation of a new payment method is logically separate from the question of whether total funding
will be budget-neutral or increased or decreased. Total funding will be determined before implementation
of the new method based on direction from the 2009 Legislature. In calculating the appropriate DRG base
price, the Department will take into account the likely impact on average casemix of improved
documentation and coding by hospitals. Base prices will be reviewed each year.
9. Will there be separate payments for capital?
No. Capital costs will be factored into the DRG base price.
10. What changes, if any, will be made to disproportionate-share hospital (DSH) payments?
Payment policies and calculation formulas for supplementary DSH payments are not part of this project.
ALL PATIENT REFINED DRGS
11. Why were APR-DRGs chosen? Why not the same DRG system as Medicare uses?
APR-DRGs were chosen because they are suitable for use with a Medicaid population, especially with
regard to neonatal and pediatric care, and because they incorporate sophisticated clinical logic to capture
the differences in comorbidities and complications that can significantly affect hospital resource use. Each
stay is assigned first to one of 314 base APR-DRGs. Then, each stay is assigned to one of four levels of
severity (minor, moderate, major or extreme) that are specific to the base APR-DRG.
MS-DRGs—the algorithm now used by Medicare—were designed only for a Medicare population using
only Medicare claims. In the Medicare program, fewer than 1% of stays are for obstetrics, pediatrics, anad
newborn care. In the Rhode Island fee-for-service inpatient dataset, these categories represent 21% of
12. Who developed APR-DRGs? Who uses them?
APR-DRGs were developed by 3M Health Information Systems and the National Association of
Children’s Hospitals and Related Institutions (NACHRI). According to 3M, APR-DRGs have been
licensed by over 20 state and federal agencies and by 1,600 hospitals. APR-DRGs have been used to
adjust for risk in analyzing hospital performance; examples are the “America’s Best Hospitals” list by
U.S. News & World Report, state “report cards” and analysis done by organizations such as the Agency
for Healthcare Research and Quality (AHRQ), the Medicare Payment Advisory Commission (MedPAC)
and the Joint Commission on Accreditation of Healthcare Organizations (JCAHO).
APR-DRGs are also in use or planned for use in calculating payment by the state of Maryland, Montana
Medicaid, New York Medicaid, Pennsylvania Medicaid, North Dakota Medicaid, Mississippi Medicaid,
and Wellmark, the BlueCross BlueShield plan in Iowa.
13. What was done to verify that APR-DRGs are appropriate for the Rhode Island Medicaid
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ACS Government Healthcare Solutions conducted an analysis of alternative DRG algorithms. Using the
statistical tests that are standard in payment method development, the contractor found that APR-DRGs
consistently fit the Rhode Island data very well, although not as well for mental health services as for
physical health services. For this reason, the proposed new method includes special provisions for mental
Results from the evaluation have been published and are available on request; see question 25.
14. In order to be paid, does my hospital need to buy APR-DRG software?
No. The Medicaid claims processing system will assign the DRG and calculate payment without any need
for the hospital to put the DRG on the claim.
For hospitals interested in learning more about APR-DRGs, information is available at
15. What version of APR-DRGs will be implemented?
The Department intends to use the latest available version of APR-DRGs at the time of implementation,
which is expected to be V.27.
CODING AND BILLING
16. How will the new payment method affect medical coding requirements?
Assignment of the APR-DRG and calculation of payment use the standard information already on the
hospital claim. APR-DRG assignment depends chiefly on the diagnosis fields and the ICD-9-CM
procedure fields, so hospitals are advised to ensure that these fields are coded completely, accurately and
defensibly. Hospitals may want to review their inpatient coding and make any necessary improvements as
soon as possible.
17. How many diagnoses and procedures will be used in DRG assignment?
The Rhode Island Medicaid claims processing system accepts the principal diagnosis, up to nine
secondary diagnoses and up to six ICD-9-CM procedures.
18. Will the Department require submission of the present-on-admission (POA) indicator?
The Department is considering whether to require submission of the POA indicator for diagnoses. A final
decision has not been made.
19. Will there be changes in prior authorization policy?
All inpatient stays, except deliveries and normal newborns in Rhode Island, will continue to require prior
authorization of the admission. Authorization of length of stay will no longer be required, except for
mental health days that exceed the day outlier threshold.
20. Will outpatient services related to the inpatient stay be bundled?
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Yes. A “related” service will be defined as any outpatient service provided by the admitting hospital, or
by another provider under arrangement with the admitting hospital, that is provided on the same calendar
day as the admission or on the calendar day before the admission. This definition is intended to strike the
appropriate balance between simplicity and precision in defining related outpatient services.
21. Any changes to interim claims and late-charge claims?
Interim claims will only be accepted for time periods of at least 30 days. The claims processing system
will no longer accept claims for late charges (type of bill 115). Instead, hospitals should adjust the earlier
claim, as they currently do for Medicare and other payers.
22. Will hospitals still have to submit cost reports?
Yes. The Department also uses cost reports in calculating hospital utilization fees and in reviewing
hospital payments overall.
23. Will payments be subject to adjustment after cost reports have been submitted?
No. Payment based on DRG will be final.
24. Will the new payment method have any impact on the provider tax calculations?
25. What will Medicaid do to involve and inform hospitals during the development of the new
• Financial simulation. Each hospital can request results from a financial simulation at the stay-
specific level. To receive simulation results in an Excel spreadsheet, an authorized hospital
representative (e.g., the CFO) should send an email request to David Bontemps at
email@example.com. Although the simulation results do not contain patient names, they do
contain other sensitive information.
• Training sessions. Training sessions and presentations on the new payment method will be scheduled
in the months preceding the implementation date.
26. Who can I contact for more information?
• Technical questions about APR-DRGs, outliers, etc. Kevin Quinn, Director, Payment Method
Development, ACS Government Healthcare Solutions, firstname.lastname@example.org, 406-457-9550;
David Bontemps, Senior Consultant, Payment Method Development, ACS Government Healthcare
Solutions, email@example.com, 770-829-1497.
• Questions about Department policy. Ralph Racca, Administrator, Center for Finance and
Administration, Rhode Island Department of Human Services, firstname.lastname@example.org, 401-462-1879.
• Questions about billing and claims processing. Kelly M. Leighton, Provider Representative, EDS,
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