ANALYSIS OF THE IMPLEMENTATION OF THE VIRGINIA MEDICAL FEE SCHEDULES EFFECTIVE JANUARY 1, 2018

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1 NCCI estimates that the implementation of Virginia s Medical Fee Schedules (MFS) in accordance with House Bill (HB) 378, effective January 1, 2018, will result in an overall impact of 1.9% on workers compensation system costs in Virginia. Summary of Changes Currently, Virginia has no MFS. An employer s liability for medical services is limited to charges as prevailing in community rates based on what is paid by injured persons. On March 7, 2016, HB 378 was approved by the governor. As per HB 378, the Workers Compensation Commission adopted regulations establishing fee schedules which set the maximum pecuniary liability of the employer for medical services provided to an injured person. The specifics of the MFS for healthcare providers, hospitals, and ambulatory surgical centers are summarized below: Professional Services Fee Schedule o Establishes maximum fees for surgeons and physician non surgeons. o Establishes maximum fees for injectable drugs based on a percentage of billed charges. Hospital Inpatient Fee Schedule o Establishes maximum fees for acute inpatient hospital stays on a per admission basis. Reimbursement for all services, including implants, will be covered by the maximum fee. o Establishes maximum fees for rehabilitation hospital stays which are based on per diem rates. o Maximum fees vary separately for Type One Teaching hospitals and all other hospitals. Hospital Outpatient Fee Schedule o Establishes maximum fees for facility services provided in a hospital outpatient setting. o Maximum fees vary separately for Type One Teaching hospitals and all other hospitals. o Establishes maximum fees for pharmacy claims, medical/surgical supplies, implants, anesthesia, recovery room, and injectable drugs based on a percentage of billed charges. Ambulatory Surgical Center Fee Schedule o Establishes maximum fees for services provided in an ambulatory surgical center. The maximum fee will cover all applicable services and supplies associated with the surgery. o Establishes maximum fees for implants based on a percentage of billed charges. Other Providers of Outpatient Medical Services Fee Schedule o Establishes maximum fees for other providers of outpatient medical services not covered under the professional services MFS, including physical medicine and rehabilitation services, osteopathic and chiropractic manipulative treatment, acupuncture, dental services, ground ambulance, and private payer codes. Note that the maximum fees vary by geographical region ( Medical Community ), based on three digit zip code prefixes. The regions as defined by law are: Page 1 of 8

2 Region Zip Code Prefixes 1 Northern 201, Northwest Central , Eastern Near Southwest , Far Southwest , 246 The MFS will not apply to the following services: Healthcare services subject to a written contract between a healthcare provider and an employer or insurance carrier. Healthcare services for which voluntary payments in excess of the reimbursement levels of the fee schedule are made by a self insured employer or an insurance carrier. Physician dispensed, retail, or mail order prescription drugs. Air ambulances. Durable medical equipment (DME) dispensed through a retail DME provider. Facility and professional services associated with a traumatic injury. Facility and professional services associated with a serious burn. Actuarial Analysis of Medical Fee Schedule Implementations NCCI s methodology to evaluate the impact of medical fee schedule implementations includes three major steps: 1. Calculate the percentage change in reimbursements Compare the current reimbursements and revised expected reimbursements subject to the fee schedule by procedure code and determine the percentage change by procedure code. Calculate the weighted average percentage change in reimbursements for the fee schedule using observed payments by procedure code as weights. 2. Estimate the price level change as a result of the fee schedule implementation NCCI research by Frank Schmid and Nathan Lord (2013), The Impact of Physician Fee Schedule Changes in Workers Compensation: Evidence from 31 States, suggests that a portion of a change in maximum reimbursements is realized on payments impacted by the change. o In response to a fee schedule decrease, NCCI s research indicates that payments decline by approximately 50% of the fee schedule change. Page 2 of 8

3 o In response to a fee schedule increase, NCCI s research indicates that payments increase by approximately 80% of the fee schedule change and the magnitude of the response depends on the relative difference between actual payments and fee schedule maximums (i.e. the price departure). o The formula used to determine the percent realized for fee schedule increases is 80% x ( x (price departure)). 3. Determine the share of costs that are subject to the fee schedule The share is based on a combination of fields, such as procedure code, provider type, and place of service, as reported on the NCCI Medical Data Call, to categorize payments that are subject to the fee schedule. In this analysis, NCCI relies primarily on two data sources: Detailed medical data underlying the calculations in this analysis are based on NCCI s Medical Data Call for Virginia for Service Years 2015 and The share of benefit costs attributed to medical benefits is based on NCCI s Financial Call data for Virginia from the latest two policy years projected to the effective date of the benefit change. General Assumptions Due to data limitations or specificities, some assumptions were necessary to conduct the pricing analysis. Key assumptions include: Transactions not in a listed Medical Community are priced using a weighted average of the six regions, with census population data as the relative weights 1. Modifier data is not reported systematically. Consequently, if bills have codes that are eligible for a multiple procedure discount and are performed on the same day, the highest paid bill is assumed to be reimbursed at the MAR, and all subsequent eligible procedures at 50% of MAR, regardless of the reported modifier. The fee schedules include 7 provider groups. Transactions for services by Other Providers of Medical Services, Provider Group 6 (providers of outpatient medical services other than Physicians, Surgeons or Ambulatory Surgical Centers) were identified using a combination of reported procedure code, taxonomy code and place of service code. Services associated with traumatic injuries are identified based on the presence of one of the listed DRGs in the Traumatic Injury definition or a Trauma Activation level I or II hospital revenue code. 1 Source: Annual Estimates of the Resident Population: April 1, 2010 to July 1, 2016 PEP_2016_PEPAGESEX_with_ann.csv, retrieved 8/15/2017 Page 3 of 8

4 Professional Services Fee Schedule In Virginia, payments for professional services represent 25.3% of total medical costs. To calculate the percentage change in reimbursements for professional services, NCCI calculates the percentage change in reimbursement for each procedure code. The overall change in reimbursements for professional services is a weighted average of the percentage change in reimbursements by procedure code weighted by the observed payments by procedure code as reported on NCCI s Medical Data Call, for Virginia for Service Years 2015 and The current and revised reimbursements are calculated as follows: Current Reimbursement For each relevant procedure code, Current Reimbursement = Current Payments x Trend Factor The payments by procedure code were adjusted to the price levels projected to be in effect on the effective date of the MFS. The trend factor is based on the U.S. professional services component of the medical producer price index (MPPI) 2. Professional Services Service Year MPPI Change from July of Previous Year % % % % (Estimated as average of ) Based on the information provided in the table above, the trend factor is for SY 2015 and for SY Revised Reimbursement For each relevant procedure code, Revised Reimbursement = Maximum Fee x (1 + Price Departure 3 ) The overall weighted average percentage change in reimbursements for professional services is 6.5%. The impact by category is shown in the following table. 2 Source: Bureau of Labor Statistics, series ID WPU A price departure of 10% was assumed. Page 4 of 8

5 Professional Services Practice Category Share of Costs Percentage Change in Reimbursement Anesthesia 6.7% 5.8% Surgery 35.2% 12.3% Radiology 14.6% +0.1% Pathology and Laboratory 2.0% +6.8% Other Medicine 3.2% +12.9% Evaluation and Management 29.8% 7.2% Other HCPCS* 2.4% 6.7% Payments with no specific maximum fee 6.5% Total Physician Costs 100.0% 6.5% * Healthcare Common Procedure Coding System Since the overall average reimbursement for professional services decreased, the percentage expected to be realized from the fee schedule implementation is estimated to be 50%. The impact on professional services payments due to the fee schedule implementation is 3.3% (= 6.5% x 0.5). The above impact of 3.3% is then multiplied by the percentage of medical costs attributed to professional services payments in Virginia (25.3%) to arrive at an impact of 0.8% on medical costs. This is then multiplied by the percentage of benefit costs attributed to medical benefits in Virginia (68.1%) to arrive at an impact of 0.5% on overall workers compensation costs in Virginia. Hospital Inpatient Fee Schedule In Virginia, payments for hospital inpatient services represent 14.5% of total medical costs. To calculate the percentage change in reimbursements for hospital inpatient services, NCCI calculates the percentage change in reimbursement for each hospital inpatient episode. The overall change in reimbursements for hospital inpatient services is a weighted average of the percentage change in reimbursements by episode weighted by the observed payments by episode as reported on NCCI s Medical Data Call, for Virginia for Service Years 2015 and The current and revised reimbursements are calculated as follows: Current Reimbursement For each relevant episode, Current Reimbursement = Current Payments x Trend Factor The payments by procedure code were adjusted to the price levels projected to be in effect on the effective date of the MFS. The trend factor is based on the U.S. hospital inpatient component of the MPPI 4. 4 Source: Bureau of Labor Statistics, series ID WPU Page 5 of 8

6 Hospital Inpatient MPPI Service Year Change from July of Previous Year % % % % (Estimated as average of ) The trend factors for hospital inpatient services are calculated in an analogous manner to the professional services trend factors for Services Years 2015 and The combined trend factor for Service Year 2015 is 1.042, and the trend factor for Service Year 2016 is Revised Reimbursement For each relevant episode, Revised Reimbursement = (Maximum Fee + Outlier Amount (if applicable)) x (1 + Price Departure) Note that the maximum fee varies by acute inpatient and rehabilitation stays. The overall weighted average percentage change in reimbursements for hospital inpatient services is 2.9%. Since the overall average reimbursement for hospital inpatient services decreased, the percentage expected to be realized from the fee schedule implementation is estimated to be 50%. The impact on hospital inpatient payments due to the fee schedule implementation is 1.5% (= 2.9% x 0.5). The above impact of 1.5% is then multiplied by the percentage of medical costs attributed to hospital inpatient payments in Virginia (14.5%) to arrive at an impact of 0.2% on medical costs. This is then multiplied by the percentage of benefit costs attributed to medical benefits in Virginia (68.1%) to arrive at an impact of 0.1% on overall workers compensation costs in Virginia. Hospital Outpatient Fee Schedule In Virginia, payments for hospital outpatient services represent 22.8% of total medical costs. The impact on hospital outpatient services is calculated in an analogous manner to the professional services fee schedule implementation except that the trend factor is based on the U.S. hospital outpatient component of the MPPI 5. The overall weighted average percentage change in reimbursements for hospital outpatient services is 9.1%. Since the overall average reimbursement for hospital outpatient services decreased, the percentage expected to be realized from the fee schedule implementation is estimated to be 50%. The impact on hospital outpatient payments due to the fee schedule implementation is 4.6% (= 9.1% x 0.5). 5 Source: Bureau of Labor Statistics, series ID WPU Page 6 of 8

7 The above impact of 4.6% is then multiplied by the percentage of medical costs attributed to hospital outpatient payments in Virginia (22.8%) to arrive at an impact of 1.0% on medical costs. This is then multiplied by the percentage of benefit costs attributed to medical benefits in Virginia (68.1%) to arrive at an impact of 0.7% on overall workers compensation costs in Virginia. Ambulatory Surgical Center (ASC) Fee Schedule In Virginia, payments for ASC services represent 5.5% of total medical costs. The impact on ASC services is calculated in an analogous manner to the professional services fee schedule implementation except that the trend factor is based on the U.S. hospital outpatient component of the MPPI. The overall weighted average percentage change in reimbursements for ASC services is 20.8%. Since the overall average reimbursement for ASC services decreased, the percentage expected to be realized from the fee schedule implementation is estimated to be 50%. The impact on ASC payments due to the fee schedule implementation is 10.4% (= 20.8% x 0.5). The above impact of 10.4% is then multiplied by the percentage of medical costs attributed to ASC payments in Virginia (5.5%) to arrive at an impact of 0.6% on medical costs. This is then multiplied by the percentage of benefit costs attributed to medical benefits in Virginia (68.1%) to arrive at an impact of 0.4% on overall workers compensation costs in Virginia. Other Providers of Outpatient Medical Services In Virginia, payments for other providers of outpatient medical services represent 12.8% of total medical costs. The impact on other providers of outpatient medical services is calculated in an analogous manner to the professional services fee schedule implementation. The overall weighted average percentage change in reimbursements for other providers of outpatient medical services is 2.8%. Since the overall average reimbursement for other providers of outpatient medical services decreased, the percentage expected to be realized from the fee schedule implementation is estimated to be 50%. The impact on other providers of outpatient medical services payments due to the fee schedule implementation is 1.4% (= 2.8% x 0.5). The above impact of 1.4% is then multiplied by the percentage of medical costs attributed to other providers of outpatient medical services payments in Virginia (12.8%) to arrive at an impact of 0.2% on medical costs. This is then multiplied by the percentage of benefit costs attributed to medical benefits in Virginia (68.1%) to arrive at an impact of 0.1% on overall workers compensation costs in Virginia. Page 7 of 8

8 Summary of Impacts The impacts from the implementation of the Virginia Medical Fee Schedules, effective January 1, 2018, are summarized in the following table: (A) (B) (C) = (A) x (B) (D) (E) = (C) (D) Type of Service Impact on Type of Service Share of Medical Costs Impact on Medical Costs Medical Costs as a Share of Overall Benefit Costs Impact on Overall Costs Professional Services 3.3% 25.3% 0.8% 0.5% Hospital Inpatient 1.5% 14.5% 0.2% 0.1% Hospital Outpatient 4.6% 22.8% 1.0% 0.7% 68.1% ASC 10.4% 5.5% 0.6% 0.4% Other Providers 1.4% 12.8% 0.2% 0.1% Impact Due to Fee Schedule Implementation 2.8% 1.9% Page 8 of 8