Lessons for states in inpatient ratesetting under the Boren Amendment - Hospital Payment: Beyond the Prospective Payment System

Health Care Financing Review, Winter, 1993 by Andrew I. Batavia, Ronald J. Ozminkowski, Gary Gaumer, Mary Gabay

Adequacy of Update Factor

For State payment methodologies that use an update factor to adjust base-year costs annually, an important issue is what cost increases must be incorporated to achieve reasonable and adequate rates. Several update factors have been used by States, including the Consumer Price Index (CPI) (Mary Washington Hospital, 635 F.Supp. 891) and the Medicare Prospective Payment Update Factor (MPUF) (Multicare Medical Center, 768 F.Supp. 1349). The State of Washington used the MPUF for updating its rates. The court considered whether the use of this update factor is permissible where it results in increases lower than actual cost increases. It found that this was not permissible because the State did not consider the applicability of the MPUF to the Washington Medicaid program. Again, if the update factor is not driven by budgetary concerns, and particularly if it is supported by an analysis of cost factors in the State, it is likely to withstand judicial scrutiny.

Hospital Peer Groups

Some States group hospitals (and other types of health care facilities) into peer groups, based on specific characteristics or statistical analyses, for purposes of calculating rates appropriate for similarly situated facilities. Courts have generally deferred to States in their use of peer groups, except where it appears that they are assembled arbitrarily.(2) It appears that peer grouping methodologies that are supported by some analysis, even if it is not exhaustive and does not result in perfect groups, will be found acceptable to the courts (Mary Washington Hospital, 635 F.Supp. 891; Multicare Medical Center, 768 F.Supp. 1349). However, if it is clear that the groupings are unsupported and arbitrary, and that very differently situated providers are grouped together, courts will not hesitate to invalidate the grouping methodology.

Disproportionate Share Hospitals

Under the Boren Amendment, States must take into account the situation of hospitals that serve a disproportionate number of low-income patients. In the Omnibus Budget Reconciliation Act (OBRA) of 1987 (Public Law 100-203), Congress clarified that States may calculate the required additional payments to disproportionate share hospitals either by adopting Medicare's formula for such allowances or by adopting their own formulas consistent with the legislative requirement. Specifically, OBRA 1987 provides that States' formulas must be based on "a minimum specified additional payment (or increased percentage amount) and for an increase in such payment amount (or percentage payment) in proportion to the percentage by which the hospital's utilization rate... exceeds one standard deviation above the mean." In analyzing this section, the courts appear to be concerned that the States make specific determinations that their rates meet the needs of disproportionate share providers (West Virginia University Hospitals v. Casey, 885 F.2d 11 [3rd Cir. 1989]) and that the disproportionate share adjustments be proportional to the actual increased costs of facilities that qualify for them (Temple University, 729 F.Supp. 1093, aff'd 941 F.2d 201).