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There is little question that the initial adoption of a medical home will require a financial investment in improving care for people with disabilities on Medi-Cal.  This is particularly true as Medi-Cal starts with much lower provider payment rates than other states.  However, the results in other states have shown overall budget neutrality or savings over the long term.  While costs for ambulatory care and prescription drugs will go up, there should be reductions in emergency room cost and emergency room usage, as well as a reduction in preventable hospitalizations.  DHCS data shows that an emergency room visit costs 2.5 times the cost of the same services in a physician’s office.  Given this cost comparison, there is room for savings in moving care out of the emergency room and into more appropriate and lower-cost settings.  

2-C. Payment System Reforms to Encourage Ambulatory Not Inpatient Care

Controlling long term health care cost growth by better managing care and shifting care to lower cost settings is an important reform goal both nationally and in California.  Medicaid programs often do not give providers the right incentives to achieve these goals.  The best example is the Medicaid DSH program.  Medicaid DSH is the lifeblood of the safety net hospitals, paying for both uncompensated cost for Medi-Cal patients and the uninsured.  In California, federal law permits the Medicaid DSH program to pay certain public hospitals up to  175 percent of the hospitals’ uncompensated costs – but only for the uncompensated inpatient and outpatient services performed in a hospital.  If a provider seeks to shift this treatment to a clinic or other lower cost setting, the DSH funding is lost.  Often this DSH funding is not replaced by any other source of Medicaid funding.  In California public clinics may recoup some of by funding through the safety net care pool, but this source of funding only pays up to approximately 82 percent of cost.  

Current Status of California

Reimbursement under the Medi-Cal program creates incentives for care to be delivered in higher cost inpatient settings than in lower cost, non-institutional settings. Services often are reimbursed at a higher percentage of cost if they are delivered in a hospital setting.  And as rates for lower cost outpatient care have been frozen or reduced, the only way that hospitals can get increased reimbursement from Medi-Cal is through rate increases for inpatient care.  Further, Medi-Cal’s per diem inpatient hospital payment system, one of a few in the nation, provides an incentive to keep hospital stays longer and reduces reimbursement to hospitals for providing new and innovative treatments that reduce lengths of stay.  Thus, shifting care to a lower cost outpatient setting can threaten a hospital’s financial stability.  

Change Options

The current payment structure means that any waiver that seeks to shift care from inpatient to outpatient care will be confronted with the inadequacies of the payment structures for outpatient and clinic care.  There are several ways that the waiver can address this:

Prospective Payment System Rates.  Medi-Cal could fund all public hospital outpatient departments and clinics as FQHCs with prospective payment system rates.  This is currently done for five public hospitals.  By setting reimbursement to federally allowable

Health Management Associates/Harbage ConsultingPage 18

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