Protecting, maintaining and
improving the health of all Minnesotans
Staff Update: Hospital Add-On Payments for Disproportionate Share and Graduate Medical Education

During the June Advisory Committee meeting, we requested input on the possible division of
Prospective Payment System (PPS) hospitals into three separate peer groups (instead of two) for
upcoming Hospital Total Care reports. MDH staff recommended retaining two peer groups, but
wanted to address concerns by hospitals that institutions that provide a higher intensity of medical
education or provide higher proportions of uncompensated care may be disadvantaged in the cost
comparisons.

Recognizing that consumers and payers face the total cost of care, including add-on payments, past
iterations of Provider Peer Grouping have compared hospitals by including all costs and payments to
a facility in calculating their total cost of care. This has included both direct payments for care
delivered, and add-on payments received through the claims stream from Medicare or Medicaid to
compensate a hospital for indirect costs associated with its commitment to teaching (IME) or costs
for caring for a larger than typical proportion of patients who are uninsured or on publicly funded
insurance (DSH). Some hospitals have suggested this is an unfair comparison and that the presence
of add-on payments in the total cost model skews the results of the comparison.

The presence of these add-on payments, and its impact on total cost of care, is not evenly
distributed across PPS hospitals. Because Provider Peer Grouping fills two roles – to strengthen
transparency in cost (and quality) and to facilitate provider comparison in relative efficiency – there
is value in calculating a metric of costs that does not include these add-on payments.

MDH staff examined the option of removing add-on payments using a combination of CMS
methodology and a variety of payment information. The methodology uses Medicare claims data to
build up the payment from the procedure or DRG code. CMS uses this method to standardize
payments across the country. While a valid approach, we do not have the CMS data that would be
necessary to make this approach feasible.

MDH is working with its analytical contractor, Mathematica Policy Research, on a second approach
that broadly parallels this methodology. This option is analogous to “pro-rating” the amounts paid
to hospitals. Payments are adjusted by multiplying the observed Medicare FFS payment in the All
Payer Claims Database (APCD) by a hospital-specific DSH and IME rate and removing this amount
from the calculation of the total payment. We are doing the equivalent on the Medicaid side. One
benefit of this approach is that it will be significantly less time- and resource- intensive. In midOctober we will be seeking input from the Rapid Response Team about the feasibility and utility of
this approach.
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