Determination of Base to Rate Year Adjustment of Costs

(1) Purpose. The Division will make a Base to Rate Year Adjustment of Costs in order to determine RFR pursuant to 114.1 CMR 40.06. The Division will make a year to year adjustment to base year costs for additional costs that are projected to occur in the rate year due to inflation, changesin volume, costs beyond reasonable control , and new services. (2) Inflation. The Division shall make an adjustment for inflation prospectively. The Division will adjust allowed operating costs from the base year through the rate year using a composite index comprised of two cost categories: labor and non-labor. These categories shall be weighted according to the weights used by the Health Care Financing Administration for PPS-exempt hospitals. The inflation proxy for the labor cost category shall be the Massachusetts Consumer Price Index. The inflation proxy for the non-labor cost category shall be the non-labor portion of the HCFA market basket for non-acute hospitals. There will be no adjustment upward or downward to account for over or under-projection. (a) The composite inflation index as calculated in accordance with the preceding paragraph will be increased by .02 pursuant to M.G.L. c. 118G. (b) The Division will recover the additional labor costs for which hospitals were reimbursed according to the provisions of 114.1 CMR 40.07(2)(a), but were not expended on the compensation of technicians, nurses, nursing aides, orderlies and attendants, and occupational, speech, recreational, physical, and respiratory therapists, as required by M.G.L. c. 118G. The Division will recover these costs according to the following procedure: 1. Hospitals will report upon the request of the Division, the rate year expenditure of staff positions defined above . Any amount not expended will be excluded from the rate year RFR. 2. The Division may further adjust a hospital’s RFR upon audit. (3) Volume. Allowed base year operating costs shall be further adjusted to reflect reasonable volume increases and decreases as follows: (a) The Division shall require each hospital to report its costs, revenue, and volume data by HURM designated cost centers. The statistics used for volume adjustment shall be the same as those statisticsspecifiedintheHURM Manual. For purposes of calculating the volume adjustment, the Allowed Unit Cost for each cost center shall equal the base year direct and indirect costs for that cost center divided by base year units. The volume associated with a Determination of Need (DoN) project, new service, or transfer on of cost shall be part of the volume used in the computation of the volume allowance. Any allowance due to new service, DoN, or transfer-on volume shall be netted out if the costs associated with it are submitted as new services, CBCs or transfers. (b) For projected volume increases or decreases from the intermediate year to the budget year whichare greater or equalto 10%, the hospital must submit a supporting statement ofexplanation accompanied by the appropriate statistical documentation. No volume increase shall be allowed without such explanation and documentation. (c) For routine inpatient care services and routine ambulatory services, the allowed marginal cost for a unit increase or decrease in volume shall be 50%. The allowed cost for marginal cost for ancillaryservices for a unit increase or decrease in volume shall be 60%. There shallbe no upside corridors for volume increases. (d) An increase in costs due to an increase in routine inpatient services or routine ambulatory services volume from the base year to the budget year shall be calculated as the product of the projected increase in units multiplied by 50% of the allowed unit cost as defined in 114.1 CMR 40.08(3)(a) inflated by the base to rate year composite inflation index. An increase in costs due to an increase in ancillary services volume from the base year to the budget year shallbe calculated as the product of the projected increase inunits multiplied by60% of the allowed unit cost as defined in 114.1 CMR 40.08(3)(a) inflated by the base to rate year composite inflation index. (e) For routine inpatient care services, routine ambulatory services and ancillary services, the allowed marginal cost for a unit decrease in volume shall be as follows: Unit Decrease Allowed Marginal Cost Up to 5% 100% Over 5% to 25% 50% Over 25% to 50% 25% Over 50% to 75% 12.5% Over 75% 0% There shall be no downside corridors for volume decreases. (f) A decrease in cost due to a decrease in routine inpatient care service, routine ambulatory care services or ancillary services volume shall be calculated as the product of the projected decrease in units multiplied by one minus the applicable marginal cost percentage, as provided in 114.1 CMR 40.08(3)(e), multiplied by the Allowed Unit Cost as defined in 114.1 CMR 40.08(3)(a) inflated by the base to rate year composite inflation index. (4) Cost Beyond Hospital Control (CBCs). Allowed base year operating costs shall be further adjusted to reflect costs beyond the reasonable control of the hospital which meet the requirements of 114.1 CMR 40.08(4)(a) and the criteria of 114.1 CMR 40.08(4)(b). (a) A CBC is an unusual and unforeseen increase in reasonable and allowable costs which is solely attributable to unique and exceptional circumstances that are beyond the control of the hospital. The following requirements must be met before certain costs are qualified as CBCs and included in RFR. 1. A costshallnot be determined to be a CBC if in a prior fiscal year the Division approved costs corresponding to the CBC and the events giving rise to the cost did not take place in the year the cost was approved. 2. The timing and amount of the increase in costs must be reasonably certain. If the hospital does not begin to expend costs for which it has received a CBC adjustment within six months, the hospital must notify the Division that approved amounts were not expended, and the Division will deduct such costs from RFR. 3. The hospital shall demonstrate that the category of cost of the requested CBC is not included in the adjusted base year operating cost or in the base to rate year inflation and volume allowances. 4. A cost shall be allowed as a CBC only if the amount requested is greater than one tenth 1/10 of 1% of the hospital's total patient care costs. 5. Multiple unrelated CBC requests for any one cost beyond control category must not be grouped together. Each individual CBC request for a particular item must meet the materiality limit specified in 114.1 CMR 40.08(4)(a)4.. 6. Approved costs beyond control shall be only thosenecessary for the appropriate provision of services. The Division will consider a cost "necessary" only if it can be demonstrated to the satisfaction of the Division that such costs cannot be met through efficient management and economic operation at the existing reimbursable cost level. (b) The following shall qualify for CBCs provided that the criteria set out in 114.1 CMR 40.08(4)(a) and (b) are met. 1. Costs generated by correcting citations for failure to comply with changes in government requirements related to hospital licensure and participation in programs of hospital care and services under 42 U.S.C. §§ 1395 et seq. and 42 U.S.C. §§ 1396 et seq. An example of this category of CBC is a cost incurred or expected to be incurred within six months of filing to comply with a change in the manual issued after 1984 by the Joint Division on Accreditation of Healthcare Organizations (JCAHO). Costs of complying with standards contained in the manual before 1985 or costs which merely recommend improvement will not be considered as a cost beyond reasonable hospital control. Hospitals which have not previously been accredited by JCAHO will be allowed reasonable costs of complying with accreditation standards of the JCAHO contained in its manual. An example of cost which would not be considered to be beyond reasonable hospital control is expanded emergency room coverage. Also, increased utilization review costs which are not due to any allowable cost beyond control shall not be recognized as additional cost in a hospital's projected reasonable financial requirement. Documentation shall include a copy of the government requirement, verification of the costs, and verification that the increase in costs requested is reasonable to meet the government requirement. 2. Costs generated by compliance with changes in government requirements which are set forth in federal or state regulations which mandate non-discretionary hospital expenditures. However, if the costs fall within a category encompassed by an inflation factor, it shall not be allowed as a CBC. Documentation shall include a copy of the government requirement, verification of the costs, and verification that the increase in costs requested is reasonable to meet the government requirement. 3. Costs generated by disaster losses in excess of insurance or extraordinary costs related to disaster losses not covered by outside sources. Documentationshallinclude verification of loss or extraordinary cost and the insurance or outside source payment. If, however, the loss or extraordinary cost is caused by a facility being inadequately insured according to the standards of the hospital industry, or through negligence onpart of hospital management, such losses or costs shall not be approved. 4. Allowed operating costs associated with a major capital expenditure or substantial change in services which is subject to and has received a determination of need pursuant to M.G.L. c. 111, §§ 25B through 25G. These costs must be segregated from other allowed operating costs. Any volume allowance due to a DoN shallbe netted out if the costs associated with it are submitted as a CBC. The hospital must demonstrate that the increased costs requested are reasonable. 5. Wage parity adjustments resulting from mergers which are clearly demonstrated to be cost-effective. The term "cost-effective" used in this context shall mean that at the end of three years the merged hospitals are spending less than the combined projections of both hospitals. Documentationshallinclude a copyof the merger agreement and projections of costs without the merger as well as projection of the cost savings to be achieved through the merger. This adjustment will be considered a non-recurring CBC and the costs associated with it will be subtracted from rate year costs for any year in which the rate year becomes the base for future rate years. 6. Intra-hospital wage and salary adjustments which are clearly demonstrated to be cost-effective. The term "cost-effective" as used in this context shall mean that at the end of three years the hospital is spending less than it would have without the wage and salary adjustments. The hospital shall submit documentation of the projected cost savings to be achieved as a result of adjustments to wages and salaries. This adjustment will be considered a non-recurring CBC and the costs associated with it will be subtracted from rate year costs for any year in which the rate year becomes the base for future rate years. 7. Costs for reasonable increases in direct care staff salaries and wages in excess of the amount allowed through inflation. a. Wage relief may be requested for technicians, nurses, nursing aides, orderlies, attendants, occupational therapists, speech therapists, recreational therapists, physical therapists, and respiratory therapists. Any personnel in these categories who are primarily conducting administrative job duties and are not directly involved with providing patient care are not eligible for wage relief under this exception. b. The CBC for reasonable increases in direct care staff salaries and wages is defined as the reasonable rate year wage rate less the inflated base year wage rate, times the lesser ofthe rate year FTE direct care labor force or the base year FTE direct care labor force. c. The inflation allowance for direct care staff includes the full amounts granted under 114.1 CMR 40.08(2)(a) and (b). d. The reasonable rate year wage shall be the level of increase required to attract sufficient staff to ensure minimum quality of care as determined by the Department of Public Health for current patients. The rate will be determined by the Division with reference to average rates prevailing at other hospitals within the same Medicare labor market region, subject to the following conditions: i. Outlier wage rates as defined by the Division shall be excluded from the computation; ii. Special weight shall be given to rates prevailing at non-acute hospitals located in the hospital's Medicare labor market region; and iii. If it can be demonstrated that direct care staff at a hospital are transferring in significantnumbersto another competing hospital, then the wage rates prevailing atthat competing hospital shall be given special weight. iv. In no case shall the reasonable rate year wage rate used inthis calculationexceed the wage rate actually prevailing at hospitals located in the hospital's Medicare labor market region at the time of application. The determined Medicare Labor Market Regions and their associated counties are as follows: Medicare Labor Market Region Counties Eastern Mass Bristol Essex Middlesex Norfolk Plymouth Suffolk Worcester Berkshire Berkshire Springfield Hampden Hampshire Barnstable Barnstable Dukes Nantucket Rural Franklin e. In order to be eligible for this CBC, a hospital must demonstrate that it is facing extraordinary difficulties inthe market for direct care staff, as indicated by one or more of the criteria established in St. 1988, c. 270. These criteria include, but are not limited to: i. existence of significant vacancy rates for a period of time sufficient to jeopardize the welfare of patients according to Department of Public Health standards, JCAHO standards or other qualifying guidelines utilized in Massachusetts to ensure adequate care; ii. persistent difficulty in recruitment given bona fide recruitment efforts to obtain staffing levels referenced in 114.1 CMR 40.08(4)(e)7.e.i.; and iii. existing dependency upon temporary nursing services in order to maintainstaffing levels referenced in 114.1 CMR 40.08(4)(e)7.e.i.. f. This CBC shall not produce reimbursement exceeding actual rate year expenditures for such direct care staff. 8. An increase in inpatient care costs generated by increased care or services required by a more intensely ill patient population. The hospitalshallhave the burden of demonstrating a net increase in intensity from the base year to the intermediate or rate year. The higher intensity level in the intermediate or rate year shall be used to adjust RFR. a. To document that an increase in intensity has taken place between the base year and the intermediate year, a non-acute hospital may use any JCAHO-mandated measures of minimum staffing requirements mutually acceptable to itself and to the Division, or the management minutes system, in either case with results subject to verification by the Division or its agents. Alternatively, psychiatric hospitals may demonstrate that hospital- wide increases in certain intensity factors betweenthefirst eligibleyear and the intermediate year (intensity factors include, but are not limited to changes in age mix, average length of stay, number of involuntary lockup patients, patient disability index, and percentage of patients admitted from an acute hospital) have led to increases in hospital-wide service intensity (e.g., FTEs, nursing hours per patient), which in turn have led to quantifiable increases in cost. Note that increases in inputs alone are not enough to qualify for an intensity CBC; some intensity-related change in patient characteristics must also be identified. b. If the documentation for the increase in intensity is found to be acceptable, then the hospital shall have the burden of documenting the increase in patient care costs resulting from the higher level of intensity. 9. Costs for increases in physician malpractice insurance premiums paid by the hospital for physicians who are employees of the hospital and who do not bill patients or third party reimbursers separately for their professional services. The amount ofthe approved CBC will be net of all the increases already determined through the inflated adjusted base year costs. The hospital must document the actual malpractice insurance premium expense, as well as show that the physicians covered are employees of the hospital and do not bill separately for their services. The hospital may include in its request the amount of any retroactive premium payments to be made during the rate year. (c) No costs other than those meeting the criteria set forth in one or more of the categories enumerated in 114.1 CMR 40.08(4)(b) are allowable CBCs. A cost increase which is affected by or attributable to a hospital's voluntary business decision is not a CBC. An increase in the cost of doing business which affects the industry as a whole is not a CBC. (5) New Services. (a) The Division shall recognize as a new service any health services that were not offered by a hospital prior to the intermediate year. In order to be recognized as a new service by the Division, the service to be provided should conformwith the cost centers as defined in the HURM Manual. The Division shall not approve any cost allowances for a new service that is not scheduled to start within six months. (b) For a new service to be implemented after the start of the hospital's rate year, the allowable cost shall be equal to the reasonable operating costs attributed to the new service cost centers. For a new service started in the base year, the allowable cost shall be equal to the reasonable base year cost attributed to the new service inflated by a base to rate year inflation factor plus a base to rate allowance for volume adjustment attributed to the new service. (6) Capital. The base year capital requirement shall be adjusted to include reasonable projected acquisitions and retirements of fixed equipment and plant, and reasonable projected increases and decreasesinamortization, leases and rentals. The limitations to allowed base year capital costs defined in 114.1 CMR 40.07(3) apply to these adjustments as well.