Performance audit, Arizona Health Care Cost Containment System, rate-setting processes

              A REPORT
TO THE
ARIZONA LEGISLATURE
Debra K. Davenport
Auditor General
Arizona Health Care
Cost Containment
System
Rate-Setting Processes
Performance Audit Division
AUGUST • 2002
REPORT NO. 02 – 06
Performance Audit
The Auditor General is appointed by the Joint Legislative Audit Committee, a bipartisan committee composed of five
senators and five representatives. Her mission is to provide independent and impartial information and specific
recommendations to improve the operations of state and local government entities. To this end, she provides financial
audits and accounting services to the State and political subdivisions, investigates possible misuse of public monies, and
conducts performance audits of school districts, state agencies, and the programs they administer.
The Joint Legislative Audit Committee
Representative Roberta L. Voss, Chair Senator Ken Bennett, Vice Chair
Representative Robert Blendu Senator Herb Guenther
Representative Gabrielle Giffords Senator Dean Martin
Representative Barbara Leff Senator Peter Rios
Representative James Sedillo Senator Tom Smith
Representative James Weiers (ex-officio) Senator Randall Gnant (ex-officio)
Audit Staff
Lisa Eddy, Manager and Contact Person
Miriam Seymore, Team leader Kristie Waldron
Cathleen Akers
Copies of the Auditor General’s reports are free.
You may request them by contacting us at:
Office of the Auditor General
2910 N. 44th Street, Suite 410 • Phoenix, AZ 85018 • (602) 553-0333
Additionally, many of our reports can be found in electronic format at:
www.auditorgen.state.az.us
2910 NORTH 44th STREET • SUITE 410 • PHOENIX, ARIZONA 85018 • (602) 553-0333 • FAX (602) 553-0051
DEBRA K. DAVENPORT, CPA
AUDITOR GENERAL
STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL
WILLIAM THOMSON
DEPUTY AUDITOR GENERAL
August 26, 2002
Members of the Arizona Legislature
The Honorable Jane Dee Hull, Governor
Ms. Phyllis Biedess, Director
Arizona Health Care Cost Containment System
Transmitted herewith is a report of the Auditor General, A Performance Audit of the Arizona
Health Care Cost Containment System (AHCCCS)—Rate-Setting Processes. This report is in
response to an August 9, 2001, resolution of the Joint Legislative Audit Committee. The
performance audit was conducted as part of the Sunset review set forth in A.R.S. §41-2951 et
seq. I am also transmitting with this report a copy of the Report Highlights for this audit to
provide a quick summary for your convenience.
As outlined in its response, the Arizona Health Care Cost Containment System agrees with all
of the findings and recommendation.
My staff and I will be pleased to discuss or clarify items in the report.
This report will be released to the public on August 27, 2002.
Sincerely,
Debbie Davenport
Auditor General
Enclosure
Services:
The Office of Managed Care performs the following services:
1 Setting and adjusting capitation rates for acute and long-term
care;
2 Setting and adjusting fee-for-service rates for AHCCCS
physicians and other healthcare providers;
3 Monitoring the financial viability of its contractors;
4 Monitoring encounter data (records of healthcare services
provided) submitted by contractors;
5 Performing data validation studies on encounter data
submitted by contractors;
6 Performing research to support rate-setting and
development processes; and
7 Negotiating contracts for the acquisition and provision of
healthcare services to AHCCCS members.
Facilities:
The Office performs its duties at the state-owned building at
701 East Jefferson Street, in Phoenix.
Equipment:
The Office uses and owns only standard office equipment.
Mission:
To enhance the capability of the AHCCCS program to
ensure the provision of quality healthcare services to its
members and obtaining full economic value for monetary
resources expended.
FACT SHEET
Arizona Health Care Cost Containment System
Office of Managed Care
Office of the Auditor General
Office staffing:
49.5 full-time equivalent (fiscal year 2002)
Research (15)
Health Plan
Operations (6)
Health Plan
Finance (11)
Behavioral
Health Unit (10)
Arizona Long
Term Care
System (4)
Administration
(3.5)
Office funding sources:
$2.8 million (fiscal year 2002)
$157,000 $181,000
$1,200,000
$1,300,000
$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
$1,400,000
State and federal sources to help administer the Children’s
Health Insurance Program
Arizona Tobacco Litigation Fund monies to help administer
the Proposition 204 Program
State General Fund
Federal sources
State of Arizona
Office goals (fiscal years 2002-2004):
1. To ensure acute care health plans and ALTCS program contractors comply with AHCCCS
contract provisions.
2. To ensure the availability and accessibility of AHCCCS health plan providers throughout
the State.
3. To improve the completeness and quality of encounter data collected from health plans,
program contractors, and behavioral health.
Adequacy of goals and performance measures:
The Office of Managed Care’s 3 goals appear to be appropriate for its mission, and
it has established 16 performance measures that correlate to its goals. A review of
the Office of Managed Care’s mission and goals indicates that they are aligned with
each other, and that the performance measures reasonably align with the goals.
The Office has established performance measures covering input, output, outcome,
and efficiency. Although the Office has periodically conducted surveys to obtain
feedback on performance, the Office has not formally established any performance
measures addressing quality. Quality performance measures emphasize reliability or
responsiveness to the customer or stakeholder, such as client satisfaction with
physician or physician satisfaction with health plan/contractor.
Further, the Office reports only input measures for its third goal regarding encounter
data. The Office could report on at least one outcome measure. Outcome measures
indicate the results achieved and whether efforts are meeting proposed targets. For
example, the Office already reports the percentage of encounter data determined to
be accurate through medical file reviews to the federal Centers for Medicare and
Medicaid Services and could report this measure to the Governor or Legislature.
The Office of the Auditor General has conducted a performance audit of the rate-setting
processes used by the Office of Managed Care within the Arizona Health
Care Cost Containment System (AHCCCS) to develop rates for contractors and
healthcare providers in the State’s major healthcare program. AHCCCS administers
Arizona’s Medicaid program and is also the State’s healthcare program for low-income
Arizonans who do not qualify for Medicaid. This audit, part of a Sunset review
of the agency, was conducted pursuant to an August 9, 2001, resolution of the Joint
Legislative Audit Committee and under the authority vested in the Auditor General by
Arizona Revised Statutes (A.R.S.) §§41-1279 and 41-2951 et seq. It is the second in
a series of five audits of AHCCCS. Other audits in the series cover the Division of
Member Services, quality-of-care, medical services contracting practices, and a
response to the 12 factors listed in Arizona’s Sunset law.
AHCCCS administers Arizona’s Medicaid program principally through a capitated
managed care system. Within this system, AHCCCS pays healthcare contractors a
capitation rate each month to coordinate medical services for each AHCCCS
member enrolled with that contractor. This capitated rate applies regardless of the
type or level of services used by the member. Contractors in turn authorize, monitor,
and pay for services provided to AHCCCS members through a network of physicians
and other healthcare providers. For certain groups within the population, AHCCCS
also has a fee-for-service system that pays providers directly for services. For fiscal
year 2002, AHCCCS’ healthcare expenditures totaled nearly $3.4 billion. As of July 1,
2002, 686,000 of AHCCCS’ members were covered under the capitated program,
while 88,900 were covered under the fee-for-service program.
AHCCCS’ Office of Managed Care is responsible for AHCCCS’ oversight of its
healthcare contractors. The Office of Managed Care negotiates the contracts,
monitors contractor financial performance, and works with an actuary (a statistician
who calculates insurance payments) to develop the capitation rates. The Office of
Managed Care also sets and adjusts rates to directly reimburse providers who treat
fee-for-service program members.
This audit focuses on three primary responsibilities of the Office of Managed Care:
developing capitation rates, setting and adjusting physician fee-for-service rates, and
page i
Office of the Auditor General
SUMMARY
monitoring the financial solvency of healthcare contractors. The report also includes
other pertinent information about inpatient hospital reimbursement rates.
Accuracy of capitation rate data reasonably ensured (see
pages 7 through 11)
AHCCCS reasonably ensures the accuracy of the information it uses to set capitation
rates, but should better document some of the procedures it uses in processing this
information. With AHCCCS spending $2.4 billion on capitated managed care in 2002
alone, the soundness of these procedures is vital. In working with an actuary to
develop capitation rates, the Office of Managed Care summarizes information from
contractors about the extent to which members use medical services and the
amount that contractors pay medical providers for the services provided.
The Office of Managed Care validates healthcare service information (i.e., encounter
data) through monthly processing and performs annual validation studies. Each
month, AHCCCS electronically checks the encounter data for errors. The Office also
performs annual validation studies, in which two AHCCCS staff each independently
attempt to match a random sample of data submitted by a contractor with a
corresponding medical record submitted to the contractor by its service providers.
AHCCCS uses the study results to determine the quality of the rest of the contractors’
encounter data and sanctions contractors who exceed allowable error rates.
Although these control efforts appear adequate to ensure the reasonableness of the
utilization data given to the actuary, some of the Office’s procedures to verify this
utilization information are not fully documented. Better documentation would help
ensure that the Office’s approach stays consistent over time.
AHCCCS also has adequate controls over the cost data used in the calculation of
capitation rates, and has documented its processes. Specifically, AHCCCS provides
its contractors guidelines for recording and reporting financial information and
monitors quarterly and audited annual financial statements, which help to ensure the
accuracy of the cost data used in capitation rate setting.
Process for setting physician fee-for-service rates
appears appropriate (see pages 13 through 16)
AHCCCS’ approach to developing and adjusting its physician fee-for-service rates
appears appropriate. While most AHCCCS services are provided through the
page ii
State of Arizona
capitated managed care system, AHCCCS directly compensates physicians and
other healthcare providers for services provided to Native Americans enrolled in
Indian Health Services and non-qualified aliens treated through the Emergency
Services Program. These two groups accounted for 88,900 AHCCCS members as
of July 1, 2002. AHCCCS’ fee-for-service expenditures totaled approximately $363
million in fiscal year 2002.
AHCCCS’ approach in setting fee-for-service rates is similar to some other states in
that AHCCCS develops rates using the annually updated fee schedule for the federal
Medicare program as a guideline and a point of comparison for each rate. In addition
to comparing its rates with Medicare’s, AHCCCS incorporates other considerations
into the process. Medicare’s clients and AHCCCS’ clients differ in the extent to which
they use some services, such as maternity care, and in such instances, AHCCCS
develops its own rates to better reflect members’ medical service use patterns.
Additionally, AHCCCS uses physicians’ input when setting and adjusting rates.
AHCCCS obtains this input from staff with medical training and industry experience
and by consulting with outside physicians.
AHCCCS monitors contractors’ solvency (see pages 17
through 19)
AHCCCS has a reasonable system for monitoring contractors’ financial solvency.
Such a system is important, because a contractor’s financial insolvency could have
profound effects on the AHCCCS system, potentially disrupting medical services to
AHCCCS members and jeopardizing healthcare providers’ participation in the
system. AHCCCS contractually requires quarterly and audited annual financial
reports from contractors and uses this report information to monitor contractors’
solvency. For example, AHCCCS calculates several important financial ratios from
contractor data to assess contractors’ financial viability and identify problems.
AHCCCS also assesses contractors’ compliance with financial reporting
requirements during annual onsite reviews. If AHCCCS identifies significant problems
with a contractor’s financial solvency, AHCCCS may impose more frequent
monitoring. Closer monitoring keeps AHCCCS apprised of the contractor’s financial
status and, if necessary, facilitates proactive efforts to ensure continuity of AHCCCS
members’ healthcare.
page iii
Office of the Auditor General
Other pertinent information (see pages 21 through 22)
During the audit, auditors gathered information about the rates paid to hospitals for
inpatient services on a fee-for-service basis. Statute prescribes AHCCCS’
methodology for calculating hospital reimbursement rates and annually adjusting
these reimbursement rates for inflation. Some stakeholders in the medical
community have raised concerns that the methodology and inflationary adjustment
do not fully compensate hospitals. The Legislature established a Hospital
Reimbursement Workgroup to assess the adequacy and appropriateness of the
rates. This group’s work is still in process. Led by AHCCCS and composed of
representatives from six hospitals and the Arizona Hospital and Healthcare
Association, the workgroup must submit its findings to a joint legislative committee
by November 15, 2002.
page iv
State of Arizona
pagev
Office of the Auditor General
TABLE OF CONTENTS
continued
Introduction & Background
Finding 1: Accuracy of capitation rate data reasonably
ensured
Capitation rate development process
Utilization data controls adequate, but some additional
documentation is needed
Policies, procedures ensure accuracy of cost data
Recommendation
Finding 2: Process for setting physician fee-for-service
rates appears appropriate
Some services paid on a fee-for-service basis
Medicare’s rates used as guideline
Rate-setting process incorporates other key elements
Recommendation
Finding 3: AHCCCS monitors contractors’ solvency
Financial solvency critical to viable system
Policies and procedures, financial reviews guide monitoring
Recommendation
1
7
7
8
10
11
13
13
14
15
16
17
17
18
19
page vi
State of Arizona
TABLE OF CONTENTS
Other Pertinent Information
Agency Response
Tables:
1 Office of Managed Care
Schedule of Revenues and Expenditures,
Years Ended June 30, 2000, 2001, and 2002
(in Thousands)
(Unaudited)
2 Service Categories for Physician Fee Schedule
Figure:
1 Capitation Rate Development Process
As of April 2002
concluded
21
4
14
9
page1
Office of the Auditor General
INTRODUCTION
& BACKGROUND
The Office of the Auditor General has conducted a performance audit of the rate-setting
processes used by the Office of Managed Care within the Arizona Health
Care Cost Containment System (AHCCCS) to develop rates for contractors in the
State’s major healthcare program. AHCCCS administers Arizona’s Medicaid
program and is also the State’s healthcare program for low-income Arizonans who
do not qualify for Medicaid. This audit, part of a Sunset review of the agency, was
conducted pursuant to an August 9, 2001, resolution of the Joint Legislative Audit
Committee and under the authority vested in the Auditor General by Arizona Revised
Statutes (A.R.S.) §§41-1279 and 41-2951 et seq. This is the second in a series of five
audits of AHCCCS. The first audit covered the Division of Member Services, while
subsequent audits in this series will cover quality-of-care, medical services
contracting practices, and a response to the 12 factors listed in Arizona’s Sunset law.
AHCCCS overview
AHCCCS administers Arizona’s Medicaid program, and is also the State’s healthcare
program for low-income Arizonans who do not qualify for Medicaid. The majority of
AHCCCS’ members receive services through one of two managed care programs—
the acute care program, which provides a wide range of healthcare services, and the
Arizona Long Term Care System, which provides long-term care services such as
institutional nursing care and home- and community-based services. Under its
managed care system, AHCCCS does not directly provide healthcare services to its
members, but pays contractors a fixed amount in advance each month, called a
capitation rate, for each member, regardless of the number or level of services
provided. Contractors in turn pay healthcare providers for covered services provided
to AHCCCS members. As of July 1, 2002, AHCCCS contracts with 10 contractors to
provide acute care services to 652,000 members, and with 8 contractors to provide
long-term care services to 34,000 members. Additionally, as of July 1, 2002,
AHCCCS served 88,900 recipients who receive healthcare services on a fee-for-service
basis, where AHCCCS directly pays providers for services.
Fact:
AHCCCS serves
approximately 774,900
members under its
capitated and fee-for-service
programs.
page2
State of Arizona
Office of Managed Care overview and responsibilities
AHCCCS’ Office of Managed Care (Office) is responsible for oversight of the
agency’s healthcare contractors. The Office negotiates with contractors to provide
services to members and monitors contractors’ financial performance through
regular review of their financial statements and an onsite review process. It also works
with an actuary to develop the capitation rates paid to contractors and maintains a
large database of all services provided to AHCCCS members. Finally, it is
responsible for setting rates within the fee-for-service program.
For fiscal year 2002, the Office has 49.5 full-time equivalent staff (FTEs) and includes
six units:
􀁺􇩒 Research (15 FTE)—This unit develops payment rates for physicians and
hospitals and performs studies on members’ usage of the medical services
provided.
􀁺􇩈 Health Plan Finance (11 FTE)—This unit works with independent actuaries to
develop capitation rates paid to contractors. The unit also monitors the financial
solvency of the contractors by reviewing quarterly and annual financial
information, conducting onsite reviews, and developing policies and procedures
for healthcare contractors to follow.
􀁺􇩂 Behavioral Health Unit (10 FTE)—This unit oversees all behavioral health
programs provided by the Arizona Department of Health Services as well as
acute and long-term care contractors. Additionally, the unit develops quality-of-care
standards for behavioral health services, and provides technical assistance
to contractors.
􀁺􇨠 Health Plan Operations (6 FTE)—This unit conducts annual onsite reviews of
each acute care contractor. Unit staff interview contractor staff, examine policies
and procedures, and write a report with recommendations to improve
performance.
􀁺􇩁 Arizona Long Term Care System (ALTCS) (4 FTE)—This unit monitors the
contractors’ delivery of long-term care services, monitors and evaluates whether
contractors are in compliance with contractual requirements, participates in the
development and negotiation of contractor capitation rates, and provides
technical assistance.
􀁺􇩁 Administration (3.5 FTE)—This unit oversees the budget, all personnel issues,
and other projects for the Office of Managed Care.
Funding and budget
As illustrated in Table 1 (see page 4), the Office of Managed Care’s actual budget for
fiscal year 2002 was approximately $2.8 million. The Office received approximately
$1.2 million from the State’s General Fund. The Office also received $1.3 million from
federal sources, in addition to approximately $157,300 in state and federal monies,
to help administer the Children’s Health Insurance Program.
Audit scope and methodology
This audit focused on three responsibilities within the Office of Managed Care:
developing capitation rates, developing fee-for-service rates, and monitoring
contractors’ financial performance. The audit focused on these areas to determine if
AHCCCS uses sound methods for developing capitation rates paid to contractors
and for developing fee-for-service rates for other providers, and if AHCCCS
adequately monitors the financial performance of its contractors to help ensure a
viable healthcare system for its members.
This report contains findings in three areas:
􀁺􇩁 AHCCCS’ efforts to ensure the accuracy of data for determining capitation rates
are reasonably ensured, but some parts of the process need to be better
documented;
􀁺􇩁 AHCCCS’ approach for developing fee-for-service rates for physicians appears
to be appropriate; and
􀁺􇩁 AHCCCS monitors the financial performance of its contractors to help ensure a
viable healthcare system for its members.
The report also includes other pertinent information on hospital inpatient fee-for-service
rates. A legislatively mandated workgroup is studying these rates and the
methods AHCCCS uses to develop them. Their report is due to the Legislature on
November 15, 2002.
Auditors used a variety of methods to study the issues addressed in this report:
􀁺􇩔 To evaluate AHCCCS’ process for developing capitation rates, auditors
interviewed AHCCCS staff to learn how the rates are developed. Auditors
reviewed policies and procedures for monitoring contractors’ cost data and for
conducting the Office’s annual service use data study. Auditors observed and
interviewed Office staff responsible for performing quality control reviews on the
page3
Office of the Auditor General
page4
State of Arizona
data used to develop capitation rates. Auditors also interviewed staff in
AHCCCS’ Information Services Division and reviewed their policies and
procedures for generating reports. In addition, auditors interviewed the actuary
who participates in the rate development process.
􀁺􇩔 To learn about the research and the analyses performed in the process
AHCCCS uses for setting its physician fee-for-service (FFS) rates, and to assess
the strength of that process, auditors interviewed AHCCCS staff. Additionally,
auditors interviewed representatives of the Arizona Medical Association and the
Arizona Hospital and Healthcare Association to gain their perspective on FFS
rate issues. Auditors also contacted the Centers for Medicare and Medicaid
Services (Centers), the federal agency responsible for administering Medicare
and Medicaid, to obtain a perspective on FFS rate development processes and
Table 1 Office of Managed Care
Schedule of Revenues and Expenditures
Years Ended June 30, 2000, 2001, and 2002
(in Thousands)
(Unaudited)
2000 2001 2002 1
Revenues:
Appropriations:
State General Fund $2,312.1 $2,306.2 $1,201.4
Children’s Health Insurance Program Fund 2 298.7 377.3 157.3
Federal 1,584.7 1,478.6 1,294.2
Tobacco settlement litigation monies 3 .2 180.7
Total revenues $4,195.5 $4,162.3 $2,833.6
Expenditures:
Personal services $3,222.5 $3,292.5 $2,158.2
Employee-related 633.2 663.6 521.4
Professional and outside services 114.2 10.4 11.2
Travel, in-state 21.9 18.2 8.2
Travel, out-of-state 10.5 5.4 5.4
Other operating 159.7 146.4 116.5
Equipment 33.5 25.8 12.7
Total expenditures $4,195.5 $4,162.3 $2,833.6
1 Excludes revenues and expenditures of approximately $1.5 million relating to the Eligibility Quality Control Section that was moved to another division.
2 Consists of monies allocated to the Division for its role in administering the children’s health insurance program. Monies are appropriated from the Children’s Health
Insurance Program Fund and consist of tobacco taxes and federal matching monies for providing health insurance coverage to uninsured children whose families meet
certain income requirements.
3 Consists of the portion of monies obtained from a settlement with the tobacco companies allocated to the Division and used for its role in administering the Proposition
204 program.
Source: Auditor General staff analysis of financial information provided by the Arizona Health Care Cost Containment System for the years ended June 30, 2000, 2001,
and 2002.
page5
Office of the Auditor General
more specifically to obtain research Medicaid performed in developing its FFS
rate schedule. Further, auditors contacted other states’ Medicaid agencies to
obtain information on their FFS rate-setting processes.1 Auditors also reviewed
Web site information and pertinent documents for the Centers and other states.
􀁺􇨠 To determine how AHCCCS monitors its contractors’ financial performance,
auditors who are Certified Public Accountants reviewed AHCCCS policies and
procedures governing its financial monitoring of contractors. Auditors also
analyzed AHCCCS’ financial files for five contractors, including reviews of
quarterly and annual financial statements, to verify that policies and procedures
were being followed.
This audit was conducted in accordance with government auditing standards.
The Auditor General expresses appreciation to the director of AHCCCS and her staff
for their cooperation and assistance throughout the audit.
1 Other states contacted during this audit: California, Colorado, Hawaii, Idaho, Nevada, New Mexico, Oregon, Texas, Utah,
Washington, and Wyoming.
page6
State of Arizona
page7
1 Does not include KidsCare or Behavioral Health programs.
Office of the Auditor General
FINDING 1
Accuracy of capitation rate data reasonably
ensured
AHCCCS reasonably ensures the accuracy of the information used in setting
capitation rates but should better document its methods. AHCCCS uses two main
types of information to set capitation rates: data on the extent to which members use
medical services, and data on the amounts its contractors pay to healthcare
providers. Although adequate systems are in place for ensuring the quality of data on
use of services, AHCCCS’ Office of Managed Care (Office) needs to establish written
procedures for its efforts to ensure the reasonableness of reports developed from this
data. AHCCCS has appropriate steps to ensure the cost data is accurate, and these
steps are documented.
Capitation rate development process
AHCCCS administers the managed care system by paying healthcare contractors a
fixed capitation rate per member per month to coordinate healthcare services for
AHCCCS members. According to agency reports, AHCCCS spends 70 percent of its
healthcare expenditures to provide services to members enrolled in its capitated
programs.1 In the fiscal year ended June 30, 2002, AHCCCS’ capitation expenditures
for acute and long-term care totaled $2.4 billion. With such considerable amounts of
money involved, AHCCCS needs sound processes for developing reasonable
capitation rates. If AHCCCS sets rates too high, it will spend more money than is
necessary to provide healthcare to its members; if AHCCCS sets rates too low, it will
create a disincentive for contractors to participate in AHCCCS programs.
Because the federal Social Security Act requires that capitation rates used in state-managed
care systems be actuarially sound, AHCCCS works with an independent
actuary (a statistician who calculates insurance payments) to develop capitation
rates annually. Figure 1 (see page 9) illustrates the capitation rate development
process. AHCCCS’ Office of Managed Care, with the help of AHCCCS’ Information
Fact:
AHCCCS spends 70
percent of its healthcare
expenditures, or $2.4
billion, on capitated
programs.
page8
Definition:
Encounter data
collectively refers to the
records of healthcare
services provided to
AHCCCS members.
Definitions:
Utilization data
summarize the
frequency with which
AHCCCS members use
different types of
healthcare services (i.e.,
encounter data).
Cost data summarize
expenditures made by
contractors to provide
AHCCCS members with
different types of
healthcare services.
State of Arizona
Services Division, provides the actuary with the two primary inputs used to develop
capitation rates: utilization and cost data. The actuary uses the utilization and cost
data, in addition to considering national and AHCCCS-specific trends, such as fee-for-
service rate changes, to develop capitation rates for AHCCCS’ acute and long-term
care programs. The actuary formulates rate ranges for each capitation rate
category in contract bid years and identifies specific rate adjustments in contract
renewal years. The Office in turn uses the actuary’s input to determine the
reasonableness of rates proposed by potential contractors or to adjust existing
contractors’ capitation rates, depending on the contract year.
Utilization data controls adequate, but some additional
documentation is needed
The systems and procedural controls over the utilization data that the Office provides
to its actuary appear adequate but some additional documentation is needed.
Controls over the data used to compile reports for the actuary are appropriate and
well-documented, as are controls over creating the final report submitted to the
actuary. However, some of the procedures for creating the final report are not fully
documented, increasing the potential for inconsistent procedures from year to year.
Validating healthcare service data—To ensure the soundness of utilization
data, the Office validates the encounter data used to produce the utilization data
reports for the actuary. The Office not only checks encounter data for errors on a
monthly basis, but also conducts additional validation studies approximately 12
months after the end of each contract year. Both of these processes examine the
encounter data that AHCCCS requires healthcare contractors to submit
electronically.
Each month AHCCCS electronically checks the encounter data for errors. The
checks identify not only simple errors, such as fields missing data, but also more
complex errors. For example, the checks identify conflicting information within an
encounter record, such as a male giving birth. If the Office identifies encounters with
errors, it returns them to the contractor to correct and re-submit. Once the encounter
data has gone through this process, the Office uses the data to develop utilization
reports for the actuary to use in developing capitation rates.
In addition to monthly checks, the Office’s annual validation studies serve as an
important control over contractor-submitted encounter data. For example, for acute
care services, two AHCCCS staff each independently review a random sample of
paper medical service records against contractors’ previously submitted encounter
data. They attempt to match a sample of contractor-submitted encounter data with
their corresponding medical records or claims submitted to the contractor by its
page9
Office of the Auditor General
Figure 1
Arizona Health Care Cost Containment System
Office of Managed Care
Capitation Rate Development Process
As of April 2002
CONTRACTOR
Submits information about health care
services provided to AHCCCS members
to the Office of Managed Care (OMC).
Provides quarterly financial reports and
annual audited financial statements
including cost information for healthcare
services provided to AHCCCS members to
the OMC.
OFFICE OF MANAGED CARE
􀂄􈑐 Performs data control checks
of healthcare service
information on a monthly basis.
􀂄􈑐 Performs validation studies on
this data annually.
􀂄􈑒 Requests annually that the
Information Services Division
produce summary reports
called utilization data reports,
using validated healthcare
service information.
􀂄􈑖 Verifies reasonableness of
utilization data reports.
􀂄􈑐 Provides utilization data
reports to the actuary.
ACTUARY
Develops capitation rate ranges using utilization data reports and cost data.
OFFICE OF MANAGED CARE
Determines appropriate capitation rates using actuary’s rate ranges by:
􀂄􈑅 Evaluating rates proposed by contractors in contract bid year, or
􀂄􈑁 Adjusting rates in contract renewal year.
􀂄􈑒 Reconciles annual audited
financial statements with
quarterly financial reports.
􀂄􈑃 Compiles contractor cost
data on healthcare services
for AHCCCS members.
􀂄􈑐 Provides these cost data to
the actuary.
Source: Auditor General staff analysis of Arizona Health Care Cost Containment System (AHCCCS) policies,
procedures, and interviews with AHCCCS staff.
page10
State of Arizona
service providers. AHCCCS uses the study results to determine the quality of the rest
of the contractor’s encounter data. According to the Office, in a given year,
approximately 40 percent of the encounter data used to develop that year’s utilization
data reports for the actuary is validated through this process, while the remaining 60
percent is validated in the subsequent year.
The Office calculates error rates for each contractor based on the study results and
the federal Centers for Medicare and Medicaid Services require AHCCCS to sanction
contractors who exceed allowable error rates. The possibility of financial penalties
serves as a deterrent for contractors to submit inaccurate or incomplete encounter
data. Further, the Office uses the study results to educate contractors about common
problems to avoid in future encounter submissions.
Controls over utilization data adequate but need documentation—
Once AHCCCS validates the encounter data provided by contractors, on an annual
basis AHCCCS converts this information into utilization data reports for the actuary’s
use. AHCCCS’ controls over the conversion of the encounter service data into
utilization data reports adequately ensure the reasonableness of the data provided
to the actuary. Efforts to check the reasonableness of the utilization reports are
particularly important in light of the complex computer programming required to
create the reports, which is performed by AHCCCS’ Information Services Division
(ISD). Auditors reviewed ISD’s policies, procedures, and related documentation and
determined that ISD maintains an extensive quality control process for the work it
performs. For example, in creating utilization data reports for the Office, ISD analysts
not only test the programming reliability prior to sending the reports to the Office, but
also must document the Office’s approval of the product as a final quality control
check.
Although the Office’s approval of the utilization data reports is documented in ISD’s
project files, the Office lacks written procedures for the processes it uses to verify the
reasonableness of the report data. According to Office staff, they corroborate
utilization data in the current report by confirming the number of members with
quarterly enrollment reports, comparing the current healthcare service usage with
past utilization reports, and considering potential effects of recent program changes.
However, to ensure the consistency of these efforts over time, the Office should
develop written procedures for verifying the reasonableness of the utilization data
reports ISD creates that are used by the actuary.
Policies, procedures ensure accuracy of cost data
AHCCCS’ controls over the second type of data—cost data—are adequate. Auditors
reviewed a sample of AHCCCS contractor financial files to determine whether
AHCCCS follows its policies and procedures for monitoring contractors’ financial
information, including cost data. As part of AHCCCS’ efforts to monitor the financial
The Office of Managed
Care could ensure
consistency of its efforts
by developing written
procedures for verifying
the utilization reports.
page11
Office of the Auditor General
viability of its contractors (see Finding 3, pages 17 through 19), AHCCCS has also
established policies and procedures to determine the correctness and completeness
of contractors’ financial data.
To determine whether AHCCCS follows these policies and procedures, auditors
reviewed AHCCCS’ financial monitoring documents for a sample of five acute and
long-term care contractors. Auditors concluded that the files contained evidence that
AHCCCS staff follow the financial monitoring policies and procedures. Auditors also
reviewed and confirmed the appropriateness of the mathematical formulas used to
calculate contractor adherence to AHCCCS’ performance standards.
In addition, AHCCCS’ controls over financial information from contractors include
data submission requirements and reviews of the accuracy and completeness of the
submitted data. For example, AHCCCS provides its contractors with cost allocation
guidelines for recording and reporting financial information under specific categories
to help establish consistent contractor reporting. Auditors reviewed these guidelines
and determined that they provide appropriate and sufficient guidance for contractors
to allocate their costs. AHCCCS also requires contractors to submit annual audited
financial statements and reconcile them with quarterly reports. Using information
from audited financial statements, rather than financial data prepared by contractors,
provides additional assurance that financial information used in setting capitation
rates is accurate.
Recommendation
AHCCCS’ Office of Managed Care should develop written procedures for verifying
the reasonableness of the utilization data reports that the Information Services
Division produces.
Controls are adequate
over cost data.
page12
State of Arizona
page13
Office of the Auditor General
FINDING 2
Facts:
Fee-for-service includes
the Emergency Services
Program for non-qualified
aliens and
Indian Health Services
for Native Americans.
Process for setting physician fee-for-service rates
appears appropriate
AHCCCS’ approach to developing and adjusting its Physician Fee-for-Service (FFS)
rates appears appropriate. While most AHCCCS members’ services are paid
through the capitated managed care system, 11 percent of AHCCCS’ members’
services are paid on a fee-for-service basis. AHCCCS, like some other states, uses
Medicare’s rates as a guideline in the initial phase of its FFS rate review and
development process. Further, because some of Medicare’s rates and rate
adjustments are not appropriate for the AHCCCS FFS population, AHCCCS has
developed a process for setting and adjusting many of its own physician FFS rates.
This process incorporates two key elements: AHCCCS-specific service use patterns
and physician perspective.
Some services paid on a fee-for-service basis
While the majority of AHCCCS members receive services through the capitated
program, approximately 88,900 members, or 11 percent of AHCCCS’ population,
receive services through the FFS program, as of July 1, 2002. FFS program
recipients are primarily served through the Emergency Services and Indian Health
programs. The Emergency Services Program provides services for non-qualified
aliens, while the Indian Health Services program provides all available services for
Native Americans. In fiscal year 2002, AHCCCS spent approximately $204 million on
services for FFS clients (outpatient only). AHCCCS uses an FFS rate schedule to
directly compensate physicians and other healthcare providers serving these clients.
Moreover, some AHCCCS health plans, program contractors, and other entities also
use AHCCCS’ FFS rates to compensate their physicians.
page14
State of Arizona
According to AHCCCS, its FFS rate schedule includes a total of approximately
11,000 rates, 99 percent of which are included in the physician portion of the fee
schedule, and which cover a wide range of procedures.1 Because the majority of
AHCCCS’ FFS rates are included in the physician fee schedule, auditors focused on
AHCCCS’ process for setting and adjusting those rates.
Medicare’s rates used as guideline
AHCCCS, like some other states, uses Medicare’s rates as a guideline for
establishing its Medicaid FFS rates. Medicare maintains a comprehensive, regularly
updated, and publicly available rate schedule. AHCCCS and other states compare
their Medicaid FFS rates with Medicare’s rates.
Medicare has a comprehensive physician fee schedule—Medicare,
one of the largest purchasers of healthcare services in the nation, maintains a
comprehensive, annually updated physician fee schedule. Medicare has established
a fee schedule, which covers a broad range of services and includes approximately
11,800 rates. Medicare dedicates significant resources to
researching various service rates and offers its fee
schedule to the public at no cost. Additionally, Medicare
publishes the methodology behind its rate
development process in publicly available documents.
Comparing rates with Medicare—Medicare’s
rates are often considered a standard in the medical
industry and the rate schedule is easily accessible on
the Medicare Web site. Therefore, AHCCCS and 7 of 11
other Western states contacted use Medicare’s fee
schedule as a guideline when setting and adjusting
their Medicaid service rates.2 For example, in 2000,
California’s Medicaid program (MediCal) adjusted its
rates using Medicare as a guideline. Similarly, New
Mexico’s Medicaid also compares its rates to
Medicare’s.
As an initial step in its rate review process, AHCCCS
annually compares each of its FFS physician fee
schedule rates with Medicare’s rates for corresponding
services. For those rates that Medicare increased or
decreased more than 5 percent in the past year,
Facts:
Medicare’s physician
fee schedule includes
approximately 11,800
rates.
1 In this finding, the term “physician” includes all providers of all services listed in the Physician Procedures (Fee Schedule)
(see Table 2).
2 The following 11 Western states were interviewed: California, Colorado, Hawaii, Idaho, Nevada, New Mexico, Oregon,
Texas, Utah, Washington, and Wyoming.
Anesthesia
Behavioral Health
Dental
Drugs and Injections
Durable Medical
Equipment
Enteral/Parenteral1
Evaluation and
Management
Maternity and Delivery
Medical and Surgical
Supplies
Medicine
Orthotic and
Prosthetic Supplies
Pathology and
Laboratory
Professional and
Medical Services
Radiology
Surgery
Transportation
Vision and Hearing
Source: Auditor General summary of interviews with Arizona Health Care Cost
Containment System personnel and Physician Procedures, posted on
the agency's Web site.
1 Meaning nourishment administered through an IV or stomach tube.
Table 2: Service Categories for Physician Fee Schedule
page15
Office of the Auditor General
AHCCCS staff conducts research to determine if a similar change to AHCCCS’ rates
would be appropriate. For example, AHCCCS staff examine:
􀁺􇩆 Factors impacting the rate change—AHCCCS analyzes the reasoning behind
Medicare’s rate adjustments, which may include changes in medical practice or
service definition.
􀁺􇨠 Fiscal impact—AHCCCS determines the proposed rate changes’ overall
budgetary impact on AHCCCS and its contractors.
􀁺􇨠 Rate trends over time— AHCCCS examines the rates’ historical adjustments.
􀁺􇩁 Appropriateness/adequacy of the rate—AHCCCS is required by federal
regulations to set FFS rates at a level that is adequate to attract physicians.
Rate-setting process incorporates other key elements
In addition to comparing its rates with Medicare’s, AHCCCS incorporates other key
elements into its physician FFS rate-setting and adjustment process. Because
AHCCCS has determined that not all of Medicare’s rates are appropriate for its
population, AHCCCS develops its own rates or adjusts Medicare’s rates to reflect
AHCCCS-specific service use patterns. Further, AHCCCS’ process includes
physicians’ perspectives on current medical practices.
AHCCCS develops some of its own rates; modifies others—AHCCCS
develops some of its own physician FFS rates because it determined that not all of
Medicare’s rates are appropriate for its population. Medicare’s client population uses
some services more or less frequently than AHCCCS’ client population. AHCCCS
generates reports reflecting FFS members’ usage of covered services, and analyzes
differences between Medicare and AHCCCS service usage. For example, Medicare
clients have a relatively low need for maternity services, since Medicare’s population
is largely composed of the elderly. In contrast, according to statistics published in
2001 by AHCCCS, over 40 percent of Arizona births are to women who are either
enrolled or eventually become enrolled in AHCCCS.
If AHCCCS determines that Medicare’s rate is not appropriate for AHCCCS’
population, AHCCCS develops its own rate or applies Medicare’s adjustment to its
rate. When developing its own physician FFS rates, AHCCCS performs research and
analysis on service costs and AHCCCS client usage to set an appropriate rate. If
AHCCCS uses Medicare’s rate adjustment, AHCCCS applies the same percentage
If AHCCCS determines
that some Medicare
rates are not
appropriate for its
population, it may
develop its own rates.
to its rate. For example, when Medicare increased its average rate for speech and
language treatment by approximately 5 percent, AHCCCS increased its own rate for this
service by approximately 5 percent.
Some other states use a similar procedure. For example, the Texas Medicaid Program
incorporates its population’s service usage when setting some FFS rates. According to a
Texas Medicaid Program representative, Texas Medicaid determined that using part of
Medicare’s rate for some commonly used services, such as well-child exams, is not
appropriate for its Medicaid population. As a result, Texas Medicaid sets a higher rate for
these services than what Medicare would pay.
AHCCCS incorporates physicians’ perspectives—As part of its FFS physician
rate development and adjustment process, AHCCCS includes the input of staff and
industry physicians. AHCCCS’ Chief Medical Officer reviews proposed rate changes, and
advises whether the change appears appropriate based on trends and indicators from
the medical field. According to AHCCCS medical staff, they reference various clinical
journals and other sources when reviewing potential rates and rate changes. Additionally,
AHCCCS solicits input from the Arizona Medical Association, as well as from some health
plan medical directors.
To prevent some physicians from dropping out of the AHCCCS physician network,
AHCCCS did not adopt Medicare’s recent year 2002 rate reduction. Medicare reduced
physician compensation by 5.4 percent in 2002, and according to AHCCCS, some
Arizona healthcare providers expressed concern that AHCCCS would adopt Medicare’s
rate reduction. Therefore, for 2002, AHCCCS froze its physician fee schedule, in part
because it was concerned that adopting Medicare’s reduced rates may negatively affect
physician participation and client access to services.
Like AHCCCS, Medicare and other states include physicians’ input when developing and
adjusting FFS rates. For example, the Relative Value Update Committee, sponsored by
the American Medical Association, reviews and develops part of the Medicare rate
development process and solicits input from groups of physicians when determining how
to set rates. Likewise, the Texas Medicaid Program, Nevada Medicaid, and four other
Western states use physician advisory committees when considering rate adjustments.
MediCal also consulted a workgroup of providers and provider advocates in deciding
how to implement its last rate adjustment.
Recommendation
This finding provides information only. Therefore, no recommendations are presented.
page16
State of Arizona
AHCCCS uses
physicians’ input to
develop and adjust fee-for-
service rates.
page17
Office of the Auditor General
FINDING 3
AHCCCS monitors contractors’ solvency
AHCCCS has a reasonable system for monitoring contractors’ financial solvency.
Monitoring contractors’ financial performance helps AHCCCS determine that
contractors can continue to operate and obtain healthcare services for AHCCCS
members. AHCCCS has developed a variety of policies, procedures, and financial
review processes to guide its efforts. These include calculating various indicators of
financial health, conducting annual onsite reviews, and instituting additional
monitoring when significant problems are noted. Auditors’ review showed that
AHCCCS staff members were adhering to these policies and procedures.
Financial solvency critical to viable system
AHCCCS evaluates contractors’ financial solvency, which is critical to maintain a
viable healthcare system in Arizona. AHCCCS contracts with 10 contractors for acute
care services and 8 contractors for long-term care. Under AHCCCS’ managed care
system, contractors are paid a capitated rate and placed at financial risk for providing
care to enrollees. Contractors are responsible for contracting with, maintaining, and
paying an adequate network of physicians and other healthcare specialists;
obtaining all covered services for AHCCCS enrollees; and providing case
management and coordination of care. In this environment, contractor financial
insolvency could have profound effects on the AHCCCS system. If a contractor
should become insolvent, AHCCCS would need to ensure that members still receive
care and that healthcare providers continue to be paid. For example, AHCCCS’
largest acute care contractor operates in 13 counties and is one of only two
contractors in 11 of those counties. If this contractor were no longer able to operate,
approximately 212,706 members, or 32 percent of all AHCCCS acute care enrollees,
would be affected along with their healthcare providers.
Facts:
AHCCCS contracts with:
􀁺􇨱 10 contractors for
acute care services,
and
􀁺􇨸 8 contractors for
long-term care.
page18
State of Arizona
Policies and procedures, financial reviews guide
monitoring
AHCCCS uses a variety of methods to monitor contractors’ solvency.
Specifically, AHCCCS has developed policies and procedures to guide its
oversight of contractors’ quarterly and annual financial reports, including the
calculation of several important financial ratios. Annual financial reviews
performed by a team of AHCCCS staff also provide valuable insight into
contractors’ financial issues. If these efforts reveal financial concerns,
AHCCCS performs closer monthly monitoring of contractors to ensure their
continuing solvency.
Indicators of financial solvency—AHCCCS calculates important
financial ratios to use as indicators of contractors’ solvency and help to
identify problems with financial viability. Specifically, AHCCCS monitors
several important financial ratios, that are standard to accounting or
healthcare, which contractors are required to maintain. Auditors confirmed
that AHCCCS staff are monitoring each contractor’s financial solvency using
a fairly extensive list of financial ratios, including:
􀁺􇩅 Equity per Member—Long-term and acute care contractors must
maintain at least $2,000 and $150 per enrollee, respectively, in equity.
This indicates whether contractors can meet financial obligations, such
as paying healthcare providers.
􀁺􇩃 Current Ratio—This ratio, calculated by dividing current assets by
current liabilities, should be at least 1.00. If current liabilities exceed
current assets, contractors may not be able to meet financial obligations
as they come due.
􀁺􇩍 Medical Expense Ratio—AHCCCS contracts specify that contractors
must spend more than 85 percent of their capitation revenues on direct
medical care for AHCCCS enrollees. A lower percentage would signal
enrollees not receiving or utilizing enough services.
􀁺􇩔 Total Administrative Percentage—AHCCCS contracts also specify that
contractors should not spend more than 10 percent of capitation
revenues on administrative expenses.
􀁺􇩄 Days Outstanding Received but Unpaid Claims (RBUCs)—RBUCs are
medical claims received from healthcare providers but not yet paid by
the contractor. Claims should be paid within 30 days and longer time
frames may suggest contractor cash flow problems.
page19
Office of the Auditor General
􀁺􇩏 Other information—AHCCCS also monitors other important financial indicators,
such as operating income/loss, profitability by rate category, and overall
profitability.
These ratios were designed to capture critical information that can be used to
measure the likelihood of a contractor becoming insolvent. AHCCCS requires all
contractors to submit quarterly financial statements and annual audited financial
reports to its Office of Managed Care (see Finding 1, page 11). AHCCCS staff with
financial expertise, including some that are Certified Public Accountants, use these
financial statements and reports to calculate the ratios. These ratios are compared to
a contractor’s previous performance and to other contractors. Staff note any
problems or concerns and contact contractors to obtain further information or
clarification as needed. Auditors’ review of AHCCCS’ financial monitoring files
confirms that staff are adequately calculating and monitoring these ratios.
Financial reviews are additional monitoring efforts—AHCCCS also
monitors contractors’ compliance with financial reporting requirements during its
Operational and Financial Reviews. During these on-site reviews, a team of AHCCCS
staff determines whether contractors are submitting complete, timely, and accurate
financial statements, including quarterly and annual financial reports. AHCCCS
compares contractors’ quarterly financial statements to annual audited financial
reports to identify any concerns or discrepancies. For example, the AHCCCS team
also reviews contractors’ performance in meeting required financial ratios, as
mentioned above.
Closer monitoring when concerns identified—If significant problems or
concerns with financial statements or ratios are noted, AHCCCS may impose more
stringent monitoring. AHCCCS closely monitors contractors when financial concerns
are identified, either through quarterly and annual financial statements or operational
and financial reviews. Currently, 2 of AHCCCS’ 18 contractors must provide financial
statements on a monthly basis. Monthly reporting allows AHCCCS to more closely
monitor contractors’ financial status, avert contractor insolvency, or proactively
transition members to other contractors if necessary. Auditors’ review of AHCCCS’
financial monitoring files for these two contractors confirms that staff are closely
monitoring them and following up on pertinent information as warranted.
Recommendation
This finding provides information only. Therefore, no recommendations are
presented.
Facts:
AHCCCS requires
quarterly and annual
audited financial
statements.
page20
State of Arizona
page21
Office of the Auditor General
OTHER PERTINENT
INFORMATION
During the audit, auditors examined an ongoing study addressing the adequacy of
inpatient hospital reimbursement rates. Historically, inpatient reimbursement rates
have been a source of contention between AHCCCS and some hospitals. However,
AHCCCS cannot alter its current methodology for calculating inpatient
reimbursement, because the methodology is established in legislation. To address
stakeholder concerns, the Legislature mandated a Hospital Reimbursement
Workgroup to evaluate a number of objectives related to inpatient rate payment. The
work of this group is still in process.
States can determine inpatient reimbursement methodology—Federal
regulations allow state Medicaid agencies to establish their own process for
calculating hospital rates, as long as the rates are sufficient to attract
providers. Arizona’s current inpatient payment structure dates back to a 1989
study conducted by the AHCCCS administration. At the time of the study,
AHCCCS reimbursed hospitals on a system that based rates on hospitals’
charges, as opposed to hospitals’ costs. According to the study, the charge-based
system failed to promote efficiency or equity. Laws 1989, Chapter 293
§26 mandated that AHCCCS develop a new hospital reimbursement system.
After analyzing a wide variety of inpatient payment alternatives, AHCCCS
determined that a tiered per diem (see text box) payment system most
effectively met AHCCCS evaluation criteria and legislative requirements. The
Legislature amended A.R.S §36-2903.01 (Laws 1992, Ch. 302 §3), approving
the tiered per diem payment system, effective March 1, 1993.
As defined in statute, AHCCCS must establish its tiered per diem payment
rates at the beginning of the federal fiscal year. These payment rates remain
constant for the duration of the payment period. However, legislation requires
that AHCCCS annually adjust these rates for inflation using Standard & Poor’s
inflationary adjustment. AHCCCS’ inpatient rates include reimbursement for a
hospital’s operating and capital costs.1 Using information such as diagnosis and
procedure codes, and depending on the type of service provided, AHCCCS assigns
each inpatient day of care to the appropriate service tier (see text box). AHCCCS then
reimburses hospitals for each inpatient day of service based on the tiered rate.
1 Operating costs include the daily cost of hospital operation, such as utility costs. Capital costs are a blend of statewide
and hospital-specific costs, and include expenditures for buildings and fixtures.
Tiered Per Diem Rate—AHCCCS
classifies each covered inpatient
hospital day of care into one of seven
service tiers (see below). The rate paid
per day per service level is called the
tiered per diem rate.
Inpatient Tiers:
Maternity
Neonatal Intensive Care
Intensive Care
Surgery
Psychiatric
Nursery
Routine
Stakeholders have raised concerns—Several stakeholders in the medical
community have expressed concerns with AHCCCS’ current hospital inpatient
reimbursement rates. Specifically, some stakeholders are concerned that the tiered
per diem methodology does not fully recognize hospitals’ cost for providing inpatient
services. For example, some stakeholders believe that the methodology does not
adequately recognize the full cost of trauma center services. Additionally, one
stakeholder expressed concern that AHCCCS’ annual inflationary rate adjustment
fails to keep pace with actual inflation.
AHCCCS and hospitals are working together—Because of legislative
requirements, AHCCCS currently lacks the flexibility to change its inpatient hospital
reimbursement methodology. However, in 2001, the state legislature established a
Hospital Reimbursement Workgroup, which may address some stakeholder
concerns. The workgroup, led by AHCCCS, includes representatives from six
hospitals and the Arizona Hospital and Healthcare Association. According to
legislation, some workgroup objectives include:
􀁺􇩒 Reimbursement Levels—Developing a methodology to compare AHCCCS
reimbursement levels with the reimbursement levels paid by others, including
Medicare and commercial health plans. AHCCCS hired an independent
consultant to conduct the actual payment comparison.
􀁺􇩒 Rates Paid vs. Actual Costs—Evaluating the relationship between and
adequacy of AHCCCS’ inpatient hospital reimbursement rates with hospitals’
actual costs of serving AHCCCS members.
􀁺􇩏 Other States’ Methodologies—Reviewing other states’ inflationary indicators for
increasing hospital reimbursement, as well as selected states’ methodologies
for determining inpatient hospital reimbursement for Medicaid clients.
􀁺􇩆 Federal Requirements—Reviewing federal requirements regarding the
reimbursement of emergency services provided to undocumented aliens.
The workgroup must report its assessment of the inpatient rates’ adequacy and
appropriateness to the Joint Legislative Committee on the implementation of
Proposition 204 by November 15, 2002.
page22
State of Arizona
Office of the Auditor General
AGENCY RESPONSE
State of Arizona
August 20, 2002
Ms. Debra Davenport, CPA
Auditor General
Office of the Auditor General
2910 North 44th Street, Suite 410
Phoenix, Arizona 85018
Re:Draft Rate Setting Processes Report dated August 16, 2002
Dear Ms. Davenport:
Thank you for the opportunity to review and comment on the revised preliminary report
draft on AHCCCS' rate setting and contractor financial monitoring processes. Below is
our response to the one recommendation in the report.
Page 11 Recommendation:
AHCCCS’ Office of Managed Care should develop written procedures for verifying the
reasonableness of the utilization data reports that the Information Services Division
produces.
Response: The finding of the Auditor General is agreed to and the audit
recommendation will be implemented.
Since the audit took place, a policy has been written by the Office of Managed Care’s
Finance Unit addressing both the development of the data reports which are submitted to
the actuary as well as the verification processes for the utilization data contained in the
reports.
AHCCCS is gratified that the Auditor General recognized the efforts of the Office of
Managed Care to set appropriate rates and successfully monitor the financial viability of
our medical services contractors. AHCCCS has worked hard to develop and continually
improve these processes given that their importance cannot be over-emphasized. We
appreciate the efforts of the audit team and believe the recommended policy will be
effective in ensuring that procedures will be applied consistently each year.
Sincerely,
Phyllis Biedess
Director
S\KP\sunset\AG Rates Response.doc
01-17 Arizona Board of Dispensing
Opticians
01-18 Arizona Department of
Corrections—Administrative
Services and Information
Technology
01-19 Arizona Department of
Education—Early Childhood
Block Grant
01-20 Department of Public Safety—
Highway Patrol
01-21 Board of Nursing
01-22 Department of Public Safety—
Criminal Investigations Division
01-23 Department of Building and
Fire Safety
01-24 Arizona Veterans’ Service
Advisory Commission
01-25 Department of Corrections—
Arizona Correctional Industries
01-26 Department of Corrections—
Sunset Factors
01-27 Board of Regents
01-28 Department of Public Safety—
Criminal Information Services
Bureau, Access Integrity Unit,
and Fingerprint Identification
Bureau
01-29 Department of Public Safety—
Sunset Factors
01-30 Family Builders Program
01-31 Perinatal Substance Abuse
Pilot Program
01-32 Homeless Youth Intervention
Program
01-33 Department of Health
Services—Behavioral Health
Services Reporting
Requirements
02-01 Arizona Works
02-02 Arizona State Lottery
Commission
02-03 Department of Economic
Security—Kinship Foster Care
and Kinship Care Pilot
Program
02-04 State Park—Heritage Fund
02-05 Arizona Health Care Cost
Containment System—
Member Services Division
Performance Audit Division reports issued within the last 12 months
Future Performance Audit Division reports
Arizona Health Care Cost Containment System—Medical Services Contracting
Child Protective Services—Removal and Appeal Process
Arizona Health Care Cost Containment System—Sunset Factors