SECTION 355.8321. LoneSTAR Select Contracting Process for Inpatient Hospital Services

(a) Introduction. This section implements the provisions of Senate Bill 79, 73rd Texas Legislature, 1993, mandating selective contracting for non-emergency inpatient hospital services.

(b) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise.

(1) Market area--A geographic subdivision of the State of Texas defined as a group of geographically contiguous counties in which the Texas Department of Health (department) determines that health care providers will be invited to apply for selective contracting agreements. In general, each Metropolitan Statistical Area (MSA) in the State will be considered for designation as a market area. Where warranted by historical patient migration patterns, the department may designate certain non-MSA counties that are geographically contiguous to an MSA to be included with MSA counties within a market area.

(2) Effective service area--For each health care provider in a market area, the geographic area, as defined on a zip code basis, in which the health care provider has historically provided inpatient hospital services to Medicaid patients. For purposes of subsections (f) and (g) of this section, the effective service area will be determined based on historical Medicaid inpatient claims data.

(3) Executive Oversight Committee--The executive committee established by the department to direct the selective contracting initiative.

(4) Hospital capacity to provide specialized service offerings--

(A) For the LoneSTAR Select Contracting Program I, the presence or absence of specific acute care hospital services, including, but not limited to, trauma centers, burn units, neonatal intensive care unit services, and psychiatric services, that are required to be available in the market to ensure adequate access to quality care.

(B) For the LoneSTAR Select Contracting Program II, the presence or absence of specific inpatient psychiatric services, including, but not limited to, separate units for young children and adolescents, separate psychiatric and substance abuse treatment services, closed and open units, and distinct programs (e.g., dual diagnosis, eating disorder) that may be required to be available in the market to ensure adequate access to quality.

(5) New facility--A health care provider facility substantially constructed after the time the department determined the network of health care providers that would be contracted under selective provider agreements. Such term shall not include facilities that were built and operational at the time the department determined the network of selective providers for the affected market area; regardless of whether the facility's corporate structure and/or name have changed due to merger, acquisition, or other corporate reorganization.

(6) Potential network--Any combination of applicant health care providers (whether the result of a joint proposal or determined by the department) that offer a:

(A) combined effective service area that provides geographic coverage of the market area to the same extent that coverage is provided under current practice;

(B) combined service capacity equal to at least:

(i) 115% of the most recently available historic service volume experience for the market area for the LoneSTAR Select Contracting Program I; or

(ii) 125% of the most recently available historic service volume experience for the market area for the LoneSTAR Select Contracting Program II; and

(C) combination of specialized services available within the market area that is at least as broad as the range of specialized services presently available to Medicaid recipients in that market area.

(7) Selective contracting--A method of contracting, granted through waivers of certain provisions of the Social Security Act, that allows the department to contract selectively with health care providers for non-emergency inpatient services, thereby improving its ability to act as a prudent purchaser of services and to manage the Medical Assistance Program in a more effective and efficient manner, as required by Senate Bill 79.

(8) Selective provider agreement--An agreement which includes an amendment to a health care provider's existing provider agreement with the department and involves selective contracting.

(9) Disproportionate share hospital--A health care provider participating in the Medicaid program that, according to state Medicaid criteria, meets the conditions of participation and serves a disproportionate share of indigent patients. Additional requirements for disproportionate share hospitals are specified in §29.609 of this title (relating to Additional Reimbursement to Disproportionate Share Hospitals) and §29.610 of this title (relating to Disproportionate Share Hospital Reimbursement Methodology for State-Owned Teaching Hospitals).

(10) Health care provider--

(A) any acute care hospital that is eligible to provide inpatient hospital services to Medicaid recipients; or

(B) any inpatient mental health facility, as defined within this section.

(11) Optional volume management activities--Those activities that acute care hospitals may propose to furnish to Medicaid recipients in a market area to expand access to primary care services and ensure more appropriate use of acute care hospital facilities. Such activities may include, but not be limited to, furnishing ambulatory primary care clinic services to Medicaid recipients, and furnishing nurse hotlines which Medicaid recipients may call to receive professional advice about the most appropriate means to obtain medical care.

(12) Hardship exemption procedure--A method for non-contracted health care providers to obtain prior authorization from the department to provide non-emergency inpatient services to Medicaid recipients who would experience an unreasonable travel burden under the LoneSTAR Select Contracting Program(s).

(13) Emergency inpatient services--An admission into a health care provider with a diagnosis meeting the definition of a medical emergency.

(14) Non-emergency inpatient services--An admission into a health care provider with a diagnosis not meeting the definition of a medical emergency.

(15) LoneSTAR Select Contracting Program I--The selective contracting program designed and implemented for acute care hospitals.

(16) LoneSTAR Select Contracting Program II--The selective contracting program designed and implemented for inpatient mental health facilities as defined in the Health and Safety Code, §571.003.

(17) Inpatient mental health facility--A mental health facility that can provide 24-hour residential and acute inpatient psychiatric services that is:

(A) a facility operated by the Texas Department of Mental Health and Mental Retardation;

(B) a private mental hospital licensed by the department;

(C) a community center;

(D) a facility operated by a community center or other entity the Texas Department of Mental Health and Mental Retardation designates to provide mental health services;

(E) an identifiable part of a general hospital in which diagnosis, treatment, and care for persons with mental illness is provided and that is licensed by the department; or

(F) a hospital operated by a federal agency.

(c) General design. The department shall select that subset of market areas that appears to indicate the most effective competition for selective provider agreements to serve Medicaid patients. The market areas shall be divided into one or more groups of solicitations that will avoid an overlap of contract evaluation and negotiation of solicitations.

(1) The department shall implement selective contracting by executing amendments to each health care provider's existing provider agreement with the department. Health care providers that were not parties to provider agreements before implementation of the department's selective contracting are eligible to apply; however, they must enter into a provider agreement that ensures they are subject to all terms and conditions of the Medical Assistance Program. The amendments to the provider agreements, and the process by which the department solicited, evaluated, negotiated, and executed the amended agreements with health care providers under selective contracting are not subject to the laws and regulations governing acquisition of goods and services by state agencies.

(2) Health care providers shall be required to apply for selective provider agreements on an individual basis. Proposals by combinations of health care providers under common ownership in a market area shall be considered as individual proposals if the health care providers elect to apply on that basis. Proposals by combinations of health care providers in a market area that are not under common ownership will also be considered, provided that each health care provider that is a party to a joint application in a market area also submits an independent application for a selective contracting agreement in that market area; and each such health care provider provides written assurances that the terms of its individual proposal were arrived at independently without consultation with any other health care provider or combination of health care providers, and have not been communicated to any competitor or group of competitors. The department does not intend any action by the State of Texas in the contracting process to require or sanction any form of communication or joint action by competitors in the market for inpatient hospital services (with respect to either individual or joint applications) that fails to comply with the provisions of this section.

(3) The department shall send solicitation packages, inviting proposals for selective provider agreements, to each health care provider serving residents of the counties selected for participation. Health care providers will be required at all times to be eligible to participate in the Medicare and Medicaid programs. Health care providers that are not sent solicitation packages for Medicaid recipients of a particular market will be able to request a package after demonstrating their intent to offer services to Medicaid recipients in those markets.

(d) Proposals for selective provider agreements. Health care providers seeking selective provider agreements shall be required to submit the following information in their proposals:

(1) a schedule of proposed payment rates to be applied to all covered health care provider inpatient services during the term of the agreement;

(2) a proposed level of volume of services to Medicaid recipients that the health care provider would agree to serve during the contract period (this proposed level shall serve only as an estimate of services to assist the department in evaluating the availability of services within the relevant market area; it shall not serve as a limit on the amount of reimbursable services to be supplied by a contracting hospital);

(3) data to assist the department in evaluating the effective service area and specialized service offerings of the health care provider;

(4) assurances and certifications required to ensure health care provider compliance with the requirements of federal and Texas law and regulations, and the requirements of the department's selective contracting process;

(5) a narrative description of the proposed plans (if any) of the acute care hospital to furnish optional volume management programs for Medicaid recipients; and

(6) evidence that the application of the health care provider constitutes a binding quotation authorized by the corporate governance of the health care provider.

(e) Evaluation of proposals for selective provider agreements for comprehensive market area selective contracting. The department shall evaluate health care provider proposals, except proposals from new facilities according to the following criteria.

(1) Health care provider proposals shall be due to the department within one month of the release of proposal packages. All health care provider materials submitted to the department during the proposal process, and materials developed by the department or its contractors during the course of evaluation and negotiation, shall be confidential until all agreements are executed for all market areas in the state.

(2) The department shall evaluate health care provider proposals on a market-by-market basis and determine a negotiation strategy to pursue in each market area following its evaluation of all market areas. Based on the application of pre-specified evaluation criteria for each market area, the department shall prepare a recommended strategy for contracting in each market area. Each market area strategy shall be subject to approval by the Executive Oversight Committee established by the department.

(3) The department shall retain the option to make awards without negotiation. In some circumstances, the department may accept the proposals offered by every health care provider in the market area. In most cases, however, the department expects to enter into negotiations with those health care providers whose proposals, taken together, appear to represent the best combination of providers consistent with the overall objectives of the Medical Assistance Program. After negotiation, the department reserves the right not to award an agreement in a specific market area. In most cases, however, the department shall proceed to finalize and execute agreements with some subset of the health care providers in each market area. In that event, coverage restrictions associated with the use of non-contracted health care providers Medicaid recipients shall apply.

(f) Evaluation criteria and methodology for comprehensive market area selective contracting. The department's evaluation of proposals, except proposals from new facilities, for selective provider agreements for comprehensive coverage of each market area shall be conducted in two phases. Phase One shall include determining minimally acceptable network combinations and Phase Two shall include cost evaluation. A description of each phase follows.

(1) In Phase One, the department shall enter the information included in health care provider proposals in each market area into a personal computer based (PC-based) micro-simulation model designed to aid in the evaluation of the department's contracting options for each market. Data from health care provider proposals shall be combined with data from the department's eligibility systems and claims processing records to construct the data base required for this phase of the evaluation. Each health care provider's record in the data base shall contain information necessary to determine each health care provider's:

(A) effective service area for Medicaid recipients in that market area; and

(B) capacity to provide specialized services required by Medicaid recipients in the market area.

(2) The PC-based micro-simulation model shall be used to test all possible combinations of health care providers applying for selective provider agreements to determine potential networks that shall meet the department's requirements for access to services for Medicaid patients. Where health care providers have submitted a joint proposal for selective provider agreements, the department shall evaluate the proposed provider network and the proposed network in all possible combinations with remaining health care providers that submitted proposals.

(3) In Phase Two, each potential network shall be eligible for further consideration. If the Phase One evaluation fails to identify a potential network of applicant health care providers that meet the department's specified criteria, the department reserves the right to enter into direct negotiations with any health care provider serving the market area. The purpose of these negotiations shall be to develop a minimally acceptable potential network, and allow the department to initiate negotiations with a health care provider that failed to submit a proposal during the proposal period.

(4) In Phase Two, each potential network identified in a market area in Phase One shall be evaluated to determine the estimated reduction in program costs that would result from entering into selective provider agreements with all of the health care providers in that potential network, while excluding all other health care providers from serving non-emergency cases. The department shall use the PC-based micro-simulation model to produce an estimate of the total change in Medicaid program costs that would result by entering into agreements with those health care providers during the base contract period. The estimate by the department shall consider:

(A) changes in unit prices to be paid to providers for inpatient services;

(B) changes in the distribution of service volumes (and case mix) across health care providers that would result from the reallocation of service volume from non-selected to selected providers; and

(C) savings in Medicaid program costs likely to result from the changes in service volumes induced by optional volume management activities proposed by acute care hospitals, including both savings in aggregate acute care hospital service use and offsetting increases in non-hospital service costs.

(5) The result of the evaluation by the department will be a range of values for each potential network. The ranges shall be constructed using best case, worst case, and expected value assumptions about the distribution of service volumes across hospitals in the network.

(6) Following the evaluation, the department shall prepare a recommendation to the Executive Oversight Committee that includes the outcome of both phases of the evaluation for each market area, as well as a proposed strategy for the department to meet the best interests of the Medical Assistance Program. Department options shall include:

(A) making an award without negotiations--including an award at the proposed price schedules to all health care providers in the market;

(B) entering into negotiations with health care providers a single potential network to improve proposed pricing, if possible, and to finalize an agreement about key program features; or

(C) entering into negotiations with one or more health care providers influence the department's choice among multiple potential networks by lowering the pricing terms offered by individual health care providers. These negotiations may result in identifying a single potential network that would differ in its health care provider composition from potential networks initially identified in Phase One.

(g) Evaluation criteria for new facilities.

(1) A new facility may petition the department for selective provider status in a specified market area or market areas. A new facility must complete the regular enrollment process with the department or its designee to participate in the Medical Assistance Program, including the execution of the standard provider agreement before the selective provider agreement can be implemented. In addition to the information required of health care providers under subsection (d) of this section, the new facility's petition shall describe the new facility and shall specify specialties, other services to be provided, and the size and location of the new facility. Upon receipt of an acceptable petition to evaluate, the department will negotiate selective provider reimbursement rate(s) with the new facility for covered inpatient services provided during the state fiscal year the petition is evaluated and, if the department desires, for one or two subsequent state fiscal years. The department shall grant the new facility selective provider status if the new facility agrees to meet the terms and conditions negotiated in this paragraph and the terms and conditions of the LoneSTAR Select Contracting Program(s) under this section. Under no circumstances shall the department negotiate a rate with the new facility that is higher than the lesser of either the reimbursement rate used to reimburse newly constructed hospitals described in §29.606 of this title (relating to Reimbursement Methodology for Inpatient Hospital Services) or the weighted arithmetic mean of the discounted rates for the existing state fiscal year in the market which the "new" hospital is located or for any subsequent fiscal year negotiated in this paragraph. Upon execution of a selective provider agreement between the department and the facility, the new facility shall cease to meet the definition of a new facility under this section and shall be subject to all regulations affecting contracted health care providers under this section.

(2) No petition by a new facility for selective provider status and department consideration of or final action on such a petition shall require comprehensive reopening of selective provider contracting in the affected market area or of the specialities/services to be provided by the new facility.

(3) The department shall grant or reject a petition from a new facility under subsection (g) of this section no later than 60 days after receipt by the department of a petition complying with paragraph (1) of this subsection.

(4) New facilities granted selective provider status will be required at all times to be eligible to participate in the Medicare and Medicaid programs and to comply with all other applicable provisions under this section.

(h) Execution of selective provider agreements. The department shall execute selective provider agreements at the conclusion of negotiations by:

(1) requesting applicants to submit a binding revised application including the terms and conditions agreed to during negotiations with the department. The best and final offer of each health care provider shall be forwarded to the department for approval. The provider agreements shall be executed following the approval of the department; and

(2) structuring the agreements as one year amendments to the provider agreement of each health care provider, with an option to the department of extending the amendments for up to two option years. The effective date of the reimbursement rates under the amendments may, by mutual agreement, be made retroactive to a date before the date of execution. At the conclusion of the first year, the department may adjust its exercise of options on a market-by-market basis so as to place the system on a three-year rolling system of renegotiations. If the performance of any health care provider under the contract is considered unsatisfactory, however, the department may elect not to exercise any subsequent options, even if it exercised options with all other selected health care providers in the market.

(i) Reimbursement for acute care hospitals. Acute care hospitals in MSAs where the LoneSTAR Select Contracting Program I awards amended provided agreements will have their inpatient services reimbursed as follows.

(1) Hospitals awarded selective provider agreements will be reimbursed for all inpatient services (emergency and non-emergency) according to the proposed rates they submitted with their proposals or according to the final negotiated rates that all parties agree will serve as the reimbursement mechanism for all inpatient services rendered by the hospital.

(2) Hospitals not awarded selective provider agreements will be reimbursed for emergency inpatient services as currently stated in the State Plan until the patient is stabilized. After a patient is stabilized in a non-contracted hospital, inpatient services are no longer covered unless the non-contracted hospital receives an exception for the remaining number of days of stay required. A non-contracted hospital will not be reimbursed for non-emergency inpatient services to Medicaid recipients unless it receives a hardship exemption from the department. Further explanation of the payment methodology for emergency patients in non-contracted hospitals and the hardship exemption policy are as follows.

(A) After a patient is stabilized in a non-contracted hospital, after being admitted with a diagnosis meeting the definition of a medical emergency, additional inpatient services are no longer covered, unless the non-contracted hospital receives an exception for the remaining number of days required. Any and all DRGs with an average length of stay less than three days (72 hours) will be eligible to be paid the full reimbursement amount without an exception being granted. Any and all DRGs with an average length of stay in excess of three days (72 hours) will be eligible to be paid the full reimbursement amount without an exception being granted if the patient is stabilized and discharged home within 72 hours from the initial admission. If an exception is not granted by the department, the hospital will no longer be eligible to receive reimbursement for services rendered to the patient.

(i) A non-contracted hospital must contact the department prior to patient stabilization or as soon as is practicable after stabilization for determination of further reimbursable services provided by the non-contracted hospital.

(ii) If a non-contracted hospital does not contact the department before the patient is discharged, the non-contracted hospital will be reimbursed on a per diem basis as though the patient were transferred upon stabilization.

(I) The non-contracted hospital will not receive full reimbursement for the inpatient services rendered to the patient.

(II) The initial claim will be denied; the non-contracted hospital will then be required to submit a complete copy of the patient's medical record to the department or its designee.

(III) The department or its designee will determine when the patient was stabilized and establish a per diem reimbursement amount.

(iii) As in current policy, each case will continue to be subject to all utilization review criteria.

(B) Non-contracted hospitals will not be reimbursed for the non-emergency inpatient services provided to Medicaid recipients as stated in the current State Plan unless the hospital receives prior authorization from the department through a hardship exemption procedure. The hardship exemption procedure is developed for Medicaid recipients who might experience an unreasonable travel burden under the LoneSTAR Select Contracting Program. The exemption procedure requires the non-contracted hospital or the admitting physician to contact the department by telephone, facsimile or written communication and provide an explanation as to the particular circumstances that the department should be considering in determining the prior authorization of the non-emergency inpatient service(s) being requested. The Medicaid patient can not be admitted for reimbursable non-emergency inpatient services unless a hardship exemption is granted by the department. In all circumstances, the Medicaid patient must be subject to an unreasonable travel burden under the Medicaid program for the request to be considered. The department will provide a decision on all requests for the hardship exemption procedure as soon as is practicable after receiving the request (usually within 36 hours). The department will contact the requesting non-contracted hospital or attending physician by telephone with the decision; and subsequently provide a written communication.

(i) The non-contracted hospital will be responsible for including the particular circumstances to be considered by the department in the patient's medical record; with this information being a permanent part of the medical record.

(ii) Should a medical condition develop or be discovered that necessitates a change in the original admitting diagnosis to a more severe diagnosis, which would require additional hospital services above and beyond the non-emergency inpatient services authorized through the initial hardship exemption procedure, any additional inpatient services rendered will not be covered unless the hospital receives an authorization for subsequent inpatient services to be rendered.

(I) Should an emergency medical condition develop or be discovered, the procedures for a non-contracted hospital providing emergency inpatient services as explained at subparagraph (A) of this paragraph must be adhered too.

(II) Any emergency case in a non-contracted hospital with a normal DRG Length-of-Stay of 72 hours or less; or any normal DRG Length-of-Stay over 72 hours that is stabilized and discharged home within 72 hours from the initial admission will be granted an automatic exception.

(III) Should a medical condition develop or be discovered that necessitates a transfer of the patient to a contracted hospital, the non-contracted hospital will be reimbursed, utilizing the current transfer methodology.

(iii) As in current policy, each case will continue to be subject to all relevant utilization review criteria.

(j) Reimbursement for inpatient mental health facilities. Inpatient mental health facilities in MSAs where the LoneSTAR Select Contracting Program II awards amended provider agreements will have their inpatient psychiatric services reimbursed as follows.

(1) Inpatient mental health facilities awarded selective provider agreements will be reimbursed for all covered emergency services according to the proposed rates they submit with their proposals or according to the final negotiated rates that all parties agree will serve as the reimbursement mechanism for all covered emergency services rendered by the health care provider.

(2) Inpatient mental health facilities not awarded selective provider agreements will be reimbursed for covered emergency inpatient services as currently stated in the State Plan until the patient is stabilized. After a patient is stabilized in a non-contracted health care provider, inpatient services are no longer covered unless the non-contracted health care provider receives an exception for some additional days of stay.

(3) As in current policy, each case will continue to be subject to all relevant utilization review criteria.

Source Note: The provisions of this §355.8321 adopted to be effective July 27, 1994, 19 TexReg 5485; amended to be effective February 14, 1995, 20 TexReg 564; amended to be effective November 22, 1995, 20 TexReg 9274; duplicated effective September 1, 1997, as published in the Texas Register December 11, 1998, 23 TexReg 12660