Title of Regulation: 12VAC30-70. Methods and Standards for Establishing Payment Rates - Inpatient Hospital Services (amending 12VAC30-70-221, 12VAC30-70-251, 12VAC30-70-420).

Statutory Authority: § 32.1-325 of the Code of Virginia.

Public Hearing Information: No public hearings are scheduled.

Public Comment Deadline: February 10, 2016.

Effective Date: February 25, 2016.

Agency Contact: Emily McClellan, Regulatory Supervisor, Policy Division, Department of Medical Assistance Services, 600 East Broad Street, Suite 1300, Richmond, VA 23219, telephone (804) 371-4300, FAX (804) 786-1680, or email emily.mcclellan@dmas.virginia.gov.

Basis: Section 32.1-325 of the Code of Virginia grants to the Board of Medical Assistance Services the authority to administer and amend the Plan for Medical Assistance. Section 32.1-324 of the Code of Virginia authorizes the Director of the Department of Medical Assistance Services (DMAS) to administer and amend the Plan for Medical Assistance according to the board's requirements. The Medicaid authority as established by § 1902(a) of the Social Security Act (42 USC § 1396a) provides governing authority for payments for services. DMAS is relying on the general authority of § 32.1-325 for the authority to remove the 1,000-day threshold to exempt hospitals from filing cost reports.

Purpose: The purpose of this action is to replace the existing diagnosis-related group (DRG) classification system for inpatient hospital services. The current methodology is unsustainable given the implementation of the International Classification of Disease (ICD), version 10, effective October 1, 2015. The purpose is also to improve the accuracy of pricing and reimbursement by capturing differences in severity of illness among patients receiving inpatient hospital services.

This action also updates reimbursement for non-cost-reporting hospitals removing the 1,000 days threshold as a requirement to exempt non-cost-reporting hospitals from filing cost reports.

The amendments do not impact the public or citizens of the Commonwealth.

Rationale for Using Fast-Track Process: This regulatory change is being promulgated through the fast-track rulemaking process because it is expected to be noncontroversial. DMAS consulted with the Virginia Hospital and Healthcare Association (VHHA) and the affected providers and considered the advice of the Hospital Payment Policy Advisory Committee. VHHA actively participated in the development of the new methodology and indicated that it would not object to the new methodology. The affected providers are satisfied with the new DRG classification system; therefore, no opposition is expected as a result of this fast-track regulatory action.

Removing the 1,000-day threshold for determining whether a hospital is required to file a cost report is expected to be well received by providers, so no objections are expected.

Substance: Based on authority under Item 301 VVV of Chapter 2 of the 2014 Acts of the Assembly, Special Session I, the inpatient hospital operating reimbursement methodology is being amended to replace the all patient diagnosis-related group (AP-DRG) with a more refined grouper stratifying the severity of illness. This change was originally scheduled for July 1, 2014, but was delayed due to the budget uncertainty.

The AP-DRG methodology in effect prior to October 1, 2014, assigned DRGs based on the diagnosis and procedure codes submitted on inpatient hospital claims excluding inpatient acute psychiatric and rehabilitation hospital services. With the implementation of International Classification of Diseases, edition 10 (ICD-10), the current AP-DRG classification system will no longer be supported by software vendors.

DMAS implemented a new inpatient hospital claim classification system capable of processing ICD-10 claims effective October 1, 2014. The APR-DRG Classification System developed by 3M uses discharge information to classify patients into clinically meaningful groups; the patients grouped into each DRG are similar in terms of both clinical characteristics and the hospital resources they consume. Being a more refined grouper, APR-DRG uses four severity of illness (SOI) levels to create more specific groupings.

The 3M APR-DRG software improves the accuracy of pricing and reimbursement by capturing differences in severity of illness among patients. While the primary goal of transitioning to APR-DRG is to improve the accuracy of pricing and reimbursement, the current AP-DRG software will not be updated for ICD-10 diagnosis codes while the APR-DRG software will be. By implementing now, providers will have a year of experience with APR-DRG using ICD-9 diagnoses before the transition to ICD-10 diagnoses effective for dates of discharge on or after October 1, 2015.

DMAS is transitioning to APR-DRG by blending AP-DRG and APR-DRG weights over a three-year period. Operating rates were developed based on the blend of the current AP-DRG weights and the new APR-DRG weights. Using a three-year transition period, the weights will be based on the following blend of AP-DRG and APR-DRG weights:

• SFY 2015 – 50% APR-DRG and 50% AP-DRG

• SFY 2016 – 75% APR-DRG and 25% AP-DRG

• SFY 2017 – 100% APR-DRG (Full Implementation)

This action is estimated to be budget neutral in the aggregate. Individual facility payments may increase or decrease under the new methodology; however, the new payment methodology is not expected to increase inpatient hospital operating payments for hospitals in the aggregate.

DMAS is removing the 1,000-day threshold for exempting non-cost-reporting hospitals from filing cost reports. Non-cost-reporting hospitals will be reimbursed the in-state average DRG rates.

Issues: These actions change the reimbursement methodology for inpatient hospital services. The primary advantage for hospitals is the availability of commercial software to support implementation of the ICD-10 as federally required. There are no disadvantages to the hospitals by this change of the APR-DRG methodology. There are also no disadvantages to non-cost-reporting hospitals of the removal of threshold for filing cost reports.

Department of Planning and Budget's Economic Impact Analysis:

Summary of the Proposed Amendments to Regulation. Pursuant to the 2014 Special Session I Acts of the Assembly, Chapter 2, Item 301 VVV, the Department of Medical Assistance Services (DMAS) proposes to replace the All Patient Diagnosis-Related Group classification system with the All Patient Refined Diagnosis-Related Group system for inpatient hospital operating reimbursement. The proposed payment methodology has been in effect since October 1, 2014.

Result of Analysis. The benefits likely exceed the costs for all proposed changes.

Estimated Economic Impact. Prior to October 1, 2014, Virginia's Medicaid reimbursement methodology for inpatient hospital operating costs was based on the All Patient Diagnosis-Related Group classification system. The Diagnosis Related Groups (DRGs) are a patient classification scheme which provides a means of relating the type of patients a hospital treats (i.e., its case mix) to the costs incurred by the hospital. There are currently three major versions of the DRGs in use in the United States: basic DRGs, All Patient DRGs, and All Patient Refined DRGs. The basic DRGs are used by the Centers for Medicare and Medicaid Services (CMS) for hospital payment for Medicare beneficiaries. The All Patient DRGs (AP-DRGs) are an expansion of the basic DRGs to be more representative of non-Medicare populations such as Medicaid or pediatric patients. The All Patient Refined DRGs (APR-DRG) system expands the AP-DRG structure by adding four levels of severity-of-illness and risk of mortality to create more refined and specific groupings.

The AP-DRG system utilized by Virginia Medicaid prior to October 1, 2014, assigned DRGs to submitted inpatient hospital claims (excluding inpatient acute psychiatric and rehabilitation hospital services) based on the diagnostic and procedure codes defined by the federal International Classification of Disease (ICD) version 9 classification system. However, CMS will implement an updated classification system, ICD-10, on October 1, 2015. With the implementation of the ICD-10 system, the current AP-DRG classification system will no longer be supported by existing software and will not be sustainable. As a result, pursuant to the 2014 Acts of the Assembly, Chapter 2, Item 301 VVV, DMAS implemented the APR-DRG system on October 1, 2014.

According to DMAS, the APR-DRG classification system is compatible with ICD-10 codes which will be implemented in October 2015 as well as ICD-9 codes currently in effect. Thus, the providers are not affected by the proposed new methodology as they will continue to submit the ICD-9 claims until ICD-10 claims go in effect in October 2015. While they will have to purchase new software to process ICD-10 claims in October 2015, those costs will be due to federal changes and cannot be attributed to these proposed changes.

The proposed methodology is beneficial in that it improves the accuracy of pricing and reimbursement by capturing differences in severity of illness and risk of mortality among patients and is compatible with either ICD-9 or ICD-10 claims.

The impact on aggregate reimbursement to all hospitals is estimated to be budget-neutral. In FY 2014, the total Medicaid reimbursement for inpatient hospital operating costs was approximately $401 million. However, the reimbursements to individual hospitals may increase or decrease under the new methodology. Based on FY 2014 data and assuming full implementation, 23 hospitals will receive $100,000 to $530,000 less, 34 hospitals will receive $0 to $99,999 less, 14 hospitals will receive $1 to $99,999 more, and 19 hospitals will receive $100,000 to $2.8 million more in their operating payments compared to payments under the old methodology. Pursuant to legislative mandate, DMAS is transitioning to APR-DRG by blending AP-DRG and APR-DRG weights over a three year period. Using a three-year transition period, the weights will be based on the following blend of AP-DRG and APR-DRG weights: 50% APR-DRG and 50% AP-DRG in FY 2015, 75% APR-DRG and 25% AP-DRG in FY 2016, 100% APR-DRG in FY 2017.

Additionally, APR-DRG specific administrative implementation costs for DMAS are estimated to be $92,000. No significant administrative costs are expected on providers as no billing changes are required for the implementation of the new methodology.

Finally, DMAS also proposes to remove the 1,000 day threshold for exempting non-cost-reporting hospitals from filing cost reports. This change reflects the current DMAS policy and is not expected to have any significant economic impact other than clarifying the current regulations.

Businesses and Entities Affected. The proposed new methodology affects approximately 90 in-state and out-of-state hospitals currently. A few of the affected hospitals may be small and qualify as small businesses. While some of the 7 managed care organizations in Virginia may also change their provider reimbursement methodology for inpatient services following this change, this regulation does not require them to do so.

Localities Particularly Affected. The proposed changes apply throughout the Commonwealth.

Projected Impact on Employment. The proposed amendments are unlikely to significantly affect employment.

Effects on the Use and Value of Private Property. The new methodology will reduce reimbursement for 57 hospitals while increasing reimbursement for 33 hospitals. The asset values of the affected hospitals would be affected depending on the impact on their revenues.

Real Estate Development Costs. The proposed amendments are unlikely to significantly affect real estate development costs.

Small Businesses:

Definition: Pursuant to § 2.2-4007.04 of the Code of Virginia, small business is defined as "a business entity, including its affiliates, that (i) is independently owned and operated and (ii) employs fewer than 500 full-time employees or has gross annual sales of less than $6 million."

Costs and Other Effects. Only a few of the 90 affected hospitals may be considered as small businesses. The costs and other effects on them would be the same as discussed above.

Alternative Method that Minimizes Adverse Impact. There is no known alternative that would minimize the adverse impact while accomplishing the same goals.

Adverse Impacts:

Businesses: The proposed new payment methodology for inpatient hospital operating costs will reduce reimbursement for 57 hospitals.

Localities: The proposed amendments will not adversely affect localities.

Other Entities: The implementation of the proposed new methodology is expected to create an additional $92,000 in DMAS's administrative costs.

Agency's Response to Economic Impact Analysis: The agency has reviewed the economic impact analysis prepared by the Department of Planning and Budget. The agency raises no issues with this analysis.

Summary:

The amendments (i) replace the all patient diagnosis-related group (AP-DRG) classification system with the all patient refined diagnosis-related group (APR-DRG) system for inpatient hospital services in accordance with Item 301 VVV of Chapter 2 of the 2014 Acts of the Assembly, Special Session I, and (ii) update reimbursement for non-cost-reporting hospitals by removing the 1,000 days threshold to qualify for an exemption to filing cost reports.

Article 2
Prospective (DRG-Based) Payment Methodology

12VAC30-70-221. General.

A. Effective July 1, 2000, the prospective (DRG-based) payment system described in this article shall apply to inpatient hospital services provided in enrolled general acute care hospitals, rehabilitation hospitals, and freestanding psychiatric facilities licensed as hospitals, unless otherwise noted.

B. The following methodologies shall apply under the prospective payment system:

1. As stipulated in 12VAC30-70-231, operating payments for DRG cases that are not transfer cases shall be determined on the basis of a hospital specific operating rate per case times relative weight of the DRG to which the case is assigned.

2. As stipulated in 12VAC30-70-241, operating payments for per diem cases shall be determined on the basis of a hospital specific operating rate per day times the covered days for the case with the exception of payments for per diem cases in freestanding psychiatric facilities. Payments for per diem cases in freestanding psychiatric facilities licensed as hospitals shall be determined on the basis of a hospital specific rate per day that represents an all-inclusive payment for operating and capital costs.

3. As stipulated in 12VAC30-70-251, operating payments for transfer cases shall be determined as follows: (i) the transferring hospital shall receive an operating per diem payment, not to exceed the DRG operating payment that would have otherwise been made and (ii) the final discharging hospital shall receive the full DRG operating payment.

4. As stipulated in 12VAC30-70-261, additional operating payments shall be made for outlier cases. These additional payments shall be added to the operating payments determined in subdivisions 1 and 3 of this subsection.

5. As stipulated in 12VAC30-70-271, payments for capital costs shall be made on an allowable cost basis.

6. As stipulated in 12VAC30-70-281, payments for direct medical education costs of nursing schools and paramedical programs shall be made on an allowable cost basis. For Type Two hospitals, payment for direct graduate medical education (GME) costs for interns and residents shall be made quarterly on a prospective basis, subject to cost settlement based on the number of full time equivalent (FTE) interns and residents as reported on the cost report. Effective April 1, 2012, payment for direct GME for interns and residents for Type One hospitals shall be 100% of allowable costs.

7. As stipulated in 12VAC30-70-291, payments for indirect medical education costs shall be made quarterly on a prospective basis.

8. As stipulated in 12VAC30-70-301, payments to hospitals that qualify as disproportionate share hospitals shall be made quarterly on a prospective basis.

C. The terms used in this article shall be defined as provided in this subsection:

"AP-DRG" means all patient diagnosis related groups.

"APR-DRG" means all patient refined diagnosis related groups.

"Base year" means the state fiscal year for which data is used to establish the DRG relative weights, the hospital case-mix indices, the base year standardized operating costs per case, and the base year standardized operating costs per day. The base year will change when the DRG payment system is rebased and recalibrated. In subsequent rebasings, the Commonwealth shall notify affected providers of the base year to be used in this calculation.

"Base year standardized costs per case" means the statewide average hospital costs per discharge for DRG cases in the base year. The standardization process removes the effects of case-mix and regional variations in wages from the claims data and places all hospitals on a comparable basis.

"Base year standardized costs per day" means the statewide average hospital costs per day for per diem cases in the base year. The standardization process removes the effects of regional variations in wages from the claims data and places all hospitals on a comparable basis. Base year standardized costs per day were calculated separately, but using the same calculation methodology, for the different types of per diem cases identified in this subsection under the definition of "per diem cases."

"Cost" means allowable cost as defined in Supplement 3 (12VAC30-70-10 through 12VAC30-70-130) and by Medicare principles of reimbursement.

"Disproportionate share hospital" means a hospital that meets the following criteria:

1. A Medicaid utilization rate in excess of 14%, or a low-income patient utilization rate exceeding 25% (as defined in the Omnibus Budget Reconciliation Act of 1987 and as amended by the Medicare Catastrophic Coverage Act of 1988); and

2. At least two obstetricians with staff privileges at the hospital who have agreed to provide obstetric services to individuals entitled to such services under a state Medicaid plan. In the case of a hospital located in a rural area (that is, an area outside of a Metropolitan Statistical Area as defined by the Executive Office of Management and Budget), the term "obstetrician" includes any physician with staff privileges at the hospital to perform nonemergency obstetric procedures.

3. Subdivision 2 of this definition does not apply to a hospital:

a. At which the inpatients are predominantly individuals under 18 years of age; or

b. Which does not offer nonemergency obstetric services as of December 21, 1987.

"DRG" means diagnosis related groups.

"DRG cases" means medical/surgical cases subject to payment on the basis of DRGs. DRG cases do not include per diem cases.

"DRG relative weight" means the average standardized costs for cases assigned to that DRG divided by the average standardized costs for cases assigned to all DRGs.

"Groupable cases" means DRG cases having coding data of sufficient quality to support DRG assignment.

"Hospital case-mix index" means the weighted average DRG relative weight for all cases occurring at that hospital.

"Medicaid utilization percentage" is equal to the hospital's total Medicaid inpatient days divided by the hospital's total inpatient days for a given hospital fiscal year. The Medicaid utilization percentage includes days associated with inpatient hospital services provided to Medicaid patients but reimbursed by capitated managed care providers. This definition includes all paid Medicaid days (from DMAS MR reports for fee-for-service days and managed care organization or hospital reports for HMO days) and nonpaid/denied Medicaid days to include medically unnecessary days, inappropriate level of care service days, and days that exceed any maximum day limits (with appropriate documentation). The definition of Medicaid days does not include any general assistance, Family Access to Medical Insurance Security (FAMIS), State and Local Hospitalization (SLH), charity care, low-income, indigent care, uncompensated care, bad debt, or Medicare dually eligible days. It does not include days for newborns not enrolled in Medicaid during the fiscal year even though the mother was Medicaid eligible during the birth.

"Medicare wage index" and the "Medicare geographic adjustment factor" are published annually in the Federal Register by the Health Care Financing Administration. The indices and factors used in this article shall be those in effect in the base year.

"Operating cost-to-charge ratio" equals the hospital's total operating costs, less any applicable operating costs for a psychiatric distinct part unit (DPU), divided by the hospital's total charges, less any applicable charges for a psychiatric DPU. The operating cost-to-charge ratio shall be calculated using data from cost reports from hospital fiscal years ending in the state fiscal year used as the base year.

"Outlier adjustment factor" means a fixed factor published annually in the Federal Register by the Health Care Financing Administration. The factor used in this article shall be the one in effect in the base year.

"Outlier cases" means those DRG cases, including transfer cases, in which the hospital's adjusted operating cost for the case exceeds the hospital's operating outlier threshold for the case.

"Outlier operating fixed loss threshold" means a fixed dollar amount applicable to all hospitals that shall be calculated in the base year so as to result in an expenditure for outliers operating payments equal to 5.1% of total operating payments for DRG cases. The threshold shall be updated in subsequent years using the same inflation values applied to hospital rates.

"Per diem cases" means cases subject to per diem payment and includes (i) covered psychiatric cases in general acute care hospitals and distinct part units (DPUs) of general acute care hospitals (hereinafter "acute care psychiatric cases"), (ii) covered psychiatric cases in freestanding psychiatric facilities licensed as hospitals (hereinafter "freestanding psychiatric cases"), and (iii) rehabilitation cases in general acute care hospitals and rehabilitation hospitals (hereinafter "rehabilitation cases").

"Psychiatric cases" means cases with a principal diagnosis that is a mental disorder as specified in the ICD, as defined in 12VAC30-95-5. Not all mental disorders are covered. For coverage information, see Amount, Duration, and Scope of Services, Supplement 1 to Attachment 3.1 A & B (12VAC30-50-95 through 12VAC30-50-310). The limit of coverage of 21 days in a 60-day period for the same or similar diagnosis shall continue to apply to adult psychiatric cases.

"Psychiatric operating cost-to-charge ratio" for the psychiatric DPU of a general acute care hospital means the hospital's operating costs for a psychiatric DPU divided by the hospital's charges for a psychiatric DPU. In the base year, this ratio shall be calculated as described in the definition of "operating cost-to-charge ratio" in this subsection, using data from psychiatric DPUs.

"Readmissions" means when patients are readmitted to the same hospital for the same or a similar diagnosis within five days of discharge. Such cases shall be considered a continuation of the same stay and shall not be treated as new cases. Similar diagnoses shall be defined as ICD diagnosis codes possessing the same first three digits. As used here, the term "ICD" is defined in 12VAC30-95-5.

"Rehabilitation operating cost-to-charge ratio" for a rehabilitation unit or hospital means the provider's operating costs divided by the provider's charges. In the base year, this ratio shall be calculated as described in the definition of "operating cost-to-charge ratio" in this subsection, using data from rehabilitation units or hospitals.

"Statewide average labor portion of operating costs" means a fixed percentage applicable to all hospitals. The percentage shall be periodically revised using the most recent reliable data from the Virginia Health Information (VHI), or its successor.

"Transfer cases" means DRG cases involving patients (i) who are transferred from one general acute care hospital to another for related care or (ii) who are discharged from one general acute care hospital and admitted to another for the same or a similar diagnosis within five days of that discharge. Similar diagnoses shall be defined as ICD diagnosis codes possessing the same first three digits. As used here, the term "ICD" is defined in 12VAC30-95-5.

"Type One hospitals" means those hospitals that were state-owned teaching hospitals on January 1, 1996.

"Type Two hospitals" means all other hospitals.

"Ungroupable cases" means cases assigned to DRG 469 (principal diagnosis invalid as discharge diagnosis) and DRG 470 (ungroupable) as determined by the AP-DRG Grouper. Effective October 1, 2014, "ungroupable cases" means cases assigned to DRG 955 (ungroupable) and DRG 956 (ungroupable) as determined by the APR-DRG grouper.

D. The All Patient Diagnosis Related Groups (AP-DRG) Grouper grouper shall be used in the DRG payment system. Until notification of a change is given, Version 14.0 of this grouper shall be used. Effective October 1, 2014, DMAS shall replace the AP-DRG grouper with the All Patient Refined Diagnosis Related Groups (APR-DRG) grouper for hospital inpatient reimbursement. The APR-DRG Grouper will produce a DRG as well as a severity level ranging from 1 to 4. DMAS shall phase in the APR-DRG weights by blending in 50% of the full APR-DRG weights with 50% of fiscal year (FY) 2014 AP-DRG weights for each APR-DRG group and severity level in the first year. In the second year, the blend will be 75% of full APR-DRG weights and 25% of the FY 2014 AP-DRG weights. Full APR-DRG weights shall be used in the third year and succeeding years for each APR-DRG group and severity. DMAS shall notify hospitals when updating the system to later grouper versions.

E. The primary data sources used in the development of the DRG payment methodology were the department's hospital computerized claims history file and the cost report file. The claims history file captures available claims data from all enrolled, cost-reporting general acute care hospitals, including Type One hospitals. The cost report file captures audited cost and charge data from all enrolled general acute care hospitals, including Type One hospitals. The following table identifies key data elements that were used to develop the DRG payment methodology and that will be used when the system is recalibrated and rebased.

Data Elements for DRG Payment Methodology
Data Elements	Source
Total charges for each groupable case	Claims history file
Number of groupable cases in each DRG	Claims history file
Total number of groupable cases	Claims history file
Total charges for each DRG case	Claims history file
Total number of DRG cases	Claims history file
Total charges for each acute care psychiatric case	Claims history file
Total number of acute care psychiatric days for each acute care hospital	Claims history file
Total charges for each freestanding psychiatric case	Medicare cost reports
Total number of psychiatric days for each freestanding psychiatric hospital	Medicare cost reports
Total charges for each rehabilitation case	Claims history file
Total number of rehabilitation days for each acute care and freestanding rehabilitation hospital	Claims history file
Operating cost-to-charge ratio for each hospital	Cost report file
Operating cost-to-charge ratio for each freestanding psychiatric facility licensed as a hospital	Medicare cost reports
Psychiatric operating cost-to-charge ratio for the psychiatric DPU of each general acute care hospital	Cost report file
Rehabilitation cost-to-charge ratio for each rehabilitation unit or hospital	Cost report file
Statewide average labor portion of operating costs	VHI
Medicare wage index for each hospital	Federal Register
Medicare geographic adjustment factor for each hospital	Federal Register
Outlier operating fixed loss threshold	Claims history file
Outlier adjustment factor	Federal Register

12VAC30-70-251. Operating payment for transfer cases.

A. The operating payment for transfer cases shall be determined as follows:

1. A transferring hospital shall receive the lesser of (i) a per diem payment equal to the hospital's DRG operating payment for the case, as determined in 12VAC30-70-231, divided by the arithmetic mean length of stay for the DRG into which the case falls times the length of stay for the case at the transferring hospital or (ii) the hospital's full DRG operating payment for the case, as determined in 12VAC30-70-231. The transferring hospital shall be eligible for an outlier operating payment, as specified in 12VAC30-70-261, if applicable criteria are satisfied.

2. The final discharging hospital shall receive the hospital's full DRG operating payment, as determined in 12VAC30-70-231. The final discharging hospital shall be eligible for an outlier operating payment, as specified in 12VAC30-70-261, if applicable criteria are satisfied.

B. Exceptions.

1. Cases falling into DRG 456, 639, or 640 shall not be treated as transfer cases. Effective October 1, 2014, cases falling into DRG 580 and 581 shall not be treated as transfer cases. Both the transferring hospital and the final discharging hospital shall receive the full DRG operating payment.

2. Cases transferred to or from a psychiatric or rehabilitation DPU of a general acute care hospital, a freestanding psychiatric facility licensed as a hospital, or a rehabilitation hospital shall not be treated as transfer cases.

12VAC30-70-420. Reimbursement of noncost-reporting general acute care hospital providers.

A. Effective July 1, 2000, noncost-reporting (general acute care hospitals that are not required to file cost reports) hospitals shall be paid based on the in-state average DRG rates unadjusted for geographic variation increased by the average capital percentage among hospitals filing cost reports in a recent year. General acute care hospitals shall not file cost reports if they have less than 1,000 days per year (in the most recent provider fiscal year) of inpatient utilization by Virginia Medicaid recipients, inclusive of patients in managed care capitation programs.

B. Effective July 1, 2011, out-of-state hospitals shall be reimbursed the lesser of the amount reimbursed by the Medicaid program in the facility's home state or the rate defined in the subsection A of this section.

C. Prior approval must be received from DMAS when a referral has been made for treatment to be received from a nonparticipating acute care facility (in-state or out-of-state). Prior approval will be granted for inpatient hospital services provided out of state to a Medicaid recipient who is a resident of the Commonwealth of Virginia under any one of the following conditions. It shall be the responsibility of the nonparticipating hospital, when requesting prior authorization for the admission of the Virginia resident, to demonstrate that one of the following conditions exists in order to obtain authorization. Services provided out of state for circumstances other than these specified reasons shall not be covered.

1. The medical services must be needed because of a medical emergency;

2. Medical services must be needed and the recipient's health would be endangered if he were required to travel to his state of residence;

3. The state determines, on the basis of medical advice, that the needed medical services, or necessary supplementary resources, are more readily available in the other state;

4. It is general practice for recipients in a particular locality to use medical resources in another state.