(a) It is the intent of the Legislature to design a new Medi-Cal inpatient hospital reimbursement methodology based on diagnosis-related groups that more effectively ensures all of the following:

1. (1) Encouragement of access by setting higher payments for patients with more serious conditions.
2. (2) Rewards for efficiency by allowing hospitals to retain savings from decreased length of stays and decreased costs per day.
3. (3) Improvement of transparency and understanding by defining the “product” of a hospital in a way that is understandable to both clinical and financial managers.
4. (4) Improvement of fairness so that different hospitals receive similar payment for similar care and payments to hospitals are adjusted for significant cost factors that are outside the hospital’s control.
5. (5) Encouragement of administrative efficiency and minimizing administrative burdens on hospitals and the Medi-Cal program.
6. (6) That payments depend on data that has high consistency and credibility.
7. (7) Simplification of the process for determining and making payments to the hospitals.
8. (8) Facilitation of improvement of quality and outcomes.
9. (9) Facilitation of implementation of state and federal provisions related to hospital acquired conditions.
10. (10) Support of provider compliance with all applicable state and federal requirements.

(b)

1. (1)

   1. (A)

      1. (i) The department shall develop and implement a payment methodology based on diagnosis-related groups, subject to federal approval, that reflects the costs and staffing levels associated with quality of care for patients in all general acute care hospitals in state and out of state, including Medicare critical access hospitals, but excluding public hospitals, psychiatric hospitals, and rehabilitation hospitals, which include alcohol and drug rehabilitation hospitals.
      2. (ii) The payment methodology developed pursuant to this section shall be implemented on July 1, 2012, or on the date upon which the director executes a declaration certifying that all necessary federal approvals have been obtained and the methodology is sufficient for formal implementation, whichever is later.
   2. (B) The diagnosis-related group-based payments shall apply to all claims, except claims for psychiatric inpatient days, rehabilitation inpatient days, managed care inpatient days, and swing bed stays for long-term care services, provided, however, that psychiatric and rehabilitation inpatient days shall be excluded regardless of whether the stay was in a distinct-part unit. The department may exclude or include other claims and services as may be determined during the development of the payment methodology.
   3. (C) Implementation of the new payment methodology shall be coordinated with the development and implementation of the replacement Medicaid Management Information System pursuant to the contract entered into pursuant to Section 14104.3, effective on May 3, 2010.

2. (2) The department shall evaluate alternative diagnosis-related group algorithms for the new Medi-Cal reimbursement system for the hospitals to which paragraph (1) applies. The evaluation shall include, but not be limited to, consideration of all of the following factors:

   1. (A) The basis for determining diagnosis-related group base price, and whether different base prices should be used taking into account factors such as geographic location, hospital size, teaching status, the local hospital wage area index, and any other variables that may be relevant.
   2. (B) Classification of patients based on appropriate acuity classification systems.
   3. (C) Hospital case mix factors.
   4. (D) Geographic or regional differences in the cost of operating facilities and providing care.
   5. (E) Payment models based on diagnosis-related groups used in other states.
   6. (F) Frequency of grouper updates for the diagnosis-related groups.
   7. (G) The extent to which the particular grouping algorithm for the diagnosis-related groups accommodates ICD-10 diagnosis and procedure codes, and applicable requirements of the federal Health Insurance Portability and Accountability Act of 1996.
   8. (H) The basis for calculating relative weights for the various diagnosis-related groups.
   9. (I) Whether policy adjusters should be used, for which care categories they should be used, and the frequency of updates to the policy adjusters.
   10. (J) The extent to which the payment system is budget neutral and can be expected to result in state budget savings in future years.
   11. (K) Other factors that may be relevant to determining payments, including, but not limited to, add-on payments, outlier payments, capital payments, payments for medical education, payments in the case of early transfers of patients, and payments based on performance and quality of care.

(f)

1. (1) The department may adopt emergency regulations to implement the provisions of this section in accordance with rulemaking provisions of the Administrative Procedure Act (Chapter 3.5 (commencing with Section 11340) of Part 1 of Division 3 of Title 2 of the Government Code). The initial adoption of emergency regulations and one readoption of the initial regulations shall be deemed to be an emergency and necessary for the immediate preservation of the public peace, health and safety, or general welfare. Initial emergency regulations and the one readoption of those regulations shall be exempt from review by the Office of Administrative Law. The initial emergency regulations and the one readoption of those regulations authorized by this section shall be submitted to the Office of Administrative Law for filing with the Secretary of State and publication in the California Code of Regulations.
2. (2) As an alternative to paragraph (1), and notwithstanding the rulemaking provisions of Chapter 3.5 (commencing with Section 11340) of Part 1 of Division 3 of Title 2 of the Government Code, or any other provision of law, the department may implement and administer this section by means of provider bulletins, all-county letters, manuals, or other similar instructions, without taking regulatory action. The department shall notify the fiscal and appropriate policy committees of the Legislature of its intent to issue a provider bulletin, all-county letter, manual, or other similar instruction, at least five days prior to issuance. In addition, the department shall provide a copy of any provider bulletin, all-county letter, manual, or other similar instruction issued under this paragraph to the fiscal and appropriate policy committees of the Legislature.