California Medicaid DRG Payment Parameters Update

Table of Contents State/Territory Name: California State Plan Amendment (SPA) #: CA-25-0022

This file contains the following documents in the order listed:

1. Approval Letter
2. Companion Letter
3. CMS 179 F orm/Summary Form (with 179-like data)
4. Approved SPA Pages DEPARTMENT OF HEALTH & HUMAN SERVICES

Centers for Medicare & Medicaid Services 7500 Security Boulevard, Mail Stop S3-14-28 Baltimore, Maryland 21244-1850 Financial Management Group

Tyler Sadwith State Medicaid Director California Department of Health Care Services P.O. Box 997413, MS 0000 Sacramento, CA 95899-7413 RE: TN CA-25-0022 Dear Director Sadwith: The Centers for Medicare & Medicaid Services (CMS) has reviewed the proposed California state plan amendment (SPA) to Attachments 4.19-A CA-25-0022, which was submitted to CMS on August 6, 2025. This plan amendment updates State Fiscal Year (SFY) 2025-26 Diagnosis

Related Group (DRG) payment parameters for general acute inpatient services provided by private hospitals and non-designated public hospitals in California, out-of-state (border and non- border) hospitals, and hospitals designated by Medicare as critical access hospitals.

We reviewed your SPA submission for compliance with statutory requirements, including in sections 1902(a)(2), 1902(a)(13), 1902(a)(30), and 1903 as it relates to the identification of an adequate source for the non-federal share of expenditures under the plan, as required by 1902(a)(2) of the Social Security Act and the applicable implementing Federal regulations. Based upon the information provided by the state, we have approved the amendment with an effective date of July 1, 2025. We are enclosing the approved CMS-179 and a copy of the new state plan pages. Additionally, a companion letter is included with this approval package. CMS identified issues with the state's base payment methodology for out-of-state providers. The letter clarifies that the SPA contains a previously approved methodology for base payment to out-of- state providers that may differ from base payments made to in-state providers and that CMS is not approving any payment that may violate Circuit opinion in Asante v. Kennedy, No. 23-5055 (D.C. Cir. 2025), petition for cert. denied (U.S. Mar. 23, 2026) (No. 25361). More details can be found in the attached companion letter. If you have any additional questions or need further assistance, please contact James Francis at 617-531-7575 or via email at James.Francis@cms.hhs.gov. Sincerely,

Rory Howe Director Financial Management Group Enclosures

DEPARTMENT OF HEALTH & HUMAN SERVICES

Centers for Medicare & Medicaid Services 7500 Security Boulevard, Mail Stop S3-14-28 Baltimore, Maryland 21244-1850 Financial Management Group

Tyler Sadwith State Medicaid Director California Department of Health Care Services P.O. Box 997413, MS 0000 Sacramento, CA 95899-7413 RE: Payment Methodologies for Out-of-State Providers in Attachment 4.19-A Dear Director Sadwith: The Centers for Medicare & Medicaid Services (CMS) is providing this letter as a companion to the approval of SPA CA-25-0022, which updates State Fiscal Year (SFY) 2025-26 Diagnosis

Related Group (DRG) payment parameters for general acute inpatient services provided by private hospitals and non-designated public hospitals in California, out-of-state (border and non- border) hospitals, and hospitals designated by Medicare as critical access hospitals.

It appears that some of the previously approved payment methodologies that pay out-of-state providers differently (noted in “same page” review) may be problematic in light of the D.C. Circuit opinion in Asante v. Kennedy, No. 23-5055 (D.C. Cir. 2025), petition for cert. denied (U.S. Mar. 23, 2026) (No. 25361). By approving the corresponding SPA, CMS is expressly not approving any payment methodologies that would violate Asante. At this time, CMS will not take enforcement action against the state over such payment methodologies provided that the state does not implement such methodologies in a manner that conflicts with Asante. CMS is currently exploring options for how to proceed with this issue, which may include rulemaking. If you have any additional questions or need further assistance, please contact James Francis at 617-531-7575 or via email at James.Francis@cms.hhs.gov.

Rory Howe Director Financial Management Group Enclosures

1. Administrative Day Reimbursement claims
2. Level I
3. Level 2

4. APR-DRG Reimbursement
   For admissions dated July 1, 2013, and after for private hospitals and for admissions dated January 1, 2014, and after for NDPHs, reimbursement to DRG Hospitals for services provided to Medi-Cal beneficiaries are based on APR-DRG. Effective July 1, 2015, APR-DRG Payment is determined by multiplying a specific APR-DRG HSRV by a DRG Hospital's specific APR-DRG Base Price with the application of adjustors and add-on payments, as applicable. Provided all pre-payment review requirements have been approved by DHCS, APR-DRG Payment is for each admit through discharge claim, unless otherwise specified in this segment of Attachment 4.19-A.

5. APR-DRG HSRV
   The assigned APR-DRG code is determined from the information contained on a DRG Hospital's submitted UB-04 or 837I acute inpatient claim. The grouping algorithm utilizes the diagnoses codes, procedure codes, procedure dates, admit date, discharge date, patient birthdate, patient age, patient gender, and discharge status present on the submitted claim to group the claim to one of 339 specific APR-DRG groups. Within each specific group of 339, there are four severities of illness and risk of mortality sub-classes: minor (1), moderate (2), major (3), and extreme (4). This equates to a total of 1356 different APR-DRG (with two additional error code possibilities). Each discharge claim is assigned only one APR-DRG code. For each of the 1356 APR-DRG codes there is a specific APR-DRG HSRV assigned to it by the APR-DRG grouping algorithm. The APR-DRG HSRVs are

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the remote rural base price. The labor share percentage for a SFY shall be the same percentage that the Medicare program has established according to the latest published CMS final rule and notice published prior to the start of the state fiscal year, with the exception for hospitals having wage area index less than or equal to 1.00 will have the labor share percentage applied at 62.0%. Medicare published the Medicare impact file for FFY 2025 in October 2024 and it was used for the base prices for SFY 2025-26. Similarly, final changes to all DRG hospitals wage area, index value, or labor share calculation published for future federal fiscal years will be used for the state fiscal year beginning after the start of each respective federal fiscal year. All wage area index values were set as of July 1, 2025, and are effective for services provided on or after that date. All rates are published and can be viewed on the Medi-Cal DRG Pricing Calculator posted on the DHCS website at https://www.dhcs.ca.gov/provgovpart/pages/DRG.aspx.

1. The wage area adjustor is not applied to the hospital-specific transitional base price
   (determined in paragraph C.3 above).

2. After the hospital-specific transitional base price years, the CA wage area index values
   are capped to no more than a reduction of five percent, when compared to the provider’s wage area index value assignment for the previous SFY and after application of the CA wage area neutrality adjustment factor.

3. Policy Adjustors
   The implementation of APR-DRG Payment includes the functionality of policy adjustors. These adjustors are created to allow the DHCS to address any current, or future, policy goals and to ensure access to care is preserved. Policy adjustors may be used to enhance payment for services where Medi-Cal plays a major role. This functionality of policy adjustors allows DHCS the ability to ensure access to quality care is available for all services. A list of the current policy adjustors is reflected in Appendix 6 of Attachment 4.19-A. These policy adjustors are multipliers used to adjust payment weights for care categories. The projected financial impact of the policy adjustors was considered in developing budget-neutral base prices.

4. Cost Outlier Payments
   Outlier payments are determined by calculating the DRG Hospital's estimated cost and comparing it to the APR-DRG Payment to see if there is a loss or gain for the hospital for a discharge claim. The DRG Hospital's estimated cost on a discharge claim is determined by the following: The DRG Hospital's estimated cost may be determined by multiplying the Medi-Cal covered charges by the DRG Hospital's most currently accepted cost-to- charge ratio (CCR) from a hospital's CMS 2552-10 cost report. The CCR is calculated from a hospital's Medicaid costs (reported on worksheet E-3, part VII, line 4) divided by the Medicaid charges (reported on worksheet E-3, part VII, line 12). All hospital CCRs will be updated annually with an effective date of July 1, after the acceptance of the CMS 2552-10 by DHCS. Alternatively, a hospital (other than a new hospital or an out-of-state border or

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1. Separately Payable Services, Supplies, Devices, and Prescribed Drugs

2. A separate outpatient claim may be submitted for certain services, supplies, and
   devices as determined by DHCS, reflected in Appendix 6 of Attachment 4.19-A, and will be reimbursed in accordance with Attachment 4.19-B. b.A separate outpatient claim may be submitted for select prescribed drugs as determined by DHCS, reflected in Appendix 6 of Attachment 4.19-A, and will be reimbursed in accordance with Attachment 4.19-B, Section 12.a. (Prescribed drugs). c.Professional services furnished by provider-based physicians and practitioners should be billed as professional claims and are reimbursed outside of the DRG reimbursement. All physician professional services should be billed as professional claims.

3. Out-of-State Hospital Reimbursement
   For admissions beginning July 1, 2013, when acute inpatient medical services area. provided out-of-state pursuant to Section 2.7 of the State Plan and have been certified for payment at the acute level of an emergency nature for which prior Medi-Cal authorization has been obtained, then such inpatient services are reimbursed utilizing the statewide APR-DRG Base Price for the services provided. b.When Medi-Cal is required to provide acute inpatient services that are not available in the State to comply with paragraph (3) of part 431.52(b) of Title 42 of the Code of Federal Regulations, and the out-of-state hospital refuses to accept the APR-DRG rate, then DHCS may negotiate payment in excess of the APR-DRG rate for the acute inpatient services provided but no more than what the out-of-state hospital charges the general public. c.DHCS will adjust payment to out-of-state inpatient hospitals for provider preventable

' conditions, as described in Attachment 4.19-A. When treating a Medi-Cal

TN No. 16-011

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List of Hospitals Eligible to receive the “DRG- NICU- Surgery Policy Adjustor”

1. Hospitals approved to receive Policy Adjustor – NICU Surgery, status as of January 22, 2025: 1)California Pacific Medical Center - Pacific 2)Cedars Sinai Medical Center 3)Children’s Hospital & Research Center of Oakland (UCSF Benioff Oakland)

4)Children’s Hospital of Los Angeles

5)Children’s Hospital of Orange County

6)Citrus Valley Medical Central – Queen of the Valley 7)Community Regional Medical Center Fresno 8)Good Samaritan - San Jose 9) Huntington Memorial Hospital 10) Kaiser Anaheim 11) Kaiser Downey 12) Kaiser Fontana 13) Kaiser Foundation Hospital - Los Angeles 14) Kaiser Permanente Medical Center - Oakland 15) Kaiser Foundation Hospital – Roseville 16) Kaiser Permanente – Santa Clara 17) Kaiser Foundation Hospital San Diego 18) Loma Linda University Medical Center 19) Lucille Salter Packard Children’s Hospital – Stanford 20) Miller Children’s at Long Beach Memorial Medical Center 21) Pomona Valley Hospital Medical Center 22) Providence Tarzana Regional Medical Center 23) Rady Children’s Hospital - San Diego 24) Santa Barbara Cottage Hospital 25) Sutter Memorial Hospital 26) Valley Children’s Hospital

Appendix 6 to Attachment 4.19 – A Page 3a