Virginia Rebase Process Used to Calculate Medicaid Rates for State Fiscal Years 2001 Through 2003

EXECUTIVE SUMMARY:

Our objective was to determine whether Virginia used allowable cost report data to establish rates used to calculate Medicaid diagnosis-related group (DRG) base and outlier payments to the two State-owned teaching hospitals during State fiscal years (FY) 2001 through 2003. Virginia did not use allowable cost report data to establish rates used to calculate Medicaid DRG base and outlier payments to State-owned teaching hospitals. Instead, Virginia used as-filed cost report data, which included overstated bed days and other unallowable costs, to develop the hospital-specific operating rates per case and cost-to-charge ratios. If Virginia had used tentatively settled cost report data it would have reduced payments to the two State-owned teaching hospitals by $18,088,512 ($9,351,348 Federal share) during State FYs 2001 through 2003. We recommended that Virginia consider amending its State plan to revise the operating rates per case and cost-to-charge ratios when material misstatements in a hospital's base-year cost report data are identified after the State rebases. Virginia did not concur with the specific recommendation. However, Virginia stated that it has taken steps to reduce the possibility of using cost-to-charge ratios with material misstatements in the context of the rebasing process.