Annual Inpatient Hospital Rate Setting & Policy Simulation
2025-2026A claim-level rate-setting pipeline and four-scenario policy simulation using two years of inpatient claims to update hospital payment rates, quantify provider-level tradeoffs, and support selection of a model affecting roughly $148 million in modeled payments.
Problem
A Medicaid agency needed to set annual inpatient hospital rates while moving to a new version of its APR-DRG methodology and responding to changes in rural hospital services and provider participation. The agency had to balance budget neutrality, hospital cost coverage, outlier policy, and access goals without relying on a single statewide rate change that obscured material differences across hospital groups.
Approach
Built and ran a repeatable SAS rate-setting pipeline using inpatient claims data, hospital Medicare cost reports, inflation factors, and APR-DRG relative weights. The pipeline regrouped claims under both the current and new DRG versions, estimated claim-level costs and cost-to-charge ratios, recalculated outlier thresholds, established budget targets, and generated provider- and service-level validation outputs.
Modeled four rate-setting alternatives across roughly 14,400 inpatient stays, including separate base-rate treatment based on hospital service availability, updated outlier thresholds, provider service changes, and newly participating hospitals without historical claims. Compared each scenario by hospital category, payment-to-cost ratio, case mix, base payment, and outlier payment so agency leaders could see the financial and policy tradeoffs before selecting rates.
Outcome
The analysis enabled the agency to select a final rate model and ultimately implement new base rates covering roughly $148 million in modeled inpatient payments. The selected rates preserved a budget-neutral base rate for most hospital categories while directing additional budgeted reimbursement to rural hospitals providing obstetrics and maternity services, bringing that hospital group’s modeled payments to 100% of estimated cost in aggregate.
The same pipeline established a reusable annual process for claims preparation, DRG-version migration, costing, simulation, validation, and provider-level review, allowing future rate cycles and policy alternatives to be refreshed instead of rebuilt.