Unlocking the Mystery of Rate Setting

Pink background with graphic representation of a stack of coins with a dollar side next to a circle with the percent sign with an arrow going around it.

Rate setting is the process that Medicaid systems use to create reimbursement rates for services provided. Many factors are taken into consideration during the development of rates. It’s meant to standardize the many costs associated with service delivery. Providers are asked to stay reasonably within those standards.  

The Process Involves 3 Major Components: 

  1. Defining the Service Including the delivery unit of service
  2. Identifying Key Cost Components Provided as assumptions from the funders
  3. Calculation Of the costs per unit of delivery, which considers the unit of service and its relationship to other factors

Rate setting can be somewhat hard to understand. This blog will attempt to explain the above:

Defining the Service 

Service definitions explain how a service is delivered and lists the goals and outcomes of the service. Delivery can be “direct” or “indirect” depending on the type of service.

Direct services are those provided in person face to face to by a services professional. Direct service can be provided to an individual or to a small group with similar needs.

Indirect services are not provided face to face. A service professional provides these services to others who are working directly with a person with a disability. Indirect services may include, but not be limited to activities such as:

  • Staff consultation with medical professionals and or other professionals in the field 
  • Supervision of Direct Support workers and doing related paperwork 
  • Paperwork related to documentation of the work done on behalf of a person with a disability.  
  • Monitoring progress of a person to achieve a goal 
  • Monitoring equipment or assistive technology 

Identifying key cost components  

Key cost components related to providing the service include the following: 

Wages and Salaries: When building a rate, an assumed wage range is often provided by funders. The wage range includes a low rate for entry level employees, and a high rate for more experienced employees.

Employment Related Expenses (ERE) – Employer paid benefits are a function of wages and salaries. These can be expressed as a percentage of wages or, calculated as a flat amount based on a Full Time Equivalents. Examples of employment related expenses include Social Security, unemployment insurance, worker’s compensation costs, and life and disability insurance.

Supporting Costs: Supporting Costs are other expenses paid to provide the service that. They are separate from wages and employment relates expenses. They may include living arrangement costs, supplies, communications, transportation, equipment, and repairs.  

Indirect Program Costs: These include the costs of recruiting staff, the personnel involved, and the costs of providing an office and/or other space to provide them.

General Administrative costs: These are indirect costs evenly distributed across an organization. This includes executive leadership, accounting, service billing, financial reporting, auditing, and tax preparation. These costs can be expressed as a percentage of total costs.

In PA, rates are also based on market data and are scheduled to be updated every three years.

For more information on rate assumptions, please contact any member of the Fiscal team.