Medicaid Program; Disproportionate Share Hospital Payments–Treatment of Third Party Payers in Calculating Uncompensated Care Costs

SUMMARY: This final rule addresses the hospital-specific limitation on Medicaid disproportionate share hospital (DSH) payments under section 1923(g)(1)(A) of the Social Security Act (Act), and the application of such limitation in the annual DSH audits required under section 1923(j) of the Act, by clarifying that the hospital-specific DSH limit is based only on uncompensated care costs. Specifically, this rule makes explicit in the text of the regulation, an existing interpretation that uncompensated care costs include only those costs for Medicaid eligible individuals that remain after accounting for payments made to hospitals by or on behalf of Medicaid eligible individuals, including Medicare and other third party payments that compensate the hospitals for care furnished to such individuals. As a result, the hospital-specific limit calculation will reflect only the costs for Medicaid eligible individuals for which the hospital has not received payment from any source.

EFFECTIVE DATE: These regulations are effective on June 2, 2017.

FOR FURTHER INFORMATION CONTACT: Wendy Harrison, (410) 786-2075.

SUPPLEMENTARY INFORMATION:

I. Background

A. Legislative History

Title XIX of the Act authorizes the Secretary of the Department of Health and Human Services (the Secretary) to provide grants to states to help finance programs furnishing medical assistance (state Medicaid programs) to specified groups of eligible individuals in accordance with an approved state plan. "Medical Assistance" is defined at section 1905(a) of the Act as payment for part or all of the cost of a list of specified care for eligible individuals. Section 1902(a)(13)(A)(iv) of the Act requires that payment rates for hospitals take into account the situation of hospitals that serve a disproportionate share of low-income patients with special needs. Section 1923 of the Act contains more specific requirements related to payments for such disproportionate share hospitals (DSH) payments. These specific statutory requirements include aggregate state level limits, hospital-specific limits, qualification requirements, and auditing requirements.

Under section 1923(b) of the Act, a hospital meeting the minimum qualifying criteria in section 1923(d) of the Act is deemed as a disproportionate share hospital (DSH). States have the option to define DSHs under the state plan using alternative qualifying criteria as long as the qualifying methodology comports with the deeming requirements of section 1923(b) of the Act. Subject to certain federal payment limits, states are afforded flexibility in setting DSH state plan payment methodologies to the extent that these methodologies are consistent with section 1923(c) of the Act.

Section 1923(f) of the Act limits federal financial participation (FFP) for total statewide DSH payments made to eligible hospitals in each federal fiscal year (FY) to the amount specified in an annual DSH allotment for each state. These allotments essentially establish a finite pool of available federal DSH funds that states use to pay the federal portion of payments to all qualifying hospitals in each state. As states often use most or all of their federal DSH allotment, in practice, if one hospital gets more DSH funding, other DSH-eligible hospitals in the state may get less.

B. Hospital-Specific DSH Limit

Section 13621 of the Omnibus Budget Reconciliation Act of 1993 (OBRA 93), which was signed into law on August 10, 1993, added section 1923(g) of the Act, limiting Medicaid DSH payments during a year to a qualifying hospital to the amount of uncompensated care costs for that same year. The Congress enacted the hospital-specific limit on DSH payments in response to reports that some hospitals received DSH payment adjustments that exceeded "the net costs, and in some instances the total costs, of operating the facilities." (H.R. Rep. No. 103-111, at 211-12 (1993), reprinted in 1993 U.S.C.C.A.N. 278, 538-39.) Such excess payments were inconsistent with the purpose of the Medicaid DSH payment, which is to ameliorate the real economic burden faced by hospitals that treat a disproportionate share of low-income patients and to ensure continued access to care for Medicaid patients. Accordingly, Congress imposed a hospital-specific limit that restricts Medicaid DSH payments to qualifying hospitals to the costs incurred by the hospital of providing inpatient and outpatient hospital services during the year to Medicaid eligible patients and individuals who have no health insurance or other source of third party coverage for the services provided during the year, net of Medicaid payments (other than Medicaid DSH) and payments by uninsured patients. The statute states that the costs of providing services are "as determined by the Secretary," and as further explained below, the Secretary has determined that "costs," as it is used in the statute, are costs net of third-party payments received for those services, including, but not limited to, payments by Medicare and private insurance. As a result, the hospital-specific limit will reflect only the amount of uncompensated care costs for that same year.

Congress revisited the DSH payment requirements in the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) (Pub. L. 108-173, enacted on December 8, 2003). The MMA added section 1923(j) to the Act, which requires states to report specified information about their DSH payments, including independent, certified audits that, among other elements, are required to review compliance with the hospital-specific limits under section 1923(g)(1)(A) of the Act. Significantly, section 1923(j)(2)(C) of the Act provides a gloss on section 1923(g)(1)(A), by specifying that the audits must verify that only the uncompensated care costs of providing inpatient hospital and outpatient hospital services to individuals described in paragraph (1)(A) of such subsection [1923(g) of the Act] are included in the calculation of the hospital-specific limits under such subsection. Until the establishment of an audit requirement, there was no standardization among the states as to how the hospital-specific limit was calculated. In the late 1990's and early 2000's the Government Accountability Office (GAO) and the U.S. Department of Health and Human Services Office of Inspector General (OIG) issued a series of reports focusing on the hospital-specific DSH limit. Among other findings, the GAO and OIG reports identified multiple instances where states included unallowable costs or did not account for costs net of applicable payments when determining the hospital-specific limits. These reviews and audits led to the enactment, as part of the MMA, of the audit requirements at section 1923(j) of the Act. Section 1923(j) of the Act not only required that we issue standardized audit methods and procedures, it also provided clarity on how the hospital-specific limit should be applied. Specifically, section 1923(j)(2)(C) of the Act provides that only the uncompensated care costs of providing inpatient hospital and outpatient hospital services to individuals (described in section 1923(g)(1)(A of the Act) are included in the calculation of the hospital-specific limits under section 1923(g)(1)(A) of the Act. This provision makes clear that Congress intended that the hospital-specific limit at section 1923(g)(1) of the Act only includes uncompensated care costs. And it also makes clear that FFP is not available for DSH payments that exceed a hospital's hospital-specific limit. In passing OBRA 93 and the hospital-specific DSH limit, Congress contemplated that hospitals with "large numbers of privately insured patients through which to offset their operating losses on the uninsured" may not warrant Medicaid DSH payments (H. Rep. 103-111, p. 211).

C. The 2008 DSH Final Rule and Subsequent Policy Guidance

Section 1001 of the MMA required annual state reports and audits to ensure the appropriate use of Medicaid DSH payments and compliance with the DSH limit imposed at section 1923(g) of the Act.

In the August 26, 2005, Federal Register we published the "Medicaid Program; Disproportionate Share Hospital Payments" proposed rule (70 FR 50262) to implement the annual DSH audit and reporting requirements established or amended by the MMA. During the public comment period, one commenter requested clarification regarding the treatment of individuals dually eligible for Medicaid and Medicare for purposes of calculating the hospital-specific DSH limit. We responded to this comment in the "Medicaid Disproportionate Share Hospital Payments" final rule (73 FR 77904) (herein referred to as the 2008 DSH final rule) published in the December 19, 2008 Federal Register . As section 1923(g) of the Act limits DSH payments on a hospital-specific basis to "uncompensated costs," the response to the comment clarified that all costs and payments associated with individuals dually eligible for Medicare and Medicaid, including Medicare payments received by the hospital on behalf of the patients, must be included in the calculation of the hospital-specific DSH limit. In other words, the extent to which a hospital receives Medicare payments for services rendered to Medicaid eligible patients must be accounted for in determining uncompensated care costs for those services. 6

--This is a summary of a Federal Register article originally published on the page number listed below--

Final rule.

CFR Part: "42 CFR Part 447"

RIN Number: "RIN 0938-AS92"

Citation: "82 FR 16114"

Document Number: "CMS-2399-F"

Federal Register Page Number: "16114"

"Rules and Regulations"