CMS Issues Proposed DSH Rule on Calculation of Hospital Uncompensated Care Costs

Authors: Deborah Bachrach | Anne O'Hagen Karl

On January 18, 2012, the Centers for Medicare and Medicaid Services (“CMS”) published a proposed rule addressing the calculation of the hospital-specific cap on Medicaid disproportionate share hospital (“DSH”) payments.  Although CMS describes the proposed rule as largely a clarification of existing policy, the rule has important implications for both states and hospitals with respect to the 2008 DSH audit requirements, as well as the procedures the Secretary of the Department of Health and Human Services (“HHS”) will follow in allocating among states the impending roughly 50 percent reduction in federal matching funds available for DSH payments required by the Patient Protection and Affordable Care Act (“ACA”). 

While the Social Security Act (the "Act") provides states with significant flexibility in allocating DSH payments among hospitals, Act limits the total amount a state may receive in federal matching funds for DSH payments on both a statewide basis and a hospital-specific basis.  Under the hospital cap, DSH payments to any specific hospital may not exceed the hospital’s uncompensated care costs—the sum of costs incurred to provide services to Medicaid and uninsured patients less payments received for those patients.  Only the hospital’s inpatient and outpatient costs—and not, for example, physician costs—may count toward a hospital’s uncompensated care costs for the purposes of calculating the hospital’s DSH cap.  Additionally, all Medicaid payments that a hospital receives, including lump-sum supplemental payments, count as payments received for providing care to patients, thereby reducing a hospital’s uncompensated care costs for DSH purposes.

Reflecting ongoing concerns about state DSH payment policies, in 2003 Congress imposed a requirement that states identify each hospital receiving a DSH payment and the amount of that payment along with such other information as HHS determines necessary to ensure the appropriateness of DSH payments.  Congress also required that each state have its DSH programs independently audited and that the audit verify that the DSH payments complied with applicable federal law and rules.  In August 2005 HHS announced proposed rules implementing the audit requirements.  HHS published its final rule implementing the audit requirements in December 2008.

The 2008 final rule clarified, among other things, which patients may be considered “individuals who have no health insurance (or other source of third-party coverage) for services furnished during the year” for the purposes of calculating the hospital-specific DSH cap. Specifically, the preamble to the final rule indicated that CMS considers uninsured patients to be those individuals who do not have creditable coverage, as defined by the rules implementing requirements of the Health Insurance Portability and Accountability Act of 1996.

The Proposed Rule
Responding to concerns with the 2008 final rule expressed by states and hospitals, CMS issued the proposed rule to clarify which patients should be considered uninsured for the purposes of calculating a hospital-specific DSH cap.  Under the proposed rule, “uninsured patients” are patients who do not have coverage for the specific hospital service they receive.  If a patient’s health insurance does not cover, for example, transplants, and the patient receives a transplant, then the hospital may count the costs of the transplant as part of their uncompensated care costs.  Similarly, the proposed rule clarifies that the costs of services provided after an individual has exhausted benefit limits or exceeded the policy’s annual or lifetime limits may also count as part of the hospital’s uncompensated care costs.  Additionally, the proposed rule, like the 2008 final rule and the ACA, expressly states that costs associated with bad debt, including unpaid co-insurance, unpaid deductibles, or payer discounts, may not be included as uncompensated care costs.

Finally, the proposed rule clarifies how the definition of uninsured patients applies to prisoners and Native Americans.  Under the proposed rule, prisoners are not considered uninsured, since the federal, state, or local law enforcement agency that has custody of the prisoner has the legal responsibility to pay for the costs of the prisoner’s care.  As a result, costs associated with providing care to prisoners may not count as uncompensated care costs.  The proposed rule also clarifies that Native Americans are considered covered by Indian Health Service (“IHS”) or tribal health programs only when they receive services directly from IHS or a tribal health program or when IHS or a tribal health program has authorized coverage through a contract health service program.  Other services that a hospital provides to Native Americans who do not have other third-party coverage may be counted as uncompensated care costs.

Conclusion
CMS’s decision to allow hospitals to include the costs of uncovered services provided to patients that are otherwise insured is an important clarification long sought by hospitals.  However, implementation of the ACA will generate new questions, chief among them being the effect of the individual mandate.  Starting in 2014, individuals will be required to have minimum essential coverage unless they receive a waiver of the individual mandate because they cannot afford the coverage.  Under the proposed rule, it is unclear whether an individual who receives an affordability waiver of the individual mandate would be considered uninsured for purposes of calculating a hospital’s DSH cap.  Likewise, it is unclear whether an individual who fails to purchase coverage but has not received an affordability waiver would be considered uninsured for purposes of DSH.  Another question that arises with respect to the definition of uninsured after implementation of the ACA is how to treat an individual whose health plan covers the required essential health benefits (“EHBs”) but the individual requires services beyond those provided under the EHBs.  Will the hospital’s costs of providing those additional services be considered uncompensated care for purposes of the DSH cap?

Finally, the proposed rule has implications for states seeking to minimize reductions in their statewide DSH caps under the ACA.  As noted above, the ACA provides for a roughly 50 percent reduction in federal matching funds available for DSH payments.  Under the ACA, the HHS Secretary will develop a methodology to reduce funding to states that will apply the largest reductions in state DSH allotments to states that (i) have the lowest uninsured rates, (ii) have the lowest levels of uncompensated care, and (iii) do not target DSH payments to hospitals with high volumes of Medicaid inpatient care.  The proposed rule’s clarification of which patients may be considered uninsured and what costs may count as uncompensated care costs will no doubt inform the Secretary’s allocation of the ACA’s DSH reductions among states.