[Federal Register Volume 81, Number 157 (Monday, August 15, 2016)]
[Proposed Rules]
[Pages 53980-53985]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-19107]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 447

[CMS-2399-P]
RIN 0938-AS92


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

AGENCY: Centers for Medicare & Medicaid Services (CMS), HHS.

ACTION: Proposed rule.

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[[Page 53981]]

SUMMARY: This proposed 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 would make clearer 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 received by 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 would reflect only the 
costs for Medicaid eligible individuals for which the hospital has not 
received payment from any source (other than state or local 
governmental payments for indigent patients).

DATES: To be assured consideration, comments must be received at one of 
the addresses provided below, no later than 5 p.m. September 14, 2016.

ADDRESSES: In commenting please refer to file code CMS-2399-P. Because 
of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission.
    You may submit comments in one of four ways (please choose only one 
of the ways listed):
    1. Electronically. You may submit electronic comments on this 
regulation to http://www.regulations.gov. Follow the ``Submit a 
comment'' instructions.
    2. By regular mail. You may mail written comments to the following 
address ONLY: Centers for Medicare & Medicaid Services, Department of 
Health and Human Services, Attention: CMS-2399-P, P.O. Box 8016, 
Baltimore, MD 21244-8016.
    Please allow sufficient time for mailed comments to be received 
before the close of the comment period.
    3. By express or overnight mail. You may send written comments to 
the following address ONLY: Centers for Medicare & Medicaid Services, 
Department of Health and Human Services, Attention: CMS-2399-P, Mail 
Stop C4-26-05, 7500 Security Boulevard, Baltimore, MD 21244-1850.
    4. By hand or courier. Alternatively, you may deliver (by hand or 
courier) your written comments ONLY to the following addresses prior to 
the close of the comment period: a. For delivery in Washington, DC--
Centers for Medicare & Medicaid Services, Department of Health and 
Human Services, Room 445-G, Hubert H. Humphrey Building, 200 
Independence Avenue SW., Washington, DC 20201.
    (Because access to the interior of the Hubert H. Humphrey Building 
is not readily available to persons without federal government 
identification, commenters are encouraged to leave their comments in 
the CMS drop slots located in the main lobby of the building. A stamp-
in clock is available for persons wishing to retain a proof of filing 
by stamping in and retaining an extra copy of the comments being 
filed.)
    b. For delivery in Baltimore, MD--Centers for Medicare & Medicaid 
Services, Department of Health and Human Services, 7500 Security 
Boulevard, Baltimore, MD 21244-1850.
    If you intend to deliver your comments to the Baltimore address, 
call telephone number (410) 786-7195 in advance to schedule your 
arrival with one of our staff members.
    Comments erroneously mailed to the addresses indicated as 
appropriate for hand or courier delivery may be delayed and received 
after the comment period.
    For information on viewing public comments, see the beginning of 
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT: Wendy Harrison, (410) 786-2075 and 
Rory Howe, (410) 786-4878.

SUPPLEMENTARY INFORMATION: Inspection of Public Comments: All comments 
received before the close of the comment period are available for 
viewing by the public, including any personally identifiable or 
confidential business information that is included in a comment. We 
post all comments received before the close of the comment period on 
the following Web site as soon as possible after they have been 
received: http://regulations.gov. Follow the search instructions on 
that Web site to view public comments.
    Comments received timely will also be available for public 
inspection as they are received, generally beginning approximately 3 
weeks after publication of a document, at the headquarters of the 
Centers for Medicare & Medicaid Services, 7500 Security Boulevard, 
Baltimore, Maryland 21244, Monday through Friday of each week from 8:30 
a.m. to 4 p.m. To schedule an appointment to view public comments, 
phone 1-800-743-3951.

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 DSH if 
it meets certain criteria. States have the option to define 
disproportionate share hospitals 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 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 eligible uncompensated care costs 
during that same year. The Congress enacted the hospital-specific limit 
on DSH payments in response to reports that some hospitals received

[[Page 53982]]

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 for 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. Costs for providing services are 
``as determined by the Secretary'' and are to be net of applicable 
payments received for those services.
    The Congress revisited the DSH payment requirements in the Medicare 
Prescription Drug, Improvement, and Modernization Act of 2003 (MMA), 
Public Law 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)(B) 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 cost 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 promulgate standardized audit methods and 
procedures, it also provided clarity on how the hospital-specific limit 
should be applied. The Congress explicitly addressed any ambiguity 
about whether the hospital-specific limit could include costs that have 
been compensated by payers other than the individual or the Medicaid 
program. Section 1923(j)(2)(C) of the Act specifically 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 the Congress itself specified the hospital-
specific limit at section 1923(g)(1) of the Act to include only 
uncompensated care costs.
    As a result, it is clear that the Congress intended that FFP is not 
available for DSH payments that exceed a hospital's hospital-specific 
limit. The hospital-specific limit prevents hospitals from receiving 
DSH payments above the level of any net uncompensated cost incurred in 
the treatment of Medicaid eligible or uninsured individuals.
    As indicated in a 2008 final rule describing the required DSH audit 
process, 73 FR 77904, 77926 (December 19, 2008), to be considered an 
inpatient or outpatient hospital service for purposes of Medicaid DSH, 
a service must meet the federal and state definitions of an inpatient 
hospital service or outpatient hospital service and must be included in 
the state's definition of an inpatient hospital service or outpatient 
hospital service under the approved state plan and reimbursed under the 
state plan as an inpatient hospital or outpatient hospital service. 
While a state may have some flexibility to define the scope of 
inpatient or outpatient hospital services covered by the state plan, a 
state must use consistent definitions. Hospitals may engage in any 
number of activities, or may furnish practitioner, nursing facility, or 
other services to patients that are not within the scope of inpatient 
hospital services or outpatient hospital services and are not paid as 
such. These services are not considered inpatient or outpatient 
hospital services for purposes of calculating the Medicaid hospital-
specific DSH limit. In passing OBRA 93 and the hospital-specific DSH 
limit, the 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 Medicare Prescription Drug, Improvement and 
Modernization Act of 2003 (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 a proposed 
rule entitled, ``Medicaid Program; Disproportionate Share Hospital 
Payments'' (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 final rule published in the Federal 
Register on December 19, 2008, entitled ``Medicaid Disproportionate 
Share Hospital Payments'' (73 FR 77904) (herein referred to as the 2008 
DSH final rule). 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. 
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.
    Following the publication of the 2008 DSH final rule, we received 
numerous questions from interested parties regarding the treatment of 
costs and payments associated with dual eligibles and Medicaid eligible 
individuals who also have a source of third party coverage (for 
example, coverage from a private insurance company) for purposes of 
calculating uncompensated care costs. We posted additional policy 
guidance titled ``Additional Information on the DSH Reporting and Audit 
Requirements'' on the Medicaid Web site at https://www.medicaid.gov/
medicaid-chip-program-information/by-topics/financing-and-
reimbursement/

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downloads/part-1-additional-info-on-dsh-reporting-and-auditing.pdf 
providing that all costs and payments associated with dual eligibles 
and individuals with a source of third party coverage must be included 
in calculating the hospital-specific DSH limit, as section 1923(g) of 
the Act limits DSH payments to ``uncompensated'' care costs. This 
additional guidance was based upon the policy articulated in the 2008 
final rule and sub-regulatory guidance issued to all state Medicaid 
directors on August 16, 2002.
    In the August 16, 2002, letter to state Medicaid directors, we 
directed that when a state calculates the uninsured costs and the 
Medicaid shortfall for the OBRA 93 uncompensated care cost limits, it 
must reflect a hospital's costs of providing services to Medicaid 
patients and the uninsured, net of Medicaid payments (except DSH) made 
under the state plan and net of third party payments. Medicaid 
payments, include but are not limited to regular Medicaid fee-for-
service rate payments, any supplemental or enhanced payments and 
Medicaid managed care organization payments. The guidance also stated 
that not recognizing these payments would overstate a hospital's amount 
of uninsured costs and Medicaid shortfall, thus inflating the OBRA 93 
uncompensated care cost limits for that particular hospital. As state 
DSH payments are limited to an annual federal allotment, this policy is 
necessary to ensure that limited DSH resources are allocated to 
hospitals that have a net financial shortfall in serving Medicaid 
patients.
    Prior to the 2008 final rule, some states and hospitals were 
excluding both costs and payments associated with Medicaid eligible 
individuals with third party coverage, including Medicare, when 
calculating hospital-specific DSH limits (or were including costs while 
not including payments). This practice led to the artificial inflation 
of uncompensated care costs and, correspondingly, of hospital-specific 
DSH limits and permitted some hospitals to be paid based on the same 
costs by two payers--once by Medicare or other third party payer and 
once by Medicaid. The clarification included in the final rule and 
associated implementation promotes fiscal integrity and equitable 
distribution of DSH payments among hospitals by preventing payment to 
DSH hospitals based on costs that are covered by Medicare or a private 
insurer. It also promotes program integrity by ensuring that hospitals 
receive Medicaid DSH payments only up to the actual uncompensated care 
costs incurred in providing inpatient and outpatient hospital services 
to Medicaid eligible individuals or individuals with no health 
insurance or other source of third party coverage.
    Given the timing of the final rule and audit requirements, we 
recognized that there could have been a retroactive impact on some 
states and hospitals if the requirements had been imposed immediately. 
To ensure that states and hospitals did not experience any immediate 
adverse fiscal impact due to the publication of the DSH audit and 
reporting final rule and to foster development and refinement of 
auditing techniques, we included a transition period in the final rule. 
During this transition period, states were not required to repay FFP 
associated with Medicaid DSH overpayments identified through the annual 
DSH audits. The final rule allowed for a 3 year period between the 
close of the state plan rate year and when the final audit was due to 
us, which meant that audits for state plan rate year 2008 were not due 
to us until December 31, 2011. Recognizing that states would be 
auditing state plan rate years that closed prior to publication of the 
final rule, we stated in the final rule that there would be no 
financial implications until the audits for state plan rate year 2011 
were due to us on December 31, 2014. This allowed states and hospitals 
to adjust to the audit requirements and make adjustments as necessary. 
This resulted in a transition period for the audits associated with 
state plan rate years 2005 through 2010.
    The 2008 DSH final rule also reiterated our policy that costs and 
payments are treated on an aggregate, hospital-specific basis. For 
purposes of this hospital-specific limit calculation, any Medicaid 
payments, including but not limited to regular Medicaid fee-for-service 
rate payments, supplemental/enhanced Medicaid payments, and Medicaid 
managed care organization payments, made to a disproportionate share 
hospital for furnishing inpatient and outpatient hospital services to 
Medicaid eligible individuals, which are in excess of the Medicaid 
incurred costs for these services, are applied against the total 
uncompensated care costs of furnishing inpatient and outpatient 
hospital services to individuals with no source of third party coverage 
for such services.
    In this policy verification, we explicitly acknowledge there will 
be instances where Medicaid payments will be greater than the cost of 
treating Medicaid eligible patients. However, to avoid overstating the 
hospital-specific limit, we nonetheless require that all Medicaid 
payments be included in the calculation, explaining that any ``excess'' 
payments will be applied against the uncompensated care costs that 
result from the uninsured calculation. The same principle applies to 
payments received from third party payers that exceed the cost of the 
service provided to a particular Medicaid eligible individual. All 
third party payments (including, but not limited to, payments by 
Medicare and private insurance) must be included in the calculation of 
uncompensated care costs for purposes of determining the hospital-
specific DSH limit, regardless of what the Medicaid incurred cost is 
for treating the Medicaid eligible individual. For example, if a 
hospital treats two Medicaid eligible patients at a cost of $2,000 and 
receives a $500 payment from a third party for each individual and a 
$100 payment from Medicaid for each individual, the total uncompensated 
care cost to the hospital for is $800, regardless of whether the 
payments received for one patient exceeded the cost of providing the 
service to that individual.
    Subsequent to both the 2008 DSH final rule and the interpretive 
issued guidance, multiple states, hospitals, and other stakeholders 
expressed concern regarding this policy and requested clarification. In 
addition to requests for clarification, some states have challenged 
this policy. We have disapproved one state plan amendment proposing to 
exclude the portion of a Medicare payment that exceeds the cost 
providing a service to a dual eligible and one state plan amendment 
proposing to exclude the portion of a third party commercial that 
exceeds the cost providing a service to a Medicaid eligible individual 
with private insurance coverage. Additionally, some hospitals and state 
governments have sued us regarding the treatment of third party payers 
in calculating uncompensated care costs.
    In light of the statutory requirement limiting DSH payments on a 
hospital-specific basis to uncompensated care costs, it is inconsistent 
with the statute to assist hospitals with costs that have already been 
compensated by third party payments. This proposed rule is designed to 
reiterate the policy and make explicit within the terms of the 
regulation that all costs and payments associated with dual eligibles 
and individuals with a source of third party coverage must be included 
in calculating the hospital-specific DSH limit. This policy is 
necessary to ensure that only actual uncompensated care costs are 
included in the Medicaid hospital-specific DSH limit. And,

[[Page 53984]]

because state DSH payments are limited to an annual federal allotment, 
this policy is also necessary to ensure that limited DSH resources are 
allocated to hospitals that have a net financial shortfall in serving 
Medicaid patients.
    In a simplified example, consider a state that has only two 
hospitals. The first hospital treated only patients who were either 
uninsured or eligible for Medicaid, and received no payments other than 
from Medicaid. The hospital-specific limit for this hospital would be 
equal to the hospital's total costs of treating its patients through 
inpatient hospital or outpatient hospital services minus the non-DSH 
Medicaid payments. The second hospital, on the other hand, treated only 
patients who were either uninsured or dually eligible for Medicaid and 
Medicare, and received no payments other than from Medicaid and 
Medicare. Under 1902(a)(13)(A)(iv) of the Act, the ``situation'' of the 
second hospital that receives comparatively generous payments from 
Medicare for the dual eligibles is relevantly different than the 
``situation'' of the first hospital that has not received such 
payments. Our policy--that Medicare and other third party payments must 
be taken into account when determining a hospital's costs for the 
purpose of calculating Medicaid DSH payments--ensures that the DSH 
payment reflects the real economic burden of hospitals that treat a 
disproportionate share of low-income patients (i.e. the ``situation'' 
of the hospitals). Turning back to the example, the hospital-specific 
limit for the second hospital must take into account both the Medicaid 
and Medicare payments. If the hospital-specific limit did not take into 
account the Medicare payments, the second hospital would be able to 
receive DSH dollars in excess of its uncompensated care costs. As 
federal DSH funding is limited by the state-wide DSH allotment, the 
excess DSH payments to the second hospital may be at the expense of the 
first hospital, which could otherwise receive these DSH dollars.

II. Specific Proposed Regulatory Changes

A. Treatment of Payments Associated With Dual Eligibles and Medicaid 
Eligible Individuals With a Source of Third Party Coverage Under 
Section 1923(g) of the Act

    We are proposing to clarify the hospital-specific limitation on 
Medicaid DSH payments under section 1923(g)(1)(A) of the Act and annual 
DSH audit requirements under section 1923(j) of the Act. Specifically, 
this rule proposes to modify the terms of the current regulation to 
make it explicit that ``costs'' for purposes of calculating hospital-
specific DSH limits are costs net of third-party payments received.
    We are proposing at Sec.  447.299 to clarify the definition of 
``Total cost of care for Medicaid IP/OP services'' to specify that the 
total annual costs of inpatient hospital and outpatient hospital (IP/
OP) services must account for all third party payments, including, but 
not limited to payments by Medicare and private insurance.
    We are aware of at least one court that has questioned whether it 
is a permissible interpretation of the statute to take third party 
payments into account when calculating the uncompensated care costs of 
treating Medicaid patients. The court reasoned that because Congress 
had expressly stated that costs must be net of Medicaid payments, it 
was unreasonable to interpret the statute as allowing other payments, 
not specifically mentioned, to be taken into account. At this time, we 
respectfully disagree. We believe that our interpretation--that all 
third party payments should be taken into account--better reflects the 
real economic burden of hospitals that treat a disproportionate share 
of low-income patients, and accordingly, better facilitates the 
Congressional directive of section 1923 of the Act in general and the 
hospital-specific limit in particular. Additionally, we believe that 
the statutory language indicating that costs are ``as determined by the 
Secretary'' gives us the discretion to take Medicare and other third 
party payments into account when determining a hospital's costs for the 
purpose of calculating Medicaid DSH payments. Nevertheless, in light of 
the court's opinion, we request comments on this issue.

III. Collection of Information Requirements

    This document does not impose new information collection and 
recordkeeping requirements, though states will continue to be required 
to meet annual reporting requirements in 42 CFR 447.299. The burden for 
these requirements is currently approved under OMB #0938-0746 with an 
expiration date of March 31, 2017. Consequently, this proposed rule 
need not be reviewed by the Office of Management and Budget under the 
authority of the Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 
35).

IV. Response to Comments

    Because of the large number of public comments we normally receive 
on Federal Register documents, we are not able to acknowledge or 
respond to them individually. We will consider all comments we receive 
by the date and time specified in the DATES section of this preamble, 
and, when we proceed with a subsequent document, we will respond to the 
comments in the preamble to that document.

V. Regulatory Impact Statement

A. Statement of Need

    This proposed regulation would ensure that only the uncompensated 
care costs for covered services provided to Medicaid eligible 
individuals are included in the calculation of the hospital-specific 
DSH limit, as required by section 1923(g) of the Act.

B. Overall Impact

    We have examined the impacts of this rule as required by Executive 
Order 12866 on Regulatory Planning and Review (September 30, 1993), 
Executive Order 13563 on Improving Regulation and Regulatory Review 
(January 18, 2011), the Regulatory Flexibility Act (RFA) (September 19, 
1980, Pub. L. 96 354), section 1102(b) of the Social Security Act, 
section 202 of the Unfunded Mandates Reform Act of 1995 (March 22, 
1995; Pub. L. 104-4), Executive Order 13132 on Federalism (August 4, 
1999) and the Congressional Review Act (5 U.S.C. 804(2).
    Executive Orders 12866 and 13563 direct agencies to assess all 
costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). Section 
3(f) of Executive Order 12866 defines a ``significant regulatory 
action'' as an action that is likely to result in a rule: (1) (Having 
an annual effect on the economy of $100 million or more in any 1 year, 
or adversely and materially affecting a sector of the economy, 
productivity, competition, jobs, the environment, public health or 
safety, or state, local or tribal governments or communities (also 
referred to as ``economically significant''); (2) creating a serious 
inconsistency or otherwise interfering with an action taken or planned 
by another agency; (3) materially altering the budgetary impacts of 
entitlement grants, user fees, or loan programs or the rights and 
obligations of recipients thereof; or (4) raising novel legal or policy 
issues arising out of legal mandates, the President's priorities, or

[[Page 53985]]

the principles set forth in the Executive Order.
    A regulatory impact analysis (RIA) must be prepared for major rules 
with economically significant effects ($100 million or more in any 1 
year). This rule does not reach the economic threshold and thus is not 
considered a major rule.
    The RFA requires agencies to analyze options for regulatory relief 
for small entities, and if a rule has a significant impact on a 
substantial number of small entities. For purposes of the RFA, small 
entities include small businesses, nonprofit organizations, and small 
government jurisdictions. The great majority of hospitals and most 
other health care providers and suppliers are small entities, either by 
being nonprofit organizations or by meeting the SBA definition of a 
small business (having revenues of less than $7.5 million to $38.5 
million in any 1 year).
    We are not preparing an analysis for the RFA because we have 
determined, and the Secretary certifies, that this proposed rule would 
not have a significant economic impact on a substantial number of small 
entities.
    In addition, section 1102(b) of the Act requires us to prepare a 
regulatory impact analysis if a rule may have a significant impact on 
the operations of a substantial number of small rural hospitals. This 
analysis must conform to the provisions of section 603 of the RFA. For 
purposes of section 1102(b) of the Act, we define a small rural 
hospital as a hospital that is located outside of a Metropolitan 
Statistical Area for Medicare payment regulations and has fewer than 
100 beds. We are not preparing an analysis for section 1102(b) of the 
Act because we have determined, and the Secretary certifies, that this 
proposed rule would not have a significant impact on the operations of 
a substantial number of small rural hospitals.
    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) also 
requires that agencies assess anticipated costs and benefits before 
issuing any rule whose mandates require spending in any 1 year of $100 
million in 1995 dollars, updated annually for inflation. In 2016, that 
is approximately $146 million. Since this rule would not mandate 
spending costs on state, local, or tribal governments in the aggregate, 
or by the private sector over the threshold of $146 million or more in 
any 1 year, the requirements of the UMRA are not applicable.
    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a proposed rule (and subsequent 
final rule) that imposes substantial direct requirement costs on state 
and local governments, preempts state law, or otherwise has federalism 
implications. Since this regulation does not impose any costs on state 
or local governments, the requirements of Executive Order 13132 are not 
applicable.

C. Anticipated Effects

1. Effects on State Medicaid Programs
    Because this is not a change in policy, we do not anticipate that 
this proposed rule would have significant financial effects on state 
Medicaid programs. This rule would only make explicit within the terms 
of the regulation that ``costs'' for purposes of section 1923(g) of the 
Act are costs net of third-party payments.
2. Effects on Other Providers
    Because this is not a change in policy, we do not anticipate that 
this proposed rule would have significant financial effects on other 
providers. This rule would only make explicit within the regulation 
that ``costs'' for purposes of section 1923(g) of the Act are costs net 
of amounts that have been paid by third parties and will ensure a more 
equitable distribution of Medicaid DSH payments within each state.

D. Alternatives Considered

    We considered not proposing this rule. However, numerous states and 
other stakeholders have requested clarification regarding this 
requirement. Accordingly, we are proposing to make explicit within the 
terms of our regulation our existing policy that implements section (j) 
of the Act, in part.
    Additionally, we considered issuing additional policy guidance 
through sub-regulatory means, such as a letter to all state Medicaid 
directors. However, we anticipate that modifying the regulatory text of 
42 CFR part 447 is as clear and comprehensive as possible on this 
issue, avoiding any need for future clarification.

List of Subjects in 42 CFR Part 447

    Accounting, Administrative practice and procedure, Drugs, Grant 
programs-health, Health facilities, Health professions, Medicaid, 
Reporting and recordkeeping requirements, Rural areas.

    For the reasons set forth in the preamble, the Centers for Medicare 
& Medicaid Services proposes to amend 42 CFR chapter IV as set forth 
below:

PART 447--PAYMENTS FOR SERVICES

0
1. The authority citation for part 447 continues as follows:

    Authority: Sec. 1102 of the Social Security Act (42 U.S.C. 
1302).

0
2. Section 447.299 is amended by revising paragraph (c)(10) to read as 
follows:


Sec.  447.299  Reporting requirements.

* * * * *
    (c) * * *
    (10) Total Cost of Care for Medicaid IP/OP Services. The total 
annual costs incurred by each hospital for furnishing inpatient 
hospital and outpatient hospital services to Medicaid eligible 
individuals. The total annual costs are determined on a hospital-
specific basis, not a service-specific basis. For purposes of this 
section, costs--
    (i) Are defined as costs net of third-party payments, including, 
but not limited to, payments by Medicare and private insurance.
    (ii) Must capture the total burden on the hospital of treating 
Medicaid eligible patients prior to payment by Medicaid. Thus, costs 
must be determined in the aggregate and not by estimating the cost of 
individual patients. For example, if a hospital treats two Medicaid 
eligible patients at a cost of $2,000 and receives a $500 payment from 
a third party for each individual, the total cost to the hospital for 
purposes of this section is $1,000, regardless of whether the third 
party payments received for one patient exceeds the cost of providing 
the service to that individual.
* * * * *

    Dated: July 19, 2016.
Andrew M. Slavitt,
Acting Administrator, Centers for Medicare & Medicaid Services.
    Dated: July 29, 2016.
Sylvia M. Burwell,
Secretary, Department of Health and Human Services.
[FR Doc. 2016-19107 Filed 8-12-16; 8:45 am]
BILLING CODE 4120-01-P