[Federal Register Volume 82, Number 62 (Monday, April 3, 2017)]
[Rules and Regulations]
[Pages 16114-16122]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-06538]
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DEPARTMENT OF HEALTH AND HUMAN SERVICES
Centers for Medicare & Medicaid Services
42 CFR Part 447
[CMS-2399-F]
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: Final rule.
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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
[[Page 16115]]
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.
DATES: 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
[[Page 16116]]
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
We also indicated in the 2008 DSH final rule that 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 paid
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.
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 eligible 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/financing-and-reimbursement/dsh/ making it clear that all
costs and payments associated with dual eligible 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 costs.'' This additional guidance was based
upon the policy articulated in the 2008 DSH final rule and was
consistent with subregulatory 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 DSH 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). Excluding both costs and payments associated
with Medicaid eligible individuals is not consistent with the statutory
requirement that we include the costs of all individuals ``eligible for
medical assistance,'' which means those individuals eligible for
Medicaid. Including costs (while not including payments) 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
2008 DSH final rule and subsequent subregulatory guidance 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. In that
rule, we explicitly acknowledge that there will be instances where
Medicaid payments will be greater than the costs of treating Medicaid
eligible patients. But because
[[Page 16117]]
those payments reduce the overall uncompensated costs of treating
Medicaid eligible patients, we required that all Medicaid payments be
included in the hospital-specific limit calculation, and explained that
any ``excess'' payments will be applied against the uncompensated care
costs that result from the uninsured calculation. This position is
codified in Sec. 455.304(d)(4). Specifically, for purposes of the
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.
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 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 2010 guidance,
multiple states, hospitals, and other stakeholders expressed concern
regarding this policy and requested clarification. In addition to
requests for clarification, some states challenged this policy. We have
disapproved one state plan amendment (SPA) proposing to exclude from
the hospital-specific limit calculation the portion of a Medicare
payment that exceeds the cost of providing a service to a dual eligible
and one state plan amendment SPA proposing to exclude the portion of a
third party commercial payment that exceeds the cost of providing a
service to a Medicaid eligible individual with private insurance
coverage. Additionally, some hospitals, and one state government
agency, have sued 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 final rule is designed to
reiterate the policy and make explicit within the terms of the
regulation that all costs and payments associated with dual eligible
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, 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 eligible 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 (that is, 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. Summary of Proposed Provisions
We proposed 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.
At Sec. 447.299 we proposed 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.
III. Analysis of and Responses to Public Comments
We received 161 timely comments from state Medicaid agencies,
provider associations, providers, and other interested parties, in
response to the publication of the Disproportionate Share Hospital
Payments--Treatment of Third Party Payers in Calculating Uncompensated
Care Costs proposed rule. During our review of these comments, we
identified 10 general comment areas, in which we received multiple
comments, from multiple respondents. We also received 9 specific
comments that did not fit into the general comment areas. Those
comments and our responses are included below.
A. Proposed Rule Is Consistent With the Statute
Comment: Many commenters suggested that CMS' interpretation of the
hospital-specific limit is inconsistent with the statutory language
under section 1923(g)(1)(A) of the Social Security Act, or that CMS'
interpretation is not required under section 1923(j) of the Act.
Response: We disagree with these commenters. The statute limits
Medicaid DSH payments to the amount of uncompensated care costs for
that same year. Specifically, the statute limits the DSH payment to the
costs
[[Page 16118]]
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''; such language 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.
As a result, the hospital-specific limit calculation reflects only the
costs for Medicaid eligible individuals for which the hospital has not
received payment from any source.
Even though the 2008 regulation did not expressly mention Medicare
and third party payments, this policy is necessary to facilitate the
Congressional directive of section 1923 of the Act in general, and the
hospital-specific limit in particular, of limiting the DSH payment to a
hospital's uncompensated care costs. Moreover, we have been clear in
our longstanding policy and in the 2008 rule that all third party
payments must be taken into account when calculating the hospital-
specific limit. This policy was also articulated in subsequent
implementation guidance.
B. Uninsured and Dual Eligible Patients
Comment: A number of commenters suggested that the policy reflected
in the proposed rule should not apply to dual eligible patients for
which there has not been a Medicaid claim generated or a Medicaid
payment received on behalf of the dually eligible individual, noting
that children who qualify for Medicaid often have Medicaid as their
secondary coverage. According to the commenters, by including private
insurance payments for services never billed to Medicaid, hospitals
serving a high number of children with complex medical conditions may
become ineligible for DSH funds, even though they have substantial
losses for Medicaid-paid admissions and for the uninsured.
Response: The statutory language refers to those ``eligible for
medical assistance,'' which means those individuals eligible for
Medicaid benefits. The statutory language does not condition
eligibility on whether the cost of the service was claimed, or if a
Medicaid payment was received. Therefore, all costs and payments
associated with Medicaid eligible individuals must be included in the
hospital-specific limit calculation, regardless of whether Medicaid
made a payment.
Moreover, the commenters' belief--that under our longstanding
policy, a hospital may receive a DSH payment up to the hospital-
specific limit and nevertheless incur ``substantial losses'' for
treating Medicaid eligible and uninsured individuals--is incorrect. In
the situation where a hospital receives a DSH payment up to the
hospital-specific limit, a hospital will have received payments equal
to the cost of providing inpatient and outpatient hospital services to
Medicaid patients and the uninsured (from Medicaid, Medicaid DSH, and
from other payers). Rather, it appears that the commenters are
suggesting that the hospital-specific limit calculation should take
into account the cost of services that are not paid for as inpatient or
outpatient services or costs that are not paid for by Medicaid at all.
Ancillary programs and services that hospitals provide to patients may
be laudable, but they are not paid for by Medicaid because they are not
costs associated with furnishing inpatient and outpatient hospital
services to Medicaid eligible and uninsured individuals. To the extent
a hospital has actual uncompensated care costs for furnishing such
hospital services, the hospital will be eligible to receive a DSH
payment in accordance with the statute and regulation. Under our
interpretation of the statute, the hospital-specific limit ensures that
a hospital's eligible uncompensated care costs may be compensated but
that Medicaid DSH payments will not double pay for costs that have
already been compensated. Accordingly, we believe our approach best
fulfills the purpose of the DSH statute.
Comment: A few of the commenters suggested that CMS needs to
reconsider how they determine a patient is uninsured, suggesting, for
example, that the one-time determination of an individual's status as
having third-party coverage should be reconsidered. The commenters also
suggested that CMS should allow an inpatient hospital service to be
reevaluated at the point that a benefit limit or dollar limit is
reached, or benefits are otherwise exhausted, in which case the
individual may be treated as uninsured for that portion of the stay.
Response: We thank the commenters for this comment, but it is
outside the scope of this rule. This rule does not address how a
patient is determined to be ``uninsured''. Rather, the rule is
clarifying existing policy on the calculation of Medicaid uncompensated
care costs for the purposes of making Medicaid DSH payments.
C. Effective Date
Comment: Multiple commenters suggested that, if the proposed rule
is finalized, CMS should only impose this policy prospectively and
should provide an adequate transition period to allow states to change
their payment methodologies.
Response: This rule is providing clarification to existing policy,
therefore there is no issue of retroactivity, nor a need for a
transition period. Under the 2008 regulation, states were provided a 5-
year transition period, from 2005 through 2010. Given previous
rulemaking and implementing guidance, we do not believe it is necessary
to afford an additional transition period.
D. No Increased Burden to States or Hospitals
Comment: Many commenters suggested that the regulation will impose
a great burden on all involved, which outweighs any incremental benefit
in transparency and accountability, and diverts scarce financial and
human resources away from providing and paying for care to
beneficiaries.
Response: We disagree with the commenters and believe that taking
into account all third party payments associated with a Medicaid
eligible individual better facilitates the Congressional directive of
section 1923 of the Act in general, and the hospital-specific limit in
particular. Medicaid DSH payments are limited to an annual federal
allotment. 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. This policy ensures
that limited DSH resources are allocated to hospitals that have a net
financial shortfall in serving Medicaid patients. This rule does not
reflect a change in policy and the language of this final rule
accurately reflects existing policy.
E. Pending Litigation
Comment: Multiple commenters suggested that in light of the pending
litigation, CMS should withdraw the proposed rule, refrain from
enforcing its subregulatory guidance, and await the outcome of that
litigation.
Response: This final rule is a clarification of the existing policy
and as such it is not necessary to wait for the outcome of the pending
litigation. We believe that our interpretation--that all third party
payments should be taken into account--better facilitates the
[[Page 16119]]
Congressional directive of section 1923 of the Act in general, and the
hospital-specific limit in particular, by limiting the DSH payment to a
hospital's uncompensated care costs.
F. Additional Costs Affecting Medicaid
Comment: A number of commenters stated that the proposed rule would
ensure consistency in how Medicaid shortfall is calculated and provide
a more complete measure of the financial impact of these patients on
hospital finances. These commenters suggested including certain costs
of physicians and clinic services provided by hospitals in the
calculation of ``uncompensated care costs.'' The commenters also
suggested including provider contributions toward the non-federal share
of DSH payments through health care related taxes and other mechanisms,
which affect their net Medicaid payments.
Response: We agree with the commenters that the rule as proposed
would ensure consistency in how Medicaid uncompensated care costs are
calculated and provide a more complete measure of the financial impact
of Medicaid eligible patients on DSH hospitals. The proposed rule did
not address whether certain costs of physicians and clinic services
provided by hospitals and provider contributions toward the non-federal
share of DSH payments should be included for purposes of calculating
the hospital-specific limit. Therefore, this rule only addresses the
scope of inpatient and outpatient hospital costs that can be included
for Medicaid DSH purposes.
G. Policy Clarification
Comment: Many commenters suggested that CMS withdraw the proposed
rule because it is not a clarification of existing policy, but rather a
substantive rule that is changing the current policy.
Response: We disagree. This rule does not reflect a change and the
language of this final rule accurately reflects existing policy. This
policy has also been articulated in the 2008 DSH final rule, as well as
implementing guidance.
H. Rule Poses No Financial Impact
Comment: A few commenters suggested that the proposed rule would
redistribute billions of dollars, therefore the rule will be considered
as having an economically significant impact on hospitals. The
commenters requested that CMS make all records available, including
data and reports, used in drafting the proposed rule and publish a
regulatory impact analysis for the rule.
Response: Not recognizing third party payments associated with
Medicaid eligible individuals would overstate a hospital's
uncompensated care costs, thus inappropriately inflating the hospital-
specific limit. Providing clarification to the existing policy ensures
that the limited Medicaid DSH resources are allocated to hospitals that
have a net financial shortfall in serving Medicaid patients. The
regulatory impact of this final rule is specifically addressed in the
regulatory impact section.
I. Appropriate Allocation of DSH Funds
Comment: Multiple commenters suggested that the proposed rule is
most harmful to children's hospitals and safety net hospitals, such as
Medicare-dependent hospitals, rural facilities, critical access
hospitals, sole community hospitals, and Indian Health Service (IHS)
areas, which are the very hospitals that the Medicaid DSH program was
developed to help.
Response: The policy reflected in the proposed rule does not
disproportionately harm children's hospitals and safety net hospitals.
We believe this rule ensures the appropriate allocation of Medicaid DSH
dollars to those hospitals that have a true financial shortfall related
to serving Medicaid eligible individuals. The intent of this rule is to
provide clarification to the statutory requirements and ensure Medicaid
DSH dollars are available to offset costs that are truly uncompensated.
J. Applying the Rule
Comment: A few commenters suggested that CMS should withdraw the
proposed rule because, if finalized, this rule cannot be enforced,
applied or implemented uniformly across all states.
Response: This rule ensures that existing interpretive policy is
explicitly reflected in our regulatory text. This policy is currently
being enforced, applied and implemented uniformly across all states,
except in limited instances where we have suspended enforcement of the
existing policy in light of court orders. We appreciate the commenters'
concern but are finalizing the rule as proposed.
In addition to the comments we discussed above, we received 9
comments that did not fit into the 10 general comment areas. Those
additional 9 comments, along with our responses, are included below.
Comment: One commenter suggested that comments received through the
rulemaking process cannot be considered meaningful consultation within
the scope of Executive Order 13175 and CMS' own tribal consultation
policy, which states that tribal consultation must take place prior to
the rulemaking process.
Response: Executive Order 13175 and our own tribal consultation
policy state that to the extent practicable and permitted by law, no
agency shall issue any regulation that will significantly affect Indian
Tribes, without prior consultation with tribal officials. The rule as
proposed would not have a significant impact on Indian Tribes because
the language of this rule accurately reflects existing policy that is
currently being enforced, applied and implemented uniformly across all
states, except in limited instances where we have suspended enforcement
of the existing policy in light of court orders. Further, this policy
has been previously articulated in the 2008 DSH final rule. During the
development of the 2008 DSH final rule, the agency held the required
tribal consultation.
Comment: One commenter wanted to reiterate concerns raised in
comments submitted on CMS-1655-P, Medicare Program; Hospital Inpatient
Prospective Payment Systems for Acute Care Hospitals and Long-Term Care
Hospital Payment System and Proposed Policy Changes and Fiscal Year
2017 rates, et al. The Medicare DSH payment is a percentage add-on to
the standard diagnosis-related group (DRG) payment (excluding new
technology add-on payments and outlier payments). Effective October 1,
2013 the methodology for calculating Medicare DSH payments was revised
so that eligible hospitals are paid 25 percent of the DSH payment under
the previous methodology, and the remaining 75 percent is an
uncompensated care payment allocated from a prospectively determined
estimate of dollars. Medicare allocates these dollars based on the
ratio of a hospital's uncompensated care costs to the uncompensated
care costs of all hospitals eligible for Medicare DSH. We proposed to
define uncompensated care costs as the costs of charity care and non-
Medicare bad debt and to incorporate Worksheet S-10 data over a 3-year
period beginning in FY 2018, where insured low income day data (which
we have been using as a proxy for uncompensated care costs) will be
averaged with uncompensated care cost data.
Response: This rule does not impact the formula for calculating
Medicare DSH payments. Medicaid and Medicare DSH operate under two
different statutory authorities and this final rule only addresses the
Medicaid DSH calculation. As such, Medicaid
[[Page 16120]]
uncompensated care costs include only those costs for Medicaid eligible
individuals that remain after accounting for all 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.
Comment: One commenter stated that adherence to Medicare reasonable
costs principles and methods in the DSH program is clearly emphasized
throughout the law, the rules and other CMS guidance, and that FAQ 33
violates these principles, many of which are foundational to the
earliest days of the Medicare and Medicaid program. According to the
commenter, CMS stated in FAQ 21 that the same methods used in preparing
the Medicare 2552-96 cost report should be applied in determining costs
to be used in calculating the hospital-specific DSH limits, and that
Medicare reasonable cost principles do not allow for other patients to
bear the cost of care provided to program beneficiaries.
Response: In the Additional Information on the DSH Reporting and
Audit Requirements, Part I, FAQ 33, we clarified that ``days, costs,
and revenues associated with patients that are eligible for Medicaid
and also have private insurance should be included in the calculation
of the hospital-specific DSH limit. As Medicaid should be the payer of
last resort, hospitals should also offset both Medicaid and third-party
revenue associated with the Medicaid eligible day against the costs for
that day to determine any uncompensated amount.'' We disagree that this
violates Medicare cost principles or general methods in the CMS-2552
cost report. Since the costs of these services are included in the
hospital-specific DSH limit calculation, revenue associated with those
same services must be applied as offsets to arrive at net costs to the
hospital for the services. In the CMS-2552 settlement worksheets,
payments received for program services, including payment from non-
program sources, are offset against costs of program services (or
program payment amount) to arrive at net program payment. Furthermore,
we disagree that this application results in other patients bearing the
cost of care provided to program beneficiaries. The clarification in
the cited FAQ and in this rule continues to allow the hospital-specific
DSH limit to recognize a hospital's uncompensated care costs for
Medicaid services (including those Medicaid services for which there is
Medicare or third party payment) and uninsured services.
Comment: One commenter suggested that CMS and states should
leverage the same coordination of benefits processes employed by state
Medicaid programs, which would capture resource and cost efficiencies
as well as economies of scale. According to the commenter, CMS and
states must mandate that providers of DSH services submit individual
claims transactions through MMIS so that Medicaid will be able to look
for instances where the uninsured individual has access to other health
insurance that can be billed as primary. The commenter suggested that
these recommendations are in line with GAO and MACPAC recommendations.
Response: While we understand the importance of ensuring accurate
accounting of payments, this rule is not related to coordination of
benefits or claims transactions. We always encourage state efforts to
assist uninsured individuals in exploring avenues to obtain health care
coverage. Also, Medicaid DSH is not an individual service payment,
rather it is a payment in recognition of costs that certain hospitals
incur for serving Medicaid and uninsured individuals.
Comment: One commenter referenced a State Medicaid Plan, approved
by CMS from 2004 to 2013, which set forth the hospital-specific
Medicaid DSH limit calculation in detail and made no mention of private
health insurance or Medicare payments made on behalf of Medicaid
eligible patients as separate offsets.
Response: The approved state plan in question did not go into
sufficient detail to address the policy at issue here. The state plan
language provided assurances that the state was abiding by statutory
requirements, but did not delve into the details of the hospital-
specific limit. We anticipate that the state in question will comply
with applicable statutory and regulatory requirements in implementing
its state plan, and that the independent DSH audit will determine if it
did so.
Comment: One commenter requested clarification that the proposed
rule in no way affects the qualifying criteria for a hospital being
deemed DSH, and that it only applies to limit the financial benefit
associated with such determination.
Response: This final rule does not address deeming qualifications
for hospitals for Medicaid DSH purposes. Determining how a hospital
qualifies as a DSH is not within the scope of this rule.
Comment: One commenter asked that we address whether the source of
private insurance must come from private health insurance owned by the
Medicaid beneficiary or whether it can come from a policy otherwise
identifying the Medicaid beneficiary and paying the hospital for
hospital services furnished to the beneficiary.
Response: This rule clarifies existing policy 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. Therefore, those payments received by or
on behalf of Medicaid eligible individuals from private health
insurance, regardless of whether the policy is owned by or otherwise
covers some or all of the costs of hospital services furnished to the
Medicaid beneficiary, must be accounted for.
Comment: One commenter encouraged CMS to permit a hospital to carry
net uncompensated care cost forward for one year, in the event that the
following year a DSH qualified hospital realized an extraordinary third
party liability (TPL) recovery year, resulting in the hospital
exceeding its hospital-specific limit.
Response: This rule does not address how uncompensated care costs
are attributed for accounting purposes. The final rule from 2008 lays
out the detailed requirements for how costs should be audited and
reported, and those requirements do not permit a hospital to carry net
uncompensated care cost forward for one year, in the event that the
following year a DSH qualified hospital realized an extraordinary TPL
recovery year.
Comment: One commenter suggested CMS consider the Medicaid provider
tax with this rule, stating that the Medicaid provider tax on the
state's hospitals is currently only using 28 percent of the tax money
to benefit the hospitals by funding the Medicaid DSH allotment.
According to the commenter, this rule could have many of these
hospitals paying this provider tax without receiving anything back in
the form of DSH payments to help offset the cost.
Response: This rule does not address how states utilize revenues
generated by health-care related taxes. While we realize that many
states impose health care-related taxes to generate non-federal share
for Medicaid payments, there is no requirement that the revenues be
used to fund payments back to the same provider class. States have
flexibility in how they utilize the revenues so long as there are no
hold harmless violations.
[[Page 16121]]
IV. Provisions of the Final Rule
We are finalizing the provisions as proposed.
V. Collection of Information Requirements
This rule does not impose any new or revised information collection
requirements or burden. It does not impact currently approved
reporting, auditing, or state plan requirements or associated burden
estimates. Consequently, this rule is not subject to the provisions of
the Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35).
VI. Regulatory Impact Statement
A. Statement of Need
This final rule will 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 (Pub. L. 96-354
enacted on September 19, 1980) (RFA), section 1102(b) of the Social
Security Act, section 202 of the Unfunded Mandates Reform Act of 1995
(Pub. L. 104-4 enacted on March 22, 1995) (UMRA), 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
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 ``significant regulatory action'' under E.O. 12866, nor a
``major rule'' under the Congressional Review Act.
The RFA requires agencies to analyze options for regulatory relief
for small entities, and to prepare a final regulatory flexibility
analysis if a rule is found to have 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 a final regulatory flexibility analysis
because we have determined, and the Secretary certifies, that this
final rule will 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 604 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
final rule will 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. Currently,
that threshold 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 issues 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 final rule will have significant financial effects on state
Medicaid programs. This rule will 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 final rule will 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 sections
(g) and (j) of the Act, in part.
Additionally, we considered issuing additional policy guidance
through subregulatory 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.
In accordance with the provisions of Executive Order 12866, this
regulation was reviewed by the Office of Management and Budget.
[[Page 16122]]
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 amends 42 CFR chapter IV as set forth below:
PART 447--PAYMENTS FOR SERVICES
0
1. The authority citation for part 447 continues to read 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 payment received for one patient exceeds the cost of providing
the service to that individual.
* * * * *
Dated: March 24, 2017.
Seema Verma,
Administrator, Centers for Medicare & Medicaid Services.
Dated: March 28, 2017.
Thomas E. Price,
Secretary, Department of Health and Human Services.
[FR Doc. 2017-06538 Filed 3-30-17; 4:15 pm]
BILLING CODE 4120-01-P