[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