[Federal Register Volume 88, Number 37 (Friday, February 24, 2023)]
[Proposed Rules]
[Pages 11865-11887]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-03673]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 433, 447, 455, and 457

[CMS-2445-P]
RIN 0938-AV00


Medicaid Program; Disproportionate Share Hospital Third-Party 
Payer Rule

AGENCY: Centers for Medicare & Medicaid Services (CMS), Department of 
Health and Human Services (HHS).

ACTION: Proposed rule.

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SUMMARY: This proposed rule would address recent legislative changes to 
the Social Security Act, which governs the hospital-specific limit on 
Medicaid disproportionate share hospital (DSH) payments, as a result of 
the Consolidated Appropriations Act, 2021. This proposed rule would 
afford States and hospitals more clarity on how the limit, the changes 
to which took effect on October 1, 2021, will be calculated. 
Additionally, this proposed rule would enhance administrative 
efficiency by making technical changes and clarifications to the DSH 
program.

DATES: To be assured consideration, comments must be received at one of 
the addresses provided below, no later than 5 p.m. on April 25, 2023.

ADDRESSES: In commenting, please refer to file code CMS-2445-P. Because 
of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission.
    Comments, including mass comment submissions, must be submitted in 
one of the following three ways (please choose only one of the ways 
listed):
    1. Electronically. You may submit electronic comments on this 
regulation to https://www.regulations.gov. Follow the ``Submit a 
comment'' instructions.
    2. By regular mail. You may mail written comments to the following 
address ONLY:

Centers for Medicare & Medicaid Services, Department of Health and 
Human Services, Attention: CMS-2445-P, P.O. Box 8016, Baltimore, MD 
21244-8016.

    Please allow sufficient time for mailed comments to be received 
before the close of the comment period.
    3. By express or overnight mail. You may send written comments to 
the following address ONLY:

Centers for Medicare & Medicaid Services, Department of Health and 
Human Services, Attention: CMS-2445-P, Mail Stop C4-26-05, 7500 
Security Boulevard, Baltimore, MD 21244-1850.

    For information on viewing public comments, see the beginning of 
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT: Lia Adams, (410) 786-8258, Charlie 
Arnold, (404) 562-7425, Richard Cuno, (410) 786-1111, Stuart Goldstein, 
(410) 786-0694, Charles Hines, (410) 786-0252, and Mark Wong, (415) 
744-3561, for Medicaid Disproportionate Share Hospital Payments and 
Overpayments. Jennifer Clark, (410) 786-2013, for Children's Health 
Insurance Program (CHIP).

[[Page 11866]]


SUPPLEMENTARY INFORMATION: 
    Inspection of Public Comments: All comments received before the 
close of the comment period are available for viewing by the public, 
including any personally identifiable or confidential business 
information that is included in a comment. We post all comments 
received before the close of the comment period on the following 
website as soon as possible after they have been received: https://www.regulations.gov. Follow the search instructions on that website to 
view public comments. CMS will not post on Regulations.gov public 
comments that make threats to individuals or institutions or suggest 
that the individual will take actions to harm the individual. CMS 
continues to encourage individuals not to submit duplicative comments. 
We will post acceptable comments from multiple unique commenters even 
if the content is identical or nearly identical to other comments.

I. Background

A. Overview

    Title XIX of the Social Security Act (the Act) established the 
Medicaid program as a Federal-State partnership for the purpose of 
providing and financing medical assistance to specified groups of 
eligible individuals. States have considerable flexibility in designing 
their programs, but must abide by requirements specified in the Federal 
Medicaid statute and regulations. Each State is responsible for 
administering its Medicaid program in accordance with an approved State 
plan, which specifies the scope of covered services, groups of eligible 
individuals, payment methodologies, and all other information necessary 
to assure the State plan describes a comprehensive and sound structure 
for operating the Medicaid program, and ultimately, provides a clear 
basis for claiming Federal matching funds.
    Section 1902(a)(13)(A)(iv) of the Act requires that States consider 
the situation of hospitals that serve a disproportionate share of low-
income patients with special needs, in a manner consistent with section 
1923 of Act, in determining payments. The purpose of this proposed rule 
is to update the regulatory requirements of the disproportionate share 
hospital (DSH) program in response to the Consolidated Appropriations 
Act, 2021 (herein, referred to as the CAA) (Pub. L. 116-260, December 
27, 2020) and to further improve upon the program. More specifically, 
the proposed provisions seek to implement the DSH-related provisions of 
the CAA concerning the treatment of third-party payments for purposes 
of calculating Medicaid hospital-specific DSH limits. We note that the 
CAA also created new supplemental payment reporting requirements 
through the addition of section 1903(bb) of the Act; however, DSH 
payments were specifically excluded from these requirements, and we 
have issued guidance on those requirements.\1\
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    \1\ ``New Supplemental Payment Reporting and Medicaid 
Disproportionate Share Hospital Requirements under the Consolidated 
Appropriations Act, 2021,'' State Medicaid Director Letter #21-006, 
December 10, 2021. Available at https://www.medicaid.gov/federal-policy-guidance/downloads/smd21006.pdf.
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    This proposed rule also seeks to clarify regulatory payment and 
financing definitions and other regulatory language that could be 
subject to misinterpretation, refine administrative procedures used by 
States to comply with Federal regulations, and remove regulatory 
requirements that have been difficult to administer and do not further 
the program's objectives.
    For the CAA-related provisions of this proposed rule, we propose an 
applicability date of October 1, 2021, to align with the effective date 
in the statute. This information is noted in each of the CAA-related 
provision sections. We propose that the remaining provisions, if 
finalized, would be effective 60 days after publication of the final 
rule.

B. Disproportionate Share Hospital (DSH) Payments

1. Background
    States are statutorily required to make DSH payments to qualifying 
hospitals that serve patients who are uninsured and enrolled in the 
Medicaid program, as described in section 1923(d) of the Act. States 
generally have flexibility regarding the specific hospitals to which 
they make payments and how they determine the amount of those payments, 
within certain parameters. Section 1902(a)(13)(A)(iv) of the Act 
requires that States consider the situation of hospitals that serve a 
disproportionate number of low-income patients with special needs, in a 
manner consistent with section 1923 of the Act. DSH payments are not 
considered part of base payments or supplemental payments to providers, 
as they are made under distinct statutory authority. Section 1923 of 
the Act contains specific requirements related to DSH payments, 
including aggregate annual State-specific DSH allotments that limit 
Federal financial participation (FFP) for Statewide total DSH payments 
under section 1923(f) of the Act, and hospital-specific limits on DSH 
payments under section 1923(g) of the Act. Under the statutory 
hospital-specific limits, a hospital's DSH payments may not exceed the 
costs incurred by that hospital in furnishing inpatient and outpatient 
hospital services during the year to certain Medicaid beneficiaries and 
the uninsured, less payments received under title XIX (other than 
section 1923 of the Act) and payments by uninsured patients. In 
addition, section 1923(a)(2)(D) of the Act requires States to provide 
an annual report to the Secretary describing the DSH payment 
adjustments made to each DSH.
    Section 1001(d) of the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003 (MMA) (Pub. L. 108-173, December 8, 2003) 
added section 1923(j) of the Act to require States to report additional 
information about their DSH programs. Section 1923(j)(1) of the Act 
requires States to submit an annual report including an identification 
of each hospital that received a DSH payment adjustment during the 
preceding fiscal year (FY) and the amount of such adjustment, and such 
other information as the Secretary determines necessary to ensure the 
appropriateness of the DSH payment adjustments for such FY. 
Additionally, section 1923(j)(2) of the Act requires States to submit 
an independent certified audit of the State's DSH program, including 
specified content, annually to the Secretary.
2. Consolidated Appropriations Act, 2021 (CAA) DSH Requirements
    The CAA was enacted on December 27, 2020. It modified the Medicaid 
statute in several ways, including by updating section 1923 of the Act. 
Specifically, Division CC, Title II, Section 203 of the CAA (herein 
referred to as section 203) amended section 1923(g) of the Act, which 
describes the methodology for calculating hospital-specific Medicaid 
DSH limits. This provision took effect October 1, 2021. For purposes of 
calculating the hospital-specific DSH limit, section 203 of the CAA 
modified the calculation of the Medicaid portion of the hospital-
specific DSH limit to include only costs and payments for services 
furnished to beneficiaries for whom Medicaid is the primary payer for 
such services, as specified in section 1923(g)(1)(B)(i) of the Act. 
Accordingly, the limit excludes costs and payments for services 
provided to Medicaid beneficiaries with other sources of coverage, 
including Medicare and commercial insurance). Section 1923(g) of the 
Act, as modified

[[Page 11867]]

by the CAA, includes an exception to this methodology for hospitals in 
the 97th percentile of all hospitals with respect to inpatient days 
made up of patients who, for such days, were entitled to Medicare Part 
A benefits and to supplemental security income (SSI) benefits. This 
exception, as described in section 1923(g)(2)(B) of the Act, applies to 
hospitals that are in the 97th percentile, either with respect to the 
number of inpatient days or percentage of total inpatient days that 
were made up of such days. The exception provides qualifying hospitals 
with a hospital-specific limit that is the higher of that calculated 
under the methodology in which costs and payments for Medicaid patients 
are counted only for beneficiaries for whom Medicaid is the primary 
payer, or the methodology in effect on January 1, 2020. From June 2, 
2017, to the passage of the CAA, payments made by all third-party 
payers (TPP), such as Medicare, other insurers, and beneficiary cost 
sharing, would all be included in the calculation of hospital-specific 
DSH limits, in accordance with the ``DSH Payments--Treatment of Third-
Party Payers in Calculating Uncompensated Care Costs'' final rule in 
the April 3, 2017 Federal Register (82 FR 16114), which delineated the 
treatment of TPP and the calculation of hospital-specific DSH limits.
    We acknowledge there are data limitations, which we describe later 
in this rule, that have delayed CMS' ability to clarify which hospitals 
qualify for the exception for 97th percentile hospitals. This rule 
proposes how CMS would determine which hospitals qualify for this 
exception.
3. Annual DSH Audits and Overpayments
    The ``Medicaid Program; Disproportionate Share Hospital Payments'' 
final rule published in the December 19, 2008 Federal Register (73 FR 
77904) (and herein referred to as the 2008 DSH audit final rule) sets 
forth the data elements necessary to comply with the requirements of 
section 1923(j) of the Act related to auditing and reporting of DSH 
payments under State Medicaid programs. The regulations at 42 CFR 
447.299(c) finalized in the 2008 DSH audit final rule outline 18 data 
elements States must submit to CMS, at the same time as the State 
submits the completed audit required under 42 CFR 455.304, in order to 
permit CMS verification of the appropriateness of such payments. One 
such data element is the total uncompensated care cost, which equals 
the total cost of care for furnishing inpatient hospital and outpatient 
hospital services to Medicaid eligible individuals and to individuals 
with no source of third-party coverage for the hospital services they 
receive, less the sum of other payment sources listed in Sec.  
447.299(c)(16). Despite the robust data, potential data gaps may exist 
as a result of an auditor identifying an area, or areas, in which 
documentation is missing or unavailable for certain costs or payments 
that are required to be included in the calculation of the total 
eligible uncompensated care costs.
    Consequently, at times we are unable to determine whether a DSH 
overpayment to a provider has occurred, the root causes of any 
overpayments, and the amount of the overpayments associated with each 
cause. In current practice, an auditor may include a finding (or 
``caveat'') in the audit, stating that the missing information may 
impact the calculation of total eligible uncompensated care costs, 
rather than making a determination of the actual financial impact of 
the identified issue. This lack of transparency results in uncertainty 
even if costs are ultimately correct, and restricts CMS' and States' 
ability to ensure proper recovery of all FFP associated with DSH 
overpayments identified through annual DSH audits in instances where 
errors did occur.
    In the past, the Office of Inspector General (OIG) and the 
Government Accountability Office (GAO) have raised concerns similar to 
ours regarding oversight of the Medicaid DSH program. The 2008 DSH 
audit final rule addressed concerns raised by the OIG \2\ by 
implementing in regulations the independent certified audit 
requirements under section 1923(j) of the Act, by requiring States to 
include data elements as specified in Sec.  447.299(c) with their 
annual audits. In 2012, the GAO published the report ``Medicaid: More 
Transparency of and Accountability for Supplemental Payments are 
Needed.'' \3\ Although Medicaid DSH payments are not ``supplemental 
payments,'' as described previously, they are akin to supplemental 
payments, and thus, the GAO's report did not focus on supplemental 
payments exclusively. As part of the report, the GAO analyzed the 2010 
DSH audits for 2007 DSH payments and found DSH payments that did not 
comply with the audit requirements specified in part 455, subpart D. 
For each of the required DSH audit elements, there were a number of 
hospitals for which the GAO could not determine compliance due to data 
reliability or documentation issues. For example, the GAO could not 
determine compliance with the requirement that uncompensated care costs 
are accurately calculated for 33.7 percent of hospitals analyzed by 
GAO. The report highlights that, although the independent certified 
audit requirements have allowed us to identify various compliance 
issues and quantify some provider overpayments, in some instances, 
findings remain unquantified.
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    \2\ ``Audit of Selected States' Medicaid Disproportionate Share 
Hospital Programs,'' March 2006 (A-06-03-00031), https://www.oig.hhs.gov/oas/reports/region6/60300031.pdf.
    \3\ https://www.gao.gov/assets/660/650322.pdf.
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    We agree with the report that more transparency is needed, but to 
obtain the necessary overpayment amounts under current reporting 
processes, CMS or the State would have to conduct a secondary review or 
audit, which would be burdensome and largely redundant. By proposing 
that States must submit to CMS in its annual reports described in Sec.  
447.299(c) an additional data element requiring a dollar estimate of 
any Medicaid DSH provider overpayments, as discussed further in section 
II. of this rule, we hope to further enhance our oversight to better 
ensure the integrity of hospital-specific limit calculations.
    Amounts in excess of the hospital-specific limit are regarded as 
overpayments to providers, under 42 CFR part 433, subpart F. Section 
1903(d)(2)(C) of the Act provides that, when an overpayment by a State 
is discovered, the State has a 1-year period to recover or attempt to 
recover the overpayment before an adjustment is made to FFP to account 
for the overpayment. FFP is not available for DSH payments that are 
found in the independent certified audit to exceed the hospital-
specific limit. Currently, regulations in Sec.  433.316 provide for 
determining the date of discovery of an overpayment, which is necessary 
to determine the statutory 1-year period, but it does not specify how 
this relates to the independent certified DSH audits required under 
section 1923(j)(2) of the Act and 42 CFR part 455, subpart D.
    Accordingly, the discovery of overpayments necessitates the return 
of the Federal share, or redistribution by the State of the overpaid 
amounts to other qualifying hospitals, in accordance with the State's 
approved Medicaid State plan. While the preamble to the 2008 DSH audit 
final rule generally addressed the return or redistribution of provider 
overpayments identified through DSH audits, it did not include specific 
procedural requirements for returning or redistributing overpayments. 
Therefore, we have identified this area as an opportunity to strengthen 
program oversight and integrity protections,

[[Page 11868]]

specifically with respect to the overpayment and redistribution 
reporting process and requirements for identifying the financial impact 
of audit findings. In this proposed rule, we propose requirements to 
enhance these areas.
4. DSH Health Reform Reduction Methodology
    Section 2551 of the Affordable Care Act \4\ (ACA) amended section 
1923(f) of the Act to require aggregate reductions to State Medicaid 
DSH allotments annually from FY 2014 through FY 2020, to account for 
the then-anticipated decrease in uncompensated care as a result of 
expansions of coverage authorized by the ACA. The ACA specified in 
section 1923(f)(7)(B) of the Act certain factors CMS must consider in 
implementing these reductions, and left certain components of the 
methodology to the Secretary of Health and Human Services to define (as 
described later in this section). The methodology is referred to as the 
DSH Health Reform Methodology (DHRM). We published a final rule in 
October 2013 that delineated a methodology to implement the annual 
reductions only for FY 2014 and FY 2015 in order to accommodate data 
refinement and methodology improvement for later reduction years. 
However, Congress has since modified section 1923(f)(7) of the Act 
several times such that the reductions have never taken effect. On 
September 25, 2019, we published a final rule \5\ (2019 final rule) 
delineating a revised methodology for the calculation of DSH allotment 
reductions, which at that time were scheduled to begin in 2020. 
Congress has since further delayed the start of these reductions until 
FY 2024. The CAA modified section 1923(f) of the Act such that the 
reductions occur beginning FY 2024 through FY 2027, in the amount of $8 
billion each year.
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    \4\ Patient Protection and Affordable Care Act of 2010, Public 
Law 111-148, as amended by the Health Care and Education 
Reconciliation Act of 2010, Public Law 111-152.
    \5\ 84 FR 50308.
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    Section 1923(f)(7) of the Act requires the Secretary to develop a 
methodology to determine the annual, State-by-State DSH allotment 
reduction amounts based on five factors: uninsured factor (UPF); 
Medicaid volume factor (HMF); uncompensated care factor (HUF); low DSH 
State factor (LDF); and the budget neutrality factor (BNF). The 2019 
final rule assigned weights to the annual reduction amount for the 
three core factors: UPF, HMF, and HUF. The remaining two factors, the 
LDF and the BNF, affect the allocation of the reduction amounts within 
the three core factors. The LDF accomplishes this allocation at the 
front end of the calculations by shifting a portion of the reduction 
amount specified under section 1923(f)(7)(A)(ii) of the Act to non-low 
DSH States. Following this step, we determine the reduction 
calculations prescribed by the three core factors. We then perform 
additional reductions associated with the BNF within the HMF and HUF 
for States that divert DSH allotment amounts under section 1115 
demonstrations. We then reallocate these reduction amounts away from 
States that do not divert DSH allotment amounts under section 1115 
demonstrations, in order to comply with the aggregate reduction amounts 
specified under statute at section 1923(f)(7)(A)(ii) of the Act. The 
five factors are specified in section 1923(f)(7)(B) of the Act as 
follows:
     UPF--The statute requires that States with lower 
uninsurance rates receive higher percentage DSH reductions. 
Calculations performed under this factor utilize Census Bureau data 
that is subject to a 1-year lag.
     HMF--The statute requires that States that target DSH 
payments to hospitals with high Medicaid volume receive a lower 
percentage reduction in their DSH allotment. Calculations performed 
under this factor utilize DSH audit data that is on a 3-year lag.
     HUF--As required by statute, States that target DSH 
payments to hospitals with high levels of uncompensated care receive a 
lower percentage reduction in their DSH allotment. Calculations 
performed under this factor utilize DSH audit data that is on a 3-year 
lag.
     Low DSH State factor--Section 1923(f)(7)(B)(ii) of the Act 
requires that statutorily defined ``low DSH States'' receive a lower 
overall DSH reduction percentage than non-low DSH States. To accomplish 
this, low DSH States and non-low DSH States are separated into two 
cohorts before applying the reduction methodology.
     BNF--DSH allotment amounts diverted for coverage expansion 
under section 1115 demonstrations approved as of July 31, 2009, receive 
a limited protection from reduction.
5. Modernizing the Publication of Annual DSH and CHIP Allotments
    Section 447.297 provides a process and timeline for us to publish 
preliminary and final annual DSH allotments and national expenditure 
targets in the Federal Register. The current requirements specify that 
we publish DSH preliminary allotments and national expenditure targets 
by October 1 of each Federal fiscal year (FFY), and publish the final 
allotments and national expenditure targets by April 1 of that FFY. We 
have found the current regulatory Federal Register publication process 
to be time consuming and administratively burdensome for us, and 
ultimately unnecessary in light of more timely notification practices 
already taking place.
    Similarly, section 2104 of the Act provides appropriations for FY 
CHIP allotments for FYs 1998 through 2027. Regulations at 42 CFR 
457.609 describe the process for calculating State CHIP allotments for 
a FY after FY 2008. Section 457.609(h) provides that CHIP allotments 
for a FY may be published as preliminary or final allotments in the 
Federal Register as determined by the Secretary. Similar to the current 
DSH allotment publication process, we have found the current FY CHIP 
allotment publication regulations administratively burdensome and less 
efficient than other means of notification. We propose to codify the 
process already taking place while eliminating inefficient and 
duplicative publication requirements.

II. Provisions of the Proposed Rule

A. Proposed Provisions

1. When Discovery of Overpayment Occurs and Its Significance (Sec.  
433.316)
    Section 1903(d)(2)(C) of the Act provides that, when an overpayment 
by a State is discovered, the State has a 1-year period to recover or 
attempt to recover the overpayment before an adjustment is made to FFP 
to account for the overpayment. Currently, regulations in Sec.  433.316 
provide for determining the date of discovery of an overpayment to a 
provider, which is necessary to determine the statutory 1-year period, 
in three distinct cases: when the overpayment results from a situation 
other than fraud, under Sec.  433.316(c); when the overpayment results 
from fraud, under Sec.  433.316(d); and when the overpayment is 
identified through a Federal review, under Sec.  433.316(e). It is not 
explicitly clear in the current regulations how the date of discovery 
is determined when an overpayment is discovered through the annual DSH 
independent certified audit required under Sec.  455.304. Therefore, we 
believe an amendment is appropriate to specify the date of discovery of 
overpayments, as it relates to the annual DSH independent certified 
audit.
    Accordingly, we are proposing to redesignate paragraphs (f) through 
(h) of Sec.  433.316 as paragraphs (g) through (i), respectively, and 
to add a new proposed paragraph (f). In the new paragraph (f), we are 
proposing that, in the case of an

[[Page 11869]]

overpayment identified through the DSH independent certified audit 
required under part 455, subpart D, we will consider the overpayment as 
discovered on the earliest of either the date that the State submits 
the DSH independent certified audit report required under Sec.  
455.304(b) to CMS, or of any of the dates specified in Sec.  
433.316(c): paragraph (c)(1) (the date on which any Medicaid agency 
official or other State official first notifies a provider in writing 
of an overpayment and specifies a dollar amount that is subject to 
recovery); paragraph (c)(2) (the date on which a provider initially 
acknowledges a specific overpaid amount in writing to the Medicaid 
agency); and paragraph (c)(3) (the date on which any State official or 
fiscal agent of the State initiates a formal action to recoup a 
specific overpaid amount from a provider without having first notified 
the provider in writing). If finalized, this change will afford more 
clarity concerning the independent certified DSH audit and the 
requirements that will be imposed on States based on those audits.
2. DSH Health Reform Reduction Methodology (Sec.  447.294)
    As discussed in section I.B.4 of this proposed rule, section 
1923(f)(7)(B)(iii) of the Act requires that the methodology for 
calculating each State's Medicaid DSH allotment reduction, as first 
established by the ACA, consider the extent to which the DSH allotment 
for a State was included in the budget neutrality calculation for a 
coverage expansion approved under section 1115 (that is, a section 1115 
demonstration to provide coverage to individuals not otherwise eligible 
for Medicaid) as of July 31, 2009. In the 2019 final rule, we finalized 
a policy to exclude from DSH allotment reductions the amount of DSH 
allotment States had approved as of July 31, 2009, under a coverage 
expansion section 1115 demonstration. Any DSH allotment amounts 
included in budget neutrality calculations for non-coverage expansion 
purposes (for example, where DSH allotment amounts included in budget 
neutrality calculations have been used to match State expenditures for 
approved delivery system reform initiatives) under approved 1115 
demonstrations are still subject to reduction regardless of when they 
were approved. Further, the preamble to the 2019 final rule indicates 
that for any section 1115 demonstrations not approved as of July 31, 
2009, these DSH allotment amounts included in budget neutrality 
calculations, whether for coverage expansion or otherwise, would also 
be subject to reduction. We note that all section 1115 demonstrations 
approved as of or before July 31, 2009, have expired and the protection 
does not apply to renewals or extensions of those 1115 demonstrations. 
Therefore, there no longer exist any amounts related to coverage 
expansion for us to exclude from future DSH allotment reductions 
scheduled to begin in FY 2024.
    In the absence of DSH audit data relating to how States expend DSH 
allotment amounts diverted under section 1115 demonstrations, we 
propose to assign average HUF and HMF reduction percentages to these 
amounts.\6\ We believe this approach is a reasonable method to 
determine reductions for the HUF and HMF factors, given the absence of 
relevant, hospital-specific DSH payment data for these payments. We 
considered using alternative percentages higher or lower than the 
average but settled on average percentages over concerns that these 
alternative percentages might provide an unintended benefit or penalty 
to these States for DSH diversions approved under a demonstration under 
section 1115 of the Act.
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    \6\ 84 FR 50308 at 50328, wherein we discuss the policy to 
assign average amounts in the 2019 final rule.
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    While the provisions of Sec.  447.294(e)(12) are clear that we will 
assign average reductions to amounts associated with non-coverage 
expansion purposes in effect as of July 31, 2009, only the preamble to 
the 2019 final rule addresses the amounts diverted under a section 1115 
demonstration approved after July 31, 2009. Additionally, the 
regulations are not specific regarding how these amounts are determined 
and accounted for in the DSH allotment reduction methodology. As such, 
we propose to update the regulations at Sec.  447.294(e)(12) to clearly 
specify that amounts diverted under a section 1115 demonstration 
approved after July 31, 2009, are subject to average reductions under 
the HUF and HMF so that the regulation may better reflect the policy 
finalized in the 2019 final rule preamble.
    In addition, we propose to remove the language, ``for the specific 
fiscal year subject to reduction'' in Sec.  447.294(e)(12) introductory 
text and (e)(12)(i), because we are concerned that the current 
regulatory language could lead to anomalous results, as discussed later 
in this section. We propose that the determination of diverted amounts 
that are subject to average reductions under the HUF and HMF would 
align with the State plan rate year (SPRY) for the DSH audits utilized 
in the DSH allotment reduction calculations, as specified in Sec.  
447.294(d), rather than the fiscal year subject to reduction. For 
example, when calculating the statutorily required DSH allotment 
reductions for FY 2024 (the fiscal year subject to reduction), we would 
utilize data from each State's SPRY 2019 DSH audit data because this 
would be the most recent data available to us. For States that do not 
divert their entire DSH allotment, we would include the amount of each 
State's DSH allotment diverted under a section 1115 demonstration for 
the time period that aligns with the associated SPRY (in this example, 
SPRY 2019). A discussion of States that divert their entire DSH 
allotment follows this proposal. Each State would then be assigned the 
average HUF and HMF reduction amounts for the State's respective State 
group based on this diverted amount.
    Section 477.294(e)(12) introductory text and (e)(12)(i) currently 
align the amount of DSH allotment diverted under a section 1115 
demonstration for a fiscal year with the fiscal year of the DSH 
allotment subject to reduction under section 1923(f)(7)(A)(ii) of the 
Act. We recognize that this non-alignment between the SPRY 2019 DSH 
audit data that we would use to determine the HUF and HMF, and the FY 
2024 section 1115 demonstration budget neutrality calculation diversion 
amount that would be used under the current regulation, could result in 
inappropriate and illogical outcomes. For example, in a case where a 
State claimed all or almost all of its DSH allotment amount for DSH 
expenditures for the SPRY DSH audit utilized in the DHRM (here, SPRY 
2019), but later diverted a large portion of its DSH allotment amount 
under a section 1115 demonstration during a year subject to DSH 
allotment reductions (here, FY 2024), the State could receive a 
reduction on an amount (including both DSH payments and DSH allotment 
diverted under a section 1115 demonstration) that is excess of the 
amount available under its current DSH allotment subject to reductions. 
Therefore, we believe our proposed approach is reasonable because in 
the absence of DSH audit data relating to how States expend DSH 
allotment amounts diverted under section 1115 demonstrations, CMS will 
assign average HUF and HMF reduction percentages to these diverted 
amounts. As such, it is appropriate that the amounts diverted under 
section 1115 demonstrations should align with the SPRY of the DSH audit 
used in the DHRM and that the amounts subject to reduction do not 
exceed what States

[[Page 11870]]

could have expended, either through DSH payments or diverted DSH 
allotment amounts, during the associated SPRY. We considered leaving 
the current regulatory text unchanged. However, we believe it is 
important to update the current regulation in the interest of clarity 
and transparency and to avoid this potential outcome wherein a State 
might receive an inappropriately large reduction due to a misalignment 
of time periods for elements of the reduction methodology. Accordingly, 
we are proposing to revise Sec.  477.294(e)(12) to remove language 
indicating that the BNF and budget neutrality calculations are applied 
to each State's amount of DSH allotment diverted under a section 1115 
demonstration ``for the specific fiscal year subject to reduction.'' 
Further, we are proposing to amend Sec.  477.294(e)(12)(ii) to specify 
that the budget neutrality calculations are performed on the amount of 
each State's DSH allotment diverted under an approved 1115 
demonstration during the period that aligns with the associated SPRY 
DSH audit utilized in the DSH allotment reductions.
    For States that divert their entire DSH allotment, and as such do 
not complete DSH audits, we are unable to use a DSH audit SPRY. 
Therefore, we are proposing to apply reductions under the HMF and HUF 
to the DSH allotment that the State would have had available during the 
demonstration year (DY) coinciding with the SPRY DSH audits utilized in 
the DHRM. We are also proposing to prorate the FFY allotment amount to 
determine this reduction in cases where the DY of the section 1115 
demonstration crosses two FFYs. For example, as stated previously we 
would use SPRY 2019 DSH audit data for FFY 2024 DSH allotment 
reductions. However, if a State that diverts its entire DSH allotment 
has a DY that begins July 1, 2018, and ends June 30, 2019, we would 
have to determine the reduction amount associated with the diverted DSH 
allotment to reflect the amount of the FFY 2018 DSH allotment available 
from July 1, 2018, through September 30, 2018, and the amount of FFY 
2019 DSH allotment available from October 1, 2018, through June 30, 
2019. We do not believe it would be appropriate to calculate the 
reduction associated with the diverted DSH allotment using the full FFY 
2019 DSH allotment because the diverted DSH funds would not have been 
available for the full DY ending June 30, 2019. For a State that 
diverts part of its DSH allotment, it would have a SPRY DSH audit 
already utilized in the DHRM. We would use the diverted DSH amount from 
the same SPRY, which may also involve prorating diverted DSH amounts 
from a DY, depending on whether the DY as specified in the section 1115 
demonstration aligns with the SPRY. In previous rulemaking, we proposed 
and finalized a policy to utilize the most recent year available for 
all data sources and to align the SPRY of data sources whenever 
possible.\7\ Providing this clarification in regulation through this 
rulemaking would accomplish this goal.
---------------------------------------------------------------------------

    \7\ 82 FR 35155 at 35157; 84 FR 50308 at 50322.
---------------------------------------------------------------------------

3. Hospital-Specific Disproportionate Share Hospital Payment Limit 
(Sec.  447.295)
    Effective October 1, 2021, the amendments to section 1923(g) of the 
Act made by section 203 of the CAA change the methodology for 
calculating the Medicaid shortfall portion (Medicaid costs less 
Medicaid payments) of the hospital-specific DSH limit to only include 
costs and payments for hospital services furnished to beneficiaries for 
whom Medicaid is the primary payer. From June 2, 2017, to the effective 
date of the CAA, costs and payments for hospital services furnished to 
beneficiaries who were eligible for Medicaid, even when there was a 
third-party payer such as Medicare or other insurer, that pays primary 
to Medicaid for inpatient and outpatient hospital services, would all 
be included in the calculation of Medicaid shortfall portion of the 
hospital-specific DSH limits in accordance with the ``DSH Payments--
Treatment of Third-Party Payers in Calculating Uncompensated Care 
Costs'' final rule in the April 3, 2017 Federal Register. Additionally, 
the CAA amended section 1923(g)(2) of the Act to provide an exception 
for certain hospitals that are in the 97th percentile or above of all 
hospitals with respect to the number of Medicare SSI days (that is, 
inpatient days made up of patients who, for such days, were entitled to 
Medicare Part A benefits and to SSI benefits) or percentage of Medicare 
SSI days to total inpatient days. In Sec.  447.295(b), we are proposing 
to add the definition of ``97th percentile hospital'' to mean a 
hospital that is in at least the 97th percentile of all hospitals 
nationwide with respect to the hospital's number of Medicare SSI days 
or percentage of inpatient days that are Medicare SSI days, for the 
hospital's most recent cost reporting period. For hospitals that meet 
this criteria, section 1923(g)(2)(A) of the Act specifies that the 
hospital-specific DSH limit is the higher of the amount determined 
under the methodology as amended by section 203 of the CAA or the 
amount determined under the methodology in effect on January 1, 2020 
(described previously), which we propose to implement in paragraph 
(d)(3) of the definition of ``Hospital-specific DSH limit calculation'' 
in Sec.  447.295. As further discussed below, we also propose in the 
definition of 97th percentile hospital that CMS would identify the 97th 
percentile hospitals, for each Medicaid SPRY beginning on or after 
October 1, 2021, using Medicare cost reporting and claims data sources, 
as well as supplemental security income eligibility data provided by 
the Social Security Administration. CMS would publish lists identifying 
each 97th percentile hospital annually in advance of October 1 of each 
year and would revise a published list only to correct a mathematical 
or other similar technical error that is identified to CMS during the 
one-year period beginning on the date the lists are published.
    For the October 1, 2021, effective date of the amendments to 
section 1923(g) of the Act made by section 203 of the CAA, we interpret 
these new requirements to be applicable for SPRYs ``beginning on or 
after'' the October 1, 2021, effective date. Previously, certain 
statutory references to ``fiscal year,'' such as in section 1923(g)(1) 
and (2) and (j)(1) of the Act, have also been interpreted as referring 
to each State's SPRY, instead of the FFY, when establishing 
requirements for the hospital-specific DSH limit (and audit 
requirements to ensure that payments comply with hospital-specific DSH 
limits). In the 2008 DSH audit final rule, CMS indicated that this 
interpretation was in ``recognition of varying fiscal periods between 
hospitals and States'' and that ``[t]he Medicaid [SPRY] is the period 
which each State has elected to use for purposes of DSH payments and 
other payments made in reference to annual limits.'' Further, we 
believe interpreting this provision to be applicable on an FFY basis 
would impose an excessive burden on States and hospitals. In 
particular, we believe such an interpretation would create a 
significant burden in situations when a hospital would qualify to meet 
the exception for 97th percentile hospitals for a portion of its SPRY, 
but not for the full SPRY, if qualification were determined on the 
basis of the FFY. This result would be likely to occur, given that the 
majority of States have SPRYs that do not align with the FFY. In these 
instances, States would need to prorate the uncompensated care costs, 
for affected hospitals, within a SPRY accordingly

[[Page 11871]]

since the methodology for calculating the Medicaid shortfall portion of 
the hospital-specific DSH limit may not be consistent for the entire 
SPRY if the hospital qualified as a 97th percentile hospital for only a 
portion of the SPRY. As such, we are proposing that section 203 of the 
CAA 2021, including the 97th percentile exception, be effective 
starting with each State's first SPRY beginning on or after October 1, 
2021. For example, if a State's SPRY begins July 1, then the amendments 
made by section 203 of the CAA would be effective starting with the 
SPRY beginning July 1, 2022. Conversely, if a State's SPRY begins each 
year on October 1, then such amendments would be effective starting 
with the SPRY beginning October 1, 2021.
    Hospitals meeting the definition of a 97th percentile hospital, and 
therefore, qualifying for the 97th percentile exception will, by 
statute, calculate their hospital-specific DSH limit using the higher 
value of either the hospital-specific DSH limit amount determined for 
the hospital under section 1923(g)(1)(A) of the Act as amended by 
section 203 of the CAA 2021, or the amount determined for the hospital 
under section 1923(g)(1)(A) of the Act as in effect on January 1, 2020. 
Where section 1923(g)(2)(A)(ii) of the Act, as amended by section 203 
of the CAA, refers to ``the amount determined for the hospital under 
paragraph (1)(A) as in effect on January 1, 2020,'' we interpret this 
to refer to the hospital-specific limit calculation methodology that 
was in effect on January 1, 2020, and not the specific dollar amount 
that was applicable on that date.
    We are proposing to revise Sec.  447.295(d) to reflect the 
statutory changes made by section 203 of the CAA to update the 
methodology for the calculation of the hospital-specific DSH limit to 
only include costs and payments for hospital services furnished to 
beneficiaries for whom Medicaid is the primary payer. In addition, we 
are proposing to revise Sec.  447.295(d) to specify the methodology 
that hospitals meeting the exception for 97th percentile hospitals will 
utilize in the calculation of the hospital-specific DSH limit. 
Specifically, in Sec.  447.295(d)(1), we propose to specify that for 
each State's Medicaid SPRYs beginning prior to October 1, 2021 and 
subject to proposed paragraph (d)(3), only costs incurred in providing 
inpatient hospital and outpatient hospital services to Medicaid 
individuals, and revenues received with respect to those services, and 
costs incurred in providing inpatient hospital and outpatient hospital 
services, and revenues received with respect to those services, for 
which a determination has been made in accordance with Sec.  447.295(c) 
that the services were furnished to individuals who have no source of 
third-party coverage for the specific inpatient hospital or outpatient 
hospital service are included when calculating the costs and revenues 
for Medicaid individuals and individuals who have no health insurance 
or other source of third-party coverage for purposes of section 
1923(g)(1) of the Act. In Sec.  447.295(d)(2), we propose to specify 
that for each State's first Medicaid SPRY beginning on or after October 
1, 2021, and thereafter, subject to proposed paragraph (d)(3), only 
costs incurred in providing inpatient hospital and outpatient hospital 
services to Medicaid individuals when Medicaid is the primary payer for 
such services, and revenues received with respect to those services, 
and costs incurred in providing inpatient hospital and outpatient 
hospital services, and revenues received with respect to those 
services, for which a determination has been made in accordance with 
Sec.  447.295(c) that the services were furnished to individuals who 
have no source of third-party coverage for the specific inpatient 
hospital or outpatient hospital service are included when calculating 
the costs and revenues for Medicaid individuals and individuals who 
have no health insurance or other source of third-party coverage for 
purposes of section 1923(g)(1) of the Act. As noted above, we propose 
to implement the 97th percentile hospital exception in proposed Sec.  
447.295(d)(3), which would specify that, effective for each State's 
first Medicaid SPRY beginning on or after October 1, 2021, and 
thereafter, the hospital-specific DSH limit for a 97th percentile 
hospital defined in proposed paragraph (b) is the higher of the values 
from the calculations described in proposed paragraphs (d)(1) and (2).
    We are also proposing to develop a data set, compiling cost report, 
claims, and eligibility data, to determine which hospitals, ranked on a 
national level, qualify to meet the statutory 97th percentile hospital 
exception. We are proposing to publish these data for use in 
determining which hospitals qualify as a 97th percentile hospital on an 
annual basis, electronically or in another format as determined by CMS, 
prior to the SPRY to which it will apply. We would determine these 
hospitals on an annual basis prior to each SPRY beginning on or after 
October 1. In this way, we would be able to qualify hospitals on the 
basis of SPRYs, while also accounting for non-alignment of SPRYs across 
States. Again, this would not be done on the basis of the FFY, but 
rather would be an annual process to qualify hospitals for each SPRY. 
We would publish these data once a year, prior to October 1. Each State 
would use these data to determine which hospitals qualify for the 97th 
percentile hospital exception for the State's SPRY that begins between 
that October 1 and September 30 of the following calendar year.
    We are proposing to determine a hospital's qualification for the 
97th percentile exception for each SPRY on a prospective basis. We 
believe this to be a reasonable interpretation in that the statute 
specifically refers to the ``most recent cost reporting period'' in 
determining a hospital's qualification ``for the fiscal year,'' which, 
as noted, we interpret to mean SPRY. That is, we believe it is 
reasonable to interpret the reference to the ``most recent cost 
reporting period'' in section 1923(g)(2)(B) of the Act to mean the most 
recent cost reporting period for which there is a cost report available 
before the beginning of the SPRY for which the 97th percentile 
hospitals are being identified.
    By applying this exception prospectively, we eliminate the need to 
retroactively rank and qualify hospitals based on actual Medicare SSI 
days and ratios for services furnished during the SPRY. This 
application would allow for States and hospitals to know prior to the 
beginning of the SPRY which hospitals qualify for the exception. That 
knowledge would allow States and hospitals to gauge how payments should 
be made and measured against hospital-specific DSH limits and provide 
greater payment predictability than a retroactive application. We 
believe this interpretation to also be the most feasible from an 
operational standpoint.
    To compile this source of data, we would use data originating from 
various systems and sources, including the Healthcare Cost Report 
Information System (HCRIS) and Medicare Provider Analysis and Review 
(MEDPAR) files, and SSI eligibility data from the Social Security 
Administration (SSA). Utilizing HCRIS, we would identify the universe 
of hospitals that have filed a Medicare cost report and each hospital's 
most recent cost reporting period, including acute care hospitals paid 
under the inpatient prospective payment system (IPPS), critical access 
hospitals, inpatient rehabilitation facilities, and inpatient 
psychiatric facilities.
    We would determine each hospital's Medicare SSI days for discharges

[[Page 11872]]

occurring in the hospital's most recent cost reporting period, 
regardless of the length of that cost reporting period, using a data 
set that combines MEDPAR claims data and SSI eligibility data. We would 
utilize Medicare SSI days for discharges occurring in the cost 
reporting period, rather than Medicare SSI days occurring within the 
cost reporting period because the data source shows the Medicare SSI 
day count for each inpatient stay as a whole. This approach is 
consistent with how Medicare uses this data to develop the Medicare SSI 
days ratios for Medicare DSH purposes. Section 1886(d)(5)(F)(vi) of the 
Act, in describing the Medicare SSI percentage within the Medicare 
``disproportionate patient percentage,'' refers to the ``number of such 
hospital's patient days for such period.'' Then the implementing 
regulations at 42 CFR 412.106 describe the Medicare SSI days used for 
Medicare DSH as patient days that ``are associated with discharges that 
occur during that period.'' This approach means if an inpatient stay 
begins in one cost reporting period but ends in the next cost reporting 
period, we would not count any of the inpatient stay's days toward the 
day count for the first cost reporting period, but instead count all of 
this inpatient stay's days toward the day count for the second cost 
reporting period. This approach would not favor the counting of days in 
one cost reporting period over others. On average, exclusion of days 
for inpatient stays that straddle between one cost reporting period and 
the hospital's next cost reporting period will be offset by any 
inclusion of days for inpatient stays that straddle between that one 
cost reporting period and the hospital's previous cost reporting 
period. Therefore, we can ensure we do not overinclude or underinclude 
Medicare SSI days for inpatient stays that straddle two cost-reporting 
periods.
    To determine each hospital's percentage of Medicare SSI days to 
total inpatient days, we would divide the Medicare SSI days by each 
hospital's total inpatient days for that same cost reporting period 
from HCRIS to obtain a percentage. We would then compile two lists, 
ranking the hospitals based on the absolute number of Medicare SSI 
days, and the percentage of inpatient days that are Medicare SSI days, 
respectively. A hospital may qualify to meet the 97th percentile 
exception on the basis of either of the two lists.
    We are proposing to utilize the Medicare SSI days and total 
inpatient days data to mathematically determine a threshold of 
acceptance to identify hospitals meeting the 97th percentile exception. 
The array includes either the values of Medicare SSI days or the 
percentage of inpatient days that are Medicare SSI days, for the 
universe of hospitals nationwide identified through this data process. 
For the Medicare SSI days, the 97th percentile threshold would be 
rounded to the nearest whole number, with x.5 or higher rounded up, and 
less than x.5 rounded down. Any hospital with Medicare SSI days for its 
most recent cost reporting period greater than or equal to the 97th 
percentile threshold would qualify as a 97th percentile hospital. For 
the percentage of inpatient days that are Medicare SSI days, all values 
would be rounded to the fourth decimal place (0.xxxx, alternatively 
stated as xx.xx percent), including each hospital's own percentage and 
the 97th percentile threshold. Values of 0.xxxx5 or higher would be 
rounded up, and less than 0.xxxx5 would be rounded down. Any hospital 
that has a percentage of total inpatient days that are Medicare SSI 
days from its most recent cost reporting period that is greater than or 
equal to the 97th percentile threshold would qualify as a 97th 
percentile hospital. The ranking will be on a national level, as the 
statutory language under section 203 of the CAA refers to ``97th 
percentile of all hospitals,'' which we believe is most consistent with 
a national, rather than a State-level ranking.
    To follow the statutory requirement to utilize information from the 
most recent cost reporting period, we are proposing to utilize each 
hospital's most recent cost reporting period for which there is a filed 
cost report in HCRIS, at a particular point in time in advance of the 
SPRY to which the 97th percentile qualification would apply. A filed 
cost report would first have an ``as submitted'' status in HCRIS, which 
subsequently would change to ``amended,'' ``settled without audit,'' 
``settled with audit,'' or ``reopened'' status, which indicates a final 
report that was previously reopened and re-settled. We considered 
utilizing the most recent settled cost reporting period, but we have 
determined that the use of the as-submitted cost report will result in 
the use of more current and more consistent reporting periods across 
hospitals, consistent with the statutory directive to rely on ``the 
most recent cost reporting period.'' Moreover, we have determined that 
the total inpatient days seldom change between the as-submitted and the 
settled cost reports. The total inpatient days count is the primary 
data element needed from the cost report in order for us to determine 
which hospitals meet the 97th percentile exception. However, if that 
most recent cost reporting period for which there is an as-submitted 
cost report happens to already have an amended cost report, a settled 
cost report, or a reopened cost report as of the date that CMS obtains 
data from HCRIS for use in determining which hospitals meet the 97th 
percentile hospital exception, we propose that we would use the total 
inpatient day count from the amended cost report, settled cost report, 
or reopened cost report for that period because that is the most 
updated information available for that period. We will elaborate on the 
timing of this process in more detail later in this section.
    We are proposing to utilize both covered and non-covered Medicare 
Part A days when collecting data and calculating hospital percentiles. 
The statutory language in section 1923(g)(2)(B)(i) of the Act as 
modified by section 203 of the CAA specifically refers to patients who 
were entitled to benefits under part A of title XVIII. A patient's 
status as entitled to benefits under part A of title XVIII does not 
depend on whether payment for a particular inpatient day was available 
under Medicare Part A payment principles, and a qualifying Medicare 
beneficiary remains entitled to benefits under Part A even if Medicare 
payment is not available with respect to a particular inpatient day.\8\ 
As such, we believe the calculations must include all Medicare Part A 
inpatient days, whether covered or non-covered, in the associated 
calculations. Further, this is consistent with CMS' use of covered and 
non-covered days in the Medicare SSI days ratio calculations for 
Medicare DSH payment purposes under section 1886(d)(5)(F)(vi)(I) of the 
Act, which describes a hospital's inpatient days for patients who were 
entitled to benefits under part A of title XVIII and were entitled to 
SSI benefits under title XVI of the Act.
---------------------------------------------------------------------------

    \8\ See Becerra v. Empire Health Found., for Valley Hosp. Med. 
Ctr., 142 S. Ct. 2354 (2022).
---------------------------------------------------------------------------

    Hospitals may provide acute inpatient hospital services, as well as 
other inpatient hospital services in distinct part units of the 
hospital. The distinct part units of a hospital that provide inpatient 
hospital services which are reported separately on the hospital's 
Medicare cost report are rehabilitation distinct part units and 
psychiatric distinct part units. We are proposing to include all 
inpatient days for inpatient hospital services reported on each 
hospital's Medicare cost report, including days furnished in distinct 
part units of the hospital that provide

[[Page 11873]]

inpatient hospital services, for purposes of determining a hospital's 
Medicare SSI days and total inpatient days. We note that Medicare pays 
for services furnished in these distinct part units under different 
payment systems from the acute care inpatient hospital services 
provided by the hospitals. However, for Medicaid purposes, the DSH 
uncompensated care costs of the hospital are inclusive of the costs of 
inpatient and outpatient hospital services furnished by the hospital, 
including those furnished in these distinct parts. Therefore, we 
believe the hospital's Medicare SSI days and total inpatient days 
should be inclusive of these distinct part unit days and not limited to 
acute inpatient hospital days.
    In determining when we can begin to collect and assemble the 
necessary data prior to the beginning of each upcoming SPRY that begins 
on or after October 1 each year, we are proposing to use HCRIS data as 
it exists as of March 31, in advance of October 1 of that same calendar 
year. Using the HCRIS data as of March 31, we will identify each 
hospital's most recent cost reporting period for which the hospital has 
an available cost report, and also identify the total inpatient days 
from the latest cost report available for that most recent cost 
reporting period. We are also proposing to use the latest available 
MEDPAR files and SSI eligibility data, as of the same March 31 date, to 
determine the Medicare SSI days data that correspond to that same most 
recent cost reporting period for each hospital.
    For example, for the 97th percentile determination applicable to 
SPRYs beginning October 1, 2023 through September 30, 2024, (that is, 
SPRYs beginning during FFY 2024), we would determine a hospital's most 
recent cost reporting period in which it has a cost report in HCRIS as 
of March 31, 2023. For instance, if a hospital's most recent cost 
reporting period with a cost report in HCRIS as of March 31, 2023, is 
for the cost reporting period of July 1, 2021 to June 30, 2022, we 
would take the total inpatient day count from that cost report. Then we 
would utilize the MEDPAR files and SSI eligibility data available as of 
March 31, 2023, to determine the hospital's Medicare SSI days for the 
discharges occurring in that same cost reporting period of July 1, 
2021, to June 30, 2022.
    Using the most recently available data as of March 31 in advance of 
October 1 each year would allow us a reasonable 6-month timeframe to 
pull data from each of these data sources, address any potential data 
issues, complete the necessary compiling and calculations, perform any 
data integrity checks, determine the 97th percentile and the hospitals 
meeting the threshold based either on the Medicare SSI days or the 
percentage of total inpatient days that are Medicare SSI days, and make 
the results available prior to October 1. States would then have the 
97th percentile results applicable to the State's SPRY that begins 
between October 1 of that calendar year and September 30 of the 
following calendar year. The proposed March 31 date establishes a 
snapshot for a point in time each year that is reasonably close to 
October 1 of that same calendar year that we would use to determine 
what is the ``most recent'' data available for application to the 
upcoming SPRYs, while allowing us sufficient time to process the data 
and make the results available before the start of those SPRYs.
    Given the timing of this rulemaking and the October 1, 2021 
effective date of the amendments made by section 203 of the CAA, we are 
proposing to produce the 97th percentile hospital data for both SPRYs 
beginning during FFY 2022 and SPRYs beginning during FFY 2023 using the 
necessary Medicare SSI days and cost report information as it would 
have been available to us under the timelines proposed herein. For 
example, for the data necessary to determine hospitals meeting the 97th 
percentile exception for SPRYs beginning during FFY 2022, we would 
obtain a snapshot of the HCRIS, MEDPAR, and SSI eligibility data as 
would have been available on March 31, 2021.
    While we propose to include all hospitals that provide Medicaid-
covered inpatient services and file a Medicare cost report in our data 
set, there will be circumstances that will result in some hospitals 
being omitted from the data set. We will begin gathering all necessary 
data after March of each year, based on the data availability described 
previously, in order to develop the data set that will be used to rank 
and indicate which hospitals qualify to meet the 97th percentile 
hospital exception for each State's upcoming SPRY that begins on or 
after October 1 of that year. In accordance to 42 CFR 413.24(f)(2), 
cost reports are generally due 5 months from the end of each hospital's 
cost-reporting period. For example, a hospital with a cost reporting 
year end of September 30th would generally be expected to file a cost 
report by the end of February the following year, while a hospital with 
a cost reporting year end of June 30 would generally be expected to 
file its cost report by the end of November of that year. However, we 
also want to build in a reasonable window for late filing and cost 
report processing into HCRIS. Therefore, we are proposing to include in 
the data set any hospital that has filed a cost report dating back to 
at least September 30, 3 years prior in order to capture as many 
hospitals as possible in our data set. It is unlikely that there would 
be a delay greater than 3 years from when a hospital's cost report is 
generally due to when that cost report is captured in HCRIS. For 
example, when we begin the data-development process for data available 
through March 2023, we would exclude a hospital from the data set that 
does not have a cost report in HCRIS from a cost-reporting period 
ending by September 30, 2020, or later. We are proposing this cutoff in 
order to capture as many hospitals in our data set as possible, but to 
also prevent significant variability in the cost-reporting periods by 
excluding Medicare hospitals whose most recent cost-reporting period 
for which there is a cost report in HCRIS dates back more than 3 years. 
This cutoff is intended to help exclude hospitals that may be inactive 
or terminated from our data set.
    As noted earlier in this section, we are also proposing to include 
in the data set only hospitals that file a Medicare cost report. 
Because the Medicare cost report data are the source of total inpatient 
days, it is necessary for a hospital to file a Medicare cost report to 
calculate a hospital's Medicare SSI day as a percentage of total 
inpatient days. We cannot perform the calculations without this cost 
report information. Therefore, we propose to include only hospitals 
that file a Medicare cost report in the data set. Section 1923(g)(2)(B) 
of the Act recognizes the necessity of the Medicare cost report for the 
implementation of the 97th percentile exception by basing the 
qualification for the exception on the number or percentage of Medicare 
SSI days ``most recent cost reporting period.'' Therefore, we believe 
it is appropriate and consistent with the statutory requirements to 
include only these hospitals that have submitted Medicare cost reports 
in the data set for both 97th percentile exception lists. We do not 
anticipate this to be a problem, since any hospital serving Medicaid 
patients, but that does not file a Medicare cost report, would not 
qualify for the 97th percentile hospital exception. In accordance with 
Sec.  413.24(f), Medicare-participating hospitals are required to file 
cost reports, which are generally due 5 months after the close of each 
cost reporting period. In accordance with Medicare Provider 
Reimbursement Manual, Part II, Section 110, hospitals with no Medicare 
utilization do not

[[Page 11874]]

need to file a cost report, and hospitals meeting low Medicare 
utilization thresholds may file a less than full cost report with 
limited information. Because a hospital would only qualify for the 97th 
percentile hospital exception with a relatively high volume of Medicare 
SSI days, a hospital with no or low Medicare utilization, and 
therefore, with no cost report or with a less than full cost report 
which would not have inpatient days data, would not qualify for the 
97th percentile hospital exception.
    Given that we are proposing to use snapshot cost report, claims, 
and eligibility data in advance of October 1 each year to produce 
nationwide lists applicable for each State's upcoming SPRY beginning on 
or after that October 1, we would not modify the 97th percentile 
qualification results based on a request by one or more individual 
hospitals (or by one or more States, with respect to one or more 
individual hospitals) to update or reconsider hospital cost report, 
claims, or eligibility data. The proposed snapshot approach recognizes 
that, at a given point in time, a hospital's most recent cost reporting 
period for which there is a cost report available in HCRIS, as well as 
the hospital's number of total inpatient days as reported in that most 
recent cost report and number of Medicare SSI days as determined from 
MEDPAR and SSI eligibility data sources, may be subject to future 
revision. However, to determine qualification for the 97th percentile 
hospital exception, we must select a point in time to capture snapshot 
data, and the resulting lists must provide reasonable certainty to 
hospitals and States nationwide regarding which hospitals qualify for 
the exception. This proposed rule would specify the snapshots (and 
their timing) that we would use in qualifying 97th percentile hospitals 
for each SPRY. It would not be prudent or reasonable to continuously 
revisit the 97th percentile hospital qualifications based on changing 
cost report, claims, or eligibility data, outside of those established 
snapshot parameters.
    Nonetheless, we recognize there is a possibility of a mathematical 
or other similar technical error by CMS that could lead to a 
misidentification of the hospitals that qualify for the 97th percentile 
exception. In such a circumstance, we believe that it would be 
appropriate for us to correct our error, recognizing that this could 
result in some hospitals being determined eligible for the 97th 
percentile hospital exception that previously (erroneously) were not so 
listed, and other hospitals losing their previous (erroneous) 
designation as qualifying for the exception. At the same time, we must 
balance this consideration with the recognition that the published 
lists will be relied upon by States and hospitals for identifying which 
hospitals qualify for the exception, hospital-specific limits will be 
set accordingly, and DSH payments will be made; all interested parties 
(including hospitals, the States, and CMS) have an interest in finality 
for these payments after a reasonable time. Accordingly, we are 
proposing to allow 1 year from the posting of the 97th percentile 
hospital lists for States, hospitals, CMS, or other interested parties 
to identify any mathematical or other similar technical error, 
according to instructions that would appear on the published lists. 
Upon CMS verification that an error occurred that affected the 
hospitals appearing on a list of 97th percentile hospitals for a given 
year, we would determine and publish a revised list as soon as 
practicable. We believe 1 year is a reasonable timeline for identifying 
any mathematical or other similar technical error made by CMS, and 
would also allow a corrected qualifying list to be available in advance 
of the start of the independent DSH audit for the respective SPRY in 
most instances. For example, if this rule is finalized as proposed and 
we publish the qualifying lists in 2023 for application retroactively 
to a SPRY that begins October 1, 2021 (that is, SPRY 2022), we could 
post a corrected qualifying list, if necessary, sometime in 2024. Then, 
when the independent audit is performed for that SPRY in 2025, the 
final 97th percentile qualification lists would be available and not 
subject to any further changes. Accordingly, in paragraph (2) of the 
proposed definition of ``97th percentile hospital'' in Sec.  
447.295(b), we propose that CMS would publish lists identifying each 
97th percentile hospital annually in advance of October 1 of each year. 
We propose that CMS would revise a published list only to correct a 
mathematical or other similar technical error that is identified to CMS 
during the one-year period beginning on the date the list is published.
    We propose that the effective date for this and other CAA-related 
proposals, noted in the respective sections, be applicable to fiscal 
years beginning on or after October 1, 2021, to align with the 
effective date of the CAA.
4. Limitations on Aggregate Payments for DSHs Beginning October 1, 1992 
(Sec.  447.297)
    We are proposing to eliminate the Sec.  447.297(c) requirement to 
publish annual DSH allotments in the Federal Register and to provide 
that the Secretary will post preliminary and final national expenditure 
targets and State DSH allotments in the Medicaid Budget and Expenditure 
System/State Children's Health Insurance Program Budget and Expenditure 
System (MBES/CBES) and at Medicaid.gov (or similar successor system or 
website). Current regulations require us to publish the annual DSH 
allotments in the Federal Register. We have found this process to be 
time consuming and administratively burdensome for us, and are 
concerned that it makes providing the information to States and other 
interested parties less timely and accessible. Additionally, because we 
currently notify States directly regarding annual allotment amounts and 
make such information publicly available outside of the Federal 
Register on a routine basis, we find that it is duplicative and 
unnecessary to go through the process of publishing in the Federal 
Register. Therefore, by proposing to eliminate the Sec.  447.297(c) 
requirement to publish annual DSH allotments in the Federal Register 
notice, we would be removing the administratively burdensome task, 
which would allow us to focus our efforts on providing the information 
in a timely and easily accessible manner through the MBES/CBES and at 
Medicaid.gov (or similar successor system or website).
    Additionally, we are proposing in Sec.  447.297(b) and (d)(1) to 
remove the date on which final national targets and allotments are 
published, currently specified as April 1, and revise this timeframe to 
as soon as practicable. In Sec.  447.297(d)(1), we are also proposing 
to remove the phrase ``prior to the April 1 publication date,'' and to 
add in its place the phrase, ``prior to the posting date'' for 
consistency with the new timeframe. We are proposing to remove the 
April 1 publication date to allow for Medicaid expenditures associated 
with the FFY DSH allotment to be finalized. CMS utilizes these amounts 
in the calculations of the 12 percent limit under section 
1923(f)(3)(B)(ii) of the Act. Finally, we are proposing to remove Sec.  
447.297(e), which consists of redundant publication requirements 
already identified in Sec.  447.297(b) through (d), in its entirety, to 
align with our proposed changes Sec.  447.297(c).
5. Reporting Requirements (Sec.  447.299)
a. Calculating Medicaid Shortfall
    We are proposing to revise Sec.  447.299(c)(6), (7), (10), and (16) 
to reflect the statutory changes made by section 203 of the CAA to 
update the methodology for calculating the

[[Page 11875]]

Medicaid shortfall portion (Medicaid costs less Medicaid payments) of 
the hospital-specific DSH limit to only include costs and payments for 
hospital services furnished to beneficiaries for whom Medicaid is the 
primary payer, effective for the SPRY beginning on or after October 1, 
2021, and to include the statutory exception for 97th percentile 
hospitals. Hospitals meeting this exception will calculate their 
hospital-specific DSH limit using the higher value of either the 
hospital-specific DSH limit calculated per methodology which includes 
only costs and payments associated with beneficiaries for whom Medicaid 
is the primary payer, or the hospital-specific DSH limit calculated per 
the methodology in effect on January 1, 2020. We reviewed the other 
data elements in Sec.  447.299(c) to determine if additional updates 
were necessary to account for the changes made by section 203 of the 
CAA. However, we believe these are the only data elements requiring 
updates because these are the only elements that will differ based on 
whether statutory requirements provide for the consideration of all 
Medicaid eligible individuals, or only those for whom Medicaid is the 
primary payer. Therefore, it is only necessary to revise Sec.  
447.299(c)(6), (7), (10), and (16) in order to account for the 
statutory changes made by section 203 of the CAA.
    Accordingly, we are proposing to revise Sec.  447.299(c)(6), which 
specifies that this data element should include inpatient and 
outpatient Medicaid fee-for-service (FFS) basic rate payments paid to 
hospitals, ``not including DSH payments or supplemental/enhanced 
Medicaid payments, for inpatient and outpatient services furnished to 
Medicaid eligible individuals.'' We are proposing this change because, 
for most hospitals, for SPRYs beginning on or after October 1, 2021, 
only those FFS payments for Medicaid eligible individuals for whom 
Medicaid is the primary payer will be counted in the calculation of the 
hospital-specific DSH limit. Therefore, we are proposing to revise 
Sec.  447.299(c)(6) to remove the reference to Medicaid eligible 
individuals and update the regulatory text to indicate that FFS 
payments for inpatient and outpatient hospital services furnished to 
Medicaid individuals in accordance with Sec.  447.295(d) should be 
included in this data element.
    We are also proposing to revise Sec.  447.299(c)(7), which 
specifies that this data element includes payments made to the 
hospitals ``by Medicaid managed care organizations for inpatient 
hospital and outpatient hospital services furnished to Medicaid 
eligible individuals.'' We are proposing this change because for most 
hospitals, for SPRYs beginning on or after October 1, 2021, only 
payments made by Medicaid managed care organizations for Medicaid 
eligible individuals for whom Medicaid is the primary payer will be 
counted in the calculation of the hospital-specific DSH limit. 
Therefore, we are proposing to revise Sec.  447.299(c)(7) to remove the 
reference to Medicaid eligible individuals and update the regulatory 
text to indicate that Medicaid managed care payments for inpatient and 
outpatient hospital services furnished to Medicaid individuals in 
accordance with Sec.  447.295(d) should be included in this data 
element.
    We are also proposing to revise Sec.  447.299(c)(10), which 
specifies that this data element includes ``costs incurred by each 
hospital for furnishing inpatient hospital and outpatient hospital 
services to Medicaid eligible individuals.'' We are proposing this 
change because for most hospitals, for SPRYs beginning on or after 
October 1, 2021, only costs incurred on behalf of Medicaid eligible 
individuals for whom Medicaid is the primary payer will be counted in 
the calculation of the hospital-specific DSH limit. Therefore, we are 
proposing to revise Sec.  447.299(c)(10) to remove the reference to 
Medicaid eligible individuals and update the regulatory text to 
indicate that costs incurred by each hospital for furnishing inpatient 
hospital and outpatient hospital services to Medicaid individuals as 
determined pursuant to Sec.  447.295(d) should be included in this data 
element.
    Finally, we are proposing to revise Sec.  447.299(c)(16), which 
specifies the calculation of uncompensated care costs, which include 
``the total cost of care for furnishing inpatient hospital and 
outpatient hospital services to Medicaid eligible individuals'' and the 
uninsured, which are to be offset by ``Medicaid FFS rate payments, 
Medicaid managed care organization payments, supplemental/enhanced 
Medicaid payments, uninsured revenues, and section 1011 payments for 
inpatient and outpatient hospital services.'' Therefore, we are 
proposing to revise Sec.  447.299(c)(16) to remove the reference to 
Medicaid eligible individuals and update the regulatory text to 
indicate that total annual uncompensated care cost equals the total 
cost of care for furnishing inpatient hospital and outpatient hospital 
services to Medicaid individuals, as determined in accordance with 
Sec.  447.295(d), and to individuals with no source of third-party 
coverage for the hospital services they receive, less the sum of 
payments received on their behalf, should be included in this data 
element.
    We propose that the effective date for this and other CAA-related 
proposals, noted in the respective sections, be applicable to fiscal 
years beginning on or after October 1, 2021, to align with the 
effective date of the CAA.
b. Reporting DSH Overpayments
    To improve the accuracy of identification of provider overpayments 
discovered through the DSH audit process, we are proposing to add an 
additional reporting requirement for annual DSH audit reporting 
required by Sec.  447.299. We are proposing to redesignate Sec.  
447.299(c)(21) as paragraph (c)(22) of that section, and to add a 
proposed new Sec.  447.299(c)(21) to require an additional data element 
for the required annual DSH audit reporting. The new data element we 
are proposing would require auditors to quantify the financial impact 
of any finding, including those resulting from incomplete or missing 
data, lack of documentation, non-compliance with Federal statutes or 
regulations, or other deficiencies identified in the independent 
certified audit, which may affect whether each hospital has received 
DSH payments for which it is eligible within its hospital-specific DSH 
limit.
    Currently, audits may include a caveat indicating the auditors are 
unable to quantify the financial impact of an identified audit finding. 
We propose that, for purposes of this section, audit finding means an 
issue identified in the independent certified audit required under 
Sec.  455.304 concerning the methodology for computing the hospital-
specific DSH limit or the DSH payments made to the hospital, including 
compliance with the hospital-specific DSH limit as defined in Sec.  
447.299(c)(16). For example, an audit may identify that a hospital was 
unable to satisfactorily document the outpatient services it provided 
to Medicaid-eligible patients, resulting in the exclusion of associated 
costs and payments from the Medicaid shortfall calculation. Based on 
this lack of documentation, the audit may include a caveat noting the 
auditor's finding that the hospital's total uncompensated care cost may 
be misstated as a result of this exclusion, with unknown impact on the 
hospital-specific DSH limit. Given this lack of quantification of the 
financial impact of this finding, CMS and the State would be unable to 
determine whether an overpayment has resulted related to this

[[Page 11876]]

audit finding, and if so, the amount. We believe that requiring the 
quantification of such findings would limit the burden on States and 
CMS of performing follow-up reviews or audits. Specifically, conducting 
a secondary review or audit after the independent auditors have 
completed theirs would lengthen the review process, and therefore, 
delay the results of the audit. It would also require additional time, 
personnel, and resources by CMS, States, and hospitals to participate 
in a secondary review or audit, which would largely duplicate aspects 
of the audit already conducted by the independent auditor. If 
finalized, the new data element would help ensure appropriate recovery 
and redistribution, as applicable, of all DSH overpayments in excess of 
the hospital-specific limit. Adding this requirement to the submission 
will also ensure auditors provide the additional information at the 
time they are already reviewing the applicable data, reducing the labor 
burden as opposed to a later, secondary audit.
    Auditors would be afforded the professional discretion and the 
flexibility to determine how to best quantify these amounts in the 
audit findings. For example, auditors would be able to use alternative 
source documentation, utilize a methodology to estimate the financial 
impact in terms of the dollar amount at risk, or provide an estimated 
range of financial impact if a determination of an exact dollar amount 
is not possible. However, we also understand that, due to the 
complexity of issues that may arise, the actual financial impact of an 
audit finding may not always be calculable. Therefore, we propose that, 
in the expectedly rare event that the actual financial impact cannot be 
calculated, a statement of the estimated financial impact for each 
audit finding identified in the independent certified audit that is not 
reflected in the other data elements identified in Sec.  447.299(c) 
would be required. We propose that actual financial impact means the 
total amount associated with audit findings calculated using the 
documentation sources identified in Sec.  455.304(c). Estimated 
financial impact means the total amount associated with audit findings 
calculated on the basis of the most reliable available information to 
quantify the amount of an audit finding in circumstances where complete 
and accurate information necessary to determine the actual financial 
impact is not available from the documentation sources identified in 
Sec.  455.304(c). The estimated financial impact would use the most 
reliable available information (for example, related source 
documentation such as data from State systems, hospitals' audited 
financial statements, and Medicare cost reports) to quantify an audit 
finding as accurately as possible. We believe this additional data 
reporting element is necessary to better enable our oversight of the 
Medicaid DSH program to better ensure compliance with the hospital-
specific DSH limit in section 1923(g) of the Act.
    Additionally, we are proposing to add Sec.  447.299(f), which would 
codify our existing policy for how overpayments identified through the 
annual independent certified DSH audits required under part 455, 
subpart D, must be handled and reported to CMS. Specifically, we 
propose that DSH payments found in the independent certified audit 
process under part 455, subpart D to exceed hospital-specific cost 
limits are provider overpayments which must be returned to the Federal 
Government in accordance with the requirements in 42 CFR part 433, 
subpart F, or redistributed by the State to other qualifying hospitals, 
if redistribution is provided for under the approved State plan. We 
propose that overpayment amounts returned to the Federal Government 
must be separately reported on the Form CMS-64 as a decreasing 
adjustment which corresponds to the fiscal year DSH allotment and 
Medicaid SPRY of the original DSH expenditure claimed by the State.
    We further propose to add Sec.  447.299(g), which would establish 
reporting requirements concerning the redistribution of DSH 
overpayments in accordance with a State's redistribution methodology in 
its Medicaid State plan, as applicable. Specifically, we propose that, 
as applicable, States would be required to report any overpayment 
redistribution amounts on the Form CMS-64 within 2 years from the date 
of discovery that a hospital-specific limit has been exceeded, as 
determined under Sec.  433.316(f) in accordance with a redistribution 
methodology in the approved Medicaid State plan. The State must report 
redistribution of DSH overpayments on the Form CMS-64 as separately 
identifiable decreasing adjustments reflecting the return of the 
overpayment as specified in Sec.  447.299(f) and increasing adjustments 
representing the redistribution by the State. Both adjustments must 
correspond to the fiscal year DSH allotment and Medicaid SPRY of the 
related original DSH expenditure claimed by the State. These proposed 
additions of paragraphs (f) and (g) to Sec.  447.299 would memorialize 
our current policy concerning the return of FFP in or redistribution of 
Medicaid DSH payments in excess of the hospital-specific limit in 
regulation, and thereby promote clarity and transparency, avoid 
misunderstanding, and enhance oversight of the Medicaid DSH program.
    These proposals for the independent certified audit and DSH-related 
claims reporting would enhance Federal oversight of the Medicaid DSH 
program and improve the accuracy of DSH audit overpayments identified 
and collected through annual DSH audits. We invite comments on these 
proposals.
6. Definitions (Sec.  455.301)
    We are proposing to revise the definition of the ``independent 
certified audit'' to include the requirement for auditors to quantify 
the financial impact of each audit finding, or caveat, on an individual 
basis, for each hospital, per the reporting requirement in proposed 
Sec.  447.299(c)(21) and under section 1923(j)(1)(B) of the Act. 
Updating this definition is consistent with the goals of the updates to 
Sec.  447.299(c)(21) to facilitate our determination of whether the 
State made DSH payments that exceeded any hospital's specific DSH limit 
in the Medicaid SPRY under audit. Specifically, as discussed in item 
five of the proposed provisions, we are proposing to add to annual DSH 
reporting required under Sec.  447.299(c) a requirement for States to 
report the financial impact of audit findings identified by the State's 
independent auditor. To align with this proposal, we propose to revise 
the definition of the independent certified audit under Sec.  455.301 
an inclusion of the auditor's certification of ``a quantification of 
the financial impact of each audit finding on a hospital-specific 
basis.'' As previously discussed, based on current independent 
certified DSH audit submissions, we are at times unable to determine 
whether a DSH overpayment to a provider has occurred, the underlying 
cause of any overpayment, and the amount of the overpayment(s) 
associated with each cause. This is the result of an auditor including 
audit findings or caveats indicating that missing information or other 
issues may have an impact on the calculation of total uncompensated 
care costs (that is, the DSH hospital-specific limit), while not making 
a determination of the actual (or estimated) financial impact of the 
identified issue. As such, we believe that revising the definition to 
include a quantification of the financial impact of any issues 
identified in the audit is necessary to better ensure proper oversight 
and integrity of the DSH program.

[[Page 11877]]

    We are soliciting comments related to this proposed change.
7. Condition for Federal Financial Participation (FFP) (Sec.  455.304)
    We are proposing to revise Sec.  455.304(d)(1), (3), (4), and (6) 
to reflect the proposed revisions to the independent certified data 
elements at Sec.  447.299(c)(6), (7), (10), and (16). The revisions 
would reflect the statutory changes made by section 203 of the CAA, 
updating the independent certified audit verifications as they relate 
to the treatment of Medicaid eligibles and third-party payers. We 
reviewed the other independent certified audit verifications in Sec.  
455.304(d) to determine if additional updates were necessary to account 
for the changes made by section 203 of the CAA. However, we believe 
these are the only verifications requiring updates because these are 
the verifications that consider the treatment of Medicaid eligibles for 
purposes of the independent certified audit. Therefore, it is only 
necessary to revise Sec.  455.304(d)(1), (3), (4), and (6) in order to 
account for the statutory changes made by section 203 of the CAA.
    Accordingly, we are proposing to revise Sec.  455.304(d)(1), which 
specifies that auditors should verify that each qualifying hospital 
that receives DSH payments, associated with the provisions of services 
to ``Medicaid eligible individuals and individuals with no source of 
third-party coverage,'' is allowed to retain that payment. We are 
proposing this change because for most hospitals, for SPRYs beginning 
on or after October 1, 2021, the methodology by which these DSH 
payments were calculated and paid will be reflective of Medicaid costs 
and payments associated with Medicaid eligible individuals for whom 
Medicaid is the primary payer. Therefore, we are proposing to revise 
Sec.  455.304(d)(1) to remove the reference to Medicaid eligible 
individuals and update the regulatory text to indicate that the DSH 
payments are associated with inpatient hospital and outpatient hospital 
services provided to Medicaid individuals as determined in accordance 
with Sec.  447.295(d).
    We are also proposing to revise Sec.  455.304(d)(3), which 
specifies that ``Only uncompensated care costs of furnishing inpatient 
and outpatient hospital services to Medicaid eligible individuals'' and 
the uninsured should be included in the calculation of the hospital-
specific DSH limit. We are proposing this change because for most 
hospitals, for SPRYs beginning on or after October 1, 2021, only costs 
incurred on behalf of Medicaid eligible individuals for whom Medicaid 
is the primary payer will be counted in the calculation of the 
hospital-specific DSH limit. Therefore, we are proposing to revise 
Sec.  455.304(d)(3) to remove the reference to Medicaid eligible 
individuals and update the regulatory text to indicate that 
uncompensated care costs for furnishing inpatient hospital and 
outpatient hospital services to Medicaid individuals is determined in 
accordance with Sec.  447.295(d). We are also proposing to revise Sec.  
455.304(d)(3) to streamline this provision by removing a redundant 
reference to section 1923(g)(1)(A) of the Act.
    Further, we are proposing to revise Sec.  455.304(d)(4), which 
specifies that Medicaid payments, including FFS, supplemental/enhanced, 
and Medicaid managed care payments made to a hospital ``for furnishing 
inpatient hospital and outpatient hospital services to Medicaid 
eligible individuals,'' should be included in the calculation of the 
hospital-specific DSH limit. We are proposing this change because for 
most hospitals, for SPRYs beginning on or after October 1, 2021, only 
costs incurred on behalf of Medicaid eligible individuals for whom 
Medicaid is the primary payer will be counted in the calculation of the 
hospital-specific DSH limit. Therefore, we are proposing to revise 
Sec.  455.304(d)(4) to remove the reference to Medicaid eligible 
individuals and update the regulatory text to indicate that the DSH 
payments associated with inpatient hospital and outpatient hospital 
services provided to Medicaid individuals as determined in accordance 
with Sec.  447.295(d) are included in the calculation of hospital-
specific DSH limit.
    Finally, we are proposing to revise Sec.  455.304(d)(6), which 
requires that auditors include a description of the methodology for 
calculation each hospital's hospital-specific DSH limit, including 
``how the State defines incurred inpatient hospital and outpatient 
hospital costs for furnishing inpatient hospital and outpatient 
hospital services to Medicaid eligible individuals.'' We are proposing 
this change because for most hospitals, for SPRYs beginning on or after 
October 1, 2021, the methodology by which these DSH payments were 
calculated and paid will be reflective of Medicaid costs and payments 
associated with Medicaid eligible individuals for whom Medicaid is the 
primary payer. Therefore, we are proposing to revise Sec.  
455.304(d)(6) to remove the reference to Medicaid eligible individuals 
and update the regulatory text to indicate that inpatient hospital and 
outpatient hospital services provided to Medicaid individuals are 
determined in accordance with Sec.  447.295(d).
    We propose that the effective date for this and other CAA-related 
proposals, noted in the respective sections, be applicable to fiscal 
years beginning on or after October 1, 2021, to align with the 
effective date of the CAA.
8. Process and Calculation of State Allotments for FYs After FY 2008 
(Sec.  457.609)
    We have not published CHIP allotments in the Federal Register since 
the FY 2013 CHIP allotments. Each year following FY 2013, States have 
been notified of their CHIP allotments through email notifications or 
MBES/CBES. We propose to remove from Sec.  457.609(h), which references 
our discretionary option to publish in the Federal Register the 
national CHIP allotment amounts as determined on an annual basis for 
the FYs specified in statute. Instead, we are proposing to post CHIP 
allotments in the MBES/CBES and at Medicaid.gov (or similar successor 
systems or websites) annually. We believe that posting the CHIP 
allotment amounts at Medicaid.gov and in the MBES/CBES is an efficient 
way to increase transparency by making the information more easily 
accessible to interested parties and would be less administratively 
burdensome for us.
    We are soliciting any comments related to these proposed changes.

III. Retroactive Application of the Rule

    The amendments made by section Division CC, Title II, section 203 
of the Consolidated Appropriations Act, 2021, require that the changes 
to the calculations of Medicaid hospital-specific DSH limits take 
effect on October 1, 2021, and apply to payment adjustments made under 
section 1923 of the Act during fiscal years beginning on or after that 
date. Accordingly, these provisions of this proposed rule, if 
finalized, will apply retroactively as set out in statute.

IV. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3501 et 
seq.) we are required to provide 60-day notice in the Federal Register 
and solicit public comment before a ``collection of information'' 
requirement is submitted to the Office of Management and Budget (OMB) 
for review and approval. For the purpose of the PRA and this section of 
the preamble, collection of information is defined under 5 CFR 
1320.3(c) of the PRA's implementing regulations.

[[Page 11878]]

    To fairly evaluate whether an information collection should be 
approved by OMB, section 3506(c)(2)(A) of the PRA requires that we 
solicit comment on the following issues:
     The need for the information collection and its usefulness 
in carrying out the proper functions of our agency.
     The accuracy of our estimate of the information collection 
burden.
     The quality, utility, and clarity of the information to be 
collected.
     Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    We are soliciting public comment on each of these issues for the 
following sections of this document that contain information collection 
requirements. Comments, if received, will be responded to within the 
subsequent final rule.

A. Wage Estimates

    To derive average costs, we used data from the U.S. Bureau of Labor 
Statistics' (BLS) May 2021 National Occupational Employment and Wage 
Estimates for all salary estimates (https://www.bls.gov/oes/current/oes_nat.htm). In this regard, Table 1 presents BLS' mean hourly wage, 
our estimated cost of fringe benefits and overhead (calculated at 100 
percent of salary), and our adjusted hourly wage.

                          Table 1--National Occupational Employment and Wage Estimates
----------------------------------------------------------------------------------------------------------------
                                                                             Fringe benefits
          Occupation title             Occupation code    Mean hourly wage   and overhead ($/   Adjusted hourly
                                                               ($/hr)              hr)            wage ($/hr)
----------------------------------------------------------------------------------------------------------------
Accountants and auditors............            13-2011              40.37              40.37              80.74
Financial Specialist all other......            13-2099              38.64              38.64              77.28
Managers all other..................            11-9199              62.36              62.36             124.72
----------------------------------------------------------------------------------------------------------------

    As indicated, we are adjusting our employee hourly wage estimates 
by a factor of 100 percent. This is necessarily a rough adjustment, 
both because fringe benefit and overhead costs vary significantly from 
employer to employer, and because methods of estimating these costs 
vary widely from study to study. Nonetheless, we believe that doubling 
the hourly wage to estimate total cost is a reasonably accurate 
estimation method.

B. Proposed Information Collection Requirements

    The following regulatory sections of this rule contain proposed 
collection of information requirements (or ``ICRs'') that are subject 
to OMB review and approval under the authority of the PRA. Our analysis 
of the proposed requirements and burden follow.
    The remaining provisions are not associated with any information 
collection requirements. In that regard they are not subject to the 
requirements of the PRA and are not addressed under this section of the 
preamble. For this rule's full burden implications, please see the 
Regulatory Impact Analysis under section V. of this preamble.
1. ICRs Regarding DSH Reporting Requirements (Sec.  447.299)
    The following proposed changes will be submitted to OMB for review 
under control number 0938-0746 (CMS-R-266).
    Under Sec.  447.299, this proposed rule would require States to 
provide an additional data element as part of its annual DSH audit 
report. This additional element would require a State auditor to 
quantify the financial impact of any audit finding not captured within 
any other data element under Sec.  447.299(c), which may affect whether 
each hospital has received DSH payments for which it is eligible within 
its hospital-specific DSH limit.
    The proposed additional data element would require auditors to 
indicate the financial impact of all findings rather than indicating 
that the financial impact of any finding is unknown.
    The burden consists of the time it would take each of the States to 
quantify any audit finding identified during the independent certified 
audit required under section 1923(j)(2) of the Act. As we rarely 
receive audits with no identified findings, we will assume for the 
purposes of this estimate that all applicable States will complete this 
work. The territories have been excluded from this proposed requirement 
since they do not receive a DSH allotment under section 1923(f) of the 
Act. We have also excluded Massachusetts from the total burden 
estimate, as it currently does not complete DSH audits because its 
entire DSH allotment amount is diverted for payments under a section 
1115 demonstration project.
    We believe the additional burden associated with the new data 
element would be 2 hours given that auditors are already engaged in a 
focused review of available documentation to quantify the aggregate 
amounts that comprise each of the existing data elements required under 
Sec.  447.299(c). We also estimate that the additional 2 hours would 
consist of 1 hour at $77.28/hr. for a financial specialist to add the 
additional data to the report and 1 hour at $124.72/hr for management 
and professional staff to review the additional data in the report. In 
aggregate we estimate an annual burden of 102 hours (50 States x 2 hr/
response x 1 response/year) at a cost of $10,100 (50 States x [(1 hr x 
$124.72/hr) + (1 hr x $77.28/hr)]).
    If the auditor is unable to determine the actual financial impact 
amount of an audit finding, the auditor would be required to provide a 
statement of the estimated financial impact for each audit finding 
identified in the independent certified audit. For the purposes of this 
burden estimate, we will assume every State may have some quantifiable 
findings and some unquantifiable findings. As such, we anticipate that 
a State auditor would have to spend an additional 1 hour at $80.74/hr 
quantifying the financial impact of DSH findings that are classified as 
unknown. The estimated annual burden would be 50 hours (50 States x 1 
hr) at a cost of $4,037 (50 hr x $80.74/hr).

C. Summary of Annual Burden Estimates for Proposed Requirements

    Table 2 summarizes the burden for the proposed provisions.

[[Page 11879]]



                                            Table 2--Proposed Annual Recordkeeping and Reporting Requirements
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                        Time per      Total
Regulation section(s) under title 42  OMB control No. (CMS ID  Respondents   Responses      Total       response   annual time  Labor costs   Total cost
             of the CFR                         No.)                        (per state)   responses     (hours)      (hours)       ($/hr)        ($)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Sec.   447.299 DSH audit............  0938-0746 (CMS-R-266)..           50            1           51            2          102       varies       10,100
                                                                        50            1           51            1           51        80.74        4,037
                                                              ------------------------------------------------------------------------------------------
    Total...........................  .......................           50            2          102       varies          153       varies       14,137
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The audit requirement proposal represents the only information 
collection provision of this rule. As such, we estimate there would be 
a total annual burden of 153 hours at a cost of $14,420 and an average 
per State burden of 3 hours (153 hr/51 States) and $282.75 ($14,420/51 
States).

D. Submission of PRA-Related Comments

    We have submitted a copy of this proposed rule to OMB for its 
review of the rule's ICRs. The requirements would not be effective 
until they have been approved by OMB.
    To obtain copies of the supporting statement and any related forms 
for the proposed collections discussed in this rule, please visit the 
CMS website at www.cms.hhs.gov/PaperworkReductionActof1995, or call the 
Reports Clearance Office at 410-786-1326.
    We invite public comments on this potential ICR. If you wish to 
comment, please submit your comments electronically as specified in the 
DATES and ADDRESSES section of this proposed rule and identify the rule 
(CMS-2445-P), the ICR's CFR citation, and the OMB control number.

IV. Response to Comments

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

V. Regulatory Impact Analysis

A. Statement of Need

    This proposed rule would codify in Federal regulations the 
statutory requirements of Division CC, Title II, section 203 of the 
CAA, which relate to Medicaid shortfall and third-party payments. These 
changes are necessary to align with Federal statute, and to provide 
States and hospitals an understanding of how qualifying hospitals' DSH 
payments may be impacted by the legislation. These changes are 
necessary in order to reflect the statutory changes to section 1923(g) 
of the Act to update the methodology for calculating the Medicaid 
shortfall portion of the hospital-specific DSH limit to only include 
costs and payments for hospital services furnished to beneficiaries for 
whom Medicaid is the primary payer, and to codify the exception for 
certain hospitals that are in the 97th percentile or above of all 
hospitals with respect to the number of Medicare SSI days or percentage 
of Medicare SSI days to total inpatient days.
    Since we were required to engage in rulemaking in order to codify 
the statutory changes made under the CAA, we are also taking the 
opportunity to update certain DSH regulations in order to provide 
additional clarity and efficiency. The proposed changes to the BNF and 
associated calculations performed under the DHRM will provide better 
clarity for States that divert all or a portion of their DSH allotment 
under an approved section 1115 demonstration.
    Additional Medicaid DSH payments and requirements are addressed in 
this proposed rule. We propose to add additional specificity to the 
reporting requirements of the annual DSH audit conducted by an 
independent auditor to enhance Federal oversight of the Medicaid DSH 
program. Additionally, we seek to improve the accurate identification 
of and collection efforts related to overpayments identified through 
the annual DSH independent certified audits by specifying the date of 
discovery and standards for return of FFP or redistribution of DSH 
payments made to providers in excess of the hospital-specific limit. 
The proposed rule also seeks to alleviate the administrative burden of 
publishing the annual DSH and CHIP allotments in the Federal Register, 
of which we also notify States directly by providing notification 
through other, more practical means.

B. Overall Impact

    We have examined the impacts of this proposed rule as required by 
Executive Order 12866 on Regulatory Planning and Review (September 30, 
1993), Executive Order 13563 on Improving Regulation and Regulatory 
Review (January 18, 2011), the Regulatory Flexibility Act (RFA) 
(September 19, 1980, Pub. L. 96-354), section 1102(b) of the Act, 
section 202 of the Unfunded Mandates Reform Act of 1995 (March 22, 
1995; Pub. L. 104-4), Executive Order 13132 on Federalism (August 4, 
1999), and the Congressional Review Act (5 U.S.C. 804(2)).
    Executive Orders 12866 and 13563 direct agencies to assess all 
costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). Section 
3(f) of Executive Order 12866 defines a ``significant regulatory 
action'' as an action that is likely to result in a rule: (1) having an 
annual effect on the economy of $100 million or more in any 1 year, or 
adversely and materially affecting a sector of the economy, 
productivity, competition, jobs, the environment, public health or 
safety, or State, local or tribal governments or communities (also 
referred to as ``economically significant''); (2) creating a serious 
inconsistency or otherwise interfering with an action taken or planned 
by another agency; (3) materially altering the budgetary impacts of 
entitlement grants, user fees, or loan programs or the rights and 
obligations of beneficiaries 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.
    Based on our estimates using a ''no action'' baseline, OMB's Office 
of Information and Regulatory Affairs has determined that this 
rulemaking is ``economically significant,'' as discussed in more detail 
in this section.

C. Detailed Economic Analysis

    Some amendments made by the CAA required us to propose regulatory 
updates, but there are statutory changes that are effective regardless 
of our actions. Typically, under OMB Circular

[[Page 11880]]

A-4, our analysis for instances such as this would utilize a ``pre-
statute'' baseline. However, we are unable to assess the impact of the 
statutory changes in a meaningful way. Therefore, for the purposes of 
assessing the incremental economic impact, we determined the most 
appropriate analysis is to compare the effects of this rulemaking 
against a ``no action'' baseline in accordance with OMB Circular A-4. 
This baseline incorporates the statutory changes made by the CAA that 
do not require rulemaking to be in effect, such as the change to the 
definition of Medicaid shortfall. This will be the focus of our 
analysis. Similarly, for the non-CAA-required or related DSH provisions 
in this proposed rule, our analytical baseline is a direct comparison 
between the proposed provisions and not proposing the rule.
    Because the impact of our rule depends on downstream impacts of 
changes created in statute unaffected by this rulemaking, such as the 
change to only include Medicaid costs and payments in the hospital-
specific DSH limit when Medicaid is the primary payer, calculating 
financial cost and transfer impacts specific to this rulemaking 
presents challenges which we will discuss further in those sections.
1. Benefits
    The policies in this proposed rule, if finalized, would enhance 
Federal oversight of the Medicaid DSH program, improve the accuracy of 
DSH audit overpayments identified through and collected as a result of 
annual DSH audits, and provide clarity on certain existing Medicaid DSH 
policies. This proposed rule would clarify existing CMS policy by 
codifying that the date of discovery of DSH overpayments is determined 
according to the date on which the State submits its annual DSH 
independent certified audit to CMS, or any of the dates specified in 
Sec.  433.316(c). Further, this proposed rule would provide additional 
transparency regarding the DSH allotment reductions calculated under 
the DHRM, specifically regarding the BNF, by updating the applicable 
regulations to specify that amounts diverted under a section 1115 
demonstration approved after July 31, 2009, or approved as of that date 
but for a purpose other than coverage expansion, are subject to 
reduction under the HMF and HUF. Further, these regulatory updates 
would provide transparency regarding how the amounts diverted under a 
section 1115 demonstration are to be determined and applied in the 
DHRM. In addition, this proposed rule includes specific details related 
to the development and application of the data set used to determine 
the qualification for the exception for 97th percentile hospitals. This 
proposed rule details how hospital-specific DSH limits should be 
calculated under section 1923(g) of the Act and reported in the 
independent certified audit, as specified in Sec.  447.299(c). Further, 
the proposed additional data reporting element in Sec.  447.299(c)(21) 
would strengthen CMS oversight of the Medicaid DSH program and better 
ensure compliance with the hospital-specific DSH limit under section 
1923(g) of the Act. Finally, this proposed rule would also allow CMS to 
provide annual DSH and CHIP allotment information in a timely and 
assessible manner while reducing unnecessary administrative burden by 
eliminating the Sec. Sec.  447.297(c) and 457.609 requirement and 
option, respectively, to publish these annual allotments in a Federal 
Register notice.
2. Costs
    Under Sec.  447.299, this proposed rule would require States to 
determine the hospital-specific DSH limit for hospitals meeting the 
exception for 97th percentile hospitals. For these hospitals, the 
hospital-specific DSH limit is calculated using the higher value of 
either the hospital-specific DSH limit amount determined for the 
hospital under section 1923(g)(1)(A) of the Act as amended by section 
203 of the CAA or the amount determined for the hospital under section 
1923(g)(1)(A) of the Act as in effect on January 1, 2020. This amount 
will be captured under the reporting element at Sec.  447.299(c)(10). 
While we propose that CMS will produce the source of data used to 
identify hospitals qualifying to meet the exception for 97th percentile 
hospitals, this will require a State auditor to calculate two separate 
hospital-specific DSH limits and determine the higher value thereof for 
hospitals meeting this exception. Given this exception applies to a 
limited number of hospitals and that the identity of these hospitals 
and the information required to determine their hospital-specific DSH 
limit amounts under both calculations would be based on readily 
available information, we believe the additional burden associated with 
determining the hospital-specific DSH limit for hospitals qualifying 
under this exception to be minimal.
    To estimate the overall burden of adding this requirement for the 
calculation of the hospital-specific DSH limit for hospitals meeting 
the exception for 97th percentile hospitals, we considered the number 
of annual independent certified audits received by CMS in addition to 
the limited number of hospitals that will qualify under this exception. 
In order for States to assess which hospitals meet the exception, we 
estimate that it would take approximately 2 hours, consisting of: 1 
hour at $77.28/hr for a financial specialist to prepare the 
aforementioned spreadsheet report, and 1 hour at $124.72/hr for 
management and professional staff to review the report. In the 
aggregate, we estimate an ongoing annual burden of 102 hours (51 States 
x 2 hr/response x 1 response/year) at a cost of $10,302 ((51 States x 
[(1 hr $124.72/hr) + (1 hr x $77.28/hr)] or $202 per State ($10,302/51 
States). Additionally, we anticipate that a State auditor would have to 
spend an additional hour verifying the hospital-specific DSH limits for 
hospitals meeting the exception for 97th percentile hospitals. The 
estimated annual burden would be 1 hour per State (51 States x 1 hour) 
51 hours x $80.74/hr for auditors to complete the audit at a cost of 
$4,118 per year (51 States x 1 hour x $80.74 per hour). The total cost 
of this provision of the proposed rule would be $14,420 ($10,302 + 
$4,118) and 153 hours, or $282.74 and 3 hours per State.
    The additional DSH audit data reporting element creates a burden of 
153 hours at a cost of $14,420, with an average of 3 hours ($282.74 hr/
51 States) at a cost of $282.74 per State Medicaid agency per year 
($14,420/51 States).
    We do not estimate there will be a cost impact related to the DHRM 
BNF proposal. This proposal merely provides clarification regarding how 
amounts are determined, and the impact of the policy itself was 
accounted for the in the 2019 final rule that finalized the factor 
amounts. Therefore, the only costs would be associated with review of 
this rule, which are accounted for in Part 4 of this section.
    Similarly, there will be no cost impact related to the proposals to 
publish DSH and CHIP allotments through an alternative means. Under 
current CMS practice, States are already informed of their allotment 
amounts prior to the Federal Register publication, so the removal of 
that step will not require a change in entities' practices or systems.
3. Transfers
    Although the policies discussed in this proposed rule would affect 
the calculation of the hospital-specific DSH limit established at 
section 1923(g) of the Act and some providers may see a decrease in 
their historic hospital-specific DSH limits, these effects are a direct 
result of statutory changes rather

[[Page 11881]]

than the proposals in this rule. In addition, some providers may see an 
increase in their historic hospital-specific DSH limits, again as a 
result of the changes made by statute. Further, lower hospital-specific 
DSH limits for some hospitals may result in States choosing to 
distribute higher DSH payments to hospitals that historically had not 
been paid at higher levels. We note that this rule would not affect the 
considerable flexibility afforded States in setting DSH State plan 
payment methodologies to the extent that these methodologies are 
consistent with section 1923(c) of the Act and all other applicable 
statutes and regulations. Therefore, we cannot predict whether and how 
States would exercise their flexibility in setting DSH payments to 
account for changes in historic hospital-specific DSH limits and how 
this would affect individual providers or specific groups of providers. 
We invite comments from State agencies and hospitals providing 
information or data for the calculation of these estimates.
4. Regulatory Review Cost Estimation
    If regulations impose administrative costs on private entities, 
such as the time needed to read and interpret this proposed rule, we 
estimate the cost associated with regulatory review. Due to the 
uncertainty involved with accurately quantifying the number of entities 
that will review the rule, we assume that States, Medicaid DSH 
hospitals, and independent auditors will be likely reviewers of this 
proposed rule. We acknowledge that this assumption may understate or 
overstate the costs of reviewing this rule. It is possible that not all 
Medicaid DSH hospitals will choose to review individually, or that 
State agencies will have multiple people in different roles review. 
Nevertheless, we thought the entities directly or indirectly impacted 
by this rule served as the best basis. As such, we will assume half of 
the approximately 2,700 Medicaid DSH hospitals will review the rule, in 
addition to at least one person from each of the 51 State agencies 
impacted by this rule, and at least one person from the independent DSH 
auditor for each of the 51 States, resulting in 1,502 total entities. 
We welcome any comments on the approach in estimating the number of 
entities which will review this proposed rule.
    Although this rule has a number of provisions, they more or less 
all relate to DSH, and we assume entities with DSH equities will review 
the entire rule. Using the wage information from the BLS, https://www.bls.gov/oes/current/oes119111.htm, for medical and health service 
managers (Code 11-9111), we estimate that the cost of reviewing this 
rule is $115.22 per hour, including overhead and fringe benefits. We 
estimate that it would take approximately 2 hours for the staff to 
review this proposed rule. For each entity that reviews the rule, the 
estimated cost is $230.44 (2 hours x $115.22). Therefore, we estimate 
that the total one-time cost of reviewing this regulation is $346,121 
($230.44 x 1,502).

D. Alternatives Considered

    In developing this proposed rule, the following alternatives were 
considered:
1. Not Proposing the Rule
    Before undertaking this rulemaking, we examined if States and 
hospitals could have the necessary information regarding the changes 
made by the CAA through alternative sub-regulatory guidance. However, 
upon review we concluded that, due to the changes to regulatory 
language necessitated by the legislation, rulemaking was necessary. 
Apart from that, we considered not including the additional DSH 
proposals and maintaining the status quo. However, based on the 
generally favorable response these proposals received in prior 
rulemaking that was not finalized, we determined it the best use of our 
time and resources to include them once the need for rulemaking was 
identified.
2. The 97th Percentile Hospital Qualification Data Source
    We considered using a readily existing data source to determine the 
application of this exception. In State Medicaid Director letter #21-
006, we indicated that we assessed the ability to utilize the Medicare 
SSI days and ratio information for use in the Medicare DSH adjustment 
calculation for IPPS hospitals. However, we determined that this data 
source is not appropriate because the Medicare SSI ratio is determined 
using total Medicare Part A days in the denominator, while section 
1923(g)(2)(B) of the Act specifies that a hospital must be at least in 
the 97th percentile of all hospitals with respect to its percentage of 
total inpatient days made up of patients who are both entitled to 
Medicare Part A and entitled to SSI benefits. In addition, the Medicare 
SSI days and ratio information made available by CMS for the Medicare 
DSH adjustment calculations does not include all types of hospitals 
that receive Medicaid DSH payments, including critical access hospitals 
and inpatient psychiatric facilities. Finally, the Medicare SSI days 
and ratio data made available by CMS for the Medicare DSH adjustment 
calculations are calculated based on the FFY, while the 97th percentile 
determination under section 1923(g)(2)(B) of the Act is based on the 
hospitals' most recent cost reporting periods. As such, we determined 
that it is necessary for CMS to develop an appropriate source of data 
that both featured a broader, although not exhaustive, universe of 
hospitals and aligned with statutory definition for the exception as 
set forth in section 1923(g)(2)(B) of the Act. The data we are using 
for the 97th percentile determination is inclusive of all hospital 
types; however, an individual hospital would be excluded if it does not 
have a Medicare cost report in the most recent cost reporting period 
that meets our selection parameters as discussed in this proposed rule.
    We considered that the October 1, 2021 statutory effective date of 
section 203 of the CAA would apply to the FFY beginning October 1, 
2021. However, we believe that this application does not align with 
how, for purposes of the DSH program, FY has been interpreted to refer 
to the applicable to the SPRY in prior rulemaking. Further, we believe 
an FFY application would be burdensome on States and hospitals. For 
example, if a State has a SPRY that does not align with the FFY and a 
hospital qualifies for the 97th percentile hospital exception for one 
FFY but not the next, the State would potentially need to prorate the 
total uncompensated care costs within a SPRY to account for this 
scenario. This process would need to be performed for each hospital and 
in each SPRY when this scenario occurs.
    We considered proposing that the exception for 97th percentile 
hospitals be applied on a Statewide rather than a national level. 
However, the statutory language under section 203 of the CAA refers to 
``97th percentile of all hospitals,'' which we believe is most 
consistent with a national, rather than a State-level ranking.
    We considered determining a hospital's qualification for the 97th 
percentile exception for each SPRY on a retroactive basis in order to 
better align the time periods associated with the cost report and SSI 
eligibility data with the SPRY subject to qualification. However, this 
application would require CMS to retroactively rank and qualify 
hospitals for a SPRY based on actual Medicare SSI days and ratios for 
services furnished during that SPRY. This application would create 
uncertainty for States and hospitals in making DSH payments and 
calculating hospital-specific DSH limits, given the time delay inherent 
in a retroactive application of the exception. This

[[Page 11882]]

approach also likely would require more financial transactions to 
return payments to hospitals in excess of the hospital-specific DSH 
limits to the State, which would then be required to return associated 
FFP to CMS or redistribute the returned overpayment amounts to other 
qualifying hospitals. Similar increases in financial transactions would 
occur in a State that paid below its hospital-specific DSH limits. 
These additional transactions would be administratively burdensome, and 
potentially financially burdensome in particular for the hospitals 
required to return additional amounts.
    With respect to rounding, for performing the calculations necessary 
for the determination of hospitals qualifying for the 97th percentile 
exception, we considered various mathematical approaches. We considered 
an approach of rounding down the 97th percentile threshold while 
rounding up each hospital's own value in order to be more generous to 
potentially allow additional hospitals qualify for the exception. 
However, we believe this would create an inconsistent rounding policy 
and could be viewed as arbitrary. Therefore, we proposed what we 
believe to be a more consistent mathematical approach.
    We considered utilizing only most recent audited or settled cost 
reporting period, but have determined that the use of as-submitted cost 
reporting period would result in more current and more consistent 
reporting periods across hospitals. Further, we considered using the 
total patient day count from only the ``as submitted'' cost report from 
the most recent cost reporting period even if there happens to be a 
later status (such as amended or settled or reopened) on that same cost 
report. However, we have determined that even though the total patient 
days seldom change between the as-submitted, amended, settled, and 
reopened cost reports, we should still use the latest available data. 
As such, we have proposed to use the total inpatient days from the cost 
report with the most updated cost report status, for the most recent 
cost reporting period, available on the day that the data are pulled, 
in determining the hospitals that meet the 97th percentile threshold.
    We are proposing to use Medicare SSI days associated with 
discharges occurring within each hospital's most recent cost reporting 
period. We did consider identifying Medicare SSI days for the inpatient 
days occurring within each hospital's most recent cost reporting period 
instead. However, the claims data that we are using identifies the 
number of Medicare SSI days for each inpatient hospital stay as a 
whole. We do not believe it is practical or necessary to attempt to 
allocate Medicare SSI days between two cost reporting periods for those 
inpatient hospital stays that straddle between two cost reporting 
periods, when using days associated with discharges occurring within a 
cost reporting also results in an equitable counting of days and is 
consistent with how Medicare identifies Medicare SSI days for Medicare 
DSH purposes, as explained earlier in this rule.
    We considered proposing to utilize only covered Medicare Part A 
days when collecting data and calculating hospital percentiles. Using 
only covered Medicare Part A days would have meant in determining the 
Medicare SSI days for each inpatient stay, we would have to limit the 
Medicare SSI days to no more than the covered Medicare Part A days for 
that stay. The statutory language set forth in law by section 203 of 
the CAA specifically describes the Medicare SSI days as relating to 
patients who were entitled to benefits under part A of title XVIII and 
were entitled to SSI benefits under title XVI. As such, we believe the 
calculations must include all Medicare Part A inpatient days, whether 
covered or non-covered, in the associated calculations. As discussed 
previously, the use of covered and non-covered days is also consistent 
with Medicare's DSH adjustment calculation for IPPS hospitals.
    We considered not including the distinct part unit days reported on 
each hospital's Medicare cost report where the hospital has 
rehabilitation distinct part units and psychiatric distinct part units, 
in addition to the hospital's acute inpatient days. However, for 
Medicaid purposes, the DSH uncompensated care costs of the hospital 
would be inclusive of the costs of these rehabilitation and psychiatric 
distinct part units that provide inpatient hospital services; 
therefore, the hospital's Medicare SSI days and total inpatient days 
should be inclusive of these distinct part unit days in our 
calculations of hospitals that meet the 97th percentile threshold.
    In determining when we can begin to collect and assemble the 
necessary data prior to the beginning of each upcoming SPRY that begins 
on or after October 1 each year, we are proposing to use HCRIS, MEDPAR, 
and SSI eligibility data as they exist as of March 31, in advance of 
October 1 of that same calendar year. We considered using a date closer 
to October 1, such as June 30, as the point in time to pull the ``most 
recent'' data available for application to the upcoming SPRYs. However, 
we selected March 31 to ensure there is sufficient time to gather the 
data, work through any potential data issues, perform the necessary 
calculations, and make the 97th percentile results available in advance 
of October 1. We also considered using a date in the preceding calendar 
year for the HCRIS snapshot while using a date in the current calendar 
year for the MEDPAR and SSI eligibility data snapshot. This alternative 
would allow greater assurance that for all the most recent cost 
reporting periods as of that HCRIS snapshot date, the claims data for 
services furnished in those identified cost reporting periods from a 
later MEDPAR and SSI eligibility snapshot date would include a longer 
claims run out period. However, we are not proposing this approach 
because we would no longer be utilizing ``the most recent cost 
reporting period'' for which there is a cost report available in HCRIS 
at the time we are performing this data extract and 97th percentile 
determination each year, as required by the amendments made by section 
203 of the CAA.
    Given the delay in developing a data set to implement section 203 
of the CAA, we have proposed to determine the annual 97th percentile 
qualification using data available as it would have been available at 
the time it would have otherwise been collected and assembled prior to 
the SPRY to which it would apply, for SPRYs beginning during FFY 2022 
and FFY 2023. We considered utilizing the most recently available cost 
report data available following the finalization of this rule in order 
to produce the source of data to qualify 97th percentile hospitals for 
both the current and past periods affected by section 203 of the CAA. 
However, we believe that the approach would result in some hospitals 
that would have otherwise qualified to meet the exception based on CMS' 
proposed data set timelines to not qualify if this more recent data are 
utilized. This could disqualify and penalize hospitals, that would have 
met the exception at that time, for a reason that was beyond their 
control. Conversely, some hospitals could qualify for the exception for 
SPRYs 2022 and 2023 based on the more recent data but would not have 
qualified using CMS' proposed data timelines. We believe it is more 
equitable to use the proposed data timeline consistently for all SPRYs 
beginning on or after October 1, 2021, regardless of the delay in the 
implementation. We have capability within the data source systems to 
retroactively extract such data as they existed at those particular 
points in time

[[Page 11883]]

(that is, March 31, 2021 for application to SPRYs beginning during FFY 
2022 and March 31, 2022, for application to SPRYs beginning during FFY 
2023).
    We considered proposing a process in order include information for 
hospitals that do not have Medicare cost reports in the data set used 
to determine which hospitals meet the exception for 97th percentile 
hospitals. However, without a cost report CMS would not have the total 
inpatient day count readily available to compute the Medicare SSI day 
ratio. Even if we were to consider an alternative mechanism outside of 
the existing Medicare cost report data to collect total inpatient days 
data from those hospitals without Medicare cost reports in HCRIS, there 
would not be a way to define what the most recent cost reporting period 
would be for those hospitals that would be consistent with how we are 
defining it as proposed for hospitals that do have a cost report, which 
is based on what is the most recent cost reporting period available in 
HCRIS at a given point in time in advance of October 1 each year. Given 
that the plain language of section 203 of the CAA points to the days 
for ``the most recent cost reporting period,'' and we would not be able 
to associate these hospitals' nominal Medicare Part A days found in 
MEDPAR with a cost report, we believe it is reasonable to exclude 
hospitals with no cost report from the data set.
    For hospitals with cost reports that are for periods less than 1 
year, we considered annualizing the number of days for ranking purposes 
for qualification of the 97th percentile exception. However, hospitals 
with a short cost reporting period would still have an opportunity to 
qualify to meet the exception on the basis of the percentage of their 
Medicare SSI days to total inpatient days. Also, annualizing hospitals 
with a short cost reporting period could push a hospital with 12-month 
cost reporting period, that would have otherwise qualified, out of the 
ranking to qualify for the 97th percentile exception, based on what is 
in effect hypothetical data from another hospital's partial-year cost 
reporting period that would be extrapolated to a full year. 
Furthermore, for hospitals with cost reports that are for periods of 
greater than 1 year, we also considered annualizing the number of days 
to 12 months. However, doing that would again mean we are not using the 
number of days from the most recent cost reporting period as they are, 
and in this case potentially adversely affecting that hospital's own 
qualification for the 97th percentile exception by reducing its number 
of days hypothetically. Consistent with the treatment of hospitals with 
cost reports that are for periods less than 1 year, we are proposing to 
use the data as they are and not annualize for hospitals with cost 
reports that are for period greater than 1 year.
    CMS considered various alternatives for making the determination 
regarding how far back the time period of a hospital's cost report 
could relate to in order to be included in the data set for the 
calculation of hospitals that meet the 97th percentile threshold 
exception. While we proposed not including any cost report ending 
earlier than September 30, 3 years prior to the March 31 snapshot date 
for compiling the data set, we considered a shorter cutoff, such as 
excluding any cost report ending earlier than September 30, 2 years 
prior to the March 31 snapshot date. However, we were concerned that 
establishing too short of a cutoff could exclude a material number of 
hospitals due to either delays in hospitals filing cost reports or 
delays in the transmitting and processing of cost report files into 
HCRIS. Conversely, we considered a longer cutoff than 3 years, but we 
were concerned this could create too much variability in the cost 
reporting periods and would also capture in the data set hospitals that 
are currently inactive or terminated. To control the uniformity in the 
cost reporting periods we are using, we also considered using only cost 
reports that begins or ends within a set FFY, but we would have to have 
selected a sufficiently old FFY in order to have a reasonably complete 
universe of hospitals due to time lags in cost reports showing up in 
HCRIS; in that case, for some hospitals those cost reports would no 
longer be for the most recent cost reporting period for which the 
hospital has a cost report in HCRIS. We believe our proposed cutoff is 
equitable in ensuring there is general consistency in the cost 
reporting periods used, conforms with the use of ``most recent cost 
reporting period,'' and is practical for implementation purposes.
3. Audit Requirement To Quantify Financial Impact of Audit Findings
    We considered proposing to require auditors to clarify the impact 
of audit findings and caveats within the existing data element report 
by incorporating finding amounts into existing data elements (for 
example, Total Medicaid Uncompensated Care). However, this option may 
not enable auditors to effectively capture financial impacts of 
specific issues and such findings might not be readily transparent to 
States, CMS, and hospitals, as the quantified impacts of potential 
errors would be folded into figures that utilize verified data. 
Therefore, we opted to include this as an additional, discrete data 
element on the DSH report to ensure our ability to assess a quantified 
impact or the extent to which there is an issue that cannot be 
quantified.
4. Clarifying the Discovery Date for DSH Overpayments and 
Redistribution Requirements
    We considered proposing to use the date that the auditor submits 
the independent certified audit to the State as the date of discovery 
for DSH overpayments identified through the independent certified 
audit, but ultimately decided to consider the date that a State submits 
the independent certified audit to CMS as the discovery date. The 
earlier date would start the clock for State repayment of FFP without 
regard to possible work that may need to occur between States and 
auditors to finalize the audit and associated reporting prior to 
submission to CMS.
5. Technical Changes To Publishing DSH and CHIP Allotments
    We considered continuing the requirement and option to publish the 
DSH and CHIP allotments, respectively, in the Federal Register. 
However, we believe this is unnecessary as States are already informed 
regarding their annual DSH and CHIP allotments prior to the publication 
of the Federal Register notice that we now provide. In addition, we did 
not receive negative feedback via public comment when this change was 
proposed in prior rulemaking.

E. Accounting Statement and Table

    As required by OMB Circular A-4 (available at https://obamawhitehouse.archives.gov/omb/circulars_a004_a-4/), we have prepared 
an accounting statement in Table 3 showing the classification of the 
costs associated with the provisions of this proposed rule.

[[Page 11884]]



                        Table 3--Accounting Statement--Classification of Estimated Costs
----------------------------------------------------------------------------------------------------------------
                                                                                       Units
                                                                 -----------------------------------------------
                    Category                         Estimates                     Discount rate
                                                                       Year             (%)       Period covered
----------------------------------------------------------------------------------------------------------------
                      Costs
----------------------------------------------------------------------------------------------------------------
Annualized Monetized ($million/year)............            0.01            2021               7       2022-2032
                                                            0.01            2021               3       2022-2032
----------------------------------------------------------------------------------------------------------------
                From Whom to Whom                                        Federal to States
----------------------------------------------------------------------------------------------------------------
Annualized Monetized ($million/year)............            0.04            2021               7            2022
                                                            0.04            2021               3            2022
----------------------------------------------------------------------------------------------------------------
                From Whom to Whom                                     Regulatory Review Costs
----------------------------------------------------------------------------------------------------------------

F. Regulatory Flexibility Act (RFA)

    The RFA requires agencies to analyze options for regulatory relief 
of small entities, if a rule has a significant impact on a substantial 
number of small entities. 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 $8.0 million to $41.5 
million in any 1 year). Individuals and States are not included in the 
definition of a small entity. As its measure of significant economic 
impact on a substantial number of small entities, HHS uses a change in 
revenue of more than 3 to 5 percent. We do not believe that this 
threshold will be reached by the provisions in this proposed rule.
    This rule establishes requirements that are solely the 
responsibility of State Medicaid agencies, which are not small 
entities. Therefore, the Secretary certifies this proposed rule would 
not, if promulgated, have a significant economic impact on a 
substantial number of small entities.
    In addition, section 1102(b) of the Act requires us to prepare a 
regulatory impact analysis if a rule may have a significant impact on 
the operations of a substantial number of small rural hospitals. This 
analysis must conform to the provisions of section 603 of the RFA. For 
purposes of section 1102(b) of the Act, we define a small rural 
hospital as a hospital that is located outside of a metropolitan 
statistical area and has fewer than 100 beds. This rule will not have a 
significant impact on the operations of a substantial number of small 
rural hospitals.

G. Unfunded Mandates Reform Act (UMRA)

    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) also 
requires that agencies assess anticipated costs and benefits before 
issuing any rule whose mandates require spending in any 1 year of $100 
million in 1995 dollars, updated annually for inflation. In 2022, that 
threshold is approximately $165 million. This rule does not contain 
mandates that will impose spending costs on State, local, or tribal 
governments in the aggregate, or by the private sector, in excess of 
the threshold.

H. Federalism

    Executive Order 13132 establishes certain requirements that an 
agency must meet when it issues a proposed rule that imposes 
substantial direct requirement costs on State and local governments, 
preempts State law, or otherwise has federalism implications. This rule 
does not impose substantial direct costs on State or local governments, 
preempt State law, or otherwise have federalism implications.

I. Conclusion

    If the policies in this proposed rule are finalized, it will enable 
CMS to implement statutory changes, strengthen financial oversight, 
clarify existing financial management policies, and reduce unnecessary 
administrative burden.
    The analysis in this section V., together with the rest of this 
preamble, provides a regulatory impact analysis. In accordance with the 
provisions of Executive Order 12866, this proposed rule was reviewed by 
the Office of Management and Budget.
    Chiquita Brooks-LaSure, Administrator of the Centers for Medicare & 
Medicaid Services, approved this document on February 7, 2023.

List of Subjects

42 CFR Part 433

    Administrative practice and procedure, Child support, Claims, Grant 
programs--health, Medicaid, Reporting and recordkeeping requirements.

42 CFR Part 447

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

42 CFR Part 455

    Fraud, Grant programs--health, Health facilities, Health 
professions, Investigations, Medicaid, Reporting and recordkeeping 
requirements.

42 CFR Part 457

    Administrative practice and procedure, Grant programs--health, 
Health insurance, Reporting and recordkeeping requirements.

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

PART 433--STATE FISCAL ADMINISTRATION

0
1. The authority citation for part 433 continues to read as follows:

    Authority:  42 U.S.C. 1302.

0
2. Amend Sec.  433.316 by--
0
a. Redesignating paragraphs (f) through (h) as paragraphs (g) through 
(i), respectively; and
0
b. Adding a new paragraph (f).
    The addition reads as follows:


Sec.  433.316  When discovery of overpayment occurs and its 
significance.

* * * * *
    (f) Overpayments identified through the disproportionate share 
hospital

[[Page 11885]]

(DSH) independent certified audit. In the case of an overpayment 
identified through the independent certified audit required under part 
455, subpart D, of this chapter, CMS will consider the overpayment as 
discovered on the earliest of the following:
    (1) The date that the State submits the independent certified audit 
report required under Sec.  455.304(b) of this chapter to CMS.
    (2) Any of the dates specified in paragraph (c)(1), (2), or (3) of 
this section.
* * * * *

PART 447--PAYMENTS FOR SERVICES

0
3. The authority citation for part 447 continues to read as follows:

    Authority:  42 U.S.C. 1302 and 1396r-8.

0
4. Amend Sec.  447.294 by revising paragraphs (e)(12) introductory text 
and (e)(12)(i) and (ii) to read as follows:


Sec.  447.294  Medicaid disproportionate share hospital (DSH) allotment 
reductions.

* * * * *
    (e) * * *
    (12) Section 1115 budget neutrality factor (BNF) calculation. This 
factor is only calculated for States for which all or a portion of the 
DSH allotment was included in the calculation of budget neutrality 
under a section 1115 demonstration pursuant to an approval on or before 
July 31, 2009. CMS will calculate the BNF for qualifying States by the 
following:
    (i) For States in which the State's DSH allotment was included in 
the budget neutrality calculation for a coverage expansion that was 
approved under section 1115 as of July 31, 2009, determining the amount 
of the State's DSH allotment included in the budget neutrality 
calculation for coverage expansion. This amount is not subject to 
reductions under the HMF and HUF calculations. DSH allotment amounts 
included in the budget neutrality calculation for purposes other than 
coverage expansion for a demonstration project under section 1115 that 
was approved as of July 31, 2009 are subject to reduction as specified 
in paragraphs (e)(12)(ii) through (iv) of this section. For States 
whose DSH allotment was included in the budget neutrality calculation 
for a demonstration project that was approved under section 1115 after 
July 31, 2009, whether for coverage expansion or otherwise, the entire 
DSH allotment amount that was included in the budget neutrality 
calculation is subject to reduction as specified in paragraphs 
(e)(12)(ii) through (iv) of this section.
    (ii) Determining the amount of the State's DSH allotment included 
in the budget neutrality calculation subject to reduction. The amount 
to be assigned reductions under paragraphs (e)(12)(iii) and (iv) of 
this section is the total of each State's DSH allotment diverted under 
an approved 1115 demonstration during the period that aligns with the 
associated State plan rate year DSH audit utilized in the DSH allotment 
reductions.
* * * * *
0
5. Amend Sec.  447.295 by adding a definition for ``97th percentile 
hospital'' in alphanumerical order in paragraph (b) and by revising 
paragraph (d) to read as follows:


Sec.  447.295  Hospital-specific disproportionate share hospital 
payment limit: Determination of individuals without health insurance or 
other third party coverage.

* * * * *
    (b) * * *
    97th percentile hospital means a hospital that is in at least the 
97th percentile of all hospitals nationwide with respect to the 
hospital's number of inpatient days or the hospital's percentage of 
total inpatient days, for the hospital's most recent cost reporting 
period, made up of patients who were entitled to benefits under part A 
of title XVIII and supplemental security income benefits under title 
XVI (excluding any State supplementary benefits paid).
    (i) CMS will identify the 97th percentile hospitals, for each 
Medicaid State plan rate year beginning on or after October 1, 2021, 
using Medicare cost reporting and claims data sources, as well as 
supplemental security income eligibility data provided by the Social 
Security Administration.
    (ii) CMS will publish lists identifying each 97th percentile 
hospital annually in advance of October 1 of each year. CMS will revise 
a published list only to correct a mathematical or other similar 
technical error that is identified to CMS during the one-year period 
beginning on the date the list is published.
* * * * *
    (d) Hospital-specific DSH limit calculation. (1) For each State's 
Medicaid State plan rate years beginning prior to October 1, 2021, and 
subject to paragraph (d)(3) of this section, only costs incurred in 
providing inpatient hospital and outpatient hospital services to 
Medicaid individuals, and revenues received with respect to those 
services, and costs incurred in providing inpatient hospital and 
outpatient hospital services, and revenues received with respect to 
those services, for which a determination has been made in accordance 
with paragraph (c) of this section that the services were furnished to 
individuals who have no source of third-party coverage for the specific 
inpatient hospital or outpatient hospital service are included when 
calculating the costs and revenues for Medicaid individuals and 
individuals who have no health insurance or other source of third-party 
coverage for purposes of section 1923(g)(1) of the Act.
    (2) For each State's first Medicaid State plan rate year beginning 
on or after October 1, 2021, and thereafter, subject to paragraph 
(d)(3) of this section, only costs incurred in providing inpatient 
hospital and outpatient hospital services to Medicaid individuals when 
Medicaid is the primary payer for such services, and revenues received 
with respect to those services, and costs incurred in providing 
inpatient hospital and outpatient hospital services, and revenues 
received with respect to those services, for which a determination has 
been made in accordance with paragraph (c) of this section that the 
services were furnished to individuals who have no source of third-
party coverage for the specific inpatient hospital or outpatient 
hospital service are included when calculating the costs and revenues 
for Medicaid individuals and individuals who have no health insurance 
or other source of third-party coverage for purposes of section 
1923(g)(1) of the Act.
    (3) Effective for each State's first Medicaid State plan rate year 
beginning on or after October 1, 2021, and thereafter, the hospital-
specific DSH limit for a 97th percentile hospital defined in paragraph 
(b) of this section is the higher of the values from the calculations 
described in paragraphs (d)(1) and (2) of this section.


Sec.  447.297  [Amended]

0
6. Amend Sec.  447.297 by--
0
a. In paragraph (b), removing the phrase ``published by April 1 of each 
Federal fiscal year,'' and adding in its place the phrase ``posted as 
soon as practicable,'';
0
b. In paragraph (c)--
0
i. Removing the phrase ``publish in the Federal Register'' and adding 
in its place the phrase ``post in the Medicaid Budget and Expenditure 
System/State Children's Health Insurance Program Budget and Expenditure 
System and at Medicaid.gov (or similar successor system or website)''; 
and
0
ii. Removing the phrase ``publish final State DSH allotments by April 1 
of each Federal fiscal year,'' and adding in its place the phrase 
``post final State DSH

[[Page 11886]]

allotments as soon as practicable for each Federal fiscal year,'';
0
c. In paragraph (d)(1), removing the phrase ``by April 1 of each 
Federal fiscal year'' and adding in its place the phrase ``as soon as 
practicable for each Federal fiscal year'' and by removing the phrase 
``prior to the April 1 publication date'' and adding in its place the 
phrase ``prior to the posting date''; and
0
d. Removing paragraph (e).
0
7. Amend Sec.  447.299 by--
0
a. Revising paragraphs (c)(6) and (7), (c)(10) introductory text, 
(c)(10)(ii), and (c)(16);
0
b. Redesignating paragraph (c)(21) as paragraph (c)(22); and
0
c. Adding new paragraph (c)(21) and paragraphs (f) and (g).
    The revisions and additions read as follows:


Sec.  447.299  Reporting requirements.

* * * * *
    (c) * * *
    (6) Inpatient (IP)/outpatient (OP) Medicaid fee-for-service (FFS) 
basic rate payments. The total annual amount paid to the hospital under 
the State plan, including Medicaid FFS rate adjustments, but not 
including DSH payments or supplemental/enhanced Medicaid payments, for 
inpatient and outpatient hospital services furnished to Medicaid 
individuals, as determined pursuant to Sec.  447.295(d).
    (7) IP/OP Medicaid managed care organization payments. The total 
annual amount paid to the hospital by Medicaid managed care 
organizations for inpatient hospital and outpatient hospital services 
furnished to Medicaid individuals, as determined pursuant to Sec.  
447.295(d).
* * * * *
    (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 individuals as 
determined pursuant to Sec.  447.295(d). The total annual costs are 
determined on a hospital-specific basis, not a service-specific basis. 
For purposes of this section, costs--
* * * * *
    (ii) Must capture the total burden on the hospital of treating 
Medicaid patients as determined pursuant to Sec.  447.295(d), not 
including 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 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.
* * * * *
    (16) Total annual uncompensated care costs. The total annual 
uncompensated care cost equals the total cost of care for furnishing 
inpatient hospital and outpatient hospital services to Medicaid 
individuals as determined pursuant to Sec.  447.295(d), and to 
individuals with no source of third-party coverage for the hospital 
services they receive, less the sum of regular Medicaid FFS rate 
payments, Medicaid managed care organization payments, supplemental/
enhanced Medicaid payments, uninsured revenues, and section 1011 
payments for inpatient and outpatient hospital services. This should 
equal the sum of paragraphs (c)(9), (12), and (13) of this section 
subtracted from the sum of paragraphs (c)(10) and (14) of this section.
* * * * *
    (21) Financial impact of audit findings. The total annual amount 
associated with each audit finding. If it is not practicable to 
determine the actual financial impact amount, state the estimated 
financial impact for each audit finding identified in the independent 
certified audit that is not otherwise reflected in data elements 
described in this paragraph (c). For purposes of this paragraph (c), 
audit finding means an issue identified in the independent certified 
audit required under Sec.  455.304 of this chapter concerning the 
methodology for computing the hospital-specific DSH limit or the DSH 
payments made to the hospital, including, but not limited to, 
compliance with the hospital-specific DSH limit as defined in paragraph 
(c)(16) of this section. Audit findings may be related to missing or 
improper data, lack of documentation, non-compliance with Federal 
statutes or regulations, or other deficiencies identified in the 
independent certified audit. Actual financial impact means the total 
amount associated with audit findings calculated using the 
documentation sources identified in Sec.  455.304(c) of this chapter. 
Estimated financial impact means the total amount associated with audit 
findings calculated on the basis of the most reliable available 
information to quantify the amount of an audit finding in circumstances 
where complete and accurate information necessary to determine the 
actual financial impact is not available from the documentation sources 
identified in Sec.  455.304(c) of this chapter.
* * * * *
    (f) DSH payments found in the independent certified audit process 
under part 455, subpart D, of this chapter to exceed hospital-specific 
cost limits are provider overpayments which must be returned to the 
Federal Government in accordance with the requirements in part 433, 
subpart F, of this chapter or redistributed by the State to other 
qualifying hospitals, if redistribution is provided for under the 
approved State plan. Overpayment amounts returned to the Federal 
Government must be separately reported on the Form CMS-64 as a 
decreasing adjustment which corresponds to the fiscal year DSH 
allotment and Medicaid State plan rate year of the original DSH 
expenditure claimed by the State.
    (g) As applicable, States must report any overpayment 
redistribution amounts on the Form CMS-64 within 2 years from the date 
of discovery that a hospital-specific limit has been exceeded, as 
determined under Sec.  433.316(f) of this chapter in accordance with a 
redistribution methodology in the approved Medicaid State plan. The 
State must report redistribution of DSH overpayments on the Form CMS-64 
as separately identifiable decreasing adjustments reflecting the return 
of the overpayment as specified in paragraph (f) of this section and 
increasing adjustments representing the redistribution by the State. 
Both adjustments must correspond to the fiscal year DSH allotment and 
Medicaid State plan rate year of the related original DSH expenditure 
claimed by the State.

PART 455--PROGRAM INTEGRITY: MEDICAID

0
8. The authority citation for part 455 continues to read as follows:

    Authority:  42 U.S.C. 1302.

0
9. Amend Sec.  455.301 by revising the definition of ``Independent 
certified audit'' to read as follows:


Sec.  455.301  Definitions.

* * * * *
    Independent certified audit means an audit that is conducted by an 
auditor that operates independently from the Medicaid agency or subject 
hospitals and is eligible to perform the disproportionate share 
hospital (DSH) audit. Certification means that the independent auditor 
engaged by the State reviews the criteria of the Federal audit 
regulation and completes the verification, calculations and report 
under the professional rules and

[[Page 11887]]

generally accepted standards of audit practice. This certification 
includes a review of the State's audit protocol to ensure that the 
Federal regulation is satisfied, an opinion for each verification 
detailed in the regulation, a determination of whether or not the State 
made DSH payments that exceeded any hospital's hospital-specific DSH 
limit in the Medicaid State plan rate year under audit, and a 
quantification of the financial impact of each audit finding on a 
hospital-specific basis. The certification also identifies any data 
issues or other caveats or deficiencies that the auditor identified as 
impacting the results of the audit.
* * * * *
0
10. Amend Sec.  455.304 by revising paragraphs (d)(1), (3), (4), and 
(6) to read as follows:


Sec.  455.304  Condition for Federal financial participation (FFP).

* * * * *
    (d) * * *
    (1) Verification 1. Each hospital that qualifies for a DSH payment 
in the State is allowed to retain that payment so that the payment is 
available to offset its uncompensated care costs for furnishing 
inpatient hospital and outpatient hospital services during the Medicaid 
State plan rate year to Medicaid individuals as determined pursuant to 
Sec.  447.295(d) of this chapter, and individuals with no source of 
third-party coverage for the services, in order to reflect the total 
amount of claimed DSH expenditures.
* * * * *
    (3) Verification 3. Only uncompensated care costs of furnishing 
inpatient and outpatient hospital services to Medicaid individuals as 
determined pursuant to Sec.  447.295(d) of this chapter, and 
individuals with no third-party coverage for the inpatient and 
outpatient hospital services they received are eligible for inclusion 
in the calculation of the hospital-specific disproportionate share 
limit payment limit, as described in section 1923(g)(1)(A) of the Act.
    (4) Verification 4. For purposes of this hospital-specific limit 
calculation, any Medicaid payments (including 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 hospital and outpatient 
hospital services to Medicaid individuals as determined pursuant to 
Sec.  447.295(d) of this chapter, which are in excess of the Medicaid 
incurred costs of such services, are applied against the uncompensated 
care costs of furnishing inpatient hospital and outpatient hospital 
services to individuals with no source of third-party coverage for such 
services.
* * * * *
    (6) Verification 6. The information specified in paragraph (d)(5) 
of this section includes a description of the methodology for 
calculating each hospital's payment limit under section 1923(g)(1) of 
the Act. Included in the description of the methodology, the audit 
report must specify how the State defines incurred inpatient hospital 
and outpatient hospital costs for furnishing inpatient hospital and 
outpatient hospital services to Medicaid individuals as determined 
pursuant to Sec.  447.295(d) of this chapter, and individuals with no 
source of third-party coverage for the inpatient hospital and 
outpatient hospital services they received.
* * * * *

PART 457--ALLOTMENTS AND GRANTS TO STATES

0
11. The authority for part 457 continues to read as follows:

    Authority:  42 U.S.C. 1302.

0
12. Amend Sec.  457.609 by revising paragraph (h) to read as follows:


Sec.  457.609  Process and calculation of State allotments for a fiscal 
year after FY 2008.

* * * * *
    (h) CHIP fiscal year allotment process. The national CHIP allotment 
and State CHIP allotments will be posted in the Medicaid Budget and 
Expenditure System/State Children's Health Insurance Program Budget and 
Expenditure System and at Medicaid.gov (or similar successor system or 
website) as soon as practicable after the allotments have been 
determined for each Federal fiscal year.

    Dated: February 16, 2023.
Xavier Becerra,
Secretary, Department of Health and Human Services.
[FR Doc. 2023-03673 Filed 2-22-23; 4:15 pm]
BILLING CODE 4120-01-P