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From Health Law Daily, September 16, 2013

CMS lays out methodology for Medicaid DSH reductions in 2014 and 2015

By Paul Clark

CMS has released a Final rule detailing how it will set the annual reductions for Medicaid disproportionate share hospital (DSH) payments for fiscal years (FY) 2014 and 2015, as mandated by the Patient Protection and Affordable Care Act (PPACA) (P.L. 111-148). Although PPACA mandated reductions in Medicaid DSH spending from 2014 through 2020, the Final rule only addresses DSH reductions for 2014 and 2015.

While CMS acknowledged in the rule that President Obama’s FY 2014 budget proposed delaying the start of Medicaid DSH allotment reductions until 2015 and reallocating the scheduled $500 million aggregate reduction for FY 2014 to FYs 2016 and FY 2017, it also noted that Congress had taken no action on passing a budget for 2014. Regulators note in the preamble to the Final rule that “HHS has no flexibility to institute a delay of the DSH allotment reductions without congressional action.”

Background. DSH adjustment payments provide funding to hospitals that: (1) serve a significantly disproportionate number of low-income patients, or (2) are located in an urban area, have 100 or more beds, and can demonstrate that more than 30 percent of their revenues are derived from state and local government payments for indigent care provided to patients not covered by Medicare or Medicaid (Social Security Act Sec. 1886(d)(5)(F)(i)).

States receive an annual DSH allotment to cover the costs of DSH hospitals that provide care to low-income patients that are not paid by other payers, such as Medicare, Medicaid, the Children’s Health Insurance Program or other health insurance. This annual allotment is calculated by law and includes requirements to ensure that the DSH payments to individual DSH hospitals are not higher than these actual uncompensated costs.

PPACA change. Because millions of Americans are expected to have access to health care insurance in 2014--through the purchase of insurance from new health care marketplaces, the expansion of Medicaid coverage in some states, and employers offering health insurance coverage—the level of uncompensated care provided by hospitals is expected to decrease.

PPACA amended existing law regarding how Medicaid DSH calculations are made. The law established aggregate reductions in Medicaid DSH payments from FYs 2014 through 2020; however, the methodology detailed in the Final rule only applies to FYs 2014 and 2015.

Soc. Sec. Act sec. 1923(f)(7)(A)(i) requires the HHS Secretary to reduce annual state allotments of federal funding for DSH payments and accompanying reductions in payments to each state. The amount of federal funding for DSH payments for each state is limited to an annual state DSH allotment. The percentage reduction in each annual state DSH allotment is to be determined by the use of a DSH Health Reform Methodology (DHRM) to achieve the required aggregate annual reduction in federal DSH funding.

The methodology used to establish the DHRM uses these five factors—

  • impose a smaller percentage reduction on low DSH states;
  • impose larger percentage reductions on states that have the lowest percentages of uninsured individuals during the most recent year for which such data are available;
  • impose larger percentage reductions on states that do not target their DSH payments on hospitals with high volumes of Medicaid inpatients;
  • impose larger percentage reductions on states that do not target their DSH payments on hospitals with high levels of uncompensated care; and
  • take into account the extent to which the DSH allotment for a state was included in the budget neutrality calculation for state's that expanded Medicaid prior to July 31, 2009.

While PPACA originally mandated that all states expand Medicaid to newly qualified individuals, the U.S. Supreme Court in National Federation of Independent Business v Sebelius (132 S. Ct. 2566 (2012) said that states were not mandated to expand Medicaid. In the preamble to the Final rule, CMS noted “Currently, we do not have sufficient information on the relative impacts that would result from state decisions to implement the new coverage group, and thus, we proposed a DHRM only for the first 2 years during which the DSH funding reductions are in effect.”

CMS also noted said that states that do not expand Medicaid would have relatively higher rates of uninsurance, and more uncompensated care, than states that do expand Medicaid. States that expand Medicaid will likely have reductions in the rates of uninsurance; therefore, the reduction in DSH funding may be greater for such states compared to states that do not expand Medicaid. Consequently, hospitals in states that expand Medicaid may experience a deeper reduction in DSH payments than they would if all states expanded Medicaid.

The Final rule adds a new section of the Code of Federal Regulations – 42 CFR 447.294 – that lays out the specific calculation used to determine Medicaid DSH payments in 2014 and 2015, based on the five factors listed above.

The Final rule will be published in the Federal Register on September 19.

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