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From Health Law Daily, March 31, 2017

DSH calculations must account for all payments received for Medicaid-eligible individuals

By Susan L. Smith, J.D., M.A.

Disproportionate share hospitals (DSHs) must include Medicare and other third-party payments that compensate the hospitals for care furnished to Medicaid-eligible individuals so that the hospital-specific DSH limit is based only on uncompensated care costs, according to a CMS advance release of a Final rule. CMS has amended 42 C.F.R. sec. 447.299(c)(10) to clarify and make explicit that uncompensated care costs includes only those costs for Medicaid-eligible individuals that remain after accounting for payments made to hospitals by or on behalf of Medicaid-eligible individuals. The Final rule does not reflect a change in policy, rather it clarifies and reflects existing policy.

Final rule. Sec. 447.299(c)(10)as amended provides that (1) the total annual costs are determined on a hospital-specific basis and not a specific-service basis; (2) costs are defined as costs net of third-party payments, including but not limited to payments by Medicare and private insurance; and (3) costs must capture the total burden on the hospital of treating Medicaid-eligible patients prior to payment by Medicaid, thus, costs must be determined in the aggregate and not by estimating the cost of the individual patient. The Final rule does not impact the formula for calculating Medicare DSH payments, it only addresses the Medicaid DSH calculation.

CMS noted that the Final rule reiterates the policy that all costs and payments associated with dual eligibles and individuals with a source of third-party coverage must be included in calculating the hospital-specific DSH limit to ensure that only actual uncompensated care costs are included in the Medicaid hospital-specific DSH limit and ensure that limited DSH resources are allocated to hospitals that have a net financial shortfall in serving Medicaid patients. Therefore, "the hospital-specific limit calculation should only reflect the costs for Medicaid eligible individuals for which the hospital had not received payment from any source," CMS said.

Proposed rule. CMS issued the Proposed rule (81 FR 53980, August 15, 2016) in response to "numerous" questions regarding the calculation and to prevent hospitals from receiving assistance with costs that have been compensated by third-party payments. In its Proposed rule, CMS added language to 42 C.F.R. sec. 447.299(c)(10), to reiterate and clarify policies intended to ensure that only actual uncompensated care costs are included in the Medicaid hospital-specific DSH limit. The Proposed rule explicitly stated that total annual costs are determined on a hospital-specific, aggregate basis, not a service-specific basis or using estimated costs of individual patients, and costs include all third-party payments including those by Medicare and private insurance (To be clear, DSH uncompensated care costs means uncompensated, August 15, 2016).

Limits on DSH payments. DSHs receive additional payments from the federal government to take into account the financial situation of hospitals that serve a disproportionate share of low-income patients with special needs. Specific requirements for DSH payments include aggregate state-level limits, hospital-specific limits, qualification requirements, and auditing requirements. Soc. Sec. Act sec.1923(f) limits federal financial participation (FFP) for total statewide DSH payments made to eligible hospitals in each federal fiscal year (FY) to the amount specified in an annual DSH allotment for each state, establishing a finite pool of available DSH funds that states use to pay the federal portion of payments to qualifying hospitals in each state. FFP is not available for DSH payments that exceed a hospital’s hospital-specific limit. Sec. 1923(g) limits Medicaid DSH payments during a year to a qualifying hospital to the amount of uncompensated care costs for that same year. Any Medicaid and third-party payments made to A DSH for furnishing inpatient and outpatient hospital services to Medicaid-eligible individuals that are in excess of the Medicaid incurred costs for the services are applied against the total uncompensated care costs of furnishing the services to individuals with no source of third-party coverage for such services.

In addition, Congress imposed a hospital-specific limit that restricts Medicaid DSH payments to the costs incurred by the hospital of providing inpatient and outpatient hospital services during the year to Medicaid-eligible patients and individuals who have no health insurance or other source of third-party coverage for the services provided net Medicaid payments and payments made by uninsured patients. The Secretary determined that costs of services are costs net of third-party payments received for those services, including but not limited to Medicare and private insurance. Further, Soc. Sec. Act sec.1923(j)(2)(C) requires that DSH audits must verify that only the uncompensated costs of providing inpatient and outpatient hospital services to individuals are included the calculation of hospital-specific limits.

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