Congress may be on summer break, but reg season is in full swing. Last week, the Centers for Medicare & Medicaid Services (CMS) released a final reg that will impact Medicare hospital payments in fiscal year (FY) 2024, which starts on October 1, 2023.
The McDermottPlus team has produced a comprehensive summary of the FY 2024 inpatient prospective payment system (IPPS) final reg. However, in this week’s Regs & Eggs, my colleague Katie Waldo and I are focusing on a key policy in the reg that has been buried in the headlines. You may have seen that CMS is increasing overall Medicare payments to hospitals by 3.1%. Some may argue that this pay bump doesn’t cover the increased year-over-year cost of providing services in hospitals. (According to the American Hospital Association, data shows that hospitals’ total costs increased by 17.5% between 2019 and 2022.) Others may think that hospitals should be happy they are getting any sort of increase given that physicians under the physician fee schedule are likely receiving a payment cut next year.
Regardless of what camp you fall in, there is one thing almost everyone in the provider community will likely agree on: CMS adopting a new policy that will alter how Medicare disproportionate share hospital (DSH) payments are calculated may have negative financial implications on hospitals and physicians alike. This policy was proposed in a separate reg in February 2023, Medicare Program; Medicare Disproportionate Share Hospital (DSH) Payments: Counting Certain Days Associated With Section 1115 Demonstrations in the Medicaid Fraction.
As background, to qualify for DSH payment, CMS applies a formula that takes into account a hospital’s geographic designation, the number of beds in the hospital and the level of the hospital’s disproportionate patient percentage (DPP). A hospital’s DPP is the sum of two fractions: the “Medicare fraction” and the “Medicaid fraction.” The Medicaid fraction is the piece that will change under the FY 2024 IPPS final reg and is computed via the following equation:
- The hospital’s number of inpatient days furnished to patients who, for such days, were eligible for Medicaid but were not entitled to benefits under Medicare Part A divided by
- The hospital’s total number of inpatient days in the same period.
The policy in question only affects certain states with a Section 1115 waiver. For reference, states use Section 1115 waivers to test changes to their Medicaid programs that generally cannot be made using other Medicaid authorities. All states use Section 1115 waivers in some capacity, and some are using these waivers to fund uncompensated or undercompensated care pools.
In the final reg, CMS is changing the definition of patients who are regarded as eligible for Medicaid included in the numerator of the above equation. The numerator will now only include a selection of patients who receive health insurance or premium assistance that meets certain additional requirements under a Section 1115 waiver. Specifically, for purposes of DSH payment calculations, only those patients who receive health insurance or buy health insurance with premium assistance provided under a Section 1115 demonstration where states receive matching funds for such programs will be included. Put another way, two factors will no longer be taken into account when calculating the numerator: patient days in which hospitals have received payment from an uncompensated/undercompensated care pool authorized by a Section 1115 demonstration and days of patients who received premium assistance under a Section 1115 demonstration.
This change effectively decreases overall DSH payments to specific hospitals, but the question is by how much?
The Medicaid and CHIP Payment and Access Commission (MACPAC) reports that in FY 2019, eight states—Arizona, California, Florida, Kansas, Massachusetts, New Mexico, Tennessee and Texas—used Section 1115 waivers to fund uncompensated care pools. Therefore, we assume these states will no longer be permitted to report patient days in the DSH calculation associated with payments from these states’ Section 1115 demonstration projects for uncompensated or undercompensated care pools. It is also important to note that some states, such as Massachusetts and Connecticut, have a premium assistance program in their Section 1115 waivers that support low-income enrollees who have commercial health insurance that is available through their employer. Thus, these patient days would not be permitted in the DSH payment calculation. Additionally, DPP is used to determine 340B eligibility. A hospital’s 340B eligibility is partially determined based on its DSH adjustment. DSH hospitals must have an adjustment percentage greater than 11.75% for the most recent cost reporting period. Since the reg is altering the Medicaid fraction in the DPP calculation, this can impact the overall DSH adjustments and disqualify a hospital from receiving 340B savings.
While MACPAC estimates that uncompensated care pool payments totaled $7.6 billion in FY 2019, the combined impact of this change has been difficult to quantify. In the final reg, CMS estimates that hospitals will receive $348 million less because of the policy change (CMS caveats this as being a rough projection). However, for unknown reasons, this estimate only includes the policy change’s impact on six states: Florida, Kansas, Massachusetts, New Mexico, Tennessee and Texas.
To CMS, the $348 million estimate is just a drop in the bucket. CMS notes that it is “approximately 0.3 percent (less than half of one percent) of total IPPS payments.” Therefore, despite many provider groups opposing this reduction, CMS does not believe it will “cause harm to hospitals, especially to the point that would cause hospital closures.” However, as hospitals continue to recover from the COVID-19 pandemic and reduced revenues in 2022, they may be skeptical of CMS’s promise that this reduction won’t have a significant impact—especially if the estimate in the reg winds up being a significant underestimate. Further, physicians who work in these hospitals may also be nervous as payments that hospitals sometimes make to physician groups to subsidize the cost of caring for underserved populations could wither. It remains to be seen whether CMS or hospitals and physicians are right, but financial uncertainty, even amid a 3.1% payment increase, is definitely in the air!
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