On February 24, 2023, CMS issued a proposed rule updating its Medicaid Disproportionate Share Hospital (DSH) program regulations as a result of legislative changes made by the Consolidated Appropriations Act (CAA) of 2021. Specifically, the proposed rule implements the DSH-related provisions of the CAA concerning the treatment of third-party payments for purposes of calculating Medicaid hospital-specific DSH limits. Among other changes, the proposed rule strengthens the ability of CMS and state auditors to identify and recover Medicaid DSH overpayments.
As background, the federal Medicaid statute requires states to make DSH payments to Medicaid-enrolled hospitals that serve patients who are uninsured as described in section 1923(d) of the Social Security Act (the Act). 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 for Medicaid eligible individuals. 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 hospital.
In recent years, the Medicaid DSH program has seen several changes in the legal landscape, as well as changes in enforcement by CMS and state agencies. A major issue has been the calculation of the hospital-specific limit. Specifically, must hospitals report commercial insurance payments and Medicare payments for their so-called “dually eligible” patients (i.e., patients eligible for Medicaid and either Medicare or commercial insurance) as an offset to their uncompensated care costs for purposes of calculating the limit? This calculation is known as the “Medicaid shortfall,” and limits the amount a hospital can receive in Medicaid DSH payments.
For years, CMS sought to reduce hospitals’ overall DSH payments by including commercial insurance and Medicare payments in the hospital-specific limit for dual-eligible patients. Federal courts repeatedly blocked CMS’s attempts to enforce this policy both through formal rulemaking and informal policy guidance. While CMS’s informal policy guidance was withdrawn, CMS’s formal policy, adopted through rulemaking in a 2017 Final Rule, was initially vacated but then reinstated on appeal in Children’s Hosp. Ass’n of Texas v. Azar.
Congress, however, ultimately had the last word with Section 203 of the CAA, which now only allows hospitals to include the costs of Medicaid-eligible (including waivers) patients for whom Medicaid is the primary payor. 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 are excepted from this provision of the CAA and are entitled to a higher hospital-specific limit.
CMS now proposes to revise the data elements identified in its regulations at 42 C.F.R.§ 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 Medicaid shortfall portion (Medicaid costs less Medicaid payments) of the hospital-specific DSH limit. Under CMS’s proposal, the calculation will only include costs and payments for hospital services furnished to beneficiaries for whom Medicaid is the primary payer. CMS has also proposed to include the statutory exception for 97th percentile hospitals.
CMS also proposes an additional data reporting element that would allow state auditors discretion to quantify the financial impact of any missing data or documentation. According to CMS, current audit reports may include a caveat noting the auditor’s finding that the hospital’s total uncompensated care cost may be misstated as a result of missing data, with an unknown impact on the hospital-specific DSH limit. Under CMS’s proposal, 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.” If finalized, the new data element could expand auditors’ ability to identify and recover DSH overpayments in excess of the hospital-specific limit.
CMS’s proposed rule also includes several other changes including clarifying the calculation of the 1-year period by when a state has to recover and identify overpayments; clarifying the criteria in determining which hospitals qualify for the 97th percentile exception; and modifying the factors by which Affordable Care Act-mandated state-by-state DSH allotment reduction amounts will occur beginning in FY 2024.
The proposed rule is available here. Comments on the proposed rule are due by April 25, 2023.
