Medicare Disproportionate Share Hospital Payment Adjustment Fact Sheet

In the hospital inpatient prospective payment system proposed rule for fiscal year 2014 (FY14), CMS outlines major changes to the disproportionate share payment adjustment that hospitals serving a significantly disproportionate number of low-income patients can quality for. Section 3133 of the Affordable Care Act (ACA) added a new section 1886(r) to the Social Security Act (the Act) that modifies the methodology for computing the Medicare DSH payment adjustment beginning in FY14. Currently, disproportionate share hospitals (DSHs) qualify for a DSH payment adjustment under a statutory formula that considers their Medicare utilization due to beneficiaries who also receive supplemental security income benefits and their Medicaid utilization.

Under section 1886(r) of the Act, which was added by section 3133i of the ACA, starting in FY14, DSHs will receive 25 percent of the amount they previously would have received under the current statutory formula for Medicare DSH payments. The remaining amount, equal to an estimate of 75 percent of what otherwise would have been paid as Medicare DSH payments, reduced to reflect changes in the uninsured population under age 65, will become available to make additional payments to each hospital that qualifies for Medicare DSH payments and that has uncompensated care. In addition to the reduced DSH payment, for FY14 and each subsequent fiscal year, the HHS Secretary shall pay an additional amount equal to the product of three factors to subsection (d) hospitals.

The first factor is the difference between CMS’s estimates of: (1) The amount that would have been paid in Medicare DSH payments for FY14 and subsequent years, in the absence of the new payment provision; and (2) the amount of empirically justified Medicare DSH payments that are made for FY14 and subsequent years, which takes into account the requirement to reduce Medicare DSH payments by 75 percent. In other words, this factor represents CMS’s estimate of 75 percent (100 percent minus 25 percent) of its estimate of Medicare DSH payments that would otherwise be made for FY14 and subsequent years in the absence of section 1886(r) of the Act.

The second factor is, for FY14 through FY17, one minus the percent change in the percent of individuals under the age of 65 who are uninsured, determined by comparing the percent of those individuals who are uninsured in 2013, the last year before coverage expansion under the ACA, minus 0.1 percent for FY14, and minus 0.2 percent for FY15 through FY17. For FY14 through FY17, the baseline for the estimate of the change in uninsurance is fixed by the most recent estimate of the Congressional Budget Office before the final vote on the Health Care and Education Reconciliation Act of 2010. For FY18 and subsequent years, the second factor is one minus the percent change in the percent of individuals who are uninsured, as determined by comparing the percent of individuals “who are uninsured in 2013 minus 0.2 percent for FY18 and FY19.”

The third factor represents a hospital’s uncompensated care amount for a given time period relative to the uncompensated care amount for that same time period for all hospitals that receive Medicare DSH payments in that fiscal year, expressed as a percent. For each hospital, the product of these three factors represents its additional payment for uncompensated care for the applicable fiscal year. CMS refers to the additional payment determined by these factors as the “uncompensated care payment.” As a result of 1886(r)(3) of the Act, there can be no administrative or judicial review of the estimates developed for purposes of applying the three factors used to determine uncompensated care payments, or the periods selected in order to develop such estimates. 

Eligible Hospitals

Hospitals must receive empirically justified Medicare DSH payments in FY14 or a subsequent year to receive an additional Medicare uncompensated care payment for that year. Under the proposal, hospitals that are not eligible to receive empirically justified Medicare DSH payments in FY14 and subsequent years would not receive uncompensated care payments for those respective years. CMS also proposes to make a determination concerning eligibility for interim uncompensated care payments based on each hospital’s estimated DSH status for FY14 or the applicable year (using the most recent data that are available). Its final determination on the hospital’s eligibility for uncompensated care payments would be based on the hospital’s actual DSH status on the cost report for that payment year. Subsection (d) Puerto Rico hospitals that are eligible for DSH payments also would be eligible to receive empirically justified Medicare DSH and uncompensated care payments under the new payment methodology. The new DSH payment methodology would be applied to the hospitals in the Bundled Payments for Improvement Initiative, so that eligible hospitals would receive empirically justified DSH and uncompensated care payments.

Special rules are proposed for sole community hospitals (SCHs). In order to implement the provisions of section 1886(r), CMS is proposing to continue to determine interim payments for SCHs based on what it estimates and projects their DSH status to be prior to the beginning of the federal fiscal year (based on the best available data at that time), subject to settlement through the cost report. The uncompensated care payments would not be accounted for in determining whether an SCH is paid the higher of the federal rate or the hospital-specific rate because the uncompensated care payments are not discharge-driven payments, but rather are payments made on the basis of a hospital’s overall share of uncompensated care during a payment year.

Because Maryland waiver hospitals are paid under section 1814(b)(3) of the Act, they are not eligible to receive empirically justified Medicare DSH payments and uncompensated care payments under the new payment methodology. Similarly, hospitals participating in the Rural Community Hospital Demonstration do not receive DSH payments, and therefore are also excluded from receiving empirically justified Medicare DSH payments and uncompensated care payments under the new payment methodology.

Empirically Justified Medicare DSH Payments

CMS has a system for interim payment and final settlement of DSH payments made. Specifically, interim payments are made for each claim based on the best available data concerning each hospital’s eligibility for DSH payments and the appropriate level of such payments. Final eligibility for Medicare DSH payments and the final amount of such payments for eligible hospitals are determined at the time of cost report settlement. Because section 1886(r)(1) of the Act requires the program to pay a designated percentage of these payments, without revising the criteria governing eligibility for DSH payments or the underlying payment methodology, CMS does not believe that it is necessary to develop and propose any new operational mechanisms for making such payments. Therefore, CMS is proposing to implement this provision simply by revising the claims payment methodologies to adjust the interim claim payments to the requisite 25 percent of what would have otherwise been paid. CMS will also make corresponding changes to the hospital cost report so that these empirically justified Medicare DSH payments can be settled at the appropriate level at the time of cost report settlement.

Uncompensated Care Payments

For each eligible hospital in FY14 and subsequent years, the new uncompensated care payment is the product of three factors. These three factors represent CMS’s estimate of 75 percent of the amount of Medicare DSH payments that would otherwise have been paid, an adjustment to this amount for the percent change in the national rate of uninsurance compared to a base of 2013, and each eligible hospital’s estimated uncompensated care amount relative to the estimated uncompensated care amount for all eligible hospitals. Because section 1886(r)(1) of the Act does not revise the criteria governing eligibility for DSH payments or the underlying payment methodology, CMS does not believe that it is necessary to develop and propose any new operational mechanisms for making such payments and would thus continue using the existing system of interim eligibility and payment determination with final cost report settlement for the empirically justified Medicare DSH payments. Thus, CMS is proposing to adopt a similar system of interim eligibility and payment determination with final cost report settlement for purposes of uncompensated care payments.

Proposed Methodology to Calculate Factor 1

In order to determine Factor 1 in the uncompensated care payment formula, CMS proposes to develop final estimates of both the aggregate amount of Medicare DSH payments that would be made in the absence of section 1886(r)(1) and the aggregate amount of empirically justified Medicare DSH payments to hospitals under section 1886(r)(1) prior to each fiscal year to which the new provision applies. Specifically, in order to determine the two elements of Factor 1 (Medicare DSH payments prior to the application of the 75 percent reduction, and empirically justified Medicare DSH payments after application of the 75 percent reduction), CMS is proposing to use the most recently available projections of Medicare DSH payments for FY14 and each subsequent year, as calculated by CMS’s Office of the Actuary. Under a prospective payment system, CMS would not know the precise aggregate Medicare DSH payment amount that would be paid for a federal fiscal year until cost report settlement for all IPPS hospitals is completed, which occurs several years after the end of the federal fiscal year. Therefore, the statute gives CMS authority to estimate this amount by specifying that, for each fiscal year to which the provision applies, such amount is to be ‘‘estimated by the Secretary.’’ CMS calculated Factor 1 to be $9.2535 billion (25 percent of the total amount estimated), which is the difference between the estimate for empirically justified Medicare DSH payments for FY14 ($3.084 billion) and Medicare DSH payments for FY14, without regard to the application of section 1886(r)(1) of the Act ($12.338 billion).

Proposed Methodology to Calculate Factor 2

Section 1886(r)(2)(B)(i) of the Act states that Factor 2 for FY14 is equal to one minus the percent change in the percent of individuals under the age of 65 who are uninsured, as determined by comparing the percent of such individuals without insurance in the baseline and in the most recent period for which CMS has data (minus 0.1 percent for FY14). This is determined by comparing the percent of such individuals who are uninsured in 2013, the last year before coverage expansion under the ACA, and who are uninsured in the most recent period for which data is available, minus the 0.1 percent for fiscal year 2014 (minus 0.2 percentage points for each of FY15, FY16, and FY17).

Using the March 20, 2010, CBO projection for 2013 and the February 5, 2013, and CBO projection of uninsurance for all residents for 2014, CMS proposes to use the following computation for Factor 2 for FY14:

Percent of individuals without insurance for 2013: 18 percent
Percent of individuals without insurance for 2014: 16 percent
1 – |[(0.16 – 0.18)/0.18]| = 1- 0.111 = 0.889 (88.9 percent)
0.889 (88.9 percent) – 0.001 (0.1 percentage points) = 0.888 (88.8 percent)
0.888 = Factor 2

Therefore, CMS is proposing that Factor 2 is one minus the percent change of the baseline percentage of individuals without insurance in 2013 (which is, for this proposed rule, 18 percent) and the most recent percentage of individuals without insurance for 2014 (which is, for this proposed rule, 16 percent) minus 0.1 percent. Accordingly, CMS proposes Factor 2 to be 88.8 percent for FY14. In conjunction with this proposal, the amount available for uncompensated care payments for FY14 will be $8.217 billion (0.888 times its proposed Factor 1 estimate of $9.2535 billion). CMS notes that its proposal for Factor 2 may be subject to change if more recent CBO estimates of the insurance rate for 2014 become available prior to the preparation of the final rule.

Proposed Methodology to Calculate Factor 3

Factor 3 is applied to the product of Factor 1 and Factor 2 to determine the amount of the uncompensated care payment that each eligible hospital will receive for FY14 and subsequent years. Factor 3 is a hospital-specific value that expresses the proportion of the estimated uncompensated care amount for each subsection (d) hospital and subsection (d) Puerto Rico hospital with the potential to receive DSH payments relative to the estimated uncompensated care amount for all hospitals estimated to receive DSH payments in the fiscal year for which the uncompensated care payment is to be made. In order to implement the statutory requirements for this factor of the uncompensated care payment formula, CMS must determine the following:

1. The definition of uncompensated care, or in other words, the specific items that are to be included in the numerator and denominator;
2. The data source(s) for the estimated uncompensated care amount; and
3. The timing and manner of computing the quotient for each hospital estimated to receive DSH payments.

In the course of considering how to determine Factor 3, CMS considered proposing to define the amount of uncompensated care for a hospital as the uncompensated care costs of that hospital and considered potential data sources for those costs. After considering the various factors that are included in different definitions of “uncompensated care,” CMS considered proposing to adopt a definition which incorporated those factors that are most commonly included within the term. Thus, it considered proposing to define “uncompensated care” as the cost of charity care plus bad debt which includes the cost of non-Medicare bad debt and non-reimbursed Medicare bad debt.

For purposes of selecting an appropriate data source for this possible definition of uncompensated care costs, CMS reviewed the literature and available data sources and determined that the Medicare cost report Worksheet S–10 could potentially provide the most complete data for Medicare hospitals. Worksheet S–10 is the only national data source that includes data for all Medicare hospitals and is designed to elicit data that are both accurate and consistent with the definition of uncompensated care costs that CMS considered proposing to use. CMS would use the sum of line 23, Column 3 of Worksheet S–10 and line 29 of Worksheet S–10 to estimate a hospital’s uncompensated care cost. CMS notes that Worksheet S–10 is a relatively new data source that has been used for specific payment purposes only in relatively restricted ways. In order to apply a definition of uncompensated care costs based upon information reported on the Worksheet S–10, it would be necessary to use the 2010/2011 cost reports, which were submitted on or after May 1, 2010, when the new Worksheet S–10 went into effect. In response to stakeholder concerns regarding data variability and lack of reporting experience with Worksheet S–10, CMS proposes to determine Factor 3 using insured low-income patient days from the 2010/2011 cost reports (including the FY11 or FY10 SSI ratios, whichever represents the most recently available inputs prior to October 1, 2013) as alternative data which are a better proxy for the treatment costs of uninsured patients. 

For FY14, the denominator for Factor 3 would reflect the estimated Medicaid and Medicare supplemental security income (SSI) patient days based on data from the 2010/2011 Medicare cost report (including the most recently available data that may be used to update the SSI ratios) for all hospitals that CMS estimates would receive an empirically justified DSH payment in FY14. The numerator of Factor 3 would be the estimated Medicaid and Medicare SSI patient days for the individual hospital based on its most recent 2010/2011 Medicare cost report data (including the most recently available data that may be used to update the SSI ratios). CMS would calculate a numerator for all subsection (d) hospitals and subsection (d) Puerto Rico hospitals that have the potential of receiving a DSH payment regardless of whether CMS estimates that the hospital would receive DSH payments in the respective federal fiscal year.

CMS is also proposing to publish a table or tables listing Factor 3 for all hospitals that it estimates would receive empirically justified DSH payments in a fiscal year (that is, hospitals that would receive interim uncompensated care payments during the fiscal year), and for the remaining subsection (d) and subsection (d) Puerto Rico hospitals that have the potential of receiving a DSH payment in the event that they receive an empirically justified DSH payment for the fiscal year as determined at cost report settlement. CMS has posted proposed tables listing Factor 3 for the hospitals that it has estimated would receive Medicare DSH payments for FY14 on its website.

The HHS Secretary is permitted to use alternative data ‘‘in the case where the Secretary determines that alternative data is available which is a better proxy for the costs of subsection (d) hospitals for treating the uninsured’’ for the numerator of Factor 3. In order to implement the statutory requirements for Factor 3 using alternative data, CMS must:

• Determine whether alternative data would be a better proxy for the treatment costs of the uninsured than the information available on the Worksheet S–10;
• Identify a source for this alternative data; and
• Determine the timing and manner of computing the quotient for each hospital.

CMS believes that data on utilization for insured low-income patients can be a reasonable proxy for the treatment costs of uninsured patients. Moreover, due to the concerns regarding the accuracy and consistency of the data reported on the Worksheet S–10, CMS believes that this alternative data, which is currently reported on the Medicare cost report, would be a better proxy for the amount of uncompensated care provided by hospitals. Accordingly, CMS would use uninsured low-income patient days from the 2010/2011 cost reports (including the FY11 or FY10 SSI ratios, whichever represents the most recently available inputs prior to October 1, 2013) as alternative data which are a better proxy for the treatment costs of uninsured patients. CMS further proposes to define insured low-income patient days as inpatient days of Medicaid patients plus inpatient days of Medicare SSI patients.

Thus, for FY14, the denominator for Factor 3 would reflect the estimated Medicaid and Medicare SSI patient days based on data from the 2010/2011 Medicare cost report (including the most recently available data that may be used to update the SSI ratios) for all hospitals that it estimates would receive an empirically justified DSH payment in FY14. The numerator of Factor 3 would be the estimated Medicaid and Medicare SSI patient days for the individual hospital based on its most recent 2010/2011 Medicare cost report data. CMS proposes to calculate a numerator for all subsection (d) hospitals and subsection (d) Puerto Rico hospitals that have the potential of receiving a DSH payment regardless of whether it estimates that the hospital would receive DSH payments in the respective federal fiscal year. In that way, if a hospital becomes eligible to receive the empirically justified DSH payment and also an uncompensated care payment, CMS will be able to finalize its uncompensated care payment efficiently and without affecting the uncompensated care payments of other hospitals.

Operational Considerations

CMS is proposing to make interim uncompensated care payments on the basis of its best available estimates concerning the eligibility of each hospital for empirically justified Medicare DSH payments and its best available calculations concerning the amount of the uncompensated care payments that the hospital is eligible to receive. CMS intends to make these interim uncompensated care payments on a periodic basis and not on a per discharge basis. Since CMS is proposing to make a final determination concerning eligibility for uncompensated care payments at the time of cost report settlement, its operational system must be able to handle the various situations that may arise between interim and final eligibility determinations. In cases where a hospital that receives empirically justified DSH and uncompensated care payments based on an initial determination that it is eligible for such payments, but then proves ineligible for them at cost report settlement, the hospital would no longer be eligible for either payment or CMS would recoup those monies. CMS must be prepared and able to recoup the interim payments that the hospital received.

Because CMS uses historical data to estimate each hospital’s eligibility for empirically justified DSH payments in FY14 and subsequent years, a reconciliation process will be necessary to account for cases in which a hospital’s eligibility for such payments changes after it has published its estimates during the rulemaking process. For example, a hospital that had not been estimated to be eligible for these payments may become eligible during the course of a given payment period. In such cases, CMS’s estimates would have indicated that the hospital was ineligible for empirically justified DSH payments, and therefore, ineligible for uncompensated care payments. That hospital would not receive interim payments. However, if the data available at cost report settlement were to indicate that the hospital is eligible for an empirically justified DSH payment, the hospital would become eligible for an uncompensated care payment based on that hospital’s Factor 3 value. 

Therefore, CMS proposes that at cost report settlement, the fiscal intermediary/MAC will make a final determination concerning whether each hospital is eligible for empirically justified Medicare DSH payments and, therefore, uncompensated care payments in FY14 and each subsequent year. For a hospital that did not receive interim payments for its empirically justified DSH payments and uncompensated care payments for FY14 or a subsequent year, but at cost report settlement is determined to be eligible for DSH payments, the fiscal intermediary/MAC would calculate the uncompensated care payment for such a hospital based on the Factor 3 value determined prospectively for that fiscal year. The reconciliations at cost report settlement would be based on the values for Factor 1, Factor 2, and Factor 3 that CMS has finalized prospectively for a federal fiscal year. Depending on the comments it receives, CMS may revise its proposed policy in the final rule so that at the time of cost report settlement and reconciliation a hospital’s final uncompensated care payments could be based on Factor 3 numerators and denominators estimated using more recent cost report data (and associated inputs). CMS notes that the uncompensated care payment will be reported on the Medicare Hospital Cost Report, and proposes that hospitals receive their uncompensated care payments with respect to the fiscal year in which their cost report begins.

Other Information

Comments on the proposal are due June 25, 2013.

Read about the adjustments to Medicare disproportionate share hospital payments contained in the FYI14 IPPS proposed rule, published in the May 10, 2013 issue of the Federal Register.