On February 20, 2024, the Centers for Medicare & Medicaid Services (CMS) released the final “Medicaid Program: Disproportionate Share Hospital Third-Party Payer Rule” to address legislative provisions in the Consolidated Appropriations Act, 2021 (CAA 2021), which makes changes to the hospital-specific limit on Medicaid disproportionate share hospital (DSH) payments.[1] The rule aims to provide more clarity to states and hospitals on how the limit will be calculated and make technical changes and clarifications to the DSH program.
The rule is scheduled to be published in the Federal Register on February 23, 2024.
BACKGROUND
The Social Security Act requires that States consider the situation of hospitals that serve a disproportionate share of low-income patients with special needs in determining payments. States are statutorily required to make DSH payments to qualifying hospitals that serve patients who are uninsured and enrolled in the Medicaid program but have flexibility regarding how they make payments to specific hospitals, within certain parameters.
The purpose of this rule is to update the regulatory requirements of the DSH program as a result of the CAA 2021 and to further improve upon the program. Specifically, the provisions seek to implement the DSH-related provisions of the CAA concerning the treatment of third-party payments for purposes of calculating Medicaid hospital-specific DSH limits. Section 203 of the CAA modified the calculation of the Medicaid portion of the hospital specific DSH limit to include only costs and payments for services furnished to beneficiaries for whom Medicaid is the primary payer for such services. This would exclude costs and payments for services provided to Medicaid beneficiaries with other sources of coverage, including Medicare and commercial insurance.
The CAA-related provisions of the rule have an applicability date of October 1, 2021 to align with the effective date of the statute.
CMS FINALIZES OVERPAYMENT DISCOVERY CHANGES
Section 1903(d)(2)(C) of the Social Security Act allows states a one-year period to recover overpayments once discovered. The current regulations at § 433.316 outline how the date of discovery of an overpayment is determined in various scenarios including in cases of fraud, in cases other than fraud, and when the overpayment is discovered via Federal review. However, the regulation lacks clarity regarding overpayments identified through the annual DSH independent certified audit. In this rule, CMS finalizes its proposal to add a new paragraph (f) to § 433.316, specifying that overpayments identified through the DSH audit are considered “discovered” on the date the state submits the audit report to CMS or other specified dates related to overpayment notification or acknowledgment.
Public comments expressed concerns with considering the audit submission date as the date of discovery, citing the need for additional review, adjustments for Medicaid DSH payments exceeding hospital-specific limits, and computing alternate payment methodologies. CMS responded to comments but finalizes its original proposal, considering the date of audit submission as the date of discovery, aligning with existing practices and regulations for determining overpayment discovery dates in other scenarios.
CMS addresses concerns by providing opportunities for states to review and adjust audit findings before submission and allowing ample time for redistributions of payments exceeding DSH limits. Additionally, states can incorporate alternate payment methodologies in their plans, streamlining the process once overpayments are identified.
CMS MAKES CHANGES TO STATE MEDICAID DSH ALLOTMENT REDUCTIONS
CMS finalizes several changes relating to State’s Medicaid DSH allotment reduction. Given the reduced number of uninsured individuals in the United States as a consequence of the Patient Protection and Affordable Care Act (ACA), the ACA directed the Secretary of the Department of Health and Human Services (HHS) to make aggregate DSH allotment reductions through fiscal year (FY) 2020. Several laws since have modified these reductions.
CMS must determine annual DSH allotment reductions based on five factors: uninsured factor (UPF); Medicaid volume factor (HMF); uncompensated care factor (HUF); low DSH State factor (LDF); and a budget neutrality factor (BNF). In a 2019 final rule, CMS excluded allotments diverted under a section 1115 demonstration from DSH allotment reductions.
In the absence of DSH audit information relative to a State’s expenditure of DSH allotment amounts diverted under section 1115 demonstrations, CMS finalizes without modification its proposal to assign average uncompensated care factors and Medicaid volume factor reduction percentages to calculate a State’s Medicaid DSH allotment reduction. This means that funds diverted under a section 1115 demonstration would be subject to these reductions.
CMS FINALIZES THIRD PARTY PAYER LIMIT IN DSH CALCULATION
The CAA 2021 specified that for the purposes of calculating the DSH hospital shortfall portion (i.e., Medicaid costs less Medicaid payments), only costs and payments for services provided to patients with Medicaid as a primary payer may be considered. To comply with the CAA, CMS updates the methodology for calculating the Medicaid shortfall portion (i.e., Medicaid costs less Medicaid payments) of the hospital-specific DSH limit to only include costs and payments for hospital services provided to beneficiaries for whom Medicaid is the primary payer, effective for the Medicaid State plan rate year (SPRY) beginning on or after October 1, 2021, and to include the statutory exception for 97th percentile hospitals.
Additionally, to improve the accuracy of identification of provider overpayments discovered through the DSH audit process, CMS adds an additional reporting requirement for annual DSH audit reporting.
The Agency states that these changes will bolster federal oversight of the Medicaid DSH program and improve the accuracy of identification of DSH audit overpayments.
The CAA 2021 provides an exception for certain hospitals ranked in the top 97th percentile regarding the number of Medicare supplemental security income (SSI) days, or the percentage of Medicare SSI days to total inpatient days. SSI days refer to inpatient days of patients who were entitled to both Medicare Part A and SSI benefits.
CMS clarifies that a 97th percentile hospital means “a hospital that is in at least the 97th percentile of all hospitals nationwide with respect to the hospital’s number of Medicare SSI days or percentage of inpatient days that are Medicare SSI days, for the hospital’s most recent cost reporting period.”[2] CMS also clarifies that these hospitals are identified, on a prospective basis, through Medicare cost reporting and claims data sources, as well as SSI eligibility data provided by the Social Security Administration for each SPRY beginning October 1, 2021 and thereafter. This means that if a State’s SPRY begins July 1, then these provisions would be effective beginning with the SPRY starting July 1, 2022.
CMS will also develop and publish a data set, consisting of cost report, claims, and eligibility data, to use in determining which hospitals may qualify.
CMS MAKES CHANGES TO PUBLICATION OF ANNUAL DSH ALLOTMENTS
CMS finalizes its proposal to eliminate regulatory requirements to publish annual DSH allotments in the Federal Register and instead provide this information in the Medicaid Budget and Expenditure System/State Children’s Health Insurance Program Budget and Expenditure System (MBES/CBES) and at Medicaid.gov. Publishing this information in the Federal Register was time consuming for CMS and provided no added benefits to stakeholders as CMS already makes the information available via other avenues. Instead of specifying that April 1st is the date on which final national targets and allotments are published, CMS changed the timeframe to “as soon as practicable.” The Agency will continue to provide this information to States as soon as it is available, but wanted to add flexibility in the deadline in case States are late in reporting their expenditure data.
CMS also finalizes its proposal to remove from regulation a reference that the Agency has the discretionary option to publish in the Federal Register the national CHIP allotment amounts as determined on an annual basis for the FYs specified in statute. CMS has not exercised this option since the FY 2013 CHIP allotments. Similar to the above, the Agency will post CHIP allotments in the MBES/CBES and at Medicaid.gov (or similar successor systems or websites) annually. CMS states that it hopes this will improve transparency and administrative burden on individuals interested in accessing these data.
CMS MAKES CHANGES TO FEDERAL FINANCIAL PARTICIPATION
CMS finalizes several changes to conditions of federal financial participation (FFP). CMS revises the regulatory conditions for FFP at 42 CFR § 455.304. Specifically, CMS removes the reference to Medicaid eligible individuals to specify that DSH payments are associated with inpatient hospital and outpatient hospital services provided to Medicaid individuals.
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This Applied Policy® Summary was prepared by April Gutmann with support from the Applied Policy team of health policy experts. If you have any questions or need more information, please contact her at agutmann@appliedpolicy.com or at (202) 558-5272.
[1] The proposed rule was issued on February 22, 2023.
[2] See page 20 of the unpublished rule.