Federal law requires that state Medicaid programs make Disproportionate Share Hospital (DSH) payments to qualifying hospitals that serve a large number of Medicaid and uninsured individuals.
Federal law establishes an annual DSH allotment for each state that limits Federal Financial Participation (FFP) for total statewide DSH payments made to hospitals. Federal law also limits FFP for DSH payments through the hospital-specific DSH limit. Under the hospital-specific DSH limit, FFP is not available for state DSH payments that are more than the hospital's eligible uncompensated care cost, which is the cost of providing inpatient hospital and outpatient hospital services to Medicaid patients and the uninsured, minus payments received by the hospital on or on the behalf of those patients.
DSH Audit and Reporting Requirements
For states to receive FFP for DSH payments, federal law requires states to submit an independent certified audit and an annual report to the Secretary describing DSH payments made to each DSH hospital.
The report must identify each disproportionate share hospital that got a DSH payment adjustment, and provide any other information the Secretary needs to ensure the appropriateness of the payment amount. The annual certified independent audit includes specific verifications to make sure all DSH payments are appropriate.
Final Rule on DSH Audit and Reporting Requirements
On December 19, 2008, the Centers for Medicare & Medicaid Services (CMS) published a final rule to implement federal law, specifying the elements for the required DSH report and the verifications required for the audit. CMS also developed additional guidance, including theand the to help states meet statutory and regulatory requirements.
As of December 30, 2018, and in light of four recent appellate court decisions, CMS withdrew FAQs 33 & 34 from the Medicaid DSH guidance that was issued in January 2010 titled "." As a result, FAQs 33 and 34 are no longer operative, and CMS will accept revised DSH audits that cover hospitals services furnished before June 2, 2017. Ultimately, whether or not a state submits revised DSH audits, CMS expects states to comply with 42 C.F.R. § 433.312(a), and expects that any overpayments identified in the audits will either be redistributed to other DSH-eligible hospitals in accordance with the applicable state plan, see 73 Fed. Reg. 77904 (Dec. 19, 2008), or that the federal portion will be refunded to CMS in accordance with the regulation. At this time, CMS does not intend to provide additional guidance regarding whether individual states should submit revised DSH audits. States are encouraged to review any applicable district court or appellate court decisions. See, e.g., Tenn. Hosp. Ass’n v. Azar, 908 F.3d 1029 (6th Cir. Nov. 14, 2018); Children’s Health Care v. CMS, 900 F.3d 1022 (8th Cir. Aug. 20, 2018); Children’s Hosp. of the King’s Daughters, Inc. v. Azar, 896 F.3d 615 (4th Cir. July 23, 2018); New Hampshire Hosp. Ass’n v. Azar, 887 F.3d 62 (1st Cir. Apr. 4, 2018).
As discussed further below, hospital services furnished on or after June 2, 2017 are covered by a final rule issued by CMS on April 3, 2017 (Medicaid Program: Disproportionate Share Hospital Payments-Treatment of Third Party Payers in Calculating Uncompensated Care Costs), clarifying the treatment of third party payers in determining the hospital-specific Medicaid DSH payment limit.
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Final DSH Rule: Treatment of Third Party Payers in Calculating Uncompensated Care Costs
On April 30, 2017, CMS issued a final rule regarding Medicaid DSH payments. This rule (published at 82 Fed. Reg. 16114 and codified at 42 C.F.R. § 447.299(c)(10)) clarifies federal requirements regarding the treatment of third party payers in determining the hospital-specific Medicaid DSH payment limit, which is set by statute as a hospital’s “uncompensated costs” incurred in providing hospital services to Medicaid and uninsured patients.
The final rule makes clearer our existing policy that uncompensated costs include only those costs for Medicaid eligible individuals that remain after accounting for all payments received by or on behalf of Medicaid eligible individuals, including Medicare and other third party payments. This is consistent with the statutory requirements governing Medicaid DSH and applicable limits.
Following the district court decision in Children’s Hosp. Ass’n of Texas v. Azar, No. 17-cv-844 (D.D.C. Mar. 2, 2018), which vacated the 2017 rule, CMS previously advised that it would not be enforcing the 2017 rule as long as that district court decision remained operative. Additionally, CMS withdrew FAQs 33 & 34 from the Medicaid DSH guidance that was issued in January 2010 titled “Additional Information on the DSH Reporting and Audit Requirements (PDF, 268.22 KB),” which provided instructions to states for offsetting third party payers (TPP) payments for services provided prior to June 2, 2017. On August 13, 2019, the United States Court of Appeals for the D.C. Circuit issued an opinion reversing the district court judgment, reinstating the final rule, and remanding the case for further proceedings. Children’s Hosp. Ass’n of Texas v. Azar, No. 18-5135 (D.C. Cir. Aug. 13, 2019). Additionally, we have received favorable rulings from two other appellate courts—namely, the Fifth and Eighth Circuits. See Baptist Mem’l Hosp.-Golden-Triangle, Inc. v. Azar, 18-60592 (5th Cir. Apr. 20, 2020); Missouri Hosp. Ass’n v. Azar, No. 18-1778 (8th Cir. Nov. 4, 2019).
Based on these court rulings, CMS will be enforcing the 2017 rule as it applies to all hospital services furnished on or after June 2, 2017. In order to assist states in complying with the applicable requirements, CMS released a CMCS Information Bulletin on August 18, 2020 entitled, “Treatment of Third Party Payers (TPP) in Calculating Uncompensated Care Costs (UCC) (PDF, 90.38 KB).” This bulletin provides states with guidance on how to properly report UCC for 2017 if states decide not to include TPP payments as an offset for purposes of calculating the hospital-specific DSH limit for periods before the June 2, 2017 effective date of the 2017 final rule.
Notice of Proposed Rulemaking: State Disproportionate Share Hospital Allotment Reductions
On July 27, 2017, CMS issued a notice of proposed rulemaking (NPRM) regarding Medicaid Disproportionate Share Hospital allotment reductions. This NPRM proposes a methodology to implement the annual reductions to state Medicaid DSH allotments for FY 2018 through FY 2025 as required by the Affordable Care Act. The proposed methodology relies on five factors identified in statute. Taking these factors into account for each state, the proposed methodology will generate a state-specific DSH allotment reduction amount for each fiscal year.
Final Rule: State Disproportionate Share Hospital Allotment Reductions
On September 23, 2019, CMS released a final rule to implement statutorily required disproportionate share hospital (DSH) allotment reductions that are scheduled to begin in FY2020. The rule finalizes a methodology to calculate the annual reductions for FY2020 through FY2025. The methodology includes five factors outlined in 1923(f) of the Social Security Act, which include the uninsured factor (UPF), Medicaid volume factor (HMF), uncompensated care factor (HUF), low DSH state factor (LDF), and budget neutrality factor (BNF). CMS will calculate individual state’s DSH reductions using each respective year’s preliminary DSH allotment as currently calculated under statue.
State-specific Annual DSH Reports and Independent Certified Audits
State-specific annual DSH reports are posted as submitted by states based on their availability and are arranged alphabetically by state under the corresponding State Plan RateYear (SPRY) heading.
Due to the size of the files and issues associated with electronic formatting, state-specific independent certified audits will be available only upon request. Interested parties should contact Richard Cuno (Richard.Cuno@cms.hhs.gov) to request copies. In order to facilitate requests, the subject line should read "DSH Independent Certified Audit Request". In the body of the email, please provide specifics regarding the state and SPRY that you are requesting. Please be advised that the provision of the audits is subject to availability and does not constitute approval of their contents.