United States: CMS Releases Proposed Rule To Amend Medicaid Disproportionate Share Hospital Rules

On January 18, 2012, the Centers for Medicare & Medicaid Services ("CMS") published a proposed rule ("Proposed Rule"), which proposes to modify, for reporting years beginning in 2011, definitions used in calculating the US hospital-specific limit on the amount of Medicaid disproportionate share hospital ("DSH") payments that a hospital may receive. Particularly for hospitals that receive Medicaid payments up to this limit, the CMS proposal may be a welcome change, since it would effectively expand the hospital service costs that may be included under the hospital-specific DSH limit.

Hospital-Specific DSH Limits

Federal law limits the Medicaid DSH payments a state may pay a hospital to the unreimbursed costs incurred by the hospital for providing inpatient and outpatient hospital services to patients eligible for Medicaid and to patients without insurance. This limit is called the "hospital-specific DSH limit" or the "OBRA '93 limit" (after the federal law that first imposed the limit).

For many years, CMS did not provide substantial guidance to states on calculating the costs included in the hospital-specific DSH limit. In 1994, CMS issued a letter explaining that CMS generally "would permit the State to use the definition of allowable costs in its State plan, or any other definition...." At that time, CMS took a relatively broad and service-specific view with respect to identifying patients without insurance. CMS' 1994 letter provided that "it would be permissible for States to include in this definition [of uncompensated care costs] individuals who do not possess health insurance which would apply to the service which the individual sought." Thus, even if a person had insurance, if the person had no insurance for the particular service provided by the hospital, the cost of that service could be counted as an uninsured cost for the purposes of calculating the hospital-specific DSH limit. For example, a person's insurance coverage might have a strict limit on the number of inpatient days. Costs associated with days beyond the coverage limits could be counted under the 1994 interpretation.

In 2008, CMS issued a final rule implementing reporting and auditing requirements related to the Medicaid DSH calculation ("2008 Final Rule"). The 2008 Final Rule was more prescriptive regarding the calculation of the hospital-specific DSH limit and also much more prescriptive with respect to the characterization of uninsured costs. In that rule, CMS stated that the test was whether or not an individual was uninsured and, in particular, whether the individual had "creditable coverage" as defined in the regulations promulgated for the Health Insurance Portability and Accountability Act ("HIPAA"). In other words, if the patient had any insurance at all, the costs associated with that patient could not be counted, even if the patient's insurance did not cover the service at issue. More specifically, CMS claimed it had "never read this language to be service-specific."

What Would the Proposed Rule Change?

In the Proposed Rule, CMS would revise its interpretation of patients without insurance to allow for the service-specific interpretation included in the 1994 letter but disavowed in 2008. In this new proposal, CMS acknowledges that prior to 2008 it had endorsed the service-specific approach and that the 2008 rule superseded that prior interpretation. However, CMS acknowledges that there have been concerns about this provision, and, effective for 2011, CMS proposes to revert back to the prior service-specific definition.

In order to implement this change, CMS would add a new regulation that would specifically define the term "individuals who have no health insurance (or other source of third party coverage) for the services furnished during the year" to be service-specific. Further, CMS would remove the references to the HIPAA definition of "creditable coverage."

CMS also clarifies that if a patient is Medicaid eligible, all costs incurred providing inpatient and outpatient hospital services are included as Medicaid costs for purposes of the hospital-specific DSH limit (as opposed to uninsured costs), regardless of whether Medicaid benefits or coverage limits have been exceeded.

What Does the Proposed Rule Not Change?

CMS makes a point of noting that certain of its 2008 final rule interpretations have not changed. In particular, CMS notes that costs associated with unpaid coinsurance and deductibles or payer discounts represent uncollected revenues, not uninsured costs. Thus, these costs are not includable in the hospital-specific DSH limit. CMS also reiterates that individuals without insurance that are inmates in a public institution are considered to have a source of third party coverage—the agency holding that person in custody—and are thus not uninsured for purposes of the hospital-specific DSH limit.

What is the Impact of the Change?

If the Proposed Rule is finalized as proposed, beginning in the 2011 rate year, states will be able to pay hospitals for a wider range of costs than would have been allowed under the 2008 Final Rule. If a state so chooses (and presuming there are state funds available), states would be able to allow the inclusion of costs related to specific services provided to persons with insurance, if that insurance did not cover that specific service provided, either because of coverage or service limitations.

Further, because the 2008 Final Rule specified (at 42 C.F.R. § 455.304(e)) that "findings of State reports and audits for Medicaid State Plan years 2005–2010 will not be given weight except to the extent that the findings draw into question the reasonableness of State uncompensated care cost estimates used for calculations of prospective DSH payments for Medicaid State plan year 2011 and thereafter," CMS would largely eliminate any impact related to the "creditable coverage"-based definition included in the 2008 Final Rule.

At the same time, because state plan rate year 2011 has already begun, many states have already changed their DSH programs to conform to the 2008 Final Rule. It is unclear how those states will or will not change their programs in response to this rule, even when finalized. There is no consequence for a state that is more strict than would be allowed under the Proposed Rule. Under the 2008 Final Rule, however, states that allowed the service-specific uninsured costs would have had an overpayment liability related to the 2011 rate year if payments exceeded the hospital-specific limit. (This would not have occurred until 2015, when the audit for 2011 would be due.)

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