UK: Hospital & Health System Reimbursement Quarterly Newsletter - Q3 2022

CMS'S EVOLVING APPROACH TO TREATMENT OF SECTION 1115 WAIVER DAYS IN MEDICARE DSH CALCULATION

For more than two decades, the Medicare disproportionate share hospital ("DSH") regulation has permitted hospitals to include days in the numerator of the Medicaid fraction that are attributable to patients who were covered under a Centers for Medicare & Medicaid Services ("CMS")-approved Section 1115 waiver. But in spite of its regulation, CMS for years has attempted to exclude from the DSH calculation days of patients covered under Section 1115 waivers through an uncompensated care pool program or premium assistance program. After losing before multiple courts in cases relating to waiver programs in three different states, CMS finally appears poised to permit hospitals to claim these categories of waiver days as Medicaid days in the DSH calculation. As discussed below, this presents an opportunity for hospitals located in states with these kinds of Section 1115 waiver programs to increase their Medicare DSH reimbursement.

For years, the CMS and its contractors have attempted to exclude days from the numerator of the DSH Medicaid fraction attributable to patients who were covered under a CMS-approved Section 1115 waiver. Section 1115 of the Social Security Act ("Act") permits CMS to waive Medicaid requirements to permit "experimental, pilot, or demonstration project[s]" that are "likely to assist in promoting the objectives" of Title XIX of the Act. 42 U.S.C. § 1315(a). Under the controlling regulation initially adopted in 2000 and amended in 2003, "hospitals may include all days attributable to populations eligible for Title XIX matching payments through a waiver approved under section 1115 of the Social Security Act" so long as the patient is "eligible for inpatient hospital services" under the waiver. 42 C.F.R. § 412.106(b)(4)(i)-(ii).

Since 2018, federal courts have repeatedly overturned CMS's disallowance of waiver days under CMS-approved Section 1115 demonstration projects. In the first case, HealthAlliance Hospitals, Inc. v. Azar, the D.C. District Court held that "the plain language of the applicable regulation unambiguously requires" that patient days under Massachusetts' Commonwealth Care Health Insurance Program must be counted in the numerator of the DSH Medicaid fraction. 346 F. Supp. 3d 43, 56, 60 (D.D.C. 2018). A year later, in Forrest General Hospital v. Azar, the Fifth Circuit similarly concluded that patient days funded through Mississippi's uncompensated care pool must be included in the numerator of the Medicaid fraction. 926 F.3d 221, 226, 234 (5th Cir. 2019). Most recently, in Bethesda Health, Inc. v. Azar, the D.C. Circuit found that the patient days under Florida's Low Income Pool could be included in the plaintiff hospitals' Medicaid fractions. 980 F.3d 121, 122-23 (D.C. Cir. 2020).

In light of these court decisions, CMS has twice proposed to amend the regulation to limit the inclusion of Section 1115 waiver days in the Medicaid fraction on a prospective basis. See 86 Fed. Reg. 25,070, 25,457-59 (May 10, 2021); 87 Fed. Reg. 28,108, 28,400-01 (May 10, 2022). But CMS did not finalize its proposal either time. See 86 Fed. Reg. 44,774, 45,249 (Aug. 13, 2021); 87 Fed. Reg. 48,780, 49,051 (Aug. 10, 2022). This leaves CMS's existing rule permitting the inclusion of waiver days in the DSH calculation in place, although the agency may revisit the rule again in a future rulemaking.

In light of the three adverse court decisions discussed above, CMS appears to be poised to allow hospitals to claim Section 1115 waiver days in the Medicare DSH calculation. In an instruction issued in May 2022, CMS informed its Medicare Administrative Contractors they must accept amended cost report filings when "the provider is seeking to amend their cost report to include Section 1115 Waiver days for DSH reimbursement purposes." TDL 220374 (May 6, 2022). This means that hospitals located in states with Section 1115 programs covering uncompensated care pools and premium assistance programs that CMS has historically disallowed can now go back and file amended cost reports for any open cost years (i.e., any cost years that have not received NPRs) and request their MACs to include Section 1115 waiver days in the DSH calculation. The MACs have been instructed to accept such amended cost reports and to issue tentative settlements or NPRs to providers that include waiver days in the DSH calculation. We understand that MACs have also been granting reopening requests for cost reports that are within the 180-day window for filing an appeal. While the instruction provides for the inclusion of waiver days in the DSH calculation, it also provides for the MACs to go back and reopen cost years that are later determined to have erroneously claimed days. While CMS has left the MACs with the ability to reopen cost reports that are settled including waiver days, CMS's instruction presents an opportunity for hospitals located in states with Section 1115 waivers to get additional cash in the door, at least for any cost years that have not been settled.

We expect continued developments in this area of Section 1115 waiver days and recommend that hospitals evaluate whether they are located in states with Section 1115 waivers covering inpatient hospital services and, if so, if those days should be included in the DSH calculation. In addition, we recommend that hospitals continue to appeal the Section 1115 waiver days issue from any NPRs that exclude those days, even if the hospital has otherwise requested a reopening but has not yet received a revised NPR including the hospital's waiver days.

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