CMS Outlines New Payment Methodology for DSH and Uncompensated Care Payments

The way hospitals will be paid their disproportionate share hospital (DSH) payments will change beginning on October 1, 2013, the start of fiscal year (FY) 2014, according to the inpatient hospital prospective payment system Final rule released August 2. The changes were mandated by section 3133 of the Patient Protection and Affordable Care Act (PPACA)(P.L. 111-148), as amended by section 1104 of the Health Care and Education Reconciliation Act (P.L. 111-152), as a way to achieve savings for the federal government from the reductions in the number of uninsured. CMS has determined that if hospitals are treating fewer uninsured as a result of the policies of PPACA, then the amount of extra payments that hospitals receive to treat the uninsured also should be reduced. It is expected that hospitals will make up any lost revenue from a change in their DSH payment from insurance providers who will be paying for the care of more people.

PPACA Changes

Under the new methodology hospitals will receive 25 percent of what they would have received if there was no change as to how DSH payments are made. How much of the remaining 75 percent of the payment that will be retained by a hospital will be determined based on the hospital’s share of uncompensated care provided compared to the total amount of uncompensated care provided by all hospitals. CMS calls the 25 percent payment as the “empirically justified Medicare DSH payment” and the 75 percent payment as the “uncompensated care payment.” It is important to note that only hospitals that are eligible for an empirically justified Medicare DSH payment will be eligible for the uncompensated care payment as well.

Empirically Justified Medicare DSH Payments

CMS is using projections of Medicare DSH payments for 2014 as calculated by CMS’ Office of the Actuary, which are based on the most recently submitted cost reports. Based on these projections CMS expects that $12.772 billion would have been paid in FY 2014 for DSH payments. The amount then available for the empirically justified Medicare DSH payments would be $3.193 billion, or 25 percent of $12.772 billion. CMS refers to this calculation as Factor 1. The process by which empirically justified Medicare DSH payments will be made is no different than how DSH payments have been made in previous years.

Uncompensated Care Payments

The amount of money available for the uncompensated care payments for FY 2014 was calculated to be $9.033 billion in FY 2104, according to CMS. CMS refers to this amount as Factor 2. This amount is somewhat less than 75 percent of $12.772 billion because section 1886(r)(2)(B) of the Social Security Act has a formula that takes into account the changes in uninsured from year to year. The total amount available for the uncompensated care payment is “equal to 1 minus the percent change in the percent of individuals under the age of 65 who are uninsured, as determined by comparing the percent of individuals who are uninsured in 2013…and [those] who are uninsured in the most recent period for which data is available, minus 0.1 percentage points for fiscal year 2014 and minus 0.2 percentage points for each of fiscal years 2015, 2016, and 2017.” Because of these reductions, CMS is estimating that the amount of money paid in FY 2014 for empirically justified Medicare DSH payments and uncompensated care payments will be about 0.4 percent less than the amount paid for DSH payments in FY 2013.

Hospital Specific Amounts

The amount each hospital will receive for its uncompensated care payment will be determined based on the amount of uncompensated care provided by the hospital compared to the total amount of uncompensated care provided by all hospitals. The amount that each hospital will receive will be determined by multiplying the total amount available for uncompensated care payments times the hospital’s own fraction. CMS refers to this as Factor 3. CMS had wanted to use data from cost report worksheet S-10 to determine the amount of uncompensated care provided by each hospital and the total amount provided by all hospitals, but CMS was aware that this worksheet was relatively new and that the data reported on worksheet S-10 may not be totally accurate. Although CMS is using data from other source for FY 2014 it fully intends in the near future to use data from worksheet S-10.

Paying Uncompensated Care Amounts

Originally CMS wanted to make interim payments of a portion of the total amount of the uncompensated care payments on a regular pre-determined time-frame, such as four times a year. Based on comments received for this Final rule CMS has determined to pay a portion of the uncompensated care amount each hospital is expected to receive with each discharge. CMS is going to estimate the number of discharges for each hospital in FY 2014 by taking the average number of discharges over the last three years. It will then divide the total amount of uncompensated care payments for each hospital in FY 2014 by the estimated discharges for FY 2014 and add it to each payment. The uncompensated care payment will not be adjusted for any claim specific factors, such as DRG weight or transfer status.

There will be a reconciliation process at the end of each hospital’s cost reporting year where the actual amount paid for uncompensated care will be compared to the calculated uncompensated care payment amount for the year. If too much was paid the hospital will have to reimburse CMS and if too little was paid CMS will pay the hospital.