CMS proposes impactful policy changes to Medicare and Medicaid DSH

The Centers for Medicare and Medicaid Services (CMS) recently released two proposed rules modifying the calculation of Medicare and Medicaid Disproportionate Share Hospital (DSH) payments and a CMCS Informational Bulletin clarifying state directed payments under Medicaid managed care. Medicare and Medicaid DSH funds are essential to the financial stability of hospitals that serve a disproportionate share of low-income patients. The CMS issuances identify major policy changes impacting the calculation of Medicaid and Medicare DSH payments and how states use 1115 waiver demonstration programs to improve the flow of funds to hospitals under Medicaid managed care.

Medicaid Program: DSH Third Party Payer Proposed Rule

The Medicaid DSH Proposed Rule updates the manner of calculating the hospital specific limit (HSL), which is a basis for determining a hospital's ability to receive Medicaid DSH supplemental payments. Many children's hospitals rely heavily on Medicaid DSH supplemental payments because children's hospitals do not otherwise qualify for Medicare supplemental payment programs. As a result of the legislative changes made to Section 203 by the Consolidated Appropriations Act (CAA) of 2021, CMS now proposes to ensure that the DSH HSL reflects only those costs and payments for hospital services furnished to Medicaid beneficiaries for whom Medicaid is the primary payer:

…only the costs incurred in providing inpatient hospital and outpatient hospital services to Medicaid individuals, and revenues received with respect to those services, and costs incurred in providing inpatient hospital and outpatient hospital services, and revenues received with respect to those services, for which a determination has been made in accordance with 447.295(c) that the services were furnished to individuals who have no source of third party coverage for the specific inpatient hospital or outpatient hospital service are included when calculating the costs and revenues for Medicaid individuals and individuals who have no health insurance or other source of third party coverage for purposes of section 1923(g)(1) of the Act.

This statutory language is the result of years of litigation in which many children's hospitals opposed CMS's interpretation of the statutory language that establishes the mathematic formula for calculating the DSH HSL at Section 1923(g). That language instructed that payments received by a hospital under DSH cannot exceed costs incurred during the year of furnishing hospital services to individuals "who either are eligible for medical assistance under the state plan or have no health insurance (or other source of third party coverage). Prior to the CAA's passage, CMS' position was that the HSL calculation must include revenues received by hospitals for individuals who may be eligible for Medicaid but for whom no payments were received by the hospital by the Medicaid program. This resulted, in many cases, in wiping out much of the HSL for many hospitals. The Medicaid DSH Proposed Rule is the culmination of this litigation. The statutory language in Section 203, passed as part of the CAA, limits the inclusion of costs and payments in the HSL formula (which forms one of the numerators to the fraction) solely to the costs incurred and revenues received for hospital inpatient and outpatient services from the Medicaid program for an individual who is a Medicaid covered beneficiary.

The Medicaid DSH Proposed Rule also contains some additional surprises. First, it would make changes to the DSH independent certified audit and overpayment rules by requiring auditors to quantify the financial impact of any finding including those resulting from incomplete or missing data, lack of documentation, non-compliance with federal laws or regulations, or other deficiencies. To that end, any DSH payment exceeding the HSL would be characterized as a "provider overpayment" that must be reported on Form CMS-64 within two years of the date of discovery. Further, CMS proposes to add that the definition of "overpayment" is the earliest date that the state submits the independent certified audit report required or any of the other dates specified in the rule.

In a second surprise, CMS proposes to clarify the methodology used for calculating each state's Medicaid DSH allotment reduction, as established under the Affordable Care Act, by considering the extent to which the DSH allotment for a state was included in the budget neutrality calculation for a coverage expansion approved under a section 1115 demonstration. The statutory provision allows for the Secretary of Health and Human Services to consider the extent to which a state uses its Medicaid DSH allotment to finance coverage expansions under section 1115 waiver authority. CMS proposes that amounts diverted under a section 1115 demonstration approved after July 31, 2009 would be subject to reductions under the uncompensated care factor (HUF) and the Medicaid volume factor (HMF) "so that the regulation may better reflect the policy finalized in the 2019 final rule preamble."

Medicare Program: DSH Payments Proposed Rule: Counting certain days associated with section 1115 demonstrations in the Medicaid fraction

The Medicare DSH Proposed Rule is also in response to years of litigating the Medicare DSH fraction, which itself is comprised of two fractions: a Medicaid fraction and a Medicare fraction. The Medicaid fraction is computed by dividing the hospital's number of inpatient days furnished to patients who, for such days were eligible for Medicaid but were not entitled to benefits under Medicare Part A, by the hospital's total number of inpatient days for the same period. Litigation ensued over the manner in which individuals were determined to be "eligible" for Medicaid, and became even more complex as section 1115 waiver programs proliferated and uncompensated care pools became more prevalent.

Following an exhaustive preamble that covers the history of the multiple proposed rules, comments and litigation, CMS writes:

…it was never our intent when we adopted the current language of the regulations to include in the DPP [disproportionate patient percentage] Medicaid fraction numerator days of patients that benefitted so indirectly from a demonstration… that it is not appropriate to include patient days associated with funding pools and premium assistance authorized by section 1115 demonstrations in the DPP Medicaid fraction numerator because the benefits provided patients are such demonstrations are not similar to Medicaid benefits provided beneficiaries under a state plan…

Thus, CMS proposes to "modify" the regulations to explicitly state their "long held view" that "only patients who receive health insurance through a section 1115 demonstration where state expenditures to provide the insurance may be matched with funds from Title XIX can be "regarded as eligible for Medicaid." As a result, CMS proposes to include only the costs associated with patients who receive their insurance through the Medicaid program, either directly or through the benefit of a specific 1115 demonstration that either:

1. Provides health insurance that covers inpatient hospital services; or
2. Is designed to provide premium assistance that covers 100 percent of the premium cost to the patient who uses it to buy health insurance that covers the provided inpatient hospital service, and for which the patient is not otherwise entitled to Medicare Part A benefits.

CMS goes on to specifically exclude from the Medicaid DSH fraction numerator days of patients with uncompensated care costs for which a hospital is paid from a funding pool authorized by a section 1115 demonstration project. This would be effective for discharges occurring on or after October 1, 2023.

The manner in which CMS has interpreted the counting of patient days "eligible for Medicaid" under the Medicare and Medicaid DSH funding formulas has been litigated for over a decade. In the instance of the Medicaid DSH HSL calculation, individuals who were eligible for benefits may or may not be "enrolled" in the Medicaid program and the revenues associated with caring for their inpatient and outpatient care were included in the numerator for calculating the HSL. In the instance of Medicare, the Medicaid fraction for the DSH formula solely included revenues associated with inpatient and outpatient care paid for by the Medicaid program. In both the Medicaid DSH and Medicare DSH Proposed Rules, a Medicaid eligible day and a Medicaid eligible patient would be tied directly to the receipt of payment and insurance benefit from the Medicaid program.

CMCS Informational Bulletin: Health care-related taxes and hold harmless arrangements involving the redistribution of Medicaid payments

The CMCS Informational Bulletin addressing Medicaid state directed payment programs (SDP) sends the proverbial "shot across the bow" by sending a message, it seems, to warn states and providers concerning healthcare related taxes and hold harmless arrangements that involve the redistribution of Medicaid payments. According to CMS, "During standard oversight activities… particularly managed care SDP and fee-for-service payment state plan amendments (SPAs), CMS is increasingly encountering health care-related tax programs that appear to contain hold harmless arrangements involving the redistribution of Medicaid payments." CMS promises to increase enforcement of what it considers inappropriate redistribution arrangements and may conduct detailed financial management reviews of health care related tax programs that appear to include redistribution arrangements.

Next steps

For those interested in providing comments to one or both of the proposed rules, the comment period for the Medicaid DSH Proposed Rule closes April 25, 2023 and the comment period for the Medicare DSH Proposed Rule closes May 1, 2023.

With regard to the Informational Bulletin, providers should evaluate their participation in programs that seek to maximize federal Medicaid matching funds to ensure such programs do not implicate the provisions cited in the Bulletin, as CMS appears to be sending strong enforcement messaging concerning their distaste for such programs.

Norton Rose Fulbright regularly advises clients concerning Medicare and Medicaid DSH supplemental payment programs and closely follows developments in this area. We will continue to review these detailed proposed regulations and provide updates.