[Federal Register: December 19, 2008 (Volume 73, Number 245)]
[Rules and Regulations]
[Page 77903-77952]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr19de08-17]
[[Page 77903]]
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Part III
Department of Health and Human Services
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Centers for Medicare & Medicaid Services
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42 CFR Parts 447 and 455
Medicaid Program; Disproportionate Share Hospital Payments; Final Rule
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DEPARTMENT OF HEALTH AND HUMAN SERVICES
Centers for Medicare & Medicaid Services
42 CFR Parts 447 and 455
[CMS-2198-F]
RIN 0938-AN09
Medicaid Program; Disproportionate Share Hospital Payments
AGENCY: Centers for Medicare & Medicaid Services (CMS), HHS.
ACTION: Final rule.
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SUMMARY: This final rule sets forth the data elements necessary to
comply with the requirements of Section 1923(j) of the Social Security
Act (Act) related to auditing and reporting of disproportionate share
hospital payments under State Medicaid programs. These requirements
were added by Section 1001(d) of the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003 (MMA).
DATES: Effective Date: This rule is effective on January 19, 2009.
FOR FURTHER INFORMATION CONTACT: Venesa Day, (410) 786-8281; Rory Howe,
(410) 786-4878; and Rob Weaver, (410) 786-5914.
SUPPLEMENTARY INFORMATION:
I. Background
Title XIX of the Social Security Act (Act) authorizes Federal
grants to States for Medicaid programs that provide medical assistance
to low-income families, the elderly and persons with disabilities.
Section 1902(a)(13)(A)(iv) of the Act requires that States make
Medicaid payment adjustments for hospitals that serve a
disproportionate share of low-income patients with special needs.
Section 1923 of the Act contains more specific requirements related to
such disproportionate share hospital (DSH) payments, including
aggregate annual state-specific limits on Federal financial
participation under Section 1923(f), and hospital-specific limits on
DSH payments under Section 1923(g). Under those hospital specific
limits, a hospital's DSH payments may not exceed the costs incurred by
that hospital in furnishing services during the year to Medicaid
patients and the uninsured, less other Medicaid payments made to the
hospital, and payments made by uninsured patients (``uncompensated care
costs''). In addition, Section 1923(a)(2)(D) requires States to provide
an annual report to the Secretary describing the payment adjustments
made to each disproportionate share hospital.
Section 1001(d) of the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003 (MMA) (Pub. L. 108-173, enacted on December
8, 2003) added Section 1923(j) to the Act to require States to report
additional information about their DSH programs. Section 1923(j)(1) of
the Act requires States to submit an annual report that includes the
following:
Identification of each DSH facility that received a DSH
payment under the State's Medicaid program in the preceding fiscal year
and the amount of DSH payments paid to that hospital in the same year.
Such other information as the Secretary of Health and
Human Services determines necessary to ensure the appropriateness of
DSH payments.
Section 1923(j)(2) of the Act also requires States to have their
DSH payment programs independently audited and to submit the
independent certified audit annually to the Secretary. The certified
independent audit must verify:
The extent to which hospitals in the State have reduced
uncompensated care costs to reflect the total amount of claimed
expenditures made under Section 1923 of the Act.
DSH payments to each hospital comply with the applicable
hospital-specific DSH payment limit.
Only the uncompensated care costs of providing inpatient
hospital and outpatient hospital services to Medicaid eligible
individuals and uninsured individuals as described in Section
1923(g)(1)(A) of the Act are included in the calculation of the
hospital-specific limits.
The State included all Medicaid payments, including
supplemental payments, in the calculation of such hospital-specific
limits.
The State has separately documented and retained a record
of all its costs under the Medicaid program, claimed expenditures under
the Medicaid program, uninsured costs in determining payment
adjustments under Section 1923 of the Act, and any payments made on
behalf of the uninsured from payment adjustments under Section 1923 of
the Act.
In addition to these reporting requirements, under Section 1923(j)
of the Act, Federal matching payments are contingent upon a State's
submission of the annual DSH report and independent certified audit.
II. Summary of the Proposed Regulations
On August 26, 2005, we published in the Federal Register (70 FR
50262-50268) a notice of proposed rulemaking implementing the reporting
and auditing requirements for State Disproportionate Share Hospital
payments. In this notice of proposed rulemaking, we proposed modifying
the DSH reporting requirements in Federal regulations at 42 CFR 447 by
providing the following changes to our regulations:
1. Reporting Requirements
To implement the reporting requirements in Section 1923(j)(1) of
the Act, we proposed to modify the DSH reporting requirements in
Federal regulations at 42 CFR 447.
We proposed to add a new paragraph (c) to the reporting
requirements in Sec. 447.299.
We proposed to redesignate the documentation requirements
in paragraph (c) as paragraph (d) and redesignate the deferrals and
disallowances information in paragraph (d) as paragraph (e),
respectively.
We proposed a list of information to reflect the data
elements necessary to ensure that DSH payments are appropriate such
that each qualifying hospital receives no more in DSH payments than the
amount permitted under Section 1923(g) of the act.
We proposed that paragraph (c) would require each State
receiving an allotment under Section 1923(f) of the Act, beginning with
the first full State fiscal year (SFY) immediately after the enactment
of Section 1001(d) of the Medicare Prescription Drug, Improvement, and
Modernization Act (MMA) and each year thereafter, to report to us the
list of information detailed in an Reporting form, which was published
in the September 23, 2005 correction notice entitled ``Medicaid
Programs; Disproportionate Share Hospital Payments''.
We proposed that States will need to consider a Section
1011 payment when determining the hospital's DSH limit, because the
total DSH payments should not exceed the total amount of uncompensated
care at the hospital.
The information supplied on this spreadsheet would satisfy
the requirements under Sections 1923(a)(2)(D) and 1923(j)(1) of the
Act.
2. Audit Requirements
We explained the statute's requirement for States to verify their
methodology for computing the hospital specific DSH limit and the DSH
[[Page 77905]]
payments made to hospitals. As required by Section 1923(j)(2) of the
Act, these five items identified in statute would provide independent
verification that State Medicaid DSH payments comply with the hospital-
specific DSH limit in Section 1923(g) of the Act, and that such limits
are accurately computed.
In Sec. 455.201, we proposed that ``SFY'' stands for
State fiscal year.
We proposed to define that an ``independent audit'' means
an audit conducted according to the standards specified in the
generally accepted government auditing standards issued by the
Comptroller General of the United States.
We proposed adding a new Sec. 455.204(a) to reflect
Section 1923(j) of the Act's requirement that each State must submit
annually the independent certified audit of its DSH program as a
condition for receiving Federal payments under Section 1903(a)(1) and
1923 of the Act.
We proposed to add a new Sec. 455.204(b) to reflect the
requirement that States must obtain an independent certified audit,
beginning with an audit of its State fiscal year 2005 DSH program.
We proposed a submission requirement within 1 year of the
independent certified audit.
We proposed that in the audit report, the auditor must
verify whether the State's method of computing the hospital-specific
DSH limit and the DSH payments made to the hospital comply with the
five items required by Section 1923(j)(2) of the Act.
III. Discussion of Public Comments
On August 26, 2005, we set forth a proposed rule implementing the
reporting and auditing requirements for State disproportionate share
hospital payments (DSH). In this notice of proposed rulemaking, we
proposed several modifications to the DSH reporting requirements and
detailed the statutory auditing requirements for States to verify their
methodology for computing the hospital-specific DSH limit to ensure
that DSH payments made to eligible hospitals do not exceed such limits.
We received 119 timely public comments, in response to the August
26, 2005, proposed rule. The comments came from a variety of
correspondents, including professional associations, national and State
organizations, physicians, hospitals, advocacy groups, State Medicaid
programs, State Legislators, and members of the Congress. The following
is a summary of the comments received and our response to those
comments.
A. General Comments on Auditing and Reporting Provisions
We received the following general comments regarding the proposed
regulation:
Comment: Many commenters believe the proposed regulation exceeds
the Congressional intent of the statutory authority of the MMA, makes
substantive interpretations and changes to longstanding DSH policy not
required by MMA and attempts to establish new policy.
Response: The statutory authority under MMA instructed States to
report and audit specific payments and specific costs. Section
1923(j)(1)(B) of the Act specifically delegated to the Secretary
authority to require reporting of information ``necessary to ensure the
appropriateness of payment adjustments made under this Section.'' These
regulations require reporting of data elements that are specifically
related to the appropriateness of DSH payments, and thus are consistent
with that statutory provision. The regulations provide States with
uniform instructions that contain detailed identification of the
necessary data elements. The audit requirements also specified in
Section 1923(j)(2) of the Act, and these regulations specifically track
the statutory requirements.
Comment: Many commenters are concerned that CMS has used the MMA
provisions, which only relate to reporting and auditing, to
dramatically change the financing of the Medicaid DSH program; this
change would have serious implications for hospitals that care for the
low-income and uninsured.
Response: Neither the statute nor the implementing regulation
addresses the financing of DSH payments. The statutory authority under
MMA instructed States to report and audit specific payments and the
underlying calculations. While it could be that this information
discloses impermissible payments (or ``financing''), this does not
reflect a change in the standards for such payments. Instead the
information will ensure that payments conform with existing applicable
law.
Comment: Several commenters noted that the proposed rule purports
to implement statutory reporting and audit requirements that do not
alter any of the substantive standards regarding the calculation of
costs under the hospital-specific DSH cap. They asserted that it would
be completely improper for CMS to employ preamble language, or include
in the rule provisions that would alter substantive standards under the
auspices of new statutory reporting requirements.
Response: The provisions of this rule do not alter the fundamental
statutory requirements to calculate DSH hospital-specific uncompensated
care costs, and audit such calculations, in order to demonstrate that
payments are proper. This rulemaking sets forth reporting requirements
to ensure uniformity in the understanding and implementation of these
requirements. By doing so, the rule will ensure that the basis for DSH
payments is clear, including the required hospital-specific
uncompensated care cost calculations, and set forth the necessary
elements for an independent audit of those cost calculations and
payments following the statute as amended by the MMA.
Comment: A few commenters expressed disagreement with the manner in
which the proposed regulation would employ audits to determine whether
States are making Medicaid DSH payments in appropriate amounts. These
commenters argued that audits should not limit State discretion in the
manner in which DSH payments are calculated. These commenters objected
to the proposed requirements that auditors determine whether DSH is
being calculated ``correctly'' when there has never been a single,
true, definitive definition of exactly what ``correct'' means. In other
words, the commenters argued that the regulation proposes counting on
auditors to help impose a standard that does not currently exist.
Response: We disagree that the calculations involved in applying
the hospital-specific DSH limits are discretionary. There have been
clear and longstanding standards for calculating the costs of hospital
services that apply to the calculation of hospital-specific DSH limits.
The statutory authority under MMA instructed States to report and audit
specific payments and specific costs to ensure compliance with those
standards.
The applicable standards are based on existing statutes,
regulations, and interpretive guidance. In 1993, Congress imposed
hospital-specific limitations on the level of DSH payments to which
qualifying hospitals were entitled. Section 1923(g)(1)(A) specifies
that DSH payments cannot exceed, ``the costs incurred during the year
of furnishing hospital services (as determined by the Secretary and net
of payments under this title, other than under this Section, and by
uninsured patients * * *)''. In 1994, CMS issued guidance that
clarified that the 1993 hospital-specific ``cost'' limit includes both
inpatient and outpatient hospital services for Medicaid individuals and
individuals
[[Page 77906]]
with no source of third party coverage. Moreover, the calculation of
hospital costs is subject to longstanding cost principles contained in
Office of Management and Budget Circulars, including Circular A-110,
and, to the extent not addressed in those Circulars, in Generally
Accepted Accounting Principles (GAAP). In addition, over the years CMS
has addressed hospital cost accounting in considerable detail in the
Medicare program, and has developed cost reporting forms and procedures
that offer further guidance on these issues.
Comment: A few commenters stated that, to the extent that CMS
retains substantive changes to DSH policy in this regulation, CMS
should acknowledge that this regulation does more than merely implement
reporting and auditing requirements against existing standards.
Response: This regulation does not alter any of the substantive
standards regarding the calculation of hospital costs, but requires
that auditors apply those standards in determining the hospital-
specific DSH limit. The preamble and the regulation set forth reporting
requirements to ensure that the basis for DSH payments is clear,
including the required hospital-specific uncompensated care cost
calculations, and set forth the necessary elements for an independent
audit of those cost calculations and payments.
Comment: Several commenters noted that States have implemented and
carried out their DSH programs pursuant to methodologies set forth in
CMS-approved Medicaid State plan amendments which were developed
consistent with the DSH statute that provides States the flexibility to
adopt procedures and methodologies tailored to each State's health care
delivery system. The commenters asserted that the proposed rule would
impose new substantive requirements that would be implemented through
third-party auditors applying standards that are at odds with existing
State plan provisions. They asserted that the approved Medicaid plan in
each Medicaid State plan should provide the substantive basis for the
independent audits and reports required under Section 1923(j). Because
CMS approved the Medicaid State plan provisions and has not implemented
the statutory process that would be required to render them invalid,
the commenters stated that the Medicaid State plans should be deemed to
reflect current Federal policy on the implementation of the Medicaid
DSH program and be the standard by which FFP is available for State
Medicaid expenditures.
Response: In reviewing State DSH payments, auditors must first
determine whether the DSH payments were initially calculated using the
methodology authorized by the approved Medicaid State plan. These
Medicaid State plans, in part, articulate the methods and standards by
which States set payment rates. Section 4.19-A of the Medicaid State
plan includes the methodologies States utilize to make Medicaid DSH
payments. The statutory hospital-specific limit, however, overlays that
methodology because it is determined by actual uncompensated costs of
inpatient and outpatient hospital services. States typically include a
provision within the Medicaid State plan that DSH payments will not
exceed each qualifying hospital's DSH limit.
The DSH payment methodologies contained in Section 4.19-A of the
Medicaid State plan do not specifically identify the cost components
included in the hospital-specific DSH limits but are governed by
longstanding principles set forth in statutes, regulations, and agency
guidance.
While CMS recognizes that States must use prospective estimates to
determine DSH payments in a given Medicaid State plan rate year, the
audits required by the MMA are statutorily required to verify the
extent to which such estimates are reflective of the actual costs and
that resultant payments do not exceed such cost limitations imposed by
Congress.
Comment: Several commenters noted that the proposed rule would
establish DSH policy that reaches beyond the reporting and audit
requirements outlined in Section 1001(d). They cited the example that,
if a State fails to comply with the reporting and auditing
requirements, CMS proposes to impose a penalty that would result in the
loss of Federal matching Medicaid dollars.
Response: Section 1923(j) of the Act very clearly stipulates that
Medicaid DSH payments are conditioned upon the submission of the annual
report and independent certified audit is required. However, with
respect to requiring recovery of any overpayments, the regulation does
not impose an immediate penalty that would result in the loss of
Federal matching dollars. As described in subsequent responses to
comments specific to the auditing component of the regulation, because
a trial period will be required for auditors to refine audit
methodologies, findings from Medicaid State plan rate year 2005 through
2010 will be used only for the purpose of determining prospective
hospital-specific cost limits and the actual DSH payments associated
with a particular year.
Beginning in Medicaid State plan rate year 2011, to the extent that
audit findings demonstrate that DSH payments exceed the documented
hospital-specific cost limits, CMS will regard them as representing
discovery of overpayments to providers that, pursuant to 42 CFR Part
433, Subpart F, triggers the return of the Federal share to the Federal
government (unless the DSH payments are redistributed by the State to
other qualifying hospitals as an integral part of the audit process).
This is not a ``penalty'' but instead reflects adjustment of an
overpayment that was not consistent with Federal statutory limits. We
note that, to the extent that States wish to redistribute DSH payments
that exceed hospital-specific limits, the Federally approved Medicaid
State plan must reflect that payment policy.
Comment: A few commenters said there are existing administrative
procedures for determining a Medicaid State plan's compliance with
Federal Medicaid law, which include a notice and hearing process.
Nothing in Section 1923 or its legislative history suggests that
Congress intended to circumvent these longstanding procedures through
the audit and reporting requirements. Therefore, any attempt to do so
in the guise of these implementing regulations would be invalid.
Response: The MMA independent audit procedures establish a process
for discovery of DSH overpayments that trigger existing
responsibilities for States to refund the Federal share of Medicaid
overpayments to providers. The audits provide information that will
identify DSH payments that exceed the amounts permitted under Section
1923(g)(1) of the Act and incorporated by reference into approved State
plans. This information, in the form of an independent certified audit
obtained by the State, will result in discovery of DSH overpayments and
will trigger requirements to refund the Federal share of those
overpayments, pursuant to existing requirements at 42 CFR Part 433,
Subpart F. States that do not refund the Federal share of overpayments
will be subject to disallowance of claims for Federal funds, and will
have notice and an opportunity for a hearing through the Medicaid
disallowance process. We believe this is consistent with the apparent
purpose of the audit requirement to ensure the financial integrity of
State DSH payments, and to ensure that DSH payments are targeted at
addressing the burdens faced by hospitals which serve a
[[Page 77907]]
disproportionate share of low income patients.
Comment: Many commenters said that the Medicaid DSH program was
designed to recognize the financial burden borne by those hospitals
that take care of a disproportionate number of low income and uninsured
individuals, and to provide financial assistance essential for these
safety net providers to continue to take care of patients. Medicaid DSH
funds are critical to the future viability of their hospitals. They
were concerned that any new policy interpretation that results in
substantially lower DSH payments or affects prior year DSH payments
will have a significant financial impact on (safety net) hospitals, and
will threaten their ability to continue to serve the community. Because
of the negative impact on hospitals and on the patients they serve, the
commenters strongly urge CMS to rethink its approach in this proposed
rule. A few commenters stated that changing the Federal position on
this matter could cause significant financial problems for State
Medicaid programs.
Response: This rule does not impose any new restrictions on DSH
payments. The statute calls for reporting and auditing of DSH payments,
to ensure that such payments comply with existing statutory
requirements limitations. This rule does not restrict the aggregate DSH
funding that is available, nor does it effect DSH payments that comply
with all statutory requirements. Consequently, there should be no
effect on DSH payments that have been properly made to hospitals to
account for the burden of treating a disproportionate share of low
income patients.
Comment: Several commenters referenced the 1994 guidance to State
Medicaid Directors in which CMS granted flexibility in allowing a State
to use the definition of allowable costs in its State Medicaid plan or
any other definition as long as the costs determined under such a
definition do not exceed the amounts that would be allowable under the
Medicare principles of cost reimbursement. They argued that this
pronouncement was consistent with the principle that Medicaid is a
Federal-State partnership and should be continued. Since this is a
Medicaid DSH program, they assert that the State should be permitted to
determine the definition of allowable costs as either not exceeding
amounts allowable under Medicare principles of cost reimbursement or
amounts that would be consistent with the State's existing Medicaid
program. They asked that the rule reaffirm State flexibility in
defining allowable costs.
Response: States have considerable discretion to determine
allowable inpatient and outpatient costs when determining payment rates
under their Medicaid State plan, but Section 1923(g)(1) of the Act
provides for a Federal limitation based on costs that must be
calculated in accordance with Federal accounting standards. In
accordance with this principle, the 1994 guidance provided State
flexibility to define Medicaid costs for purposes of setting Medicaid
payment rates. But this flexibility does not apply to calculation of
hospital-specific DSH limits to the extent that State-defined costs
exceed those permitted under Medicare cost principles.
Moreover, the hospital-specific limit is based on the costs
incurred for furnishing ``hospital services'' and does not include
costs incurred for services that are outside either the State or
Federal definition of inpatient or outpatient hospital services. While
States have some flexibility to define the scope of ``hospital
services,'' States must use consistent definitions of ``hospital
services.'' Hospitals may engage in any number of activities, or may
furnish practitioner or other services to patients, that are not within
the scope of ``hospital services.'' A State cannot include in
calculating the hospital-specific DSH limit cost of services that are
not defined under its Medicaid State plan as a Medicaid inpatient or
outpatient hospital service.
Comment: Numerous commenters said the proposed rule violates
Administrative Procedure's Act rulemaking requirements because there
was inadequate notice and opportunity for public comment on the
proposed policy to limit hospital costs includable in the Medicaid DSH
calculation. The commenters stated this is a proposed regulation for a
reporting requirement only and that the cited statutory authority for
the proposed rule has no bearing on allowability of costs in DSH
calculation. These commenters stated the rule would substantively
change longstanding DSH policy without appropriately calling for direct
public comment.
Response: CMS published the Notice of Public Rule Making on August
26, 2005. As part of this publication, a 60 day comment period was
provided. CMS received and considered numerous comments, as discussed
in this preamble. Through this process, rulemaking requirements under
the Administrative Procedure Act have been met. Moreover, the rule does
not substantively change the standards for DSH payments, or for the
review of hospital-specific limits on such payments. Even if the rule
did make changes to those standards, however, CMS has followed the
appropriate rulemaking procedures for such changes. Fundamentally, this
rule implements statutory requirements to review and audit the
calculation of DSH hospital-specific limits, including only the costs
of those hospital services that are specified in the statute, and
accounting for such costs consistently with existing applicable cost
accounting principles.
Comment: One commenter further indicated that this is not just an
issue of notice and comment rulemaking as required under the
Administrative Procedure Act, it is an issue of Federal-State comity.
The commenter asserted that the requirements contained in the proposed
rule are not consistent with Supreme Court decisions providing that, if
Congress intends to impose a condition on the grant of Federal moneys,
it must do so unambiguously.
Response: The statute expressly requires that States report and
audit DSH payments consistent with existing statutory limitations on
such payments; this rule simply defines the nature and scope of these
reporting and audit requirements. These requirements are related to
ensuring Medicaid program integrity and transparency by providing
information to identify improper payments, and the cost of meeting
those requirements may be claimed as an administrative cost of the
Medicaid program, eligible for Federal matching funding. As such, the
statutory requirements are not new substantive responsibilities, but
are part of existing State responsibilities to administer State
Medicaid programs. Moreover, the Medicaid statute expressly requires
the Secretary to identify necessary reporting requirements and the
Secretary has oversight authority to ensure compliance with the
statutory audit requirements. This rule provides detailed
identification of the data elements necessary to comply with such
reporting and auditing requirements expressly contained in statute. As
an interpretation and implementation of clear statutory
responsibilities, this rule is consistent with the cited Supreme Court
decisions.
B. Reporting
1. Retroactivity
Comment: One commenter stated that their State would need to make
several regulation changes that would need to be retroactive to July 1,
2005. The State
[[Page 77908]]
currently does not have a procedure to change regulations
retroactively.
Response: CMS does not agree that States would need to
retroactively change their programs to comply with the audit and
reporting requirements associated with Medicaid State plan rate year
2005. The audit and reporting requirements discussed in this regulation
can be met through prospective actions by States, and thus do not have
retroactive effect. While the information disclosed by the audit and
reporting requirements may reveal the need for retroactive adjustments
to account for payments that are improper, this is no different from
any other audit situation. Moreover, in order to ensure a period for
developing and refining audit practices, we are providing for a
transition period through Medicaid State plan rate year 2010, before
audit results will be given weight other than in making prospective
estimates of hospital costs for the purposes of ongoing DSH payments.
Comment: Many commenters stated that applying the proposed rule's
requirements to dates of service prior to State fiscal year (SFY) 2005
would represent an undue administrative burden and a hardship for
States and hospitals. Several commenters stated that it is unreasonable
to expect that States are going to have readily available to them for
SFY 2005, the data elements that CMS is just now requiring to be
reported under this proposal. Applying the changes to the reporting
requirements to SFY 2005 is a retroactive application and puts the
States in the position of struggling to retrieve data that was not
collected during SFY 2005. This would ultimately be to the detriment of
the providers if the States are unable to capture all of the
uncompensated care costs when they submit their reports. Many other
commenters suggested all reporting and auditing requirements be
prospective. In addition, they suggested linking the new reporting and
auditing requirements to the first State fiscal year beginning after
the finalization of the rule, no earlier than SFY 2006, with an audit
being no earlier than 2 years later.
A few commenters stated that the effective date of State Fiscal
Year (SFY) 2005 would not give hospitals time needed to modify their
procedures to comply with State instructions for reporting made
pursuant to the final regulations.
Response: We have modified the regulation to address concerns
regarding the inability to complete the audit one year from the end of
SFY 2005. The final regulation provides at 447.204(b) that:
1. The Medicaid State plan rate year 2005, rather than State fiscal
year 2005, is the first time period subject to the audit. The basis for
this modification is recognition of varying fiscal periods between
hospitals and States. The Medicaid State plan rate year is the one
uniform time period under which all States estimate uncompensated costs
in order to make DSH payments under the approved Medicaid State plan.
2. In recognition of timing issues related to initiating the audit
process, States may concurrently complete the Medicaid State plan rate
year 2005 and 2006 audits by no later than September 30, 2009.
3. Each subsequent audit beginning with Medicaid State plan rate
year 2007 must be completed by the last day of the Federal fiscal year
(FFY), September 30, ending three years from the Medicaid State plan
rate year under audit. This means that the 2007 Medicaid State plan
rate year must be audited by September 30, 2010.
4. Each audit report must be submitted to CMS within 90 days of the
completion of the audit. The report associated with Medicaid State plan
rate years 2005 and 2006 are due no later than December 31, 2009. The
2007 Medicaid State plan rate year audit report must be submitted to
CMS by December 31, 2010.
In addition, we have added a transition period at 447.204(d) to
reflect concerns that auditing techniques may need to be reviewed and
refined. Findings of the Medicaid State plan rate year audits through
2010 will not be given weight other than for purposes of prospective
Medicaid State plan rate year uncompensated care cost estimates and
associated DSH payments. This means that, starting in Medicaid State
plan rate year 2011, such findings should be used in the calculation of
prospective estimates related to DSH payments.
We are also making clear that DSH payments that, after the
regulatory transition period, are found in the audit process to exceed
the hospital-specific cost limits are provider overpayments that must
be promptly returned to the Federal Government or redistributed by
States to other qualifying hospitals. (Such redistribution authorities
must be articulated in the Federally approved Medicaid State plan.)
After the transition period to ensure the accuracy and reliability of
audit techniques, such audit findings represent discovery of an
overpayment under existing regulations at 42 CFR Part 433, Subpart F.
We note that the regulatory transition provision is not intended to
preclude review of DSH payments and discovery of overpayments prior to
Medicaid State plan rate year 2011, to the extent that such review is
independent of the State audit process.
Comment: One commenter noted that the proposed reporting
requirements do not provide for any option to request an extension for
the submission of the information or audit.
Response: As indicated in the response above, we have extended the
audit and report submission date in the regulation. These extended time
frames are detailed in a prior response and the regulation has been
revised accordingly. Based on the revisions, the time frames are
sufficiently long that there should be no need for extensions beyond
the revised time frames. In the event of a natural disaster, or other
incident beyond a State's control, we would consider providing relief
in the context of a demonstration project that addresses the overall
circumstances of the State.
Comment: Many commenters noted that the NPRM applies these new
changes to retroactively FY 2005 when most DSH plans are already in
place. Medicaid State Plans, regulations, and/or statutes will need to
be amended to reflect the new reporting and audit requirements, which
are retroactive to 7/1/05.
Response: CMS does not agree that States would need to
retroactively change regulations to comply with the audit and reporting
requirements associated with Medicaid State plan rate year 2005. In the
audit process, Medicaid State plan DSH payments in the State plan rate
year 2005 will be reviewed against uncompensated care costs during that
same period (for example, OBRA 93 hospital-specific limits), which is
consistent with the existing statutory provisions of Section
1923(g)(1). States will not need to retroactively modify their Medicaid
State plans to comply with this regulation. The DSH reimbursement
methodologies contained in Medicaid State plans articulate the methods
by which States make DSH payments and already contain assurances that
such DSH reimbursement methodologies will not exceed the OBRA 93
hospital-specific DSH limits. Typically, States currently rely on
unaudited surveys to estimate uncompensated care in eligible hospitals,
and this regulation would simply require reconciliation based on
statutory cost limits using a more accurate audit methodology.
Under this regulation, the State DSH audit and report will use
actual cost and payment data beginning with the Medicaid State plan
rate year 2005 to ensure that DSH payments in the
[[Page 77909]]
approved Medicaid State plan did not exceed DSH eligible costs in
hospitals receiving DSH payments. As noted above, to allow a period to
develop and refine audit techniques, we also have included a transition
period before audit results will be directly used to identify provider
overpayments.
Comment: One commenter stated that the proposed reporting
requirements refer to submission timing on two different pages, which
are inconsistent with each other. On Page 50264 of the Federal Register
under the Audit Requirements Section, it states, ``We are proposing a
submission requirement within 1 year of the independent certified
audit.'' On Page 50268 of the Federal Register under the List of
Subjects Section, where the proposed revisions to Section 455.204(b)
are indicated, it states, ``Timing. Beginning with State fiscal year
(SFY) 2005, a State must submit to CMS an independent certified audit
report no later than 1 year after the completion of each State's fiscal
year.''
Response: The regulation has been modified to achieve consistent
audit and reporting time frames. Generally, audits will examine prior
period DSH payments and such audit must be completed by the last day of
the FFY ending three years from the Medicaid State plan rate year under
audit. Reports of the audit will be due within 90 days of completion of
the audit. A special transition period is provided for Medicaid State
plan rate year 2005 and 2006 audits. Further detail of audit and
reporting are described in other responses to comments.
2. Effect of Lag in Medicaid Claims
Comment: Several commenters noted that there is already a
requirement for States to indicate the regular Medicaid rate payments
paid to the hospital for the SFY as part of the Medicaid claims
information provided to CMS through the Medicaid Statistical
Information System (MSIS). Claims may be submitted to the State for
payment up to one year after the date of service. Therefore, payments
made by the State for claims with dates of service in the SFY may be
submitted up to a year after the service date by the hospital. The
payment information would not be available before 12 months after the
SFY at a minimum. Obtaining the amount paid by the State for the SFY
being reported is not possible by the end of the SFY.
Response: Based on the modifications to the audit and reporting
deadlines, the existing requirement at 42 CFR 447.45(d) for provider
claims to be filed within a year from the date of service and promptly
paid by the State, and the existing two-year timely claim filing
requirement at 45 CFR 95.7, there should not be a significant
adjustment to Medicaid payments that would warrant a corrected report.
To the extent that such an adjustment to Medicaid payments occurs and
States claim Federal matching dollars (or return Federal matching
dollars) as a prior period adjustment, States should correct the audit
and report by indicating post-audit adjustments to Medicaid and DSH
payments (or uncompensated care costs if Medicaid payment adjustments
affect the Medicaid shortfall).
States must consider post-audit adjustments, as information about
them becomes available, to the extent that the State's DSH methodology
involves prospective estimates of uncompensated care, at least
beginning in Medicaid State plan rate year 2011. Similarly, such
adjustments must be reported in the quarter the underlying claims were
paid, and must be considered to determine if there were overpayments,
beginning with Medicaid State plan rate year 2011 (although in some
cases, the State plan may authorize the State to redistribute the
overpaid funds to another eligible hospital). The regulation has been
modified to include this provision.
Comment: A few commenters noted that the proposed rules do not
indicate the submission dates for the Annual DSH Reports. Based on 1)
the data reporting that is required, 2) the fact that some of these
data will need to be audited under the proposed provisions of Sec.
455.204, and 3) the fact that the audit is proposed to be required by
one year after the close of the State fiscal year to which the
reporting and the audit apply, we assume the reporting is contemplated
to be submitted less than a year after the close of the State fiscal
year. To the extent that CMS is requesting actual (and potentially
audited) cost data for the fiscal year, that information must be
gathered from hospitals and reviewed by the States prior to completion
of the Annual DSH Report. The commenters pointed out that much of the
required data are found only on Medicare cost reports, which are
submitted no sooner than five months after year-end and are desk
reviewed no sooner than 11 months after year end. Given this, the
reporting timeframes that appear to be contemplated are not realistic.
The commenters urged that CMS allow sufficient time for the States to
complete this process.
Response: We have modified the regulation to clarify that the
annual DSH reports are due at the same time as the completed
independent audits. We believe that this time frame is sufficient for
the State, hospitals and auditors to meet their respective
responsibilities to review the accuracy of the State's DSH payments.
3. Eligible Uncompensated Care
Comment: Many commenters asserted that the language in the proposed
regulation that excluded bad debts from being considered part of
uncompensated care exceeded the statutory authorization since the
statute does not specifically address that issue. These commenters
argued that bad debts are part of the burden of providing care to
uninsured, and underinsured patients for whom the hospital receives no
payment. The commenters believe that the proposed rule is inconsistent
with Congressional intent, and actually works to weaken the statute's
purpose. These commenters cited the conference report language for the
Omnibus Budget Reconciliation Act of 1993 provision establishing the
hospital-specific DSH limit, stating that the cost of providing
services to uninsured patients would be net of any out of pocket
payments received from uninsured individuals. They argued that this
language clearly implies an intent that only amounts received, and not
bad debt should be considered when implementing the hospital-specific
DSH limit.
Response: Implicit in these comments is a misunderstanding of the
term ``bad debt.'' Bad debt arises when there is non-payment on behalf
of an individual who has third party coverage. Section 1923(g)(1) is
clear that the hospital-specific uncompensated care limit is calculated
based only on costs arising from individuals who are Medicaid eligible
or uninsured, not costs arising from individuals who have third party
coverage. Thus, while the Medicaid statute does not specifically
exclude bad debt from the definition of uncompensated care costs, there
is nothing in the statute that would suggest that any costs related to
services provided to individuals with third party coverage, including
bad debt, are within that definition.
Comment: One commenter noted that if an uninsured patient does not
pay the amount he or she was expected to pay, that may be recorded by
the hospital as bad debt. The OBRA 1993 limit as prescribed by Section
1923(g) provides that the costs of furnished services are net of non-
DSH payments under Medicaid and payments by uninsured patients. The
statute does not authorize reductions to uncompensated care costs for
amounts that patients were expected
[[Page 77910]]
to pay, only for payments that are actually made.
Response: We agree. The statutory definition of uncompensated care
includes the costs of furnishing hospital services to uninsured
patients, minus the payments actually received from those patients.
To the extent that hospitals do not currently separately identify
uncompensated care related to services provided to individuals with no
source of third party coverage from uncompensated care costs of
patients with insurance, hospitals will need to modify their accounting
systems to separate the two categories in order to properly document
that DSH payments are within the hospital-specific limit.
Uncompensated inpatient and outpatient hospital care costs for
individuals without third party coverage is then offset by payments
actually made by or on behalf of those patients in the Medicaid State
plan rate year under audit, except for payments made by State-only or
local-only government programs for services provided to indigent
patients.
Comment: Numerous commenters asserted that the proposed rule was
contrary to the interpretation that bad debt should be considered when
implementing the hospital-specific DSH limit that was found in CMS
guidance in 1994 and again in 2002, and asked for a continuation of the
prior interpretation.
Response: In 1994, CMS clarified the 1993 hospital-specific
``cost'' limit to include outpatient hospital services, in addition to
inpatient hospital services, for Medicaid individuals and individuals
with no source of third party coverage. This clarification of cost
under the hospital-specific DSH limit was established in recognition of
historical Congressional references to hospital services under its
ongoing instruction regarding DSH. The 1994 letter to State Medicaid
Directors did not specifically refer to bad debt, nor did it contain
any language that should have suggested that the hospital specific
limit calculation should include costs (whether compensated or
uncompensated) related to individuals who had third party coverage.
Similarly, the State Medicaid Director letter dated August, 2002
specifically addressed the treatment of Medicaid supplemental UPL
payments for purposes of calculating uncompensated care; the treatment
of costs associated with inmates of correctional facilities; and, the
inclusion of Medicaid managed care days in the Medicaid inpatient
utilization rate formula. Nothing in that letter addressed the issue of
bad debt and the calculation of DSH eligible costs. The provisions in
this rule that expressly exclude bad debt from the calculation of the
hospital specific limit are based on the statutory language and do not
represent any change in CMS policy.
Comment: Several commenters stated that the proposed rule fails to
clarify how bad debt would be calculated.
Response: Bad debt arises when there is non-payment on behalf of an
individual who has third party coverage. Section 1923(g)(1) is clear
that the hospital-specific uncompensated care limit is calculated based
only on costs arising from individuals who are Medicaid eligible or
uninsured, not costs arising from individuals who have third party
coverage. To the extent that hospitals do not currently separately
identify uncompensated care related to services provided to individuals
with no source of third party coverage from bad debts from patients
with insurance, hospitals will need to modify their accounting systems
to separate the two categories in order to properly document that DSH
payments are within the hospital specific limit. We are not prescribing
the details of how hospitals can accurately measure uncompensated care;
the precise methodology may vary depending on individual circumstances
(but will have to provide an auditable basis for the measurement). As
described in later comments, the source of this information will be
derived from hospital cost reports, hospital financial statements, and
other hospital accounting records.
Comment: One commenter said that bad debts represent an enormous
uncompensated cost to providers and pointed out that the Medicare
program recognizes this reality and reimburses providers 70 percent of
their Medicare bad debt write-offs. The commenter suggested that
Medicaid should operate similarly to Medicare in this respect.
Response: The Medicare DSH program and the Medicaid DSH program are
separate programs authorized by different Sections of the statute and
with different purposes and goals. The Medicaid statute does not
specifically authorize payment based on bad debts, nor does it
authorize including bad debts in the calculation of the hospital
specific limit under Section 1923(g)(1). We note, however, that the
hospital specific limit is not a payment methodology, and States could
recognize bad debts in constructing DSH payment methodologies that
provide for payments less than or equal to the hospital specific limit
for each hospital.
Comment: One commenter noted that the provider will report the
``Provision for Medicaid Bad Debt'' as a component of its uncompensated
total. As such, the Provision for Bad Debt is an estimate, a Balance
Sheet account, not an expense account, and deductibles and coinsurance,
along with other charges, are estimated in that account. The actual bad
debt expense is booked against the provision and/or allowance and most
facilities would need to drill down on the Provision for Bad Debt
account to get actual bad debt expense related to uninsured cost.
Response: Setting up an accounting category to aggregate charges
and revenues associated with uninsured individuals receiving inpatient
and/or outpatient services from a hospital should be an accounting
system adjustment not far removed from the process of setting up an
account for any other payer category. To the extent that hospitals do
not currently separately identify uncompensated care related to
services provided to individuals with no source of third party coverage
from other uncompensated care costs, hospitals will need to modify
their accounting systems to do so. For purposes of the initial audits
under the transitional provision of the regulation, States and auditors
may need to develop methodologies to analyze current audited financial
statements and other accounting records to properly segregate
uncompensated costs.
Only the inpatient and outpatient hospital charges associated with
individuals with no source of third party coverage for such services
can be applied to the Medicare cost report for purposes of calculating
the uninsured uncompensated care cost component of the hospital-
specific DSH limit. Hospitals must also ensure that no duplication of
such charges exist in their accounting records. This information must
be made available to the auditor for certification.
Comment: One commenter questioned whether claims denied by insurers
for lack of prior authorization or claims submitted too late would be
considered uninsured since the service is not reimbursed by the insurer
and the amount is not a contractual allowance. The commenter asserted
that, in that instance, the cost of that portion of the stay is
uninsured.
Response: Section 1923(g)(1) refers to the costs of hospital
services furnished by the hospital ``in individuals who * * * have no
health insurance (or other source of third party coverage).'' We have
always read this language to distinguish between care furnished to
individuals who have health insurance
[[Page 77911]]
or other coverage, and care furnished to those who do not. We have
never read this language to be service-specific and we believe that
such an interpretation would be inconsistent with the broad statutory
references to insurance or other coverage. Furthermore, such a reading
would result in cost shifting from private sector coverage to the
Medicaid program. We interpret the phrase ``who have health insurance
(or other third party coverage)'' to broadly refer to individuals who
have creditable coverage consistent with the definitions under 45 CFR
Parts 144 and 146, as well as individuals who have coverage based upon
a legally liable third party payer. The phrase would not include
individuals with insurance that provides only excepted benefits, such
as those described in 45 CFR 146.145, unless that insurance actually
provides coverage for the hospital services at issue (such as when an
automobile liability insurance policy pays for a hospital stay).
Improper billing by a provider does not change the status of the
individual as insured or otherwise covered. In no instance should costs
associated with claims denied by a health insurance carrier for such a
reason be included in the calculation of hospital-specific
uncompensated care costs.
Comment: One commenter argued that small hospitals budget for and
count on receiving funding related to uncompensated bad debt, and
argued that it would be unfair to remove bad debt from the DSH payment
equation for all of 2005.
Response: Bad debt arises when there is non-payment on behalf of an
individual who has third party coverage. Section 1923(g)(1) is clear
that the hospital-specific uncompensated care limit is calculated based
only on costs arising from individuals who are Medicaid eligible or
uninsured, not costs arising from individuals who have third party
coverage. As we discuss below, the regulation provides a transition
period for reliance on audit findings. Findings 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 costs estimates used for calculations of prospective DSH payments
for Medicaid State plan year 2011 and thereafter. This regulation
requires an independent certified audit of Medicaid State plan DSH
payments beginning with the Medicaid State plan rate year 2005,
including comparison to the hospital-specific limits. As discussed
above, this regulation does not change the costs that are included in
calculating the hospital-specific limit. As discussed in a prior
response, however, because the auditing process is new and will need to
be refined, the 2005 audit findings will be used solely to review
prospective DSH payments beginning with Medicaid State plan rate year
2011.
Comment: Several commenters stated that the recent growth of health
plans and health savings accounts with high deductibles and/or have
exclusion limits, is putting new burdens on hospitals in terms of
unreimbursed costs. The proposed rule fails to clarify whether non-
payment of beneficiaries' deductibles and co-payments would be
considered bad debt and/or should be applied as a reduction in
determining uncompensated care costs.
Response: Costs associated with services furnished to individuals
who have limited health insurance or other third party coverage are not
included in the calculation of the hospital-specific DSH limit.
Specifically, the DSH limit does not include amounts associated with
unpaid co-pays or deductibles for such individuals (bad-debt associated
with third party coverage). Health savings accounts associated with
high deductible third-party coverage typically provide a source for co-
pays and deductibles as well as premium contributions or co-insurance.
When health savings accounts are not sufficient to cover such charges,
however, the individual remains insured and therefore hospital services
costs are not considered not within the statutory calculation of the
hospital specific limit.
Comment: A number of commenters stated that hospitals should not be
denied DSH payments for uncollectible co-pays and deductibles for
patients eligible for charity care based on a hospital's policy or for
bad debts that in fact are true charity care but cannot be accounted
for as such because the patient would not or could not fill out a
hospital's charity care application or did not qualify for charity care
but was uninsured.
Response: States have considerable flexibility in developing DSH
payment methodologies, and such uncollectible amounts could be a factor
in a State DSH payment methodology but can only be considered in
calculating the hospital-specific limit on DSH payments if they meet
the statutory criteria. Costs that can be included in the hospital-
specific limit set forth at Section 1923(g) of the Act are hospital
costs associated with uncompensated Medicaid costs and uncompensated
costs of hospital services provided to individuals without health
insurance (for example, the uninsured).
Charity care is a term used by hospitals to describe an individual
hospital's program of providing free or reduced charge care to those
that qualify for the particular hospital's charity care program. The
term also may be defined by a State in determining qualification for
DSH payments under the low-income utilization rate methodology set
forth in Section 1923(b)(3) of the Act. Depending on the definition
used, hospital costs associated with the uninsured may be a subset of
charity care in the hospital or may entirely encompass a hospital's
charity care program. Regardless of a hospital's definition/parameter
on what constitutes charity care, States and hospitals must comply with
Federal Medicaid DSH law and policy guidance in determining what
portion of their specific charity care program costs qualify under the
hospital-specific DSH cost limits.
To the extent that hospitals do not separately identify
uncompensated care related to services provided to individuals with no
source of third party coverage, hospitals will need to modify their
accounting systems to do so. And hospitals must ensure that no
duplication of such charges exist in their accounting records. For
purposes of the initial audits, States and auditors may need to develop
methods to analyze current audited financial statements and other
accounting records to properly segregate uncompensated costs.
Comment: A few commenters noted that if a patient does not have
health insurance, the costs of services provided to that patient may be
included in calculating the hospital-specific limit, even if revenues
related to that patient are uncollectible and eventually written off as
bad debt. They argued that the touchstone for purposes of the DSH limit
is whether the individual has third party coverage, not whether the
hospital has or has not treated the patient's account as bad debt.
Response: We agree. As long as the costs are for services furnished
to uninsured patients, they may be included in the calculation of the
hospital-specific limit, regardless of whether the hospital treats the
costs as bad debt on its own books.
Comment: A few commenters said that hospitals are currently
required to report both charity and bad debt costs to the State
Medicaid program to assure that the hospital will not receive excess
Medicaid DSH payment. The commenters indicated that this requirement is
part of an approved
[[Page 77912]]
Medicaid State plan that has been in place for numerous years, and
asserted that the proposed requirements would be an unwarranted
departure from this practice.
Response: We recognize that this rule may necessitate some changes
in current practices, but we believe these changes are warranted in
order to ensure compliance with the statutory hospital-specific limit.
As discussed above, the statutory calculation does not refer to charity
care or bad debts, but expressly refers to uncompensated costs of
furnishing hospital services to individuals eligible for Medicaid or
individuals who have no health insurance or other third party coverage.
Comment: A few commenters were concerned that the regulation lacks
a clear and appropriate definition of ``third-party coverage.'' In
particular, the commenters believe that third-party coverage should
explicitly be defined in a manner that makes clear that third-party
coverage does not include State and local programs to pay for care for
indigent and uninsured individuals and that ``lack of third-party
coverage'' also encompasses patients who lack coverage for the service
provided, not necessarily any coverage at all.
Response: We disagree. As discussed above, Section 1923(g)(1) of
the Act refers to costs of hospital services furnished to ``individuals
without health insurance (or other source of third party coverage).''
We have always read this language to distinguish between care furnished
to individuals who have health insurance or other coverage, and care
furnished to those who do not. We have never read this language to be
service-specific and we believe that such an interpretation would be
inconsistent with the broad statutory references to insurance or other
coverage. Furthermore, such a reading would result in cost shifting
from private sector coverage to the Medicaid program. We interpret the
phrase ``who have health insurance (or other third party coverage)'' to
refer to individuals who have creditable coverage consistent with the
definitions under 45 CFR Parts 144 and 146, as well as individuals who
have coverage based upon a legally liable third party payer.
4. Dual Eligibles
Comment: A few commenters indicated that days attributable to dual
eligibles should be included in the calculation described in Section
1923(a) relating to determining DSH eligibility.
Response: The Medicaid Inpatient Utilization Rate (MIUR) is a
calculation that includes all Medicaid eligible days. To the extent
that an inpatient hospital day for a dually-eligible Medicare/Medicaid
patient qualifies as a Medicaid day, that day would be included in the
MIUR calculation.
Comment: One commenter questioned whether the costs attributable to
dual eligibles be included in the calculation described in SSA Sec.
1923(g) relating to uncompensated care costs. The commenter asserted
that these costs should be excluded because the purpose of the DSH
upper payment limit is to limit DSH payments to hospitals to no more
than the difference between the cost and payments of Medicaid and the
uninsured. The commenter indicated that, since Medicare is the primary
payer for the duals, it seems appropriate to exclude the costs of those
patients from this calculation, since the payments are also excluded.
Response: We disagree; since Section 1923(g)(1) does not contain an
exclusion for dually eligible individuals, we believe the costs
attributable to dual eligibles should be included in the calculation of
the uncompensated costs of serving Medicaid eligible individuals. But
in calculating those uncompensated care costs, it is necessary to take
into account both the Medicare and Medicaid payments made, since those
payments are contemplated under Title XIX. In calculating the Medicare
payment for service, the hospital would have to include the Medicare
DSH adjustment and any other Medicare payment adjustment (Medicare IME
and GME) with respect to that service.
5. Charity and Indigent Care
Comment: One commenter questioned how a hospital would classify
individuals who had Medicaid coverage for some discharges and no
insurance for others.
Response: The hospital-specific DSH limit comprises uncompensated
care costs of furnishing inpatient and outpatient hospital services to
Medicaid eligible individuals and individuals with no source of third
party coverage for the inpatient and outpatient hospital services they
receive. If an individual is Medicaid eligible on the day they received
inpatient or outpatient hospital services, then those services would be
included in calculating the hospital-specific limit. To the extent the
Medicaid payment does not fully cover the cost of the inpatient or
outpatient hospital services provided, the unreimbursed costs of those
services would be counted in calculating that limit. Services that are
not within the State's definition of inpatient or outpatient hospital
services, and any revenue associated with such services, however, would
not be included in that calculation. The same is true for hospital
services furnished to individuals whose insurance status fluctuates;
hospital services furnished while individuals are uninsured would be
included in the calculation, and those furnished while individuals are
insured would not be included.
Comment: One commenter requested an explanation of the difference
between ``charity care'' and care provided to the uninsured.
Response: As we explained above, charity care is a term used by
hospitals to describe an individual hospital's program of providing
free or reduced charge care to those that qualify for the particular
hospital's charity care program. The term also may be defined by a
State in determining qualification for DSH payments under the low-
income utilization rate (LIUR) methodology set forth in Section
1923(b)(3) of the Act. Depending on the parameters of the individual
charity care programs, hospital costs associated with the uninsured may
be a subset of charity care in the hospital or may entirely encompass a
hospital's charity care program. Regardless of a hospital's definition/
parameter on what constitutes charity care, States and hospitals must
comply with Federal Medicaid DSH law and policy guidance in determining
what portion of their specific charity care program costs qualify under
the hospital-specific DSH cost limits.
As noted, charity care is addressed in the Medicaid statute at
Section 1923(b)(3)(B)(i) of the Act and is a variable in the formula
used to determine a hospitals low-income utilization rate as part of
the qualification criteria for DSH payments. The charity care variable,
while not further defined by statute is offset in the LIUR formula by
the subsidies provided by state and local governments to assist
hospitals in serving individuals with no other source of third party
coverage. For purposes of defining a hospital's LIUR, States may adopt
a reasonable definition of charity care to reflect care given free or
with reduced charge to indigent individuals.
The term is not used in Section 1923(g) of the Act which defines
the costs eligible for DSH payments and that limits DSH eligible costs
to the uncompensated inpatient and outpatient hospital costs associated
with Medicaid eligible individuals and individuals without health
insurance, (for example, the uninsured).
For purposes of Section 1923(g)(1) hospital-specific DSH limits,
uninsured individuals are those individuals without a source of third-
party coverage
[[Page 77913]]
(except coverage from State or local programs based on indigency).
Self-pay, in terms of the hospital-specific DSH limits, are those
individuals who are responsible to pay for the hospital services
provided them because they have no source of third party coverage, (for
example, the uninsured). Revenues required to be offset against a
hospital's DSH limit would include any amounts received by the hospital
by or on behalf of either ``self-pay'' or uninsured individuals during
the Medicaid State plan rate year under audit (except payments from
State or local programs based on indigency).
To the extent that hospitals do not separately identify
uncompensated care related to services provided to individuals with no
source of third party coverage from other uncompensated care costs,
hospitals will need to modify their accounting systems to do so. For
purposes of the initial audits, States and auditors may need to develop
methodologies to analyze current audited financial statements and other
accounting records to properly segregate uncompensated costs. It is
important to note that only the inpatient and outpatient hospital
charges associated with individuals with no source of third party
coverage for such services can be applied to the Medicare cost report
for purposes of calculating the uninsured uncompensated care cost
component of the hospital-specific DSH limit. Hospitals must also
ensure that no duplication of such charges exist in their accounting
records. This information must be made available to the auditor for
certification.
To the extent that hospitals include such eligible uncompensated
inpatient and outpatient hospital care as part of their hospital-
specific DSH limit calculation, the included costs must be offset by
payments actually made by or on behalf of patients with no source of
third party coverage in the Medicaid State plan rate year under audit.
These payments do not include payments made by State-only or local-only
government programs for services provided to indigent patients.
Comment: A few commenters requested a definition of Indigent Care
Revenue. They believe the language suggests that this term refers to
revenue from individuals with no source of third party coverage for
inpatient and outpatient hospital services they receive, irrespective
of the individuals' income, despite the fact that ``indigent'' usually
implies low income. The commenters would like CMS to confirm that this
interpretation is correct.
Response: We agree that this term was confusing and we have changed
its usage in the final regulation. We refer instead to ``uninsured''
revenue to refer to compensation for hospital services received from or
on behalf of individuals with no source of third party coverage
(regardless of whether the patient is indigent). These payments do not
include payments made by State-only or local-only government programs
for services provided to indigent patients.
Comment: Some commenters asked for more clarity with regard to what
is included in the category of indigent care revenue (Sec.
447.299(c)(12)), and a definition of third party payments. They asked
in particular about the treatment of payments made by State and other
government programs make payments to hospitals on behalf of indigent
individuals. The regulation should contain language that clarifies this
in order to avoid confusion.
Response: We agree. Section 1923(g)(1)(A) of the Act specifies
that, ``payments made to a hospital for services provided to indigent
patients by a State or a unit of local government within a State, shall
not be considered to be a source of third party payment.'' Therefore,
we have changed the usage of the term ``indigent care revenue'' and
refer instead to ``uninsured revenue.'' In addition, we have added
language to clarify that uninsured revenue does not include payments
for hospital services provided to indigent patients by a State or a
unit of local government within a State.
Comment: One commenter questioned how CMS previously audited
indigent care revenue.
Response: CMS has previously performed certain reviews of State DSH
programs as part of its financial management work plan under Medicaid.
In addition, the Office of the Inspector General has previously
performed several reviews of State DSH programs nationally.
Comment: One commenter stated CMS should clarify whether the
required data element refers to services provided to patients whose
third party coverage makes no payment to the hospital; for example, the
patient may have exhausted benefits coverage, the hospital may have
failed to properly bill for the service, or the service provided may
not be a covered benefit.
Response: Costs included in calculating the hospital-specific limit
do not include costs associated with individuals who are not Medicaid-
eligible and have health insurance, even if that health insurance is
limited. In no instance should costs associated claims denied by a
health insurance carrier due to improper billing be included in the
hospital-specific DSH limit. In addition, to the extent that the
inpatient and/or outpatient hospital services received are not within
the definition of inpatient and/or outpatient hospital services under
the State Medicaid plan, such service costs should not be included in
calculating the hospital-specific DSH limit. The treatment of inpatient
and outpatient hospital services provided to the uninsured and
underinsured also must be consistent with the definition of inpatient
and/or outpatient services under the approved Medicaid State plan.
Comment: One commenter questioned at what point an individual is
coded as self pay.
Response: The hospital-specific limit is calculated, in part, using
uncompensated costs of providing inpatient and outpatient hospital
services to individuals without health insurance (for example, the
uninsured). While some hospitals may refer to such individuals as
``self-pay,'' that term could have a broader meaning.
For purposes of determining hospital-specific DSH limits, uninsured
individuals are those individuals without health insurance or another
source of third-party coverage for inpatient and/or outpatient hospital
services. Information on insurance or third party coverage status is
routinely collected by hospitals, and should be found in patient
records. We interpret the phrase ``who have health insurance (or other
third party coverage)'' to broadly refer to individuals who have
creditable coverage consistent with the definitions under 45 CFR Parts
144 and 146, as well as individuals who have coverage based upon a
legally liable third party payer. The phrase would not include
individuals who have insurance that provides only excepted benefits,
such as those described in 42 CFR 146.145, unless that insurance
actually provides coverage for the hospital services at issue (such as
when an automobile liability insurance policy pays for a hospital
stay).
Revenues required to be offset against a hospital's DSH limit would
include any amounts received by the hospital by or on behalf of
uninsured individuals during the Medicaid State plan rate year under
audit.
Comment: One commenter noted that the phrasing of this requirement
implies that the State should report all payments unrelated to third
party coverage. The commenter suggested that, as some individuals can
pay for certain hospital bills privately, these payments would be
included within
[[Page 77914]]
this definition and those private pay amounts would be included as
Indigent Care Revenue. The commenter asserted that, if this is correct,
bad debts should be included in uncompensated care; and if this is
incorrect, CMS should clarify what amounts are to be included as
revenue from the indigent, and how the indigent and their revenues are
to be identified.
Response: It would be incorrect to include reductions in
uncompensated care in calculating the hospital-specific limit based on
private pay amounts for individuals with insurance or other third party
coverage. Revenues required to be offset against a hospital's DSH limit
would include any amounts received by the hospital by or on behalf of
uninsured individuals during the Medicaid State plan rate year under
audit. Section 1923(g)(1)(A) of the Act requires that the hospital-
specific cost limit be reduced by payments under Title XIX and payments
made by uninsured patients. To the extent that hospitals do not
separately identify uncompensated care related to services provided to
individuals with no source of third party coverage from uncompensated
care costs not eligible under the hospital-specific DSH limits,
hospitals will need to modify their accounting systems to do so. For
purposes of the initial audits, States and auditors may need to develop
methodologies to analyze current audited financial statements and other
accounting records to properly segregate uncompensated costs.
In sum, to the extent that hospitals include such uncompensated
inpatient and outpatient hospital care as part of their hospital-
specific DSH limit calculation, the included costs must be offset only
by payments actually made by or on behalf of patients with no source of
third party coverage in the Medicaid State plan rate year under audit.
These payments do not include payments made by State-only or local-only
government programs for services provided to indigent patients, nor do
they include payments by patients with a source of third party
coverage. We have revised the regulation text to try to clarify these
points.
Comment: One commenter believes CMS' use of the term
``uncompensated care costs'' throughout the regulation and preamble may
be confusing because the hospital industry generally uses the same term
to mean the combined costs related to charity care and bad debt for all
patients (not limited to uninsured patients). The commenter suggested
that CMS intends a more limited use of the term in this regulation that
would be restricted to uncompensated care costs associated with
Medicaid and uninsured patients. The commenter suggested that CMS
should not use the term ``uncompensated care costs'' to refer to
uncompensated costs associated only with Medicaid and uninsured
patients. To better facilitate hospital compliance, the commenter
recommends that CMS use a different term, such as ``uncompensated
Medicaid and uninsured costs.''
Response: While we regret any confusion, the term ``uncompensated
care costs'' has been used in this concept since the statutory change
in 1993, and we have sought to alleviate confusion by explaining in
detail the meaning of the term in this context. The uncompensated care
costs eligible under DSH were clearly articulated in the August 26,
2005 proposed regulation. That is, the uncompensated care costs
eligible under the hospital-specific DSH limit include the unreimbursed
costs of providing inpatient and outpatient hospital services to
Medicaid eligible individuals and the unreimbursed costs of providing
inpatient and outpatient hospital services to individuals with no
source of third party reimbursement. Therefore, all uncompensated costs
billed as inpatient hospital services and outpatient hospital services
to Medicaid eligible individuals and to individuals with no source of
third party reimbursement are eligible under the DSH limit.
To the extent that hospitals do not separately identify
uncompensated care related to services provided to individuals with no
source of third party coverage from uncompensated care costs not
eligible under the hospital-specific DSH limits, hospitals will need to
modify their accounting systems prospectively to do so. For purposes of
the initial audits, States and auditors may need to develop
methodologies to analyze current audited financial statements and other
accounting records to properly segregate uncompensated costs.
Comment: A few commenters requested a definition of what is
considered uninsured.
Response: We interpret the statutory phrase ``who have health
insurance (or other third party coverage)'' to broadly refer to
individuals who have creditable coverage consistent with the
definitions under 45 CFR Parts 144 and 146, as well as individuals who
have coverage based upon a legally liable third party payer. The phrase
would not include individuals who insurance that provides only excepted
benefits, such as those described in 42 CFR 146.145, unless that
insurance actually provides coverage for the hospital services at issue
(such as when an automobile liability insurance policy pays for a
hospital stay).
Comment: One commenter stated that there could be a case where a
patient comes into a hospital and has an income over the charity care
level (for example, 400 percent over the poverty level) and the patient
charges are not booked to uncompensated care but booked to self-pay.
The patient does not pay and the account is written off to bad debt. In
that case, the commenter asked whether the cost of that charge would be
counted as Medicaid DSH or as a component of bad debt. In addition, the
commenter asked if the facility could write-off the account as
uncompensated care and not bad debt. Currently, many facilities may be
writing off to bad debt because the regulations appear to be more
specific.
Response: This regulation does not directly address all potential
DSH payment methodologies, but does address the calculation of the
hospital-specific limit on DSH payments. As discussed in previous
responses, the categories of charity care and self pay are not relevant
to calculation of the hospital-specific limit. For the calculation, it
is necessary to know the uncompensated costs of providing inpatient and
outpatient hospital services to individuals without health insurance
(for example, the uninsured). To the extent that hospitals do not
separately identify uncompensated care related to services provided to
individuals with no health insurance or other source of third party
coverage, hospitals will need to modify their accounting systems to do
so.
Comment: One commenter questioned whether it is CMS' intent that
the uninsured, their charges, their payments, and their costs be
calculated and reported without regard to any income or asset
threshold? Please explain CMS' intent regarding asset and income
thresholds and the uninsured.
Response: The statutory provision at Section 1923(g)(1) does not
provide for any income or asset threshold in measuring uncompensated
care for uninsured individuals for purposes of the hospital-specific
limit on DSH payments. Presumably, such individuals with higher incomes
will be able to pay some or all of the cost of their care, and the
costs will thus not be uncompensated. Moreover, we reiterate that the
hospital-specific limit is not a DSH payment methodology, and States
may impose stricter limits on costs that they will consider in
determining payment.
Comment: One commenter noted that the CMS proposed rule would
reward hospitals whose liberal charity policies
[[Page 77915]]
result in high charity care amounts. By not using their best efforts to
collect on patient's accounts, the commenter indicated that these
institutions pass on a greater financial burden to the Medicaid program
under this proposal. The commenter asserted that hospitals have a duty
to make a reasonable effort when collecting accounts from patients who
do not have insurance or in instances where insurance does not provide
complete coverage.
Response: This rule implements the audit and reporting of DSH
payments to determine compliance with the hospital-specific DSH limits
and is not intended to create an incentive for qualifying DSH hospitals
not to collect on patients' accounts. First, States are limited in
their ability to make DSH payments by their annual DSH allotments.
Second, States are not required to make DSH payments to qualifying
hospitals in an amount equal to the hospital-specific limit. The
hospital-specific limit is not a DSH payment methodology, and States
may impose stricter limits on costs that they will consider in
determining payment. Taken together, we believe it is unlikely
hospitals will forgo revenues from patients in hope that such costs/
services would be fully subsidized by the Medicaid DSH payment.
Comment: One commenter said that several States have many non-
Medicaid indigent care programs. In many of these programs, the
commenter indicated that the sponsoring government or agency provides a
minimal payment to the hospital. The commenter noted that the proposed
regulations are not clear whether the loss on such programs/patients is
includable in uncompensated care costs.
Response: Inpatient and outpatient hospital service costs provided
to beneficiaries of State-only indigent care programs that have no
other source of third party coverage may be included in a hospital's
DSH cost limit. Section 1923(g)(1)(A) of the Act specifies that,
``payments made to a hospital for services provided to indigent
patients by a State or a unit of local government within a State, shall
not be considered to be a source of third party payment.'' Such State
or local government payments should not be offset against the inpatient
and outpatient hospital service costs associated with individuals
qualifying for such State or local government payment programs.
However, it is important to note that Medicaid inpatient and
outpatient hospital revenues received by hospitals in excess of
Medicaid inpatient and outpatient hospital costs must also be offset
against the eligible uncompensated inpatient and outpatient hospital
costs associated with individuals with no source of third party
coverage for the inpatient outpatient hospital services they received.
Comment: One commenter requests CMS clarify how the indigent are to
be identified. In particular, the commenter asked for clarification on
the treatment of other State or local funded services for indigent
patients and how that fits into the reporting for the uninsured, and
noted that some hospitals have included items in the ``uninsured''
category that are State or locally funded. Examples include items such
as county jail patients, public employee workers' compensation funded
services, and services to juveniles referred from secure State
facilities.
Response: We interpret the phrase ``who have health insurance (or
other third party coverage)'' to broadly refer to individuals who have
creditable coverage consistent with the definitions under 45 CFR Parts
144 and 146, as well as individuals who have coverage based upon a
legally liable third party payer. The phrase would not include
individuals who insurance that provides only excepted benefits, such as
those described in 42 CFR 146.145, unless that insurance actually
provides coverage for the hospital services at issue (such as when an
automobile liability insurance policy pays for a hospital stay). The
phrase also does not include coverage or payments made on the basis of
indigency by a State or a local unit of government within the State,
pursuant to Section 1923(g)(1)(A) of the Act.
Inpatient and outpatient hospital costs incurred for individuals
for which the State or local government is responsible on a basis other
than indigency should not be included in calculating the hospital-
specific limit. This would include costs for care for which the State
makes payments on the basis of status as State employees, prisoners or
other wards of the State. A State Medicaid Director letter dated August
16, 2002 specifically addressed the issue of treatment for Medicaid DSH
purposes of hospital costs associated with inmates of correctional
facilities. The letter specified that these costs were ineligible as
uncompensated costs for purposes of DSH because the inmates are wards
of the State and the State is directly responsible for their basic
economic and medical needs. Failure to do so would be in violation of
the eighth Amendment of the Constitution. Similarly, inmates of a
county jail or juvenile facility are wards of the State or local
government detaining them and their basic economic and medical needs
are the obligation of that governmental entity.
In addition, uncompensated inpatient and/or outpatient hospital
costs associated with providing services for public employee worker's
compensation programs are not eligible for inclusion in a hospital's
DSH limit. Worker's compensation programs provide third party coverage
for medical services that is not based on indigency.
Comment: One commenter said that CMS should further clarify what
costs may be included in the costs of services for the uninsured, in
particular, how ancillary and pharmacy services should be addressed.
Response: There are no special accounting principles related to the
reporting and auditing requirements under this regulation. Costs and
revenues should be determined based on otherwise applicable cost
accounting principles for hospitals. As part of the Medicare 2552-96
cost reporting and allocation step down process, ancillary service
costs may be allocated to inpatient and outpatient hospital services
provided to Medicaid eligible patients and patients with no source of
third party coverage. To the extent that the allocated ancillary
service costs are not reimbursed they may be included in the hospital-
specific DSH limit.
Pharmacy service costs are separately identified on the Medicare
2552-96 cost report and are not recognized as an inpatient or
outpatient hospital service. Pharmacy service costs that are not part
of an inpatient or outpatient rate and are billed as pharmacy service
and reimbursed as such are not considered eligible for inclusion in the
hospital-specific uncompensated cost limit.
Comment: Many commenters stated that the current accounting systems
at most hospitals would not allow them to accurately segregate payments
received from individuals with third party coverage from payments
received from individuals without third party coverage.
Response: To the extent that hospitals do not separately identify
uncompensated care related to services provided to individuals with no
source of third party coverage from uncompensated care costs not
eligible under the hospital-specific DSH limits, hospitals will need to
modify their accounting systems to prospectively do so. Setting up an
accounting category to aggregate charges and revenues associated with
uninsured individuals receiving inpatient and/or outpatient services
from a hospital should be an accounting system adjustment not far
removed from the process of setting up
[[Page 77916]]
an account for any other payer category. For purposes of the initial
audits, States and auditors may need to develop methodologies to
analyze audited financial statements and other accounting records to
properly segregate uncompensated costs.
Comment: A few commenters stated that, in their States, for the
vast majority of DSH hospitals, the State achieves compliance with the
hospital-specific DSH limit because DSH payments are less than Medicaid
uncompensated care alone, which is calculated for each hospital on the
Medicaid cost reporting forms. For this reason, the commenters asserted
that the State does not require most DSH hospitals to report costs of
uninsured patients on the cost reporting forms, and requiring them to
do so would be an unnecessary and significant burden. The commenters
recommended that the proposed rule be amended to include a provision
granting States the option to not report uninsured costs for some or
all hospitals where Medicaid losses justify the DSH payment made. Some
commenters recommend that the proposed rule be amended to include a
provision granting States the option to not report uninsured costs for
some or all hospitals where Medicaid losses alone justify the DSH
payment.
Response: The statute requires that each State report to CMS data,
and submit a certified audit, that verifies that all hospitals
receiving DSH payments under the Medicaid State plan actually qualify
to receive such payments and that such payments do not exceed the
hospital-specific DSH limit. Even if a State only makes DSH payments
under its approved Medicaid State plan that relate to the uncompensated
care of providing inpatient and outpatient hospital services to
Medicaid individuals (that is, Medicaid shortfall), it would be
possible for payments to a hospital to exceed the hospital-specific
limit if the hospital had a surplus in furnishing hospital services to
the uninsured. While this may be an unlikely circumstance, we cannot at
this time be certain that it never occurs. Therefore, in such a
circumstance we will accept reporting limited to Medicaid uncompensated
care only when the hospital provides a certification that it incurred
additional uncompensated care costs serving uninsured individuals. When
we review certified audit reports submitted by States, we will consider
whether more flexibility would be warranted, and we may address the
issue in future reporting instructions.
Comment: Numerous commenters cited the agency's 1994 letter to
State Medicaid programs as offering additional guidance by stating that
the cost of services provided individuals with third party coverage,
but whose third party coverage did not cover the hospital services the
individual received, could be included. These commenters asked for CMS
to incorporate this principle into this final rule.
Response: We do not agree with this reading of the 1994 CMS State
Medicaid Director letter, which did not refer to underinsured
individuals. Moreover, the statute appears to be clear on this issue.
While we regret any misconceptions about that letter, we take this
opportunity to clarify that the only costs relevant to the calculation
of the hospital-specific limit are costs of furnishing hospital
services to individuals who are Medicaid eligible or who have no health
insurance (or other source of third party coverage).
Comment: One commenter questioned whether claims denied by insurers
for lack of medical necessity are considered uninsured.
Response: The costs of services for individuals who have health
insurance are not included in calculating the hospital-specific limit,
even if insurance claims for that particular service are denied for any
reason. Section 1923(g)(1) of the Act includes in the calculation costs
of providing hospital services to individuals without health insurance
or other third party coverage (for example, the uninsured). Claims
denied by a health insurance carrier, including a Medicaid contracted
managed care organization, for any reason other than the inpatient/
outpatient service or services provided were not covered services
within the individuals health benefit package are furnished to
individuals who have health insurance coverage. The same is true of
services for which claims are denied due to improper billing, lack of
preauthorization, lack of medical necessity, or non-coverage under the
third party insurance package.
Comment: One commenter stated that if an individual has an
ambulatory benefit, but does not have an inpatient benefit, this
individual should be considered uninsured when inpatient hospital
treatment is provided. The costs a hospital incurs for the provision of
care to these individuals should be included in determining the cost of
uncompensated care.
Response: We interpret the phrase ``who have health insurance (or
other third party coverage)'' to broadly refer to individuals who have
creditable coverage consistent with the definitions under 45 CFR Parts
144 and 146, as well as individuals who have coverage based upon a
legally liable third party payer. The phrase would not include
individuals who have insurance that provides only excepted benefits,
such as those described in 42 CFR 146.145, unless that insurance
actually provides coverage for the hospital services at issue (such as
when an automobile liability insurance policy pays for a hospital
stay). An individual with insurance that provides only an ambulatory
benefit would qualify as having health insurance unless the benefit is
further limited so that it is considered an excepted benefit (for
example, restricted to onsite ambulatory medical clinics, limited to a
particular diagnosis, or restricted to an indemnity benefit). We are
not aware of health insurance plans that offer only ambulatory
benefits, and do not believe this is a common practice in the industry.
6. Section 1011 Payments
Comment: Numerous commenters requested an explanation of the
rationale for requiring States to consider Section 1011 payments in DSH
limit calculations when the statute does not refer to Section 1011
payments as a factor in determining the hospital's uncompensated care
burden. They asserted that Section 1011 payments do not appear to fit
in the statutory categories of Medicaid payments, health plan payments,
or payments made by uninsured patients, that are required to be
``netted'' from cost for the purpose of the DSH limit calculations. The
commenters request CMS to amend the proposed rule to eliminate the
proposed treatment of Section 1011 payments.
Response: Section 1011 payments are made to a hospital for the
costs incurred for the provision of specific services to specific
aliens to the extent that the provider was not otherwise reimbursed
(through insurance or otherwise) for such services. Because a portion
of the Section 1011 payments are made for uncompensated care costs that
are also eligible under the hospital-specific DSH limit (for example,
costs associated with those Section 1011 eligible aliens with no source
of third party coverage for the inpatient and outpatient hospital
services they receive and inpatient and outpatient hospital services
not considered eligible under Section 1011), a defined portion of the
Section 1011 payment must be recognized as an amount paid on behalf of
those ``uninsured'' Section 1011 eligible aliens, which would offset
the hospital's uncompensated cost under the hospital-specific limit.
The information necessary to properly segregate eligible
[[Page 77917]]
1011 costs under the hospital-specific DSH limit from Section 1011
costs not eligible under the hospital-specific limit is already
maintained in hospital accounting records for purposes of compliance
with Section 1011. Section 1011 costs not eligible under the hospital-
specific DSH limit include any inpatient and/or outpatient service
provided to a Section 1011 eligible individual who also had a source of
third party coverage for such services (for example, commercial
insurance, workmen's compensation, automobile insurance coverage).
Similarly, Section 1011 revenues attributable to inpatient and
outpatient hospital services provided to Section 1011 eligible aliens
with a source of third party coverage for the inpatient and outpatient
hospital services they receive or that are inpatient and outpatient
hospital services not considered eligible under Section 1011 would not
be offset against eligible uncompensated care costs under the hospital-
specific limit.
Considering the portion of Section 1011 payments attributable to
eligible aliens with no source of third party coverage for the
inpatient and outpatient hospital services they receive as revenue for
purposes of calculating the hospital-specific DSH limit does not change
the hospital's ability to be fully reimbursed for eligible
uncompensated inpatient and outpatient hospital services. This portion
of the Section 1011 payments are an additional source of funding to
hospitals and can assist States in managing the DSH allotments in a
manner that recognizes a broader universe of hospitals that provide a
disproportionate share of services to Medicaid and low-income
individuals. Offsetting the portion of the Section 1011 payments in no
way prevents a hospital from receiving DSH payments up to 100 percent
of the unreimbursed cost of providing inpatient and outpatient hospital
services to individuals with no source of third party coverage. Section
1011 revenues attributable to inpatient and outpatient hospital
services provided to Section 1011 eligible aliens with a source of
third party coverage for the inpatient and outpatient hospital services
they receive or that are inpatient and outpatient hospital services not
considered eligible under Section 1011 would not be offset against
eligible uncompensated care costs under the hospital-specific limit.
The form associated with the reporting requirements has been
modified to separately identify Section 1011 payments from other
revenue sources.
Comment: A few commenters noted the State does not have access to
information on Section 1011 payments made to hospitals by the
Secretary. The commenters asked whether CMS intends to provide each
State a hospital-specific report that quantifies the Section 1011
payments and the time period during which the payments were made. If
not, the commenters asked for clarification on how States should
collect and validate this information.
Response: CMS has produced a General DSH Audit and Reporting
Protocol, which specifically addresses the source documents to be
utilized in performing the DSH audit and report. One of the source
documents will be hospital audited financial statements. The Section
1011 payments would necessarily be identified as a revenue source in
the hospitals' audited financial statements. Each DSH hospital must
identify to the State the portion of Section 1011 payments received
during the Medicaid State plan rate year under audit as described in
the prior response to comment. These payments will then be considered a
revenue offset against the total eligible uncompensated care comprising
the hospital-specific DSH limit. The information necessary to properly
segregate eligible Section 1011 costs under the hospital-specific DSH
limit from Section 1011 costs not eligible under the hospital-specific
limit is already maintained in hospital accounting records for purposes
of compliance with Section 1011. Section 1011 costs not eligible under
the hospital-specific DSH limit include any inpatient and/or outpatient
service provided to a Section 1011 eligible individual who also had a
source of third party coverage for such services (for example,
commercial insurance, workmen's compensation, automobile insurance
coverage). Similarly, Section 1011 revenues attributable to inpatient
and outpatient hospital services provided to Section 1011 eligible
aliens with a source of third party coverage for the inpatient and
outpatient hospital services they receive or that are inpatient and
outpatient hospital services not considered eligible under Section 1011
would not be offset against eligible uncompensated care costs under the
hospital-specific limit.
Comment: One commenter requests clarification as to how CMS
proposes that such information be considered. If a State is required to
rely on self-reported hospital data then the State also requests
clarification regarding why self-reported hospital data is sufficient
for one purpose (Section 1011 payments or managed care payments) but
not another (regular rate payments).
Response: We anticipate that States and auditors will use the best
available data. The DSH audit will rely on existing financial and cost
reporting tools currently used by all hospitals participating in the
Medicare program, and available State data on Medicaid fee-for-service
payments. These documents would include the Medicare 2552-96 cost
report and audited hospital financial statements and accounting records
in combination with information provided by the States' Medicaid
Management Information Systems (MMIS) and the approved Medicaid State
plan governing the Medicaid payments made during the audit period.
There are three specific types of revenues that must be included in the
audit to which the State conducting the audit will not have access.
They are: (1) Medicaid and DSH payments received from States other than
the State in which the hospital is located, (2) Medicaid MCO payments
and, (3) payments by or on behalf of uninsured individuals (other than
State and local government indigent care payments). The State and CMS
must rely on hospital audited financial statements and accounting
records to provide this information. In addition, hospital cost
information is available only from a reporting hospital. The State and
CMS must rely on hospital 2552-96 cost reports to provide this
information. When the State has the most central and current
information through its MMIS (for example, data on Medicaid payments in
State fee-for-service inpatient hospital, outpatient hospital and DSH
payments) that system will be the best source of the information.
Comment: One commenter suggested that CMS should offset Medicare
DSH payments with these payments.
Response: There is no statutory authority to support the
commenter's suggestion. The hospital-specific DSH limit does not
contemplate consideration of costs and revenues for services provided
to Medicare beneficiaries except when those beneficiaries are dually
eligible for Medicaid services. Moreover, Medicare DSH payments are
governed under separate statutory authority and recognize the higher
costs incurred by DSH facilities that are associated with Medicare
hospital services, and do not recognize costs related to services
provided to uninsured individuals.
In contrast, Section 1011 payments specifically reimburse hospital
costs of providing uncompensated emergency services they are required
to provide under Section 1867 of the Act (EMTALA) to undocumented and
other eligible aliens, some of whom have no
[[Page 77918]]
source of third party coverage for the inpatient and outpatient
hospital services they receive. To the extent a portion of Section 1011
payments are paid to a hospital to offset these uncompensated care
costs eligible under the hospital-specific DSH limit, a defined portion
of the Section 1011 payment must be recognized as a payment on behalf
of those individuals when determining a hospital's eligible
uncompensated cost under the hospital-specific DSH limit. If the
hospital also received a Section 1011 payment to satisfy the same
uncompensated costs that are included as part of the hospital's
specific DSH limit, the Section 1011 payment must be included as an
offsetting revenue source reducing the total amount of uncompensated
care eligible for Medicaid DSH payments.
Comment: One commenter said that the requirement to consider
Section 1011 payments as revenue offsetting costs of services for the
uninsured could significantly reduce DSH payments for vulnerable DSH-
eligible hospitals and children's hospitals.
Response: CMS does not believe that treating the portion of Section
1011 payments, for those uninsured Section 1011 eligible aliens, as
revenue for purposes of calculating the hospital-specific DSH limit in
any way compromises the hospital's ability to be fully reimbursed for
uncompensated inpatient and outpatient hospital services. Instead,
Section 1011 payments are an additional source of funding to hospitals
and can assist States in managing the DSH allotments in a manner that
recognizes a broader universe of hospitals that provide a
disproportionate share of services to Medicaid and low-income
individuals. Offsetting the portion of Section 1011 payments in no way
prevents a hospital from receiving DSH payments up to 100 percent of
the unreimbursed cost of providing inpatient and outpatient hospital
services to individuals with no source of third party coverage. Section
1011 revenues attributable to inpatient and outpatient hospital
services provided to Section 1011 eligible aliens with a source of
third party coverage for the inpatient and outpatient hospital services
they receive or that are inpatient and outpatient services not
considered eligible under Section 1011 would not be offset against
eligible uncompensated care costs under the hospital-specific limit.
Comment: One commenter complained that this regulation places a
reporting and verification requirement on the State and on hospitals in
the State for the Federally administered Section 1011 program.
Response: The reporting obligation is based on the requirements
under the Medicaid program, which is administered by States. To the
extent that Section 1011 payments are paid to a hospital to offset
uncompensated care costs eligible under the hospital-specific DSH
limit, this Section 1011 payment must be recognized as a payment on
behalf of Section 1011 eligible individuals when determining a
hospital's eligible uncompensated cost under the hospital-specific DSH
limit. The Section 1011 payments are Federal payments that directly pay
hospitals and certain other providers for their otherwise unreimbursed
costs of providing services required by Section 1867 of the Act
(EMTALA). The hospital-specific limit is calculated taking into
consideration payments made by or on behalf of uninsured individuals,
and there is no statutory exception for payments made under Section
1011.
Comment: One commenter asserted that it would be harmful to States
to identify which hospitals received Section 1011 payments and the
amount of Section 1011 payments received prior to allocating DSH funds.
Response: It is not clear what harm would result from greater
understanding of the revenues available to pay for uncompensated care.
Moreover, reporting is consistent with the need to verify the
appropriateness of DSH payments, for the reasons discussed above. And,
as we discussed above, proper accounting for Section 1011 payments may
provide States with additional flexibility in the use of their limited
DSH allotment.
Comment: One commenter requests CMS to clarify for providers and
states that only supplemental Medicaid payments (to the exclusion of
Section 1011 funds, which are not Medicaid program payments) be
included for purposes of counting which payments are deemed to have
been paid to a hospital as part of the hospital-specific DSH limit. The
commenter requested that CMS explicitly exclude the Section 1011 funds
from the ``Verification 4'' requirement.
Response: We disagree with the commenter and instead are clarifying
that all Medicaid payments must be considered in the calculation of
revenues offsetting costs, as well as a portion of Section 1011
payments. Verification four specifically directs the auditor to ensure
that, ``States included all payments under this title, including
supplemental payments, in the calculation of hospital-specific DSH
payment limits.'' This verification addresses the treatment of Medicaid
payments and in particular, payments that are in excess of Medicaid
cost. To alleviate any confusion, we separately address Section 1011
payments, which are made by the Federal government on behalf of
undocumented and other specified aliens receiving emergency services
required under Section 1867 of the Act. These payments do not meet the
State or local government exclusion and must be treated as a payments
received on behalf of uninsured individuals for purposes of determining
a hospitals'-specific DSH limit.
The form associated with the reporting requirements has been
modified to separately identify Section 1011 payments from other
revenue sources.
7. Unduplicated Medicaid and Uninsured Counts
Comment: Numerous commenters stated it is feasible for States to
report the unduplicated number of Medicaid eligible individuals, but
not to report unduplicated uninsured patients. These commenters
asserted that such information appears to serve no purpose relative to
the requirements this rule is intended to enforce. The commenters
believe this requirement to be unreasonable, unwarranted, and/or
unnecessary, with no clear relationship between this data and DSH
program and this reporting requirement should be eliminated.
Response: The regulation has been modified to remove the
requirement to report unduplicated counts of both Medicaid and
uninsured patients. The form associated with the reporting requirements
has been modified to remove the Section addressing unduplicated
Medicaid counts and unduplicated uninsured counts.
8. MIUR and LIUR Calculations
Comment: Many commenters asserted that the proposed rule would
inappropriately limit the charity care component of the Low Income
Utilization Rate (LIUR) DSH qualification measurement under Section
1923(b)(3) of the Act to only charity care rendered to the uninsured,
who do not have third-party coverage for hospital services, thereby
excluding charity care for the underinsured. They argued that the
statute does not limit this ratio to services provided uninsured
individuals. They pointed out that, while the lack of third-party
coverage is an important factor in any hospital's charity care policy,
it is not the only factor. They asserted that charity care is often
appropriate, and should be recognized, when some third-party coverage
exists, but it is inadequate
[[Page 77919]]
given the financial circumstances of the patient.
Response: We agree, and the regulation has been modified to
maintain consistency with Section 1923(b) regarding the calculation of
the LIUR. Specifically, CMS recognizes that hospital charity care
policy may go beyond individuals with no source of third party coverage
and may include underinsured individuals. For purposes of the LIUR
only, individuals that qualify under a hospital's charity care policy
may be included.
Comment: One commenter stated that this new annual reporting
requirement should not be associated to the CMS 64 quarterly report.
The commenter suggested that DSH reporting should be submitted directly
to CMS on the same day that the required independent certified audit is
submitted.
Response: We agree. CMS is not requiring States to submit either
the annual report or the certified independent DSH audits in
conjunction with the CMS 64 quarterly report. Instead, the annual
report and the final audit must be submitted to CMS within 90 days of
the completion of the audit. The submissions associated with Medicaid
State plan rate year 2005 and 2006 are due no later than December 31,
2009. Each subsequent audit report beginning with Medicaid State plan
rate year 2007 must be completed by September 30 of the year ending
three years from the Medicaid State plan rate year at issue, and the
submissions are due by the following December 31st. This means that the
2007 Medicaid State plan rate year annual report and audit report must
be submitted to CMS by December 31, 2010.
Comment: A few commenters state that Federal regulations currently
require that hospitals be given the option of qualifying for DSH based
on either their Medicaid inpatient utilization rate or their low-income
utilization rate, but do not require that hospitals submit information
on both of these rates. They stated that the reporting requirements for
MUIR and LIUR are not specifically required in the MMA, and do not
appear to make a contribution to determining State compliance with the
applicable hospital-specific DSH limitation, which is the objective of
the proposed regulation according to the MMA. One commenter stated that
this reporting requirement for MUIR and LIUR represents another attempt
to adopt a substantive policy change in the context of these audit and
reporting rules.
Response: The MMA imposes audit and reporting requirements on
States regarding DSH payments to eligible hospitals. As part of this
process, CMS must ensure if all hospitals receiving DSH payments under
the Medicaid State plan actually qualify to receive such payments.
Sections 1923(b)(1)(A) and (B) of the Act require that all hospitals
with certain threshold MIUR or LIUR levels must be included by the
State as DSH eligible hospitals. This is the minimum Federal standard.
States have the option to use alternative qualifying criteria that are
broader than the minimum Federal standards.
States that use only the LIUR or only the MIUR to determine DSH
qualification should report on the statistic utilized in the approved
Medicaid State plan for the Medicaid State plan rate year under audit.
States using a broader methodology should report the statistic utilized
in lieu of the MIUR or LIUR. There is no change in the MIUR or LIUR
under this regulation. The statute calls for reporting and auditing of
DSH payments, and this rule requires such reporting and auditing,
consistent with all existing requirements and limitations associated
with those payments. In an effort to provide States with uniform
instructions, CMS provided detailed identification of the data elements
necessary to comply with these statutory reporting and auditing
requirements.
Comment: A few commenters noted that their State's DSH methodology
defines Medicaid inpatient utilization differently than does
1923(b)(2). One commenter gave as an example a State that does not
include dual eligible days in a hospital's Medicaid utilization rate
for DSH purposes, while 1923(b)(2) appears to include these days. The
commenter indicated that, using the State-defined Medicaid utilization
rate for the eligibility determination, includes more hospitals as DSH
providers and pays a higher DSH adjustment than is specified in
1923(c). Another commenter's State utilizes days attributable to dual
eligibles to calculate the Medicaid Inpatient Utilization rate (MIUR).
Some commenters asked that CMS clarify the standard to be used on
whether days attributable to dual eligibles should be included in the
calculation of the MIUR for the purposes of determining which hospitals
are deemed to be disproportionate share hospitals.
Response: We have revised the regulation to make clear that States
that use alternate broader qualifying criteria than the MIUR should
report on the hospital's measurement on such criteria. With respect to
the statutory MIUR, it is a calculation that includes all Medicaid
eligible days. To the extent that an inpatient hospital day for a
dually-eligible Medicare/Medicaid patient qualifies as a Medicaid day,
that day may be included in the MIUR calculation. States have the
option to use alternative qualifying criteria that are broader. States
using a broader methodology should report that statistic in lieu of the
MIUR or LIUR.
Comment: One commenter said that their State calculates each
hospital's MIUR and LIUR for purposes of determining DSH eligibility.
The MIUR used for a current year's DSH eligibility is based on data
from prior years. The commenter asked for clarification as to whether
the MIUR for reporting and audit purposes should be the MIUR used to
determine the current year's DSH eligibility, or an MIUR calculated
based on the hospitals' current year's operational data. One commenter
further questioned whether a State that currently calculates DSH
eligibility on a calendar year basis, must now calculate the Medicaid
Inpatient Utilization Rate on a State fiscal year basis to comply with
the reporting requirements.
Response: The data reported and used in the certified audit should
be from the Medicaid State plan rate year. States will continue to have
the flexibility to use time periods other than the Medicaid State plan
rate year to estimate DSH qualification and DSH payments, but must
provide for adjustments to ensure that final qualification and payments
are based on actual data for the relevant time period. Consistent with
that principle, the LIUR, MIUR or alternative DSH qualifying statistics
must be reported in the audit using the actual hospital utilization,
payment and cost data applicable to the Medicaid State plan rate year
under audit. For instance, if the Medicaid State plan determines DSH
qualification in a given year based on prior year Medicaid and/or low-
income utilization data, the audit must report that qualifying
statistic using actual Medicaid State plan rate year data to
demonstrate that the hospital was eligible to receive DSH payments. CMS
recognizes that States must use estimates to determine a hospital's DSH
qualification and DSH payments in a given year. The regulation is
intended to ensure that hospitals are qualified to receive DSH payments
and that such payments do not exceed the hospital-specific DSH limit.
The transition period, discussed in earlier comments, ensures that
States may adjust those estimates prospectively to avoid any immediate
adverse fiscal impact.
[[Page 77920]]
9. Medicaid Revenues Defined
Comment: A few commenters recognized the importance of the sum of
Regular Medicaid Payments, Medicaid Managed Care Organization Payments
and Enhanced/Supplemental Medicaid Payments in determining hospital
eligibility for Medicaid DSH payments and in calculating the hospital-
specific limits for such payments. However, the commenters do not
understand why these figures need to be reported separately because
those separate figures, in and of themselves, do not contribute to
CMS's ability to determine the appropriateness of DSH payments and is
not mandated by the MMA.
Response: The statute called for reporting of specific payments and
data necessary to ensure the appropriateness those payments, and
provides for States to obtain independent certified audits of such
payments. The data elements we are requiring are those that we believe
are necessary to determine the appropriateness of DSH payments, and to
verify audit findings. In an effort to provide States with uniform
instructions, CMS provided detailed identification of the data elements
necessary to comply with Congressional instruction on such reporting
and auditing.
To determine the eligible uncompensated care hospital-specific DSH
limit and to ensure that all eligible costs under such limit are offset
by total Medicaid payments made, the regulation requires a separate
accounting of types of Medicaid payments. The separate reporting of
each type of Medicaid payment creates a verification mechanism to
ensure that all Medicaid payments are properly offset against the
hospital-specific DSH limit. Regular Medicaid payment and supplemental
Medicaid payment information is readily available to the State via the
Medicaid Management Information System. Information regarding Medicaid
managed care payments made to hospitals is available from hospital
accounting systems.
Comment: A few commenters did not understand, based on the proposed
regulation, whether the categories of ``Regular Medicaid payments'' and
``Medicaid managed care organization payments'' are mutually exclusive.
Several commenters requested clarification of the phrase, ``regular
Medicaid payments,'' stating it is a new term that would benefit from
more explicit definition.
Response: We intended in the proposed rule that the terms regular
Medicaid payment and Medicaid MCO payments would be mutually exclusive,
but because the term ``regular'' was apparently confusing we are
revising the regulatory language to be more specific. We viewed
``regular'' Medicaid payments as the fee-for-service (FFS) at the base
rates that States set for Medicaid services offered through the
approved Medicaid State plan. We also included as ``regular'' Medicaid
payments under a FFS rate system any add-ons to rates that account for
specific costs. We have now revised the regulation text to identify
this category more specifically as IP/OP Medicaid fee-for-service (FFS)
basic rate payments.
We distinguish as a separate reporting data element payments to
each hospital from MCOs because those payments are derived from
different data sources (hospital records). Medicaid MCO payments are
payments from MCOs to hospitals for inpatient and outpatient services
provided to Medicaid managed care enrollees. We also distinguish as a
separate data element supplemental and/or enhanced Medicaid payments
that are not part of regular FFS Medicaid rate structure but instead
are additional reimbursement to providers above the basic service rate.
Supplemental and/or enhanced Medicaid payments are not necessarily
available to all participating Medicaid providers and may not be
triggered by a claim for Medicaid services provided. A supplemental
Medicaid payment may be based solely on qualifying criteria defined in
the Medicaid State plan.
Comment: One commenter noted that the regulation specifies how
Medicaid MCO payments to hospitals are treated, but does not appear to
contemplate the treatment of payments from other managed care entities'
that are not solely Medicaid MCOs. The regulations should clarify how
all revenues from managed care entities for hospital services should be
treated.
Response: Because the regulation specifically addresses Medicaid
DSH payments and hospital-specific DSH limits, hospitals will be
required to report only the MCO revenues associated with Medicaid
inpatient and outpatient hospital services. Only the unreimbursed
inpatient hospital and outpatient hospital costs associated with
Medicaid managed care (for example, Medicaid shortfall) are eligible to
be included in the hospital-specific DSH limit. To determine any
eligible Medicaid shortfall, hospitals must include costs associated
only with inpatient and outpatient hospital services provided to
Medicaid managed care enrollees net of the inpatient and outpatient
hospital payments made to the hospital from Medicaid MCOs.
10. Intergovernmental Transfers
Comment: One commenter noted that the proposed rule requirement of
reporting transfer payments is not mandated by the MMA. A few
commenters requested a definition of the term transfers (Sec.
447.299(c)(13)), which is undefined in existing Federal statute and
regulation. One commenter requested definition and clarification of the
phrase, ``as a condition of receiving any Medicaid payment or DSH
payment.''
Response: We have removed this proposed data element because we
agree that it is not appropriate in the context of this reporting and
auditing obligation, but instead relates to concerns that are better
addressed through other oversight procedures. In using the term
``transfer,'' we intended to reference intergovernmental transfer
obligations that a DSH hospital may have under a State's Medicaid
program. As explained in a response to a subsequent comment,
intergovernmental transfer obligations are not considered costs
eligible under the hospital-specific DSH limit.
11. Costs Defined
Comment: A few commenters requested a definition of cost indicating
that some agencies grant States some leeway in the definition of costs.
Response: Uncompensated care costs eligible under the hospital-
specific DSH limit were clearly articulated in the August 26, 2005
proposed regulation. That is, the uncompensated care cost eligible
under the hospital-specific DSH limit include the unreimbursed costs of
providing inpatient and outpatient hospital services to Medicaid
eligible individuals and the unreimbursed costs of providing inpatient
and outpatient hospital services to individuals with no source of third
party reimbursement for the inpatient and outpatient hospital services
they receive. Therefore, all costs for services that are within the
definition of inpatient hospital services and outpatient hospital
services that are furnished to Medicaid eligible individuals and to
individuals with no source of third party reimbursement should be
included in calculating the hospital-specific DSH limit. States do not
have the flexibility to broaden or narrow the costs included in
calculating the hospital-specific DSH limit, because the universe of
costs is defined in the statute. States do have the flexibility to vary
the level of DSH payment between individual hospitals as long as the
payments are at or below the hospital-specific limit. And States are
not required to make DSH payments that
[[Page 77921]]
cover all costs included in calculating the hospital-specific DSH
limit.
Comment: One commenter noted a reference to the cost determination
method via the Medicare cost report would be beneficial.
Response: CMS agrees that the same methods used in preparing the
Medicare 2552-96 cost report should be applied in determining costs to
be used in calculating the DSH hospital-specific limits. We believe
that hospitals' Medicare cost report and audited financial statements
and accounting records should contain the information necessary for
reporting and auditing responsibilities, in combination with
information provided by the States' Medicaid Management Information
Systems (MMIS) and the approved Medicaid State plan governing the
Medicaid payments made during the audit period.
It is important to note that, in using a cost-to-charge ratio in
calculating costs, only the inpatient and outpatient hospital charges
associated with individuals with no source of third party coverage for
such services can be applied to the Medicare cost report for purposes
of calculating the uninsured uncompensated care cost component of the
hospital-specific DSH limit. Hospitals must also ensure that no
duplication of such charges exist in their accounting records. This
information must be made available to the auditor for certification.
CMS has developed a General DSH Audit and Reporting Protocol which
will be available on the CMS Web site to assist States and auditors in
using information from each source identified above to determine
uncompensated care costs consistent with the statutory requirements.
Comment: A number of commenters asked for clarification of the
requirement in the proposed rule that States should report
``separately'' the ``total annual cost'' or the ``total annual amount
of uncompensated care costs,'' respectively, ``for furnishing inpatient
hospital and outpatient hospital services to Medicaid eligible
individuals and to individuals with no source of third party coverage
for the hospital services they receive.'' The commenters suggested that
CMS remove the word ``separately'' from Sec. Sec. 447.299(c)(14) and
447.299(c)(15) and clarify that only one data item must be reported for
both ``total cost of care'' and ``uncompensated care costs.''
Response: The reporting form has been modified to address many
comments concerning the necessary data elements to fulfill the audit
and reporting requirements. The data element referring to ``Total
Annual Uncompensated Care Costs'' represents the total amount of
unreimbursed care to be considered under the hospital-specific DSH
limit. This figure is the result of summing ``Total Cost of Care
Medicaid IP/OP Services'' and ``Total Cost of IP/OP for uninsured'' and
then subtracting ``Total Medicaid IP/OP Payments'' and ``IP/OP
Uninsured Revenues,'' and ``Total Applicable Section 1011 Payments''.
The source of this information will be the hospital's Medicare 2552-96
cost reports, hospital audited financial statements and accounting
records, and MMIS data.
Comment: Numerous commenters said that a review of the legislative
history of the MMA DSH reporting and auditing requirements does not
reveal that Congress raised any concerns about the calculation of
uncompensated care costs, about how unreimbursed costs were determined
for setting the hospital-specific DSH limit by the CMS or State
Medicaid programs. Several commenters stated that as a procedural
matter, CMS fails to acknowledge that it is changing the definition of
a key term, uncompensated care. The new definition is simply included
in the preamble and regulation text as though nothing is being
substantively changed.
Response: We disagree with the premise of the commenters that the
DSH reporting and auditing requirements do not indicate Congressional
concern about the appropriateness of DSH payments. And we disagree that
this rule changes the definition of uncompensated care that is counted
in calculating the hospital-specific DSH limit.
Section 1923(g)(1)(A) of the Act specifics that DSH payments cannot
exceed, ``the costs incurred during the year of furnishing hospital
services (as determined by the Secretary and net of payments under this
title, other than under this Section, and by uninsured patients) by the
hospital to individuals who either are eligible for medical assistance
under the Medicaid State plan or have no health insurance (or other
source of third party coverage)''. This language plainly identifies the
limited population, whose costs were to be included in the calculation,
and specifies offset of revenues associated with those costs.
The reporting and auditing requirement, by their nature, indicate
concern with the calculation of the hospital-specific limit. In an
effort to provide States with uniform instructions, CMS provided
detailed identification of the data elements necessary to comply with
Congressional instruction on such reporting and auditing. The
definitions of the data elements track the statutory language, and do
not change the calculation that should have always been performed.
Comment: One commenter states that CMS proposes to redefine
uncompensated care costs in a very narrow fashion for DSH reporting,
yet for reporting uncompensated care in the Medicare cost report,
hospitals are instructed to include bad debts and non-Medicaid indigent
care plans. The commenter believes that a uniform definition should be
in place for all hospital reporting.
Response: Medicare and Medicaid are separate programs. The Medicare
program uses a different, broader, definition of uncompensated care
than is authorized for purposes of the Medicaid DSH hospital-specific
limit. It is important to note that the statutory provision at Section
1923(g)(1) of the Act does not use the term ``uncompensated care'' and
we use it only because of its longstanding use in this context. The
definition we have been using tracks the statutory requirements for the
hospital-specific DSH limit.
Comment: One commenter noted that historically, there has been
great difference in how uncompensated care costs have been calculated
from State to State and asked if this rule would establish a uniform
methodology among all States for calculating the uncompensated care
costs for Medicaid eligible individuals and individuals with no source
of third party coverage. One commenter stated CMS should clarify what
amounts (revenue charges and costs) are to be included in uncompensated
care.
Response: This regulation sets forth reporting and auditing
requirements for DSH payments and necessarily will result in greater
uniformity in State practices but this regulation does not change the
underlying statutory requirements for DSH payments. In an effort to
provide States with uniform instructions, CMS provided detailed
identification of the data elements necessary to comply with
Congressional instruction on such reporting and auditing.
Comment: One commenter said that public hospitals in their State
typically screen uninsured patients to determine the extent of their
ability to pay for services rendered. The determination generally
results in an allowance that is applied to reduce the amount due from
the uninsured patient. The commenter recommends a revision to clarify
that discounts for the uninsured are not applied to reduce the
hospital's uncompensated care costs. The full cost
[[Page 77922]]
should be recognized as uncompensated notwithstanding the discount or
allowance process.
Response: We agree that the amount of calculations of uncompensated
care should not be reduced by amounts that are not paid because of a
provider discounted charge. The statute provides for costs of
furnishing services to uninsured patients to be reduced only by the
amount of payments received from or for those patients, except for
payments for care to indigent patients from a State or unit of local
government within a State. We have clarified the data elements in this
final rule, and we believe they more clearly track those statutory
elements. We note that hospitals may need to ensure that, to the extent
that they determine costs based on a cost-to-charge ratio, the
unreduced charge is used in the calculation.
Comment: One commenter noted that the ``payer discount'' exclusion
is inappropriate with respect to both the uninsured and Medicaid
beneficiaries. With respect to uninsured patients, no third party payer
is involved. For services rendered to Medicaid patients, the difference
between the Medicaid rates (or Medicaid managed care plan payments) and
the costs of furnishing the services constitutes the Medicaid
shortfall, that is a component of uncompensated care costs.
Response: As noted above, we agree that payment discounts extended
to uninsured individuals should neither increase nor decrease
uncompensated care, since offset is required only for actual revenues
from or for these individuals. The reference in the proposed regulation
was intended to refer to payment discounts extended to health insurers
or other third party payers. We have clarified this language in the
final rule.
To the extent that hospitals do not separately identify
uncompensated care related to services provided to individuals with no
source of third party coverage from uncompensated care costs not
eligible under the hospital-specific DSH limits, hospitals will need to
modify their accounting systems to do so.
Comment: A few commenters stated that contractual allowances and
payer discounts for persons with 3rd party coverage are the only items
that should not be permissible in this Section. They recommended that
the definition of uncompensated care cost be modified to include all
uncompensated care costs other than contractual allowances and third
party insurance discounts given to plans other than indigent care
plans.
Response: As enacted by OBRA 93, the hospital-specific DSH limit is
comprised only of the uncompensated care costs of providing inpatient
and outpatient hospital services to Medicaid individuals and to
individuals with no source of third party coverage for the inpatient
and outpatient hospitals services they received.
Comment: One commenter requested clarification of whether the
requirement for verifying ``The extent to which hospitals in the State
have reduced their uncompensated care costs to reflect the total amount
of payment adjustments under this Section.'', and the new Sec.
455.204(c)(1), should be read to require verification that obligations
of the qualifying DSH hospital to fund the non-Federal share of a DSH
payment or any other Medicaid payment are not included as uncompensated
care costs for purposes of the hospital-specific DSH limit.
Response: The proposed first verification was based on the
statutory language of Section 1923(j)(2)(A) of the Act. Since there is
no statutory requirement that hospitals actually use DSH payments for
uncompensated care, we are reading this verification to require
examination of whether the DSH payments made to each hospital are
retained by the hospital and are actually available to offset
uncompensated care costs. We have encountered numerous instances in
which Medicaid hospital providers are not permitted to retain Medicaid
payments for normal hospital purposes. Instead the hospital is required
to divert the funding either by returning it to the payor (either
directly or indirectly) or is required to use the funding for another
purpose. We have revised the wording of this verification to better
reflect our reading of its meaning.
We confirm that intergovernmental transfers (IGTs) cannot be
included as a cost for purposes of calculating the hospital-specific
DSH limit. IGTs are not costs of providing health care services; they
are a financing mechanism and should not be included in the calculation
of the hospital-specific DSH limits. DSH payments are limited to the
costs of providing inpatient and outpatient hospital services to
Medicaid eligible individuals and individuals with no source of third
party coverage.
Comment: One commenter stated that based on the accompanying
discussion found in the Federal Register, the State interprets this
provision to mean that any amount of funds, certified or transferred by
or from a hospital or other governmental entity, that is used to claim
Federal DSH funding, must be reported as a DSH payment to the hospital
in the evaluation of the hospital-specific DSH limit.
Response: We agree with the reading that Medicaid hospital payments
include the total computable federal and non-federal share payment
amount, even when the non-federal share is not funded directly by the
State Medicaid agency. Certified public expenditures (CPEs) and
intergovernmental transfers (IGTs) are non-Federal share funding
mechanisms utilized by States to share the cost of financing the
Medicaid program with other local government entities, including
governmentally operated health care providers. To the extent that
governmentally operated health care providers are the source of the
non-Federal share funding of a non-DSH Medicaid payment, such sources
of non-Federal share become part of the total computable Medicaid
payment received by the provider and non-DSH Medicaid payments are a
revenue source that offsets costs for purposes of calculating the
hospital-specific DSH limit. And to the extent that these mechanisms
are used to finance the DSH payments themselves, the total DSH payment
would include the total computable expenditure.
It should be noted that IGTs made by hospitals cannot be included
as a cost of hospital services under the hospital-specific DSH limit.
DSH payments are limited to the costs of providing inpatient and
outpatient hospital services to Medicaid eligible individuals and
individuals with no source of third part coverage. IGTs are not costs
of providing health care services, they are a financing mechanism and
should not be included in the calculation of the hospital-specific DSH
limits.
CPEs are also a financing method but CPEs are based on actual costs
incurred which are certified by a unit of government to represent a
Medicaid payment. CPEs by a governmentally operated hospital that
represent costs incurred for hospital services for Medicaid-eligible
individuals can be included as costs in the hospital-specific limit
calculation, but would be completely offset by the Medicaid payments
that they represent. When the DSH methodology is based directly on
payment for incurred costs of serving the uninsured, CPEs by a
governmentally operated hospital may represent the DSH payment. In that
instance, the CPE would also represent costs that could be included in
the hospital-specific limit, but there would be no payment offset in
the calculation. Instead, the total computable amount would be
considered as a DSH payment
CPEs by a local government entity that is not a health care
provider (when the entity has made a total computable Medicaid payment
on behalf of the State
[[Page 77923]]
and under the authority of the approved Medicaid State plan) the
hospital in receipt of such payment must consider the full amount of
that payment as a Medicaid payment that offsets costs in the
calculation of the hospital-specific limit.
Comment: Numerous commenters seek clarification that the same
methodology for determining uncompensated care costs need not be used
for every DSH hospital in the State. They asserted that CMS has
previously recognized that any definition of ``allowable cost'' is
acceptable, ``as long as the costs determined under such a definition
do not exceed the amounts that would be allowable under the Medicare
principles of cost reimbursement.'' The commenters indicated that, in
some States, a variety of methodologies may be used to determine the
uncompensated care costs for different categories of hospitals, such as
public and private hospitals, or for particular hospitals. They
suggested that using different methodologies for different hospitals is
entirely justified, because not every hospital has the same accounting
practices or incurs the same types of costs.
Response: States have considerable discretion to determine
allowable inpatient and outpatient costs when determining payment rates
under their Medicaid State plan, but Section 1923(g)(1) of the Act
provides for a Federal limitation based on costs that must be
calculated in accordance with Federal accounting standards. In
accordance with this principle, the 1994 guidance provided State
flexibility to define Medicaid costs for purposes of setting Medicaid
payment rates. But this flexibility does not apply to calculation of
hospital-specific DSH limits to the extent that State-defined costs
exceed those permitted under Medicare cost principles.
Moreover, the hospital-specific limit is based on the costs
incurred for furnishing ``hospital services'' and does not include
costs incurred for services that are outside either the State or
Federal definition of inpatient or outpatient hospital services. While
States have some flexibility to define the scope of ``hospital
services,'' States must use consistent definitions of ``hospital
services.'' Hospitals may engage in any number of activities, or may
furnish practitioner or other services to patients, that are not within
the scope of ``hospital services.'' A State cannot include in
calculating the hospital-specific DSH limit cost of services that are
not defined under its Medicaid State plan as a Medicaid inpatient or
outpatient hospital service.
Comment: One commenter noted that its State agency receives state
legislative authority to make distribution to hospitals from general
revenue. The State requests confirmation from CMS that these payments,
unmatched by Federal funds, are excluded from the hospital's DSH limit
calculations.
Response: Section 1923(g)(1)(A) of the Act specifies that,
``payments made to a hospital for services provided to indigent
patients by a State or a unit of local government within a State, shall
not be considered to be a source of third party payment.'' State or
local only, (non-DSH) payments received through an appropriation to the
hospital for the provision of indigent care and for which Federal
matching funds are not claimed would not be considered a revenue offset
for purposes of determining a hospital-specific DSH limit. If, however,
the ``distributions to hospitals from general revenue'' represent DSH
payments (or any other Medicaid payment) for which the State will claim
Federal matching dollars through the use of certified public
expenditures, the State must count the ``distributions'' as DSH
payments (or any other Medicaid payments) for purposes of the audit and
report.
Comment: One commenter requests CMS clarify that provider taxes are
costs that may be included in a hospital's calculation of its
uncompensated care costs.
Response: Existing Medicaid policy recognizes permissible health
care taxes as an allowable cost for the purposes of Medicaid
reimbursement. A portion of a permissible hospital tax may also be
allocated to indigent care days as part of the hospital cost report
step-down cost allocation process. Specifically, the portion of a
permissible health care related tax allocated to the cost of providing
inpatient and outpatient hospital services to patients with no source
of third party coverage may be included in the hospital-specific DSH
limit.
Comment: One commenter wants to assure hospitals' incurred costs of
furnishing services to undocumented aliens are includable in the costs
incurred by hospitals for furnishing services to individuals with no
source of third party coverage for the services they receive.
Response: The costs of inpatient and outpatient hospital services
provided to undocumented aliens with no source of third party coverage
for the inpatient and outpatient hospital services they receive are
eligible under the hospital-specific DSH limit. These costs must be
offset by any payments received by the hospital by or on behalf of the
individuals with no source of third party coverage for the inpatient
and outpatient hospital services they receive, including the applicable
portion of the funding under Section 1011 of the MMA for those Section
1011 eligible aliens with no source of third party coverage for the
inpatient and outpatient hospital services they receive or any
inpatient and outpatient services not considered eligible under Section
1011. It is important to note that inpatient and outpatient hospital
costs related to Section 1011 eligible aliens with a source of third
party coverage for the inpatient and outpatient hospital service they
receive are not eligible under the hospital-specific DSH limit, as
discussed previously.
Comment: Numerous commenters recommended that the language of
verification 1 be revised to require that the total amount of
claimed DSH expenditures for each hospital that qualifies for a DSH
payment in the State is no more than the hospital's uncompensated care
costs, exclusive of DSH payments.
Response: The commenters' recommendation appears to reflect the
issue that is addressed in the second required verification. The
proposed first verification was based on the statutory language of
Section 1923(j)(2)(A) of the Act. Since there is no statutory
requirement that hospitals actually use DSH payments for uncompensated
care, we are reading this verification to require examination of
whether the DSH payments made to each hospital are retained by the
hospital and are actually available to offset uncompensated care costs.
We have encountered numerous instances in which Medicaid hospital
providers are not permitted to retain Medicaid payments for normal
hospital purposes. Instead the hospital is required to divert the
funding either by returning it to the payor (either directly or
indirectly) or is required to use the funding for another purpose. We
have revised the wording of this verification to better reflect our
understanding.
Comment: A few commenters said that in order to ensure timely
payments to providers, States should be allowed to continue to use
prospective systems to determine uncompensated care costs.
Response: CMS recognizes that States must make prospective DSH
payments and that they must estimate eligible hospital uncompensated
care costs as part of that process. But, as indicated in numerous audit
reports by the HHS Inspector General, such estimates often result in
improper payments if not reconciled to actual uncompensated care costs
in the rate year. The new statutory reporting and auditing
[[Page 77924]]
requirements make clear that such estimates must be reconciled to
actual costs in order to apply the statutory hospital-specific limits.
As described in responses to comments regarding audit requirements, CMS
has clarified that the Medicaid State plan rate years 2005 through 2010
audit findings will be used only for purposes of assisting States in
developing estimates for Medicaid State plan rate years 2011 through
2015. As discussed in subsequent comments and applicable regulation
text, the 2005 and 2006 audit findings will be used solely to ensure
prospective DSH payments do not exceed hospital-specific limits
beginning with Medicaid State plan rate year 2011. No retroactive
fiscal impact will occur because of the transitional period.
Comment: One commenter had a question about the proposed reporting
form, requesting clarification on whether the definition of
uncompensated care includes a description of the sources of data used
in the calculation as well as a description of the methodology used to
calculate uncompensated care cost by the State.
Response: CMS has created a General DSH Audit and Reporting
Protocol to provide guidance to states, hospitals, and auditors in the
completion of the DSH audit. The total eligible uncompensated care
block contained in the reporting form should include, by hospital, the
total amount of eligible uncompensated care. This value should be
expressed by its dollar value, determined in accordance with the
General DSH Audit and Reporting Protocol. This protocol provides
general instructions regarding the types and sources of information to
be provided to the State and its auditor as well as the calculations
the auditor will make based on the data provided. The protocol will be
available on the CMS Web site.
Comment: One commenter questioned whether CMS agrees with the
method of calculating uncompensated care costs by using the ratio of
cost to charges from the hospital's most recent ``as filed'' cost
report and applies this ratio to a twelve-month period of uncompensated
charges as reported by the hospital for purposes of completing the
reporting form.
Response: The uncompensated care block contained in the reporting
form should include, by hospital, the total amount of eligible
uncompensated care actually provided during the Medicaid State plan
rate year under audit. This value should be expressed by its dollar
value and must be based on the actual costs incurred by a hospital and
reflected on the Medicare cost report(s) for the period under audit.
CMS has created a General DSH Audit and Reporting Protocol to
provide guidance to States, hospitals, and auditors in the completion
of the DSH audit. This protocol provides general instructions regarding
the types and sources of information to be provided to the State and
its auditor as well as the calculations the auditor will make based on
the data provided. The protocol will be available on the CMS Web site.
12. Physician Costs
Comment: Several commenters disagreed with the proposed exclusion
of physician services from consideration as a cost of hospital services
in calculating the hospital-specific DSH limits. They argued that
inclusion of such costs is consistent with Federal statute, the
legislative history of the statute, and the purpose of the Medicaid
Disproportionate Share Hospital Program. Several commenters noted that
States have previously relied on the description of ``cost of
services'' contained in a 1994 letter to State Medicaid Directors,
which stated that CMS ``would permit the State to use the definition of
allowable costs in its State plan, or any other definition, as long as
the costs determined under such a definition do not exceed the amounts
that would be allowable under the Medicare principles of cost
reimbursement.'' Several commenters stated that physician services in a
hospital are inseparable from other services furnished to hospital
patients. The commenters recommend allowing the uncompensated care
costs of hospital-salaried physician services to be included in the
calculation of the hospital-specific DSH limit. Many commenters cited
correspondence with CMS regarding the inclusion of physician cost as a
component of hospital services.
Response: The statute at Section 1923(g)(1) includes in the
calculation of the hospital-specific DSH limit the unreimbursed costs
of providing inpatient and outpatient ``hospital services'' furnished
to specified populations (Medicaid-eligible and uninsured). Therefore,
all costs included must be for services that meet a definition of
``hospital services.'' That is a term that is used elsewhere in the
Medicaid statute, in the definition of ``medical assistance'' at
Sections 1905(a)(1) and 1905(2)(A) of the Act, referring to inpatient
and outpatient hospital services. Under normal principles of statutory
construction and administrative practice, this term should be given a
consistent meaning. Thus, we interpret this term under Section
1923(g)(1) of the Act to mean the same as it means under the approved
Medicaid State plan description of inpatient hospital services and
outpatient hospital services.
Physician services are generally not considered hospital service
costs in either Medicare or Medicaid programs, and are recognized as
separate costs in the Medicare hospital cost reporting process.
Specifically, the physician service costs are generally identified as
professional costs and are removed from inpatient and outpatient
hospital costs as part of the hospital cost allocation step-down
process. The Medicare 2552-96 cost report does not include services
furnished by a physician. Physician services are, as a matter of
routine, separately billed and reimbursed as a professional service and
are not included as part of the inpatient hospital service benefit.
Medicaid programs generally follow Medicare payment principles in this
respect. Therefore, the uncompensated costs of those services generally
cannot be included in the inpatient hospital component of the hospital-
specific DSH limit.
In addition, under the Medicaid program, separately reimbursed
physician professional services are generally not included in State
definitions of outpatient hospital services, but are covered under a
separate benefit category. Therefore, the inclusion of separately
reimbursed Medicaid physician services in the outpatient hospital
service component of the hospital-specific DSH limit would not be
allowable because, under the statute, the DSH limit may only include
inpatient and outpatient hospital services.
In sum, physician costs that are billed as physician professional
services and reimbursed as such should not be considered in calculating
the hospital-specific DSH limit, which is comprised only of the
unreimbursed costs of providing inpatient and outpatient hospital
services to Medicaid and uninsured individuals.
Comment: Many commenters said it was not the intent of Congress to
exclude physician costs from DSH limits because Congress expressed the
expectation that hospitals receiving DSH payments were responsible for
assuring access to physician services, as articulated in the
requirement that a DSH facility have at least two obstetricians on its
medical staff.
Response: The commenters infer Congressional intent regarding what
costs should be included within a
[[Page 77925]]
hospital-specific DSH cost limit by referencing a DSH qualification
requirement and not the hospital-specific DSH limit requirements.
Section 1923(d) specifies requirements for hospitals to qualify for DSH
payments. The staff obstetrical requirements are part of the DSH
qualification requirements.
Separate treatment of hospital services and professional services
has been a longstanding practice that predates the hospital-specific
DSH limit and was affirmed by Congress in enacting prospective payment
systems for Medicare hospital services. We have to presume that
Congress understood what it meant in using the term ``hospital
services'' rather than a more open-ended term. In light of the limited
DSH allocations, we read this term to indicate the limited purpose for
which Congress elected to make Federal DSH funds available for
responsibilities that it may have deemed to be State responsibilities.
Since physician services are generally not considered hospital services
and the costs of physician services are generally recognized as
separate costs in the Medicare hospital cost reporting process, we do
not believe that Congress intended to generally include these costs in
the hospital-specific DSH limit calculation. To the extent that there
are States that have consistent practices of including physician
services as an integral part of hospital services for coverage and
payment purposes, and does not provide for separate payment (either
directly or through an add-on methodology), we would agree that this
practice would be applicable in calculating the hospital-specific DSH
limit.
Comment: One commenter noted that even Medicare recognizes
physician services as hospital services.
Response: This is not correct. Physician services are not generally
recognized as hospital service costs in the Medicare hospital cost
reporting process. Most physician service costs are identified as
professional costs and are removed from inpatient and outpatient
hospital costs as part of the hospital cost allocation step-down
process. To the extent that there may be some limited exceptions when a
physician performs hospital service functions, these exceptions would
also be recognized in calculating the hospital-specific DSH limit.
Comment: Numerous commenters stated that exclusion of physician
costs from the hospital-specific DSH limit calculation appears to be
announcing a new standard/policy, one that is a substantive change in
longstanding DSH policy, that is not currently embodied in law,
regulation or guidance and that is likely to produce substantial
confusion. The commenters stated that this is the first time CMS has
suggested that a hospital's legitimate physician costs may never be
included in the DSH limit and that this represents a policy reversal by
the agency.
Response: This regulation reflects the statutory requirements and
existing law and policy. The statute provides for consideration only of
the costs of hospital services and the treatment of physician service
costs under this rule is consistent with that requirement, with the
definition of hospital services generally used by CMS and by States in
other contexts. The statute called for reporting and auditing of
specific payments and the existing Congressional limitations associated
with those payments. In an effort to provide States with uniform
instructions, CMS provided detailed identification of the data elements
necessary to comply with Congressional instruction on such auditing and
reporting.
Comment: A few commenters stated it is inappropriate to address the
treatment of physician services in the preamble to this regulation, in
light of pending disputes. The commenters asserted that it is improper
for the agency to change course unilaterally via one sentence in a
preamble, and should not receive deference in any judicial appeals.
Response: This regulation reflects but does not modify existing law
regarding the treatment of physician services in the calculation of the
hospital-specific limit. CMS has had a consistent position on this
issue, and the Departmental Appeals Board issued a decision on May 18,
2007 in one of the pending disputes cited by commenters, in which the
Board upheld a disallowance on this basis. Moreover, even if this were
regarded as a new or changed policy, the rulemaking process that has
been undertaken is an appropriate method for its promulgation.
The issue is rooted in the language of the statute, which at
Section 1923(g)(1) refers only to hospital services, and does not
include physician services furnished in a hospital. Physician services
are not generally regarded as part of hospital services, but are
generally regarded as separate professional services. This treatment of
physician services has been consistently applied since before the 1993
enactment of the hospital-specific DSH limit.
The data elements identified in the proposed regulation were
necessary to ensure compliance with the direction of the statute and
those elements represent longstanding CMS policy.
Comment: One commenter stated that their State's Medicaid
outpatient payments to hospitals are ``bundled,'' in that the payment
includes both a hospital and physician component. Medicaid MCO
outpatient payments are similar. Hospitals are unable to separate out
the physician-related component of outpatient rates. In order to
appropriately match costs to payments for the DSH limit calculations,
the commenter believes it is appropriate to include Medicaid outpatient
costs related to hospital-based physicians in its DSH limit
calculations.
Response: To the extent that a State consistently includes
physician services as an integral part of outpatient hospital services
and does not make a separate payment for physician services either
directly or as an add-on to the hospital rate, we would agree that the
State can use the same methodology for calculating the hospital-
specific limit. We do not believe this is a customary practice.
With respect to MCO payments, payments by the State to the MCO are
not relevant for purposes of the hospital-specific limit. The relevant
data elements are hospital costs and revenues associated with inpatient
and outpatient services provided to Medicaid MCO enrollees and payments
received by the hospital from the MCO for those services. To the extent
that the MCO payment combines payment for inpatient and outpatient
hospital services with payment for other services, the hospital may
need to allocate the revenues based on the ratio of charges for
hospital services to total charges, or another reasonable allocation
method.
Comment: Many commenters noted that the proposed rule does not
prohibit the inclusion of physician costs in the case of salaried
physicians employed by the hospital delivering services. If the
physician costs are excluded in these circumstances, any hospital that
directly employs physicians would be directly impacted by this rule.
Response: This rule does not establish any new principles for the
treatment of physician service costs, but requires consistent use of
existing hospital accounting principles applicable under Federally
supported programs. As noted above, States and hospitals should use a
consistent definition of hospital services. Under Medicare, it is not
by itself relevant that a hospital pays the salary of a physician;
physician services are generally not considered hospital service costs
and are recognized as professional fees in the Medicare
[[Page 77926]]
hospital cost reporting process. Specifically, the physician service
costs are identified as professional costs and are removed from
inpatient and outpatient hospital costs as part of the hospital cost
allocation step-down process.
In sum, physician costs that are billed as physician professional
services and reimbursed as such are not included as hospital services
in calculating the hospital-specific DSH limit.
Comment: Several commenters asked about the treatment of physician
clinics and other clinic services. They indicated that physician
clinics, in both hospital and office settings, focus on primary care to
the underserved and function at a financial loss due to inadequate
medical reimbursement rates. The commenters recommended that the costs
of such clinics be included as hospital services under the hospital-
specific DSH limit when services are furnished to Medicaid eligible and
uninsured patients.
Response: As indicated above, hospitals and States should use a
consistent treatment of physician and other provider-based clinics. All
costs that are associated with services that are defined and reimbursed
under the approved Medicaid State plan as inpatient hospital services
and outpatient hospital services to Medicaid eligible individuals and
to individuals with no source of third party coverage for such services
may be included in calculating the hospital-specific DSH limit.
Comment: Numerous commenters stated that hospitals, especially
critical access hospitals, incur costs to secure the services of
physicians to serve the indigent patients, and these costs (fees,
contractual agreements or salary costs) should be allowed in the
establishment of hospital-specific DSH limits. The commenters indicated
that this may be the only way to assure availability of physicians to
serve uninsured individuals. They argued that physician costs should
not be treated any differently than other costs used to treat the
uninsured, particularly when they are incurred to meet EMTALA
obligations. They urged that CMS consider expanding the definition of
DSH-limit services to include all costs that a hospital incurs
providing services to uninsured patients. Otherwise, the purposes of
the DSH statute, to assist safety net hospitals and other hospitals to
meet their costs of serving the uninsured, would be thwarted.
Response: Section 1923(g)(1)(A) of the Act does not authorize
inclusion in the hospital-specific DSH limit of any costs associated
with treating Medicaid-eligible and uninsured patients, but
specifically authorizes inclusion only of costs of furnishing
``hospital services.'' We understand that there may be a variety of
other costs involved in treating uninsured patients, but other costs
were not included by Congress. As indicated above, hospitals and States
should use a consistent treatment of physician and other provider-based
clinics. All costs that are associated with services that are defined
and reimbursed under the approved Medicaid State plan as inpatient
hospital services and outpatient hospital services to Medicaid eligible
individuals and to individuals with no source of third party coverage
for such services may be included in calculating the hospital-specific
DSH limit.
Comment: One commenter noted that the proposed regulation does not
address how physician costs should be treated for DSH purposes for
public teaching hospitals that have elected to receive cost-based
reimbursement for their physicians as provided for at Sec. 415.160.
Response: Regardless of the reimbursement methodology (cost
reimbursement or prospective payment system), uncompensated care costs
that may be included in calculating the hospital-specific DSH limit
include only the unreimbursed costs of providing inpatient and
outpatient hospital services to Medicaid eligible individuals and the
unreimbursed costs of providing inpatient and outpatient hospital
services to individuals with no source of third party reimbursement.
Therefore, all costs defined and reimbursed under the approved Medicaid
State plan as inpatient hospital services and outpatient hospital
services to Medicaid eligible individuals and to individuals with no
source of third party coverage for such services that remain
uncompensated reimbursement are eligible under the hospital DSH limit.
Comment: Numerous commenters said that hospitals contract with
doctors to perform administrative services such as a Medical Director.
This is a direct payment from the hospital to the doctor for ``Part A''
services and not direct patient care. This portion of physician
services should be included.
Response: Because this rule is not devoted to the treatment of
physician services as hospital services, we are not going to address
every potential arrangement in this rule. As discussed above, physician
services are generally not regarded as part of hospital services, but
are generally regarded as separate professional services. This
treatment of physician services has been consistently applied since
before the 1993 enactment of the hospital-specific DSH limit. There are
some exceptions to this general principle, and this rule does not
change either the general principle or the exceptions. States and
hospitals should use a consistent definition of hospital services.
We note that, under Medicare, it is not by itself relevant that a
hospital pays the salary of a physician; physician services are
generally not considered hospital service costs and are recognized as
professional fees in the Medicare hospital cost reporting process.
There may be exceptions when a physician is not performing direct
patient care and is instead performing general hospital administration
functions. When the physician service costs are identified as
professional costs, however, they are removed from inpatient and
outpatient hospital costs as part of the hospital cost allocation step-
down process.
13. Revenues Defined
Comment: One commenter was concerned that a State could lose FFP on
its DSH payments to a hospital based on MCO payments that the State
does not control. The commenter posed the hypothetical of an MCO, at
its sole discretion, being a generous payer to a hospital, and
potentially placing the State in jeopardy of losing FFP on DSH
payments. The commenter indicated that this did not seem fair when the
State does not control the MCO payment. The commenter urged that
Medicaid MCO services should be excluded from the uncompensated care
costs limit test.
Response: In every State, significant segments of the Medicaid
population are served through MCOs. Notwithstanding that delivery
system, the costs of serving that population and the revenues received
for doing so remain Medicaid costs and revenues to the hospital. Under
the statutory hospital-specific DSH limit, it is necessary to calculate
the costs of furnishing services to the Medicaid population, including
those served by MCOs, and offset those costs with payments received by
the hospital for those services. Payments received by the MCO are a
necessary part of that statutory calculation. To the extent that
hospitals earn profits on Medicaid MCO business, this profit must be
offset against other uncompensated costs in the same manner that any
Medicaid FFS profits must be offset against other uncompensated costs.
Overall, the calculation results in the net uncompensated care in
serving the Medicaid and uninsured populations. Disregarding Medicaid
MCO revenues
[[Page 77927]]
from the hospital-specific DSH limit overstates a hospital's
uncompensated care in serving those populations.
Comment: Numerous commenters did not question the general purpose
of this requirement, but questioned whether it was fair to limit DSH
payments when the Medicaid shortfall is less than projected because of
hospital cost controls. These commenters cited the situation in which
basic Medicaid payments determined on a prospective basis and
individual hospitals are able to control costs sufficiently to earn a
profit on their Medicaid business. They argued that requiring that
profit to be offset against uncompensated care costs would mean that a
hospital that undertakes aggressive cost containment in the end would
receive less in total Medicaid revenues than another hospital that
forgoes cost containment (and therefore realizes no profit on its basic
Medicaid payments) but incurs the same level of unreimbursed uninsured
costs. The commenters urge CMS to modify its proposed regulations to
provide that for purposes of applying the individual hospital DSH
limit, a hospital's costs of serving Medicaid patients will be deemed
to be no less than the base payment made to that hospital under a
prospective payment system.
Response: Current Federal law expressly demands the offset of all
payments under Title XIX other than DSH payments when determining a
hospital-specific DSH cost limit. Section 1923(g) states that a DSH
payment is inconsistent with the statute, ``if the payment adjustment
exceeds the costs incurred during the year of furnishing hospital
services (as determined by the Secretary and net of payments under this
title, other than under this Section, and by uninsured patients) by the
hospital to individuals who either are eligible for medical assistance
under the Medicaid State plan or have no health insurance (or other
source of third party coverage) for services provided during the
year.'' Calculating certain Medicaid costs based on prospective
payments received by a hospital does not accurately identify cost and
could effectively overstate the hospital-specific DSH limit.
Comment: One commenter questioned whether it is the expectation
that hospitals that receive DSH funds that are subsequently passed on
to other entities show the gross DSH payment as revenue and the payment
to the external entity as an expense.
Response: Payments to hospitals for which Federal matching is
claimed are made for specified purposes; either to pay for covered
services furnished by the hospital or to account for the costs of
serving a disproportionate share of low income patients. To the extent
that a hospital is required to pass a Medicaid payment on to another
entity, that payment is no longer within those statutory purposes and
would be unallowable. In other words, hospitals must retain 100 percent
of the total computable DSH payments claimed by States. Any redirection
of Medicaid payments (including DSH payments) is inconsistent with the
Medicaid statute governing expenditures. For purposes of the hospital-
specific limit, DSH payments are not recognized as revenues (because
the limit applies to DSH payments, they are not part of the calculation
themselves). Finally, non-Federal share obligations to which a hospital
is obligated must be transferred prior to receipt of the DSH payment
(or any other Medicaid payment) and cannot be included as a cost
(expense) eligible under the hospital-specific DSH limit.
Comment: One commenter questioned whether indigent care revenue, as
defined, will also include any revenue received by the individual
hospital associated with liens (or other such remedies) placed upon an
uninsured individual's property or assets? The commenter asked if such
revenues (collection from liens and other remedies) would reduce the
claimed uncompensated care costs for uninsured individuals during the
period in which the revenue is realized (funds received)?
Response: The statutory authority under MMA instructed States to
report and audit specific payments and specific costs. In order to
accommodate the precise instruction from Congress, States must perform
audits associated with defined periods of time and must identify the
actual costs incurred and the actual payments received during that
defined time period.
CMS received many comments regarding the treatment of revenues
received by hospitals by or on behalf of individuals with no source of
third party coverage. The comments indicated that often these ``self-
pay'' revenues received in a given year could in fact be related to a
prior period. Similarly, CMS received comments regarding the treatment
of liens and collections which may occur after an audit is complete but
relate to a prior period. Under either circumstance, the hospital would
necessarily have received and booked the revenues in a subsequent
period. Due to the inability to control these revenue streams and to
foster administrative ease, audits should take into account these self-
pay revenues (including liens and collections) during the year in which
they are received, irrespective of whether such revenues are applicable
to a prior period. In other words, the revenue adjustment would be
measured during the audit of the Medicaid State plan rate year in which
the revenues were received.
14. Timing
Comment: One commenter was concerned that the State is required to
indicate the total annual DSH payments made in the audited SFY when DSH
payments may be made by the State at a minimum of up to one year after
the SFY being reported. The commenter indicated that obtaining the
audited SFY DSH payments by the end of the following SFY is not
possible for the State.
Response: The statutory authority instructed States to report and
audit specific payments and specific costs. Consistent with that
provision, States must perform audits associated with defined periods
of time and must identify the actual costs incurred and payments
received during that defined time period. In order for the audits to
properly measure these elements and in consideration of the many
comments related to retroactivity and timing issues associated with
gathering the data necessary to identify the costs and revenues, CMS
has made several revisions to the final rule including identifying
that: (i) The Medicaid State plan rate year 2005 is the first time
period subject to the audit; and, (ii) the deadline on reporting the
audit findings has been extended to at least three full years after the
close of the Medicaid State plan rate year subject to audit. Therefore,
hospitals would have received all Medicaid and DSH payments associated
with that Medicaid State plan rate year.
This three year period accommodates the one-year concern expressed
in many comments regarding claims lags and is consistent with the
varying cost report period and adjustments. It should be noted that, to
the extent that a State makes a retroactive adjustment to non-DSH
payments after the completion of the audit for that particular Medicaid
State plan rate year, the hospital would necessarily have received and
booked the revenues in a subsequent Medicaid State plan rate year.
Under these circumstances, the revenue adjustment would be measured
during the audit of the Medicaid State plan rate year in which the
revenues were received.
Comment: Several commenters indicated the establishment of a State
fiscal year reporting timeline may prove problematic because some
States currently include in their annual DSH
[[Page 77928]]
data collections information from two or more State fiscal years, and
then distribute DSH on a Federal fiscal year basis. State fiscal year
reporting for DSH may also be inconsistent with a DSH methodology that
involves selection of a base year and trending forward.
Response: The auditing and reporting requirements enacted under the
MMA supersede prior DSH reporting requirements enacted under the
Balanced Budget Act of 1997. This regulation does not require States to
implement retrospective DSH methodologies or otherwise change basic
approach to DSH payment used by the States. Nor would it require delay
in making DSH payments consistent with the authority of the approved
Medicaid State plan. CMS recognizes that States may need to estimate
uncompensated care to determine DSH payments in an upcoming Medicaid
State plan rate year. The regulation is intended to ensure that those
estimates are based on the most current final data. Moreover, the
regulation will ensure that CMS has the data necessary to determine
whether the ultimate DSH payment was consistent with all statutory
requirements. Because FFP is only available for proper DSH payments,
some States may determine that a retrospective reconciliation is
desirable. The transition period in the regulation ensures that States
are not adversely impacted retrospectively by the availability of new
data resulting from the statutory reporting and auditing requirements.
Comment: One commenter noted that the State reconciles outpatient
hospital payments to 72% of cost and the reconciliations may take
several years to finalize. How should those reconciliation payments/
recoveries be reported?
Response: In consideration of the many comments related to
retroactive adjustments and timing issues associated with gathering the
data necessary to identify the costs and revenues, CMS has revised the
final rule, in part, to identify that the deadline on reporting the
audit findings has been extended to at least three full years after the
close of the Medicaid State plan rate year subject to audit. By that
time, hospitals would have received all Medicaid and DSH payments
associated with that Medicaid State plan rate year. This three year
period accommodates the one-year concern expressed in many comments
regarding claims lags and is consistent with the varying hospital cost
report periods and adjustments.
It should be noted that, to the extent that a State makes a
retroactive adjustment to non-DSH payments, and that adjustment occurs
after the completion of the audit for that particular Medicaid State
plan rate year, the hospital would necessarily have received and booked
the revenues in a subsequent Medicaid State plan rate year. Under these
circumstances, the revenue adjustment would be measured during the
audit of the Medicaid State plan rate year in which the revenues were
received.
Comment: A few commenters indicated that several reporting
requirements under the proposed rule will be of little use without the
methodology to show how the reported data yielded DSH payments. The
commenters suggested States could highlight the items requested in
Sec. Sec. 447.299(c)(6) through (c)(16) whenever they appear on the
pages or worksheets. Putting the requested data in the context of a
calculation should help CMS more quickly determine the appropriateness
of payment adjustments, as required in the MMA, while simplifying the
reporting requirements for the States.
Response: As we gain more experience, we intend to refine and
improve the reporting forms. In this rule, we have focused on defining
the minimum data elements that are required for analysis of DSH
payments. We currently believe that these data elements will provide
sufficient information to do so, when considered along with the
approved Medicaid State plan and independent certified audits.
Comment: One commenter noted that the proposed rule requires that a
State report the payment elements that can be used to determine each
hospital's DSH limit payment. In order to avoid undue delays in
disbursing needed DSH funds on a timely basis, the commenter suggests
it should be acceptable for a State to identify the Medicaid payment
amounts based on data collected for a recent prior period, with
appropriate adjustments for expected changes between the data
collection period and the DSH reporting period. The commenter also
asked for clarification as to whether States will need to estimate DSH
payments and then do a settlement, or whether DSH payments will need to
be retrospective.
Response: This regulation is not intended to require States to
implement retrospective DSH methodologies nor delay the making of DSH
payments consistent with the authority of the approved Medicaid State
plan. CMS recognizes that States must estimate uncompensated care to
determine DSH payments in an upcoming year. The regulation will ensure,
however that those estimates are based on the most current final data.
Moreover, the regulation will ensure that CMS has data necessary to
determine whether the ultimate DSH payment was consistent with all
statutory requirements. Because FFP is only available for proper DSH
payments, some States may determine that a retrospective reconciliation
is desirable. The transition period in the regulation ensures that
States are not adversely impacted retrospectively by the availability
of new data resulting from the statutory reporting and auditing
requirements.
Comment: A few commenters said some of these data elements are not
available within the specified timeframes. They indicated that, while
Medicaid related data is readily available directly to the State, data
regarding Medicare payments and discharges and non-Medicaid/non-
Medicare data are not readily available to the State in efficient
formats and timeframes required by the proposed rule. Moreover, they
said that the lag in hospital cost reporting provides States with a
very small, possibly unmanageable, window of time to complete and
submit the newly required independent certified audit.
Response: Under Section 1923(j) of the Act, States must perform
audits associated with defined periods of time. In consideration of the
many comments related to timing issues associated with gathering the
data necessary to identify the costs and revenues, CMS has revised the
final rule to include the following changes, which we believe will
afford ample time to obtain final data and analyze that data.
In order to provide for some uniformity in the application of the
report and audit requirements among the States, we have identified
Medicaid State plan rate year 2005 as the first time period subject to
the audit. This revision recognizes that fiscal periods used by
hospitals, States and the Federal Government may vary. The Medicaid
State plan rate year is a time period defined and used by each State to
make DSH payments under the approved Medicaid State plan, and should be
the base period for analysis and audit of DSH payments. The statute
refers to the reporting and audit requirements applying to ``fiscal
year 2004 and thereafter'', but we are specifying Medicaid State plan
rate year 2005 because, in some States Medicaid State plan rate year
2004 may have begun prior to the beginning of Federal fiscal year 2004.
In recognition of potential delays in obtaining needed information,
we have extended the period for ongoing report and audit submission
until the end of
[[Page 77929]]
the Federal fiscal year that is at least three years after the close of
the Medicaid State plan rate year. We believe that hospitals would have
received most Medicaid, DSH payments, and other payments associated
with that Medicaid State plan rate year. This three year period
accommodates the concern expressed in many comments regarding claims
lags and is consistent with the varying hospital cost report periods
and adjustments. And we have provided an additional extension of the
time period for the reports and audits for Medicaid State plan rate
year 2005 and 2006 which may be concurrently completed by September 30,
2009.
It should be noted that, to the extent that a State makes a
retroactive adjustment to the non-DSH payments after the completion of
the audit for that particular Medicaid State plan rate year, the
hospital would necessarily have received and booked the revenues in a
subsequent Medicaid State plan rate year. Under these circumstances,
the revenue adjustment would be measured during the audit of the
Medicaid State plan rate year in which the revenues were received.
Comment: A few commenters would like clarification as to whether
the independent auditor can base certification on the fact that
Medicaid losses alone justify the DSH payment, thereby allowing the
auditor to ignore uninsured uncompensated care costs in the
certification. The commenters recommend for clarity sake that the
proposed rule be amended to include a provision granting States the
option to not report uninsured costs for some or all hospitals where
Medicaid losses justify the DSH payment made.
Response: Most States do not make DSH payments based solely on
Medicaid uncompensated care costs. But, as discussed previously, if a
State does so, then the State may report only the Medicaid portion of
uncompensated care for each hospital, if it obtains from the hospital a
certification that the hospital also incurred uncompensated care for
individuals who have no health insurance or other third party coverage.
When we review certified audit reports submitted by States, we will
consider whether more flexibility would be warranted, and we may
address the issue in future reporting instructions.
15. Institutions for Mental Disease
Comment: One commenter noted that the proposed rule, under
Verification 3, does not reference Sec. 441.40, which provides a
definition of an Institution for Mental Disease (IMD). This is
problematic since the Social Security Act clearly establishes that IMDs
are entitled to participate in Medicaid DSH programs.
Response: We agree with the suggestion that the reporting
requirement should include identification of whether the DSH facility
is an IMD; we have revised the regulation and reporting form to do so.
An additional limit applies to the percentage of the total Federally
determined DSH allotment for each State that can be used for payments
to IMDs that otherwise qualify for DSH payments under the Medicaid
State plan. Identification of whether a DSH facility is an IMD will
assist CMS in assessing the appropriateness of the DSH payment.
The IMD limit does not supersede the hospital-specific limit that
is the primary focus of the reporting and auditing requirements under
this regulation. For purposes of the hospital-specific limit, reporting
must take into consideration the Medicaid coverage limitations under
Section 1905(a) of the Act, which excludes coverage for patients in an
IMD who are under age 65, except for coverage of inpatient psychiatric
hospital services for individuals under age 21. For Medicaid-eligible
individuals under age 21, or over age 65, uncompensated care costs
those eligible individuals would be reported as uncompensated costs for
the Medicaid population. For the costs of services provided to those
patients between the ages of 22 and 64 who are otherwise eligible for
Medicaid, the treatment for the hospital-specific limit may vary based
on State practices. Many States remove these individuals from
eligibility rolls for administrative convenience (and must reinstate
them if they are discharged from the IMD); if so, the costs should be
reported as uncompensated care for the uninsured. States that do not
remove the individuals from the Medicaid eligibility rolls should
report the costs as uncompensated care for the Medicaid population. DSH
payments made to IMDs are subject to the same audit and report
requirements as all other DSH hospitals to which the State has made
payments.
16. Ownership and Type of Hospital
Comment: A few commenters noted that reporting on the type of
hospital, type of ownership and the classification of operator is not
required under Section 1001 of the MMA. They questioned why CMS
proposes such information to be necessary to comply with the reporting
requirements included as uncompensated care.
Response: We agree. The regulation and reporting form have been
modified to remove the requirement to report the ownership status of a
hospital and type of hospital.
C. Auditing
1. General
Comment: Many commenters questioned the ability of the States to
actually collect this information and have an independent audit
completed within one year after the end of SFY 2005. One commenter said
that demanding 2005 cost report data for SFY 2005 also means that most,
if not all, of the cost report data forwarded to CMS will be as
submitted by the hospitals because the States will not be able to
review and audit the cost reports before the reporting deadline.
Response: The information required under the audit is readily
available to hospitals and the State based on existing financial and
cost reporting tools. As discussed above, we have revised the timing
requirements to extend the length of time to submit required reports
and audits to permit submission as late as the last day of the Federal
fiscal year ending 3 years after the end of the Medicaid State plan
rate year, with a special timing provision for the audits for 2005 and
2006, which will be due by December 31, 2009. We believe this
accommodates most of these concerns. We also note that we expect that
reports and audits will be based on the best available information. If
audited Medicare cost reports are not available, the DSH report and
audit may need to be based on Medicare cost reports as filed.
Comment: One commenter noted that most of the reporting
requirements will require the hospital to report information directly
to the State, and requested explanation of the State's due-diligence
responsibility for confirmation/assurance of the completeness and
accuracy of the data provided by the hospital?
Response: We expect that States will obtain needed information from
the hospital's Medicare 2552-96 cost report, audited hospital financial
statements, and other hospital accounting records, in combination with
information provided by the States' Medicaid Management Information
Systems.
Because these source documents are prepared for other purposes, no
single document will contain the precise information needed for DSH
reporting and auditing purposes. States will need to work with
hospitals to develop a methodology that can be applied to these records
to properly calculate uncompensated care costs incurred in furnishing
hospital services for
[[Page 77930]]
individuals without health insurance or other third party coverage.
This methodology will need to exclude costs from the calculation costs
for services furnished to individuals with third party coverage,
prisoners, duplicate accounts, individuals included in calculating the
Medicaid shortfall, charges associated with elective procedures, and
any professional charges. The methodology must operate in such a way as
to provide the State's independent auditor confidence that the data is
an accurate representation of the hospital's eligible uncompensated
care charge and revenue data.
Comment: A few commenters questioned access to hospital records and
other jurisdictional issues. Such access would need to be discussed,
decided and clarified for the States. State auditors may not have
jurisdiction to audit private hospitals.
Response: States already have authority to obtain the primary data
sources needed to complete the DSH audit and the accompanying report.
Information can be obtained from existing cost reports and financial
information. These documents would include the Medicare 2552-96 cost
report, audited hospital financial statements, and hospital accounting
records. States and auditors also have access to information from the
States' Medicaid Management Information Systems. We expect that States
and auditors will need to work with hospitals to develop a methodology
that can be applied to these records to properly calculate
uncompensated care costs incurred in furnishing hospital services for
individuals without health insurance or other third party coverage.
Comment: A few commenters noted that although hospitals submit the
newly required S-10 Worksheet (S-10) for their Medicare cost reports,
the information required by that Worksheet does not directly parallel
the data required in the new reporting requirements. In addition,
although both seek determinations of hospitals' total uncompensated
care costs, they apply different methodologies for calculating such
costs. Thus, DSH recipients will be confronted with making one set of
calculations for their annual reports and another for their State's
annual DSH report. If States perform calculations with the requested
data to determine DSH payments, why not discard (c)(6) through (c)(16),
and instead request a copy of DSH payment calculations for all
hospitals in a particular fiscal year? Each hospital's payment
calculation could appear on separate pages or worksheets.
Response: Worksheet S-10 is not part of the Medicare 2552-96 step-
down process used to allocate inpatient and outpatient hospital costs.
The cost allocation process utilized in the 2552-96 cost report is
considered a key component of determining Medicaid and uninsured
hospital costs for purposes of calculating the hospital-specific DSH
limit. The Medicare 2552-96 cost report, in conjunction with hospital
financial information, including hospital accounting records and
Medicaid Management Information Systems data, may be used to determine
uncompensated care costs for the calculation of the hospital-specific
DSH limits. We expect these calculations to rely primarily on existing
information, as outlined in the General DSH Audit and Reporting
Protocol that will be available on the CMS Web site. We recognize,
however, there may be situations in which the hospital may have to work
with the State to develop new data or methodologies to allocate or
adjust existing data.
Comment: A few commenters said that currently, there is no one
source of data to meet the increased reporting requirements. The
sources of data are from various data warehouses and under various
State and hospital management systems. The likelihood that data will
not be from consistent data sets is possible.
Response: We expect these calculations to rely primarily on
existing information, as outlined in the General DSH Audit and
Reporting Protocol available on the CMS Web site. We recognize,
however, there may be situations in which the hospital may have to work
with the State to develop new data or methodologies to allocate or
adjust existing data. And it may be necessary for auditors to develop
methods to test, verify the accuracy of, and reconcile data from
different sources. CMS has developed a General DSH Audit and Reporting
Protocol available on the CMS Web site that may assist States and
auditors to utilize information from each source identified above and
develop the methods under which costs and revenues will be determined.
Comment: One commenter noted that one State Medicaid agency
annually surveys all hospitals near the beginning of its fiscal year
and hospitals report their data for a twelve month period, but this
period does not match the State fiscal year. Further, the commenter
noted difficulties in analyzing the data because Federal DSH payments
are provided on a Federal fiscal year, and at changing match
percentages. Another commenter indicated that another State's DSH
payment program operates on a Federal fiscal year basis, which provides
consistency with Medicare hospital payment systems, the timing of
changes in their Federal financial participation rate and with the
timing of their DSH allotment. These commenters noted that the
requirement in the proposed regulation for States to report and audit
their DSH and enhanced payment programs on a State fiscal year basis
will cause significant administrative burden and will not accurately
reflect the basis upon which the State is making payments.
Response: We have modified the regulation to indicate the Medicaid
State plan rate year as the period subject to the annual audit. The
basis for this modification is recognition of varying fiscal periods
between hospitals and States. The Medicaid State plan rate year is the
period which each State has elected to use for purposes of DSH payments
and other payments made in reference to annual limits.
In instances where the hospital financial and cost reporting
periods differ from the Medicaid State plan rate year, States and
auditors may need to review multiple audited hospital financial reports
and cost reports to fully cover the Medicaid State plan rate year under
audit. At most, two financial and/or cost reports should provide the
appropriate data. The data may need to be allocated based on the months
covered by the financial or cost reporting period that are included in
the Medicaid State plan period under audit.
CMS has developed a General DSH Audit and Reporting Protocol which
will be available on the CMS Web site that may assist States in using
the information from each source identified above and developing the
methods under which costs and revenues will be determined.
Comment: Several commenters said this would be a reporting burden
on Critical Access Hospitals and will distract from needed resources to
provide services to the uninsured. One commenter noted that a reporting
burden exists because hospitals may not keep self-pay collection logs.
Response: The DSH audit will primarily rely on existing financial
and cost reporting tools currently used by all hospitals participating
in the Medicare program and therefore, should not generally divert
resources necessary to provide services to the uninsured. These
documents would include the Medicare 2552-96 cost report, audited
hospital financial information, and hospital accounting records in
combination with information provided by the States' Medicaid
Management Information
[[Page 77931]]
Systems and the approved Medicaid State plan governing the Medicaid and
DSH payments made during the audit period.
To the extent that hospitals do not separately identify
uncompensated care related to services provided to individuals with no
source of third party coverage from uncompensated care costs not
eligible under the hospital-specific DSH limits, hospitals will need to
modify their accounting systems to do so. Setting up an accounting
category to aggregate charges and revenues associated with uninsured
individuals receiving inpatient and/or outpatient services from a
hospital should be an accounting system adjustment not far removed from
the process of setting up an account for any other payer category.
For purposes of the initial audits, States and auditors may need to
develop methodologies to analyze current audited financial information
including hospital accounting records to properly segregate
uncompensated costs.
Comment: A few commenters stated the regulation should provide more
specificity about the level of precision expected in calculating the
total cost of care. They noted that, due to the timing lag for
reporting and auditing, some States use the hospital's latest available
Medicare cost report to calculate that hospital's overall cost-to-
charge ratio. In that instance, the commenters indicated that the State
converts the Medicaid and uninsured charges to cost using the
hospital's overall cost-to-charge ratio. The commenters also pointed
out that relatively few hospitals have a cost reporting period that is
the same as the State fiscal year and, therefore, there would be two
cost reporting periods during a State fiscal year. The commenters asked
if applying a hospital's latest available cost-to-charge ratio to that
hospital's Federal fiscal year Medicaid and uninsured charges be an
acceptable and reasonable method to calculate that total cost of care.
Response: We expect that State reports and audits will be based on
the best available information. If audited Medicare cost reports are
not available for each hospital, the DSH report and audit may need to
be based on Medicare cost reports as filed. We note that hospitals must
follow the cost reporting and apportionment process as prescribed by
the Medicare 2552-96 cost report process. To the extent that these cost
reports do not contain the precise information needed for the DSH
calculation (for example, by not distinguishing the categories of
uncompensated care costs that are needed), it may be necessary for
hospitals to modify their accounting techniques. In those
circumstances, for the initial audits, it will be necessary to review
other source materials such as audited hospital financial records and
other records, and to develop methodologies to determine the necessary
information from such records. We expect States, independent auditors
and hospitals to work cooperatively to develop such methodologies.
CMS has developed a General DSH Audit and Reporting Protocol which
will be available on the CMS Web site that should assist States and
auditors in utilizing information from each source identified above and
developing methods to determine uncompensated costs of furnishing
hospital services to the Medicaid and uninsured populations.
Comment: One commenter questioned how to identify, ``* * * costs
incurred for furnishing those services provided to individuals with no
source of third party coverage for the inpatient hospital and
outpatient hospital services they receive.''
Response: CMS has developed a General Audit and Reporting Protocol
to provide guidance to States, DSH hospitals and auditors in the
completion of the DSH audit. This Protocol includes general
instructions regarding the types of information to be provided by
hospitals to the State and its auditor as well as the calculations the
auditor will make based on the data provided. Specifically, the
protocol details the process of using the Medicare 2552-96 cost report,
hospital cost to charge ratios and hospital charges for inpatient and
outpatient hospital services for which the recipient had no source of
third party coverage. The protocol also details the process for
determining eligible Medicaid uncompensated care for the Medicaid State
plan rate year under audit. The protocol will be available on the CMS
Web site.
Comment: One commenter noted that identifying uninsured patients is
complicated by the restrictions on which uninsured patient accounts
qualify (for example, if one cannot claim accounts denied due to
medical necessity issues). This requires a painstaking and time-
intensive process of reviewing each account history to identify the
reason that an insurance company did not pay.
Response: To the extent that hospitals do not separately identify
uncompensated care related to services provided to individuals with no
source of third party coverage from uncompensated care costs not
eligible under the hospital-specific DSH limits, hospitals will need to
modify their accounting systems to do so. Setting up an accounting
category to aggregate charges and revenues associated with uninsured
individuals receiving inpatient and/or outpatient services from a
hospital should be an accounting system adjustment not far removed from
the process of setting up an account for any other payer category.
For purposes of the initial audits, States and auditors may need to
develop methodologies to analyze current audited financial information,
and hospital accounting records to properly segregate and identify DSH
eligible uncompensated care costs.
Comment: One commenter noted that a State's Department of Social
Services signed a Partnership Plan for the purpose of ``establishing a
stable funding mechanism for the State's Medicaid program that embodies
accountability while assuring the availability of financial resources
to provide needed health care to the program's beneficiaries.'' The
commenter noted that additional auditing and reporting requirements, as
addressed in the proposed regulation, seem to be unduly burdensome and
potentially costly to the State and the hospitals.
Response: Section 1923(j) of the Act contains audit and reporting
requirements applicable to all States that make DSH payments. As part
of this process, CMS must determine if all hospitals receiving DSH
payments under the Medicaid State plan actually qualify to receive such
payments and that actual DSH payments do not exceed the hospital-
specific DSH limit for the same period.
To the extent that a State makes DSH payments within a Section 1115
waiver demonstration and/or a Partnership Plan, the State is not
exempted from the rules surrounding DSH payments, particularly those at
1923(g) of the Act, and the audit and reporting requirements would
still apply to that State.
It should be noted that the Partnership Plan primarily addresses
funding of the Medicaid program, and is not relevant to the issue of
whether particular payments are authorized under the approved Medicaid
State plan and may be the basis for FFP under the Federal statute.
Funding issues are not the subject of this regulation.
Comment: A few commenters suggested the creation of a $500,000
threshold of DSH payments before an in-depth audit pursuant to 42 CFR
455, new Subpart C is triggered. Many small hospitals have historically
low DSH allotments, and the administrative costs
[[Page 77932]]
of the proposed DSH reporting and auditing requirements are
disproportionately onerous. If this exemption is not possible, the
commenters request that any State with a DSH allotment under $500,000
be allowed to use a hospital's independent auditor attestation to meet
the audit requirements for hospital data used in DSH calculations. A
few commenters suggested that CMS consider evaluating whether the cost
associated with detailed audits are justified and whether an audit that
reviews a sample of hospitals annually might be just as effective and
considerably less costly. One commenter recommended that the
requirement be to verify that the State's calculation formula provides
for inclusion of only uncompensated care costs of furnishing inpatient
and outpatient hospital services to Medicaid eligible individuals and
individuals with no source of third party coverage.
Response: There is no statutory authorization for an exception to
audit and reporting requirements with respect to hospitals that receive
low DSH payments. The audit and reporting requirements under Section
1923(j) of the Act apply to all States that make DSH payments, with
respect to each hospital receiving a DSH payment. The statute further
requires that CMS obtain information sufficient to verify that such
payments are appropriate.
Relying on a sample of cost reports and financial information will
not ensure that each DSH payment is appropriate and does not exceed the
hospital-specific DSH limit.
The data elements necessary for the State to complete the DSH audit
and report should, in part, be information the State already gathers to
administer the DSH program. The responsibility of the auditor is to
measure DSH payments received by a hospital in a particular year
against the eligible uncompensated care costs of that hospital in that
same year as determined using the data provided in the cost,
utilization and financial reporting documents described above.
Finally, auditing a State's overall DSH payment methodology will
not ensure that DSH payments to each hospital do not exceed the
statutorily required hospital-specific DSH limit.
Comment: Commenting State Medicaid offices stated that the Medicaid
program already represents a huge audit task for their offices, and
that adding the additional responsibility of auditing hospital data for
each hospital receiving a DSH payment would be an extremely large
amount of additional work that would be nearly impossible to fit within
required time frames. One commenter said that unless this requirement
can be met through the acceptance of evidentiary documentation from the
qualifying hospitals, further verification can only be made by the
auditors' actual observation of the hospitals' records. The commenter
complained that sending auditors to physically visit every qualifying
hospital is onerous and expensive and the commenter questioned whether
it is CMS' intent to require this extensive a drill-down.
Response: Section 1923(j) of the Act instructs States to audit and
report specific payments and specific costs. The responsibility of the
auditor is to measure DSH payments received by a hospital in a
particular year against the uncompensated care costs for the Medicaid
and uninsured populations incurred by that hospital in that same year.
The auditor must follow accepted audit standards and develop sufficient
confidence in the data to certify the results.
CMS has developed a General DSH Audit and Reporting Protocol to
provide guidance to States, DSH hospitals and auditors in the
completion of the DSH audit. This protocol provides general
instructions regarding the types of information to be provided to the
State and its auditor as well as the calculations the auditor will make
based on the data provided. The Protocol will be available on the CMS
Web site.
Comment: Several commenters noted that a reconciliation that must
be completed no later than one year after the completion of each
State's fiscal year will place a substantial burden on hospitals. They
asserted that this would mean that hospitals will have to provide the
State with uncompensated care data for FY 2005 before it is required
for the FY 2007 DSH computation. They further indicated that this is
not practical, because uninsured patients are difficult to identify
until all collection efforts with other payers have been pursued, which
can take several years.
Response: As discussed above, we have revised the timing
requirements to extend the length of time to submit required reports
and audits to permit submission as late as the last day of the Federal
fiscal year ending 3 years after the end of the Medicaid State plan
rate year, with a special timing provision for the audits for 2005 and
2006, which will be due by December 31, 2009. We believe this
accommodates most of these concerns. We also note that we expect that
reports and audits will be based on the best available information. If
audited Medicare cost reports are not available, the DSH report and
audit may need to be based on Medicare cost reports as filed.
Comment: A few commenters said that CMS should not impose
unnecessary administrative burdens that will raise costs for * * *
hospitals and States (that ultimately will be shared by the Federal
Government) that result neither in improved quality or access nor in
any measurable gain in accuracy or efficiency, particularly at this
time when Congress and the Administration are intently focused on
reining in Medicaid expenditures. They argued that diversion of scarce
hospital resources from other productive activities to achieve, at
best, only marginal gains in accuracy of the uncompensated care cost
calculation should be reconsidered. The increased costs outweighing the
benefit of the reconciliation mandate.
Response: Section 1923(g)(1)(A) of the Act specifies that DSH
payments cannot exceed a hospital-specific limit. Section 1923(j) of
the Act, as added by the MMA, instructed States to audit and report DSH
payments made by States and compare those payments to the uncompensated
care costs as set forth in that hospital-specific DSH limit. This
regulation implements those statutory audit and report requirements and
is not a discretionary agency action.
We expect that States and auditors will rely on existing financial
and cost reporting processes currently used by all hospitals
participating in the Medicare program and therefore should not create
an undue burden on states and hospitals in reporting compliance with
Federal Medicaid law.
CMS has developed a General Audit and Reporting Protocol to provide
guidance to States, DSH hospitals and auditors in the completion of the
DSH audit. This protocol provides general instructions regarding the
types of information to be provided to the State and its auditor as
well as the calculations the auditor will make based on the data
provided. The Protocol will be available on the CMS Web site.
Comment: One commenter noted that neither the MMA nor the proposed
rule clearly state if the independent auditor is providing an opinion
on whether the State's calculation formula includes ``Only
uncompensated care costs of furnishing inpatient and outpatient
hospital services to Medicaid eligible individuals and individuals with
no source of third party coverage * * *'', or whether the intent is for
the independent auditor to perform an indepth annual audit of the
hospitals records and cost reports in order to verify the hospital
reporting processes as well as audit the State's methodology.
[[Page 77933]]
One commenter questions whether the requirement is that each State hire
an auditor to look at each hospital's uninsured calculations.
Response: Section 1923(j) of the Act, as added by the MMA requires
States to audit and report on hospital-specific DSH payments and this
rule makes clear that this obligation includes specific cost data. The
responsibility of the auditor is to measure DSH payments received by a
hospital in a particular year against the eligible uncompensated care
costs of that hospital in that same year.
States and auditors will need to obtain data from hospitals and may
need to work with hospitals to develop new data or methodologies to
allocate or adjust existing data. And it may be necessary for auditors
to develop methods to test, verify the accuracy of, and reconcile data
from different sources. This audit function is not the same as the
function of the hospital's own auditors, however, and would not involve
a review of the hospital's financial controls and internal reporting
procedures. But the auditors must review the overall methodology for
accumulating data to ensure that the resulting data reflects the
required elements. In other words, the independent auditors must review
the methodology for arriving at hospital-specific data, and must have
confidence that the data accurately represents the hospital's eligible
uncompensated care costs consistent with the statutory criteria.
Comment: One commenter said that in their State hospital
representatives are required to sign a survey of data for DSH purposes,
in order to certify that the data is accurate and in accordance with
hospital records. There is a requirement that hospitals maintain the
supporting documentation for potential audits. The commenter asked if
this process was sufficient or whether all the supporting documentation
needed to be housed at the Medicaid agency.
Response: Section 1923(j) of the Act requires audit and report of
hospital-specific DSH payments and hospital-specific uncompensated care
costs. While survey data submitted by the hospital may be an important
source of information, the auditors may need to examine the methodology
followed to arrive at that survey data, and may need to develop methods
to test, verify the accuracy of, and reconcile data from different
sources. One ultimate responsibility of the auditor is to compare DSH
payments received by a hospital in a particular year with the actual
eligible uncompensated care costs incurred by the hospital in that same
year. Unreviewed survey data is not sufficient to satisfy the statutory
instruction of the MMA.
CMS has developed a General DSH Audit and Reporting Protocol to
provide guidance to States, DSH hospitals and auditors in the
completion of the DSH audit. This protocol provides general
instructions regarding the types of information to be provided to the
State and its auditor as well as the calculations the auditor will make
based on the data provided. The Protocol will be available on the CMS
Web site.
Comment: Many commenters stated that the auditing requirements are
costly and burdensome to both the hospitals and the State, creating
another source of disincentive to hospital participation. The
commenters request CMS be mindful of the additional financial costs
that hospitals would incur and compensate hospitals accordingly.
Response: CMS believes that audits will rely primarily on documents
already available to hospitals, and thus the audit data burden will
neither be significant nor costly. CMS also believes that it is
unlikely that a hospital will decline to receive Medicaid DSH payments
merely because they must provide information to the State to verify
that DSH payments do not exceed the hospital's DSH eligible
uncompensated care costs.
Comment: One commenter asked whether the ``independent audit'' is a
financial audit, or an audit of agreed-upon procedures. The commenter
indicated that, if it is an audit of agreed-upon procedures, it would
be helpful if audit program and procedures clarification were provided
by CMS.
Response: The purpose of the audit is to ensure that States make
DSH payments under their Medicaid program that are in compliance with
Section 1923 of the Act. The nature of the audit encompasses both
program and financial elements making it impossible to label as a
traditional financial or programmatic/governmental audit.
The audit review of the State's Medicaid program is limited to
ensuring that DSH payments are consistent with the approved Medicaid
State plan and Federal statutory limits. The DSH audit will rely in
part on financial, accounting and cost report data provided by
hospitals. This data should be subject to generally accepted accounting
principles, and auditors may need to verify the methodology used for
calculating such data. These financial elements will demonstrate that
Federal payments were claimed in compliance with Federal statutes.
Comment: One commenter's opinion about the most practical manner in
which the State could meet this regulation is to require hospitals to
expand their current financial audits to include the appropriate
hospital-related compliance issues and have their uncompensated care
data audited as part of their annual financial statement audit.
Auditors of the Medicaid program (as part of the State's Single Audit)
could then rely on these audited certifications and evaluate each
State's DSH payment calculations and other information being reported
by the State to the Secretary.
Response: The statute places audit and reporting requirements upon
States, and these regulations reflect those requirements. These
regulations do not impede States from developing procedures to meet
these requirements that place particular burdens on hospitals receiving
DSH payments. For example, States may establish procedures for
hospitals to provide detailed audited data that can be relied on by the
independent certified DSH auditors. We do not agree that these
procedures can completely substitute for an independent certified audit
obtained by the State itself. Nor do we agree that the State's single
audit can substitute for the DSH audit responsibility under Section
1923(j) of the Act. The purpose of the State's single audit is
different from the DSH audit responsibility, and we read the statute to
require a distinct, focused review of DSH payments.
Comment: Several commenters recommend that CMS accept the current
audit processes of their State. One commenter said that hospitals in
the State that are currently required to complete annual certified
independent audits of their uncompensated care data are only required
to perform audits using generally accepted accounting principles and
strongly recommended that the definition be changed so that audits may
be performed under those principles already in place for a hospital's
audited financial data. The hospitals of some States already
independently certify uncompensated care data submitted to the State
and submit these audited financial statements along with their annual
cost reports. The information in the cost reports comes from the
hospitals' accounting systems that have been independently audited.
Another commenter recommended that CMS exempt States with satisfactory
independent certification programs already in place from this
provision.
Response: The statute places audit and reporting requirements upon
States, and these regulations reflect those requirements. These
regulations do not
[[Page 77934]]
impede States from developing procedures to meet these requirements
that place particular burdens on hospitals receiving DSH payments. For
example, States may establish procedures for hospitals to provide
detailed audited data that can be relied on by the independent
certified DSH auditors. We do not agree that these procedures can
completely substitute for an independent certified audit obtained by
the State itself. Nor do we agree that the State's single audit can
substitute for the DSH audit responsibility under Section 1923(j) of
the Act. The purpose of the State's single audit is different from the
DSH audit responsibility, and we read the statute to require a
distinct, focused review of DSH payments.
Comment: Numerous commenters noted that the proposed requirement
that the audit must be conducted pursuant to the government auditing
standards is unduly burdensome. Most auditors in the private sector use
generally accepted accounting principles (``GAAP'') to audit hospitals'
financial data. Thus, the independent auditors involved in performing
hospital audits and who use the GAAP standards to do these audits may
not even be familiar with the generally accepted government auditing
standards. In any case, it is inefficient to require these auditors to
perform another audit of the same data using different auditing
standards. At a minimum, States or hospitals should be allowed to use
either the GAAP standards or the government auditing standards in
meeting the audit requirements.
Response: Generally Accepted Government Auditing Standards (GAGAS)
are the principles governing audits conducted of government
organizations, programs activities, functions or funds. In general,
government audits are either performance audits or financial audits. In
either type, the focus is on the government entity, its management of a
program and/or the financial management and reporting systems
associated with that program.
The fact that there are some differences between GAGAS and GAAP,
however, is a further reason why hospital audit efforts and the DSH
audit have separate focuses and require separate analyses.
The DSH audit and report is a statutorily required component in the
administration of the Medicaid program. The purpose of the audit is to
ensure that States make DSH payments under their Medicaid program that
are in compliance with Section 1923 of the Social Security Act. The
audit does not encompass the review of the State's Medicaid program, it
simply ensures that one portion of the program is conducted in line
with Federal statutory limits. In addition, the DSH audit will rely on
financial and cost report data provided by hospitals that are subject
to generally accepted accounting principles as part of their primary
reporting function.
Comment: One commenter said some auditors may find that base year
figures cannot be verified to the extent necessary to provide a valid
base because data or audit trails not previously necessary, are now
required.
Response: States and auditors will need to obtain data from
hospitals and may need to work with hospitals to develop new data or
methodologies to allocate or adjust existing data. And it may be
necessary for auditors to develop methods to test, verify the accuracy
of, and reconcile data from different sources.
Comment: One commenter noted that the proposed rule appears to have
greatly expanded the required scope (of Section 1923(j)(2)(E)) by
making the State responsible for retaining documentation of patient-
specific data. Assuming that CMS does not intend to place such a
reporting burden on the States, the commenter requested that CMS
clarify that the documentation requirement for hospital-reported data
is limited to collecting, documenting and retaining State data and does
not include documentation for data that a hospital might otherwise have
available.
Response: States and auditors will need to work with hospitals to
determine the extent to which original patient-specific source data is
required and needs to be retained by the State.
2. Timing of Payments Under Review
Comment: A few commenters questioned whether DSH payments made by a
State after SFY 2005 for dates of services prior to SFY 2005 are
subject to the new auditing and reporting requirements. They noted
that, currently, a few States make DSH payments after receipt of
settled cost report from the Medicare fiscal intermediary and applies
the DSH allotment based on dates of service. For example, one State
made its DSH payment in SFY 2003 for dates of service in 2000 (using
the 2000 Federal DSH allotment and settled Medicare cost reports).
Response: Unless otherwise specified in a State plan, the year in
which payment is contemplated and accrues (even when subject to
adjustment) is the DSH rate year to which it applies. Many States have
provisions that provide for DSH payments based on prior year data, but
that does not mean that those payments are prior year payments. (In the
cited example, if that was the case, then the effect of any change in
the DSH payment methodology would take three years to result in payment
changes.) Each State should be aware of the Medicaid State plan rate
year for which a DSH payment is made.
Comment: A few commenters said while Medicaid related data is
readily available directly to the State, data regarding Medicare
payments and discharges and non-Medicaid/non-Medicare data is not
readily available to the State in efficient formats and timeframes
required by the proposed rule.
Response: The commenter specifically questions the availability of
non-Medicaid hospital data necessary to complete the audit. The only
non-Medicaid related data relevant for the DSH audit would be the
inpatient and outpatient hospital charges to individuals with no source
of third party coverage. This information is available in hospital
accounting records. Since the deadline for reporting the audit findings
has been extended to at least three full years after the close of the
Medicaid State plan rate year subject to audit, hospitals would have
necessarily included this charge data in their as-filed Medicare cost
reports.
Comment: One commenter noted it would avoid misunderstanding if CMS
clarified whether the required data element refers to gross revenue
(full charges for services) or net revenue (expected collections after
revenue adjustments.)
Response: Uncompensated care costs under the hospital-specific DSH
limit are calculated by reducing costs incurred in furnishing hospital
services to the Medicaid and uninsured populations, reduced by revenues
received under Medicaid (not including DSH payments) and further
reduced by payments received from or on behalf of the uninsured
population (not including payments made by a State or local government
for services to indigent patients).
Comment: Many commenters recognized that the proposed regulations
are effective for SFY 2005 and stated it is inappropriate to require an
audit for SFY 2005, when the rule outlining the required data to be
audited had only been proposed two months after the close of SFY 2005
(August 26, 2005). The commenters urged a prospective application of
these requirements effective for the first State fiscal year that
begins after the date the
[[Page 77935]]
final rule is issued, to allow sufficient time for respondents to
identify data being required and processes to accumulate such data. A
few commenters said the proposed regulation is impossible for both
States and hospitals from an operational standpoint because this
methodology uses actual costs and payments, and because of the
deadlines for the audits and reports, neither Medicaid payments nor
audited cost information are available. Numerous commenters stated that
should CMS require an independent audit, it would be virtually
impossible for States to meet the one-year filing deadline.
Response: The statutory provision at Section 1923(j) of the Act
requires audits and reports for fiscal year 2004, but we are
implementing this provision prospectively with Medicaid State plan rate
year 2005, because that is the first Medicaid State plan rate year that
necessarily begins in or after Federal fiscal year 2004. With that
clarification, and because audits are prospective activities, we do not
believe this rule has any retroactive effect. Moreover, as discussed
above, CMS has modified the regulation to address the timing concerns
expressed by these commenters. The regulation has been modified to:
1. Identify the Medicaid State plan rate year 2005 as the first
time period subject to the audit requirement.
2. Extend the time period for submission of completed audit reports
to the last day of the Federal fiscal year (FFY) ending three years
from the Medicaid State plan rate year under audit. This means that the
2007 Medicaid State plan rate year must be audited by the last day of
FFY 2010.
3. Provide for a special transition time period for concurrent
completion of Medicaid State plan rate year 2005 and 2006 audits by
September 30, 2009.
4. Provide for submission of each audit report within 90 days of
the completion of the audit.
5. Provide for a transition period for reliance on audit findings,
so that audit findings will not be given weight until Medicaid State
plan rate year 2011 and thereafter in calculating uncompensated care
cost estimates and associated DSH payments.
Comment: Many commenters said that this requirement could not be
met if the regulations required a retrospective audit, because final
settlement of hospitals' cost reports is typically contingent upon
completion by a Medicare intermediary of audits that can take several
years. One commenter noted that the requirement that the certified
audit be completed one year after the close of the fiscal year is
unattainable because the majority of the data required can only be
derived from the Medicaid cost report, which is submitted no sooner
than five months after the end of the fiscal year. Given the detail
involved in the audit, the commenters indicated that there will not be
enough time to receive cost reports, review and settle the reports, and
provide data to the auditor, who would need to certify this tentatively
settled cost report data for each of the States' DSH providers. One
commenter stated that the regulation should be clarified to permit the
required report to be based on a hospital's as-filed cost report, and
time should be allowed for States to collect the additional data needed
to meet the reporting requirements. One commenter said the hospitals in
the State accumulate and report costs based on the hospital's fiscal
year utilizing the audited Medicare cost report (HCFA-2552-96) which is
generally not available before 21 months after the hospital's year end.
Moreover, the commenter indicated that such reports do not use the same
fiscal year as the SFY, and thus the cost information is not available
on a SFY basis. The commenters also indicated that timing issues are
also complicated by the fact that Medicaid claims may be submitted by
hospitals to the State up to one year after the date of service.
Response: We discussed above the revisions made to address comments
on timing issues and extend the time frames for reporting and auditing
requirements. We expect that reports and audits will be based on the
best available information. If audited Medicare cost reports are not
available, the DSH report and audit may need to be based on Medicare
cost reports as filed. We recognize that, in many instances, hospital
financial and cost report periods will differ from the Medicaid State
plan rate year. In these instances, States and auditors may need to use
multiple audited financial reports and hospital cost reports (CMS 2552-
96, finalized when available or as-filed) to fully document the
appropriateness of DSH payments for the Medicaid State plan rate year
under audit. The data would then be allocated based on the months
covered by the financial or cost reporting period that are within the
Medicaid State plan period under audit. For instance, if a Medicaid
State plan rate year runs from July 1, 2004 through June 30, 2005, but
a DSH hospital receiving payments under the Medicaid State plan
operates its financial and cost reporting based on a calendar year, the
State and auditors may need to use information from financial and cost
reports for calendar years 2004 and 2005. Costs and revenues of serving
the Medicaid and uninsured populations would be allocated from each
financial and cost reporting period, in this case half from each
report, to determine the data for Medicaid State plan rate year 2005.
Comment: One commenter said that due to delays in receiving settled
cost reports from Medicare Intermediaries, a State may distribute more
than one year of DSH payments to hospitals in a given State Fiscal
Year. The commenter asks for confirmation that the State should submit
a separate Annual DSH Report for each year of DSH payments, regardless
of the date of DSH payment.
Response: The DSH Audit must be performed and reported to CMS on an
annual basis, which should reflect the basis for all DSH payments made
for the Medicaid State plan rate year, even if the DSH payment for that
period is made in a subsequent year.
Comment: A few commenters questioned whether a detailed audit
manual should be prepared by CMS in order to assure compliance with the
rule when promulgated and to avoid disputes after payments have been
made.
Response: CMS has developed a General DSH Audit and Reporting
Protocol to provide guidance to States, DSH hospitals and auditors in
the completion of the DSH audit. This Protocol includes general
instructions regarding the types of information to be provided by
hospitals to the State and its auditor as well as the calculations the
auditor will make based on the data provided. The Protocol will be
available on the CMS Web site.
3. Audit Objective and Data Sources
Comment: Several commenters expressed their opposition to the audit
aspect of the proposed regulation. While recognizing the need for
audits, the commenters believe that the audits should fulfill only the
following three objectives: determine whether individual States are
following their own formulas for the calculation of DSH payments and
hospital-specific DSH payment limits; verify the accuracy of States'
calculations; and determine whether individual States are making good-
faith efforts to make those calculations in compliance with Federal
guidelines. The commenters believe the proposed regulation exceeds
these three objectives. The commenters hope that CMS will instruct
auditors that there are, in fact, various ways for States to make these
calculations while
[[Page 77936]]
remaining in compliance with Federal guidelines.
Response: Section 1923(j) of the Act requires that States audit
actual DSH payments made under the approved Medicaid State plan against
actual eligible uncompensated hospital costs in the same time period.
Hence, the audit requirement necessarily will measure whether DSH
payments made under the formulas in the approved Medicaid State plan
are within the hospital-specific DSH payment limits as calculated by
the State. The Medicaid State plan includes the reimbursement
methodologies States utilize to make Medicaid DSH payments. While
States typically include a provision within the Medicaid State plan
that such payments will not exceed each qualifying hospital's DSH
limit, such reimbursement methodologies do not identify cost components
that are necessary for calculation of the hospital-specific DSH limits.
Instead, States often for payment purposes rely on survey data reported
by DSH hospitals to calculate hospital-specific DSH limit, data which
is not typically audited by States to ensure compliance with the
statutory limits on DSH payments.
While CMS recognizes that States must use estimates to determine
DSH payments in a given Medicaid State plan rate year, Section 1923(j)
of the Act requires confirmation that such payments do not exceed the
cost limitations imposed by Congress under the Omnibus Budget
Reconciliation Act of 1993.
Comment: A few commenters suggested the regulation should clarify
the source for the information to be provided for the audit,
particularly as it pertains to the payments made for the services. The
commenters specifically asked whether the information should be on
discharges during a State fiscal year (Medicare pays based on
discharges), admissions during a State fiscal year (some States pay
based on admissions), or actual payments made during the State fiscal
year regardless of when the services were provided.
Response: Section 1923(j) of the Act requires states to report and
audit hospital-specific DSH payments and hospital-specific
uncompensated care costs. To meet this requirement, States must perform
audits associated with defined periods of time and must identify the
actual costs incurred and payments received during that defined time
period.
As noted previously, we expect that States and auditors will obtain
information whenever possible from existing sources. States and
auditors should use consistent practices in their reports and audits.
Because each State uses different hospital payment methodologies, there
is no national rule on whether, for example, admissions or discharges
should be used to measure whether services were furnished within a
Medicaid State plan rate year. The same methodology should be used to
measure uncompensated care costs as is used in determining payments
under the Medicaid State plan.
CMS has developed a General DSH Audit and Reporting Protocol will
be available on the CMS Web site to assist States and auditors in
developing methodologies to use existing sources of information to
determine uncompensated care costs in furnishing hospital services to
the Medicaid and uninsured populations.
Comment: A few commenters stated they currently have no way of
verifying payments to hospitals by Medicaid managed care organizations
for inpatient and outpatient hospital services furnished to Medicaid
eligible individuals because payments to hospitals are paid directly by
the managed care plans. The commenters indicated that States have no
first hand knowledge, and no claims documentation regarding these
payments. The commenters questioned whether CMS would accept the use of
self-reported hospital financial information that references these
payments in total for purposes of the Annual DSH Reports.
Response: There are three specific types of revenues that must be
included in the audit to which the State conducting the audit will not
have direct access. They are: (1) Medicaid and DSH payments received by
the hospital from a State other than the State in which the hospital is
located; (2) Medicaid MCO payments; and, (3) uninsured payments. The
State must rely on hospital audited financial statements and hospital
accounting records for this information. The State's Medicaid
Management Information System has the most central and current
information for in-State Medicaid fee-for-service inpatient and
outpatient hospital payments, Medicaid supplemental and enhanced
payments and DSH payments and will be the source of such payment.
In addition, hospital cost information is available only from a
reporting DSH hospital. The State and CMS must rely on hospital
Medicare 2552-96 cost reports to provide this information.
Comment: One commenter requested CMS clarify that it is acceptable
to report data for a recent prior period, with appropriate adjustments
for expected changes between the data collection period and the DSH
reporting period.
Response: We read the report and audit requirements to call for
actual data, rather than estimated data. To accommodate the delays in
obtaining data, we have extended the deadlines for submission of the
reports and audits. While CMS recognizes that States must use estimates
to determine initial DSH payments in a given Medicaid State plan rate
year, Section 1923(j) of the Act requires confirmation that such
payments do not exceed the cost limitations imposed by Congress under
the Omnibus Budget Reconciliation Act of 1993. We do not believe
estimates are sufficient to meet this requirement.
Comment: One commenter questioned the ramifications of reporting
costs and payments in out-of-State and border hospitals, and asked
whether the audit team would be responsible for DSH amounts for only
hospitals in the State or for all hospitals (in State and out of State)
that received Medicaid DSH dollars from that State. The commenter
suggested that, in order to avoid duplicate payments, CMS should
outline a methodology to be utilized when auditing hospitals that
receive DSH payments from more than one State.
Response: A State is required to audit DSH payments and eligible
uncompensated care costs for only those DSH hospitals that are located
within the State. This method will allow the auditor to recognize DSH
payments received by a hospital from other States in addition to the
DSH payments received by that hospital under the ``home-State's''
approved Medicaid State plan.
For States that make DSH payments to hospitals located in other
States, the State must include in the reporting requirements the DSH
payments made to hospitals located outside of the State, but would not
be required to audit those out-of-State DSH hospital's total DSH
payments/total eligible uncompensated care costs. This method will
ensure that no DSH hospital is audited more than one time per year for
purposes of the DSH auditing and reporting requirements under the MMA.
Comment: Many commenters noted that the DSH program has allowed
hospitals to extend access to healthcare for many poor and uninsured
individuals. They noted that the new requirements include significant
administrative expenses and responsibilities to both the States and
hospitals. Several State Medicaid Agencies were concerned that a likely
outcome will be that hospitals decline to participate in the DSH
program,
[[Page 77937]]
resulting in a decline in the delivery of healthcare services to the
uninsured citizens and the patients treated from some Indian
Reservations.
Response: CMS does not believe that the audit data burden will be
significant since the audit relies on documents already available to
hospitals. CMS also believes that it is unlikely a hospital will
decline to receive Medicaid DSH payments for uncompensated care simply
because the hospital must provide information to the State to assist in
the verification that DSH payments do not exceed the hospital's
eligible uncompensated care costs as required by Federal law.
The State is responsible for the administration of its Medicaid
program and the successful completion of the DSH audit as part of that
administration. Costs associated with the audit are eligible for
Federal administrative matching funds.
Comment: Many commenters stated it would be extremely labor
intensive and an excessive reporting burden for (DSH) hospitals to
match payments received from individuals to payments received for
individuals for which there was no third party coverage because it does
not currently do that automatically.
Response: To the extent that hospitals do not separately identify
uncompensated care related to services provided to individuals with no
source of third party coverage for the inpatient and outpatient
hospital services they receive from uncompensated care costs not
eligible under the hospital-specific DSH limits, hospitals will need to
modify their accounting systems prospectively to do so. Setting up an
accounting category to aggregate charges and revenues associated with
uninsured individuals receiving inpatient and/or outpatient services
from a hospital should be an accounting system adjustment not far
removed from the process of setting up an account for any other payer
category.
For purposes of the initial audits, States and auditors may need to
develop methodologies to analyze current audited hospital financial
statements and hospital accounting records to properly segregate
uncompensated costs.
Comment: Many commenters have stated that it is unclear who must
pay for the audit.
Response: The DSH audit and report is a necessary element in the
administration of the Medicaid program. The cost of the audit is the
responsibility of the State and can be matched by the Federal
Government as a Medicaid administrative cost of the State.
Comment: Several commenters noted the proposed requirement for the
independent certified audits is unduly burdensome. Several States have
had in place for a number of years a requirement that hospitals submit
certified public audit or certifications of hospitals' uncompensated
care data. This is followed by the single State audit of State's DSH
program which tests and verifies all of the elements that are currently
required by the DSH state plan and State law requirements. To impose an
additional layer of auditing at considerable expense to States is
unnecessary.
Response: Section 1923(j) of the Act requires States to audit
actual DSH payments made under the approved Medicaid State plan against
actual eligible uncompensated hospital costs in the same time period.
Hence, the audit requirement will necessarily measure whether payments
made under the formulas in the approved Medicaid State plan are within
the hospital-specific DSH payment limits as calculated by the State.
The certification required in the regulation is a certification of the
audit performed to determine compliance with the hospital-specific
limitations imposed by Section 1923 of the Act.
While the DSH audit will rely on existing financial and cost
reporting tools currently used by all hospitals participating in the
Medicare program including audited hospital financial statements,
hospital accounting records and the Medicare 2552-96 cost report, these
source documents simply provide data to the auditor. Certification of
these source documents is not sufficient to ensure that DSH payments do
not exceed the hospital-specific limits and would not allow CMS to
carry out the intent of the law which was to ensure that each DSH
hospital will not exceed its hospital-specific limit. The independent
certified audit will verify that the DSH payments authorized under the
approved Medicaid State plan are within the hospital-specific DSH
limits defined under Federal law.
Comment: Several commenters requested clarification regarding who
is responsible for obtaining the independent audit and ensuring the
requirements are met. For example, it could be presumed that these
audit requirements are the responsibility of the State's auditor, the
State Medicaid program's auditor, the Medicaid agency's staff or their
agent, or the hospital's auditor.
A few commenters said it is not clear what constitutes
``independent,'' and propose that CMS consider ``independent audit'' to
mean an audit independent of the hospital that does not require the
State to contract with a private-sector auditing firm to complete and
certify. One commenter questioned whether the terms in the rule stating
that the audit must be independent and certified presumes that a
certified public accountant or comparable professional must perform the
audit or is the State allowed to engage the services of a contractor
with different skill sets as long as the auditor is independent? One
commenter questioned whether ``independent audit'' means that a State
may employ its current outside auditors to conduct audit and reporting
requirements required by the proposed regulations, recognizing that
audit programs will be modified to meet the additional auditing and
reporting requirements demanded?
Response: The term ``independent'' means that the Single State
Audit Agency or any other CPA firm that operates independently from
either the Medicaid agency (or other agency making Medicaid payments)
or the subject hospital(s) may perform the DSH audit. States may not
rely on non-CPA firms, fiscal intermediaries, independent certification
programs currently in place to audit uncompensated care costs, nor
expand audits of hospital financial statements to obtain audit
certification of the hospital-specific DSH limits.
Section 1923(j) of the Act requires States to report and audit
specific payments and specific costs. The responsibility of the auditor
is to measure DSH payments received by a hospital in a particular year
against the eligible uncompensated care costs of that hospital in that
same year. Certification means that the independent auditor engaged by
the State reviews the criteria of the Federal audit regulation and
completes the verification, calculations and report under the
professional rules and generally accepted standards of audit practice.
This certification would include a review of the State's audit protocol
to ensure that the Federal regulation is satisfied, an opinion for each
verification detailed in the regulation, a determination of whether or
not the State made DSH payments that exceeded any hospital's specific
DSH limit in the Medicaid State plan rate year under audit. The
certification should also identify any data issues or other caveats
that the auditor identifies as impacting the results of the audit.
Comment: Several commenters believe the most practical manner in
which the State could meet this audit regulation is by requiring
hospitals to have their uncompensated care data
[[Page 77938]]
audited as part of their annual financial statement audit. Auditors of
the Medicaid program (as part of the State's Single Audit) could then
rely on these audited certifications and evaluate each State's DSH
payment calculations and other information being reported by the State
to the Secretary. Numerous commenters stated it would be more efficient
and less burdensome for the individual hospitals to make the required
verifications for their own financial data. Most hospitals already have
their financial information reviewed and certified by an independent
auditor, so the auditor could complete these verifications as part of
the standard audit process. One commenter stated it is not clear if
audit procedures applied in any other audits the hospital has undergone
would be sufficient to rely upon in this verification. One commenter
suggests that data submitted by a hospital which has had its own
independent audit be considered ``certified'' for the independent audit
requirements of this rule.
Response: States may not rely on independent certification programs
currently in place to audit uncompensated care costs nor expand audits
of hospital financial statements to obtain audit certification of the
hospital-specific DSH limits. Section 1923(j) of the Act MMA imposes
audit and reporting requirements on States. CMS must determine if all
hospitals receiving DSH payments under the Medicaid State plan actually
qualify to receive such payments and that actual DSH payments do not
exceed the hospital-specific limit for the same period. The
certification required in the regulation is a certification of the
audit performed to determine compliance with Section 1923 of the Social
Security Act.
While the DSH audit will rely on existing financial and cost
reporting tools currently used by all hospitals participating in the
Medicare program including audited hospital financial statements,
hospital accounting records, and the Medicare 2552-96 hospital cost
report, these source documents simply provide data to the auditor.
Certification of source documents or uncompensated care cost programs
is not sufficient to ensure that DSH payments do not exceed the
hospital-specific limits and would not allow CMS to carry out the
intent of the law which was to ensure that each DSH hospital will not
exceed its hospital-specific limits.
Comment: Several commenters indicated that most of the requirements
outlined in the proposed regulations require data that will be obtained
from hospital cost reports. The commenters questioned whether the
States will be responsible for completing individual hospital audits in
greater detail prior to completing the DSH report. One commenter
questioned whether having the data audited by an independent audit firm
engaged by the DSH hospitals would satisfy the independent audit
requirement, or whether States would be required to audit the data?
Response: We anticipate that the audit will rely primarily on
already available documents. The State and auditors can use data
extracted from existing hospital cost and financial reporting tools
supplemented with State generated data from the State's Medicaid
Management Information System. The data elements necessary for the
State to complete the DSH audit and report should, in part, be
information the State already gathers to administer the DSH program.
States and auditors will need to obtain data from hospitals and may
need to work with hospitals to develop new data or methodologies to
allocate or adjust existing data. And it may be necessary for auditors
to develop methods to test, verify the accuracy of, and reconcile data
from different sources. This audit function is not the same as the
function of the hospital's own auditors, however, and would not involve
a review of the hospital's financial controls and internal reporting
procedures. But the auditors must review the overall methodology for
accumulating data to ensure that the resulting data reflects the
required elements. In other words, the independent auditors must review
the methodology for arriving at hospital-specific data, and must have
confidence that the data accurately represents the hospital's eligible
uncompensated care costs consistent with the statutory criteria.
Comment: A few commenters indicated that many States have invested
an increasing amount of time and expense managing Federal audits and
presumed the increased audit requirements would be at the States'
expense.
Response: CMS does not believe the audit data burden will be that
significant since the audit may rely primarily on already available
documents. The State and auditors can use data extracted from existing
hospital cost and financial reporting tools supplemented with State
generated data from the State's Medicaid Management Information System.
The data elements necessary for the State to complete the DSH audit and
report should, in part, be information the State already gathers to
administer the DSH program. The State would incur additional cost
associated with engaging an auditor but that cost is eligible for
Federal administrative matching funds.
Comment: One commenter stated that using an independent auditor
would add administrative costs to the Medicaid program. The State
requests CMS to confirm if DSH funds can be used to fund the cost of
the audit, and if the State can claim FFP at the DSH matching rate.
Response: State costs of the audit are administrative costs of the
Medicaid program, and not DSH costs. The DSH program was established by
Congress to help offset uncompensated inpatient and outpatient care
provided by hospitals to Medicaid individuals and the uninsured. States
may not access Federal DSH funding for purposes other than reimbursing
hospitals for unreimbursed inpatient and outpatient services provided
to Medicaid individuals and individuals with no source of third party
coverage for the inpatient and outpatient hospital services they
received.
The DSH audit and report is a necessary element in the
administration of the Medicaid program. The State is responsible for
the successful completion of the DSH audit as part of that
administration. Costs associated with the audit are eligible for
Federal administrative matching funds.
Comment: Numerous commenters noted that the proposed rule does not
address how the audits will be paid for and there is a concern that the
State Medicaid programs will pass on these additional costs to DSH
hospitals. The commenters recommended that CMS state affirmatively that
the cost of the audits should not be passed on to hospitals. A few
commenters noted that since the cost of auditing each DSH hospital's
records to satisfy the new audit requirements will be substantial and
recommended it be funded by a special appropriation to the States for
such purpose. Many commenters recommended that CMS reconsider its
conclusion that the regulation would not have a significant economic
impact and should undertake appropriate analyses under Executive Order
12866 and the regulatory impact analysis to consider how the burden on
hospitals could be lessened.
Response: We still do not believe that this regulation will impose
a significant impact. The final rule allows the DSH audits to be part
of a hospital's existing annual financial. If this is the case, the
costs to the hospital should be minimal since the annual hospital
financial audit is already a requirement. States are responsible for
the administration of their Medicaid programs and the
[[Page 77939]]
successful completion of the DSH audit as part of that administration.
Comment: Numerous commenters indicated significant confusion
regarding the mechanics of compliance with the requirement for States
to have DSH payment programs independently audited annually and to
submit those certifications annually to the DHHS Secretary. The
commenters requested further guidance and explicit details of standards
and procedures required by CMS.
Response: As a condition of continued Federal DSH funding, pursuant
to Sec. 455.204, States will need to be in compliance with audit and
reporting requirements. CMS has developed a General DSH Audit and
Reporting Protocol which will be available on the CMS Web site to
assist States and auditors in utilizing information from each source
identified above and the methods under which costs and revenues will be
determined. In addition, an auditing and reporting schedule is
described in earlier responses to comments and is also included in the
final regulation.
Comment: A few commenters noted that their States have experienced
numerous difficulties when contracting with external auditing firms.
Subjecting each hospital's DSH data to another audit at the State level
would be an extremely time-consuming and very expensive process for the
State would not add any value to the auditing process.
Response: The DSH audit and report is a necessary element in the
administration of the Medicaid program. The State is responsible for
the successful completion of the DSH audit as part of that
administration. Costs associated with the audit are eligible for
Federal administrative matching funds.
The term ``independent'' means that the Single State Audit Agency
or any other CPA firm that operates independently from the Medicaid
agency and the subject hospitals may perform the DSH audit. States may
not rely on non-CPA firms, fiscal intermediaries acting as agents for a
State's Medicaid program, independent certification programs currently
in place to audit uncompensated care costs, nor expand hospital
financial statements to obtain audit certification of the hospital-
specific DSH limits.
States may use Medicaid agency auditors to gather the data and
perform initial data analysis for the DSH audit. However, the audit
must be certified by an independent auditor as described above.
Comment: One commenter questioned whether it is CMS' intent to
prevent an independent CPA firm, contracted by a State to audit
Medicaid cost reports on the State's behalf, from being able to audit
that same state's DSH program through the independence requirements of
the Government Auditing Standards. If so, the commenter questioned if
any contract with a State's Medicaid agency would impair the
independence of a CPA firm in performing the DSH audit required in the
rule.
Response: The intent of the requirement that States use independent
auditors to certify the DSH audit is to provide a quality end product
based on consistently applied auditing standards to produce unbiased
findings. An independent auditor must operate independently from the
Medicaid agency and the subject hospitals. The fact that a CPA firm
contracts with the Medicaid agency to audit Medicaid cost reports does
not disqualify that firm from being considered independent and
therefore qualified to perform the DSH audit as long as the contract
permits the auditor to exercise independent judgment.
Comment: Many commenters questioned whether the State audit agency
would be appropriate for a certified independent audit according to
generally accepted government auditing standards. If an independent
audit of each facility is required, the commenters asked if State
Medicaid program auditors would be considered independent to perform
the hospital portion of the work.
Response: The term ``independent'' means that the Single State
Audit Agency or any other CPA firm that operates independently from the
Medicaid agency or subject hospitals is eligible to perform the DSH
audit. States may not rely on non-CPA firms, fiscal intermediaries
acting as Agents for a State's Medicaid program, independent
certification programs currently in place to audit uncompensated care
costs, nor expand hospital financial statements to obtain audit
certification of the hospital-specific DSH limits.
States may use Medicaid agency auditors to gather the data and
perform initial data analysis for the DSH audit. However, the audit
must be certified by an independent auditor as described above.
Comment: A few commenters stated that the financial effectiveness
of the audits would be enhanced if the Medicare fiscal intermediaries
were available to do the audits. Intermediaries provide services at a
lower cost than private accounting firms. Time world be saved because
the intermediaries have all the necessary information. This may also be
helpful to States that require a lengthy procurement bidding process.
Response: States may contract with Medicare fiscal intermediaries
to the extent that the Medicare fiscal intermediary meets the
definition of an independent CPA firm and operates under a contract
that ensures independent judgment. The term ``independent'' means that
the Single State Audit Agency or any other CPA firm operates
independently from the Medicaid agency or subject hospitals.
Comment: One commenter questioned whether it would be appropriate
for the State's Auditor General's office to perform the independent
audit of DSH Payments using the Generally Accepted Government Auditing
Standards.
Response: The term ``independent'' means that the Single State
Audit Agency or any other CPA firm that operates independently from the
Medicaid agency or subject hospital may be qualified to perform the DSH
audit.
Generally Accepted Government Auditing Standards are the principles
governing audits conducted of government organizations, programs
activities, functions or funds. In general, government audits are
either performance audits or financial audits. In either type, the
focus is on the government entity, its management of a program and/or
the financial management and reporting systems associated with that
program.
The DSH audit and report is a necessary part of the administration
of the Medicaid program. The purpose of the audit is to ensure that
States make DSH payments under their Medicaid program that are in
compliance with Section 1923 of the Act. The audit does not encompass
the review of the State's overall Medicaid program, it simply ensures
that one portion of the program is conducted in line with Federal
statutory limits. In addition, the DSH audit will rely on financial and
cost report data provided by hospitals that are subject to generally
accepted accounting principles as part of their primary reporting
function.
Comment: Many commenters expressed concern for the financial
stability of disproportionate share hospitals and States and their
requirement for finality, with respect to prior year DSH payment
determinations. They asserted that allowing States to make good-faith
efforts to estimate hospital-specific DSH payment limits, so long as
States are using the most recently available data, would help prevent
situations in which States would need to attempt to take back past DSH
payments to hospitals--a situation
[[Page 77940]]
that would be especially burdensome for the very kinds of hospitals
that DSH payments are intended to help. One commenter stated that the
new rules impose an extremely heavy penalty on certain small hospitals.
That commenter indicated that it would be unlikely that these hospitals
could repay any amounts to the Medicaid program from current operating
income.
Response: We recognize that States must use estimates to determine
DSH payments in a given year. The regulation will provide information
that will help ensure that the actual DSH payment made by States based
on those estimates do not exceed the actual eligible uncompensated
costs under the hospital-specific DSH limit. The transition period
included in this regulation ensures that States will have time to
adjust those estimates prospectively.
Comment: Numerous commenters did not see how the verification
requirement could be completed without an additional annual cost report
for an annual period that differs from its established fiscal year cost
reporting period and an additional audit that would tie the hospital
costs to the State year-end versus hospital year end and DSH payments
with the same year actual uncompensated care costs. They asserted that
the verification requirement is an extraordinary unreasonable and
completely unnecessary administrative and economic burden on hospitals
and States due to time-consuming, costly, and often duplicative audits.
Many critical access hospitals do not have the excess manpower and
resources to accomplish this additional audit. In many States, it
disturbs an effective and efficient system that already meets Federal
standards for program integrity.
Response: The DSH audit will rely on existing financial and cost
reporting tools currently used by all hospitals participating in the
Medicare program. We expect that State reports and audits will be based
on the best available information. If audited Medicare cost reports are
not available for each hospital, the DSH report and audit may need to
be based on Medicare cost reports as filed. CMS does not believe that
the audit data burden will be significant since the audit relies on
documents already available to hospitals.
Comment: Many commenters noted that it would be an administrative
burden to perform retrospective reviews and adjust each year's DSH
payments. Therefore, the commenters request that CMS audit the data
used by the State to determine the prospective DSH payments paid during
the State fiscal year based upon the CMS approved DSH State plan
payment methodology to determine the actual uncompensated care costs in
the same audited SFY.
Response: Section 1923(j) of the Act imposes audit and reporting
requirements on all States that make DSH payments to all DSH eligible
hospitals within the State. As part of this process, CMS must determine
if all hospitals receiving DSH payments under the Medicaid State plan
actually qualify to receive such payments and that actual DSH payments
made do not exceed the hospital-specific DSH limit for the same period.
DSH payments are limited by Federal law to each qualifying
hospital's specific eligible uncompensated care cost in a given year.
Auditing a State's DSH payment methodology will not ensure that DSH
payments actually made by States do not exceed the statutorily required
hospital-specific DSH limit. Verifying cost elements within a DSH
payment methodology would not allow CMS to carry out the intent of the
law which was to ensure that each DSH hospital will not exceed its
hospital-specific DSH limit.
Comment: One commenter said Verification 3 would be a burden on the
State. Another commenter stated that the requirements in Verification 3
would dictate significant additional work by the independent auditor
(and added cost to the State and Federal governments) for unnecessary
data analysis.
Response: CMS does not believe that Verification 3 in the
regulation will create significant additional work for the independent
auditor nor the States. The auditor engaged by a State to complete the
DSH audit must rely on information provided by the State and DSH
hospitals. This information will be based on existing financial and
cost reporting tools as well as information provided by the State's
Medicaid Management Information System and the existing approved
Medicaid State plan. DSH hospitals must provide the State with
hospital-specific cost and revenue data, including backup
documentation, so that independent auditor may utilize in developing
audit report. The State must provide the auditor with information
pertaining to the Medicaid State plan DSH payment methodologies and the
methodology utilized by the State uses to estimate the hospital-
specific DSH limits.
CMS has developed a General DSH Audit and Reporting Protocol to
provide guidance to States, DSH hospitals and auditors in the
completion of the DSH audit. This Protocol includes general
instructions regarding the types of information to be provided by
hospitals to the State and its auditor as well as the calculations the
auditor will make based on the data provided. The Protocol will be
available on the CMS Web site.
The DSH audit and report is a necessary element in the
administration of the Medicaid program. The cost of the audit is the
responsibility of the State and can be matched by the Federal
government as a Medicaid administrative cost of the State.
Comment: One commenter questioned whether it is CMS' intent that
the term ``appropriate'' indicates documentation that has been verified
and/or audited. The vagueness of the term may also make it difficult
for an independent auditor to provide an opinion. As an alternative,
and assuming that all other requirements will be clearly defined, the
commenter recommends that CMS consider an alternative that a State
employs a methodology for calculating the hospital-specific DSH limit
that is permissible under Federal rules.
Response: The statutory process requires examination of whether all
hospitals receiving DSH payments under the Medicaid State plan actually
qualify to receive such payments and whether actual DSH payments made
are within the hospital-specific DSH limit for the same period. DSH
payments are limited by Federal law to each qualifying hospital's
specific eligible uncompensated care cost limit. Several audits by the
Inspector General have highlighted the need for greater scrutiny and
have indicated that calculations performed by State agencies or
hospitals are not reliable.
Concerning the degree of data verification required, States and
auditors will need to obtain data from hospitals and may need to work
with hospitals to develop new data or methodologies to allocate or
adjust existing data. And it may be necessary for auditors to develop
methods to test, verify the accuracy of, and reconcile data from
different sources. This audit function is not the same as the function
of the hospital's own auditors, however, and would not involve a review
of the hospital's financial controls and internal reporting procedures.
But the auditors must review the overall methodology for accumulating
data to ensure that the resulting data reflects the required elements.
In other words, the independent auditors must review the methodology
for arriving at hospital-specific data, and must have confidence that
the data accurately represents the hospital's eligible uncompensated
care costs consistent with the statutory criteria.
[[Page 77941]]
Comment: A few commenters are concerned that the reporting
requirements, as stated in the proposed regulation, suggest that there
is only one way to calculate DSH payments and hospital-specific DSH
payment limits when, in reality, Federal guidelines give States some
leeway in making these calculations. The commenters are concerned that
auditors will interpret their mandate very literally. One commenter
said the State may find itself disagreeing with its auditor over the
definitions of certain requirements and methodologies. Without
additional CMS clarification, the auditor may revert to a
reasonableness test when clarification is lacking, which may not meet
the objectives of CMS in promulgating these rules.
Response: We agree that States may have some flexibility in
interpreting the payment provisions under their State plan, and we
expect that auditors will consult with the State agency on such
interpretative issues. The calculation of the hospital-specific limits
is less discretionary; DSH payments are limited by Federal law to each
qualifying hospital's specific uncompensated care costs incurred in
furnishing hospital services to the Medicaid and uninsured populations.
Comment: A few commenters said this rule would adversely affect
access to health care for all children, not just Medicaid
beneficiaries. Hospitals may be forced to close programs or clinics in
order to cover revenue losses and access to care for all children, not
just Medicaid beneficiaries would be limited. Children and their
families would be forced to seek care in emergency rooms, which is a
more expensive visit for Medicaid and will invariably result in ever
more crowded emergency rooms.
Response: DSH payments are a way to provide additional funding to
hospitals that serve a disproportionate share of low income patients,
but the statute limits DSH payments to each hospital to the total
uncompensated care costs in serving the Medicaid and uninsured
populations. Since these limitations have been in place since 1993, CMS
does not believe that any hospital could reasonably have relied on
receiving funding above that level. CMS recognizes that States must use
estimates to determine DSH payments in a given year. The information
available through the reporting and auditing program under this
regulation will assist States in ensuring that those estimates do not
generate DSH payments that exceed the hospital-specific DSH limit.
Comment: One commenter believes the independent audit requirements
should be included in the existing framework for audits of Federal
programs under the Single Audit Act and include the five items
requiring verification in the OMB Circular A-133 Compliance Supplement.
One commenter suggested revision of OMB Circular A-133 Compliance
Supplement to require the State Medicaid program's auditor test this
reporting requirement by ensuring the Medicaid program received the
information and audit assurances from the hospitals, accumulated the
information, and properly reported the results to the Centers for
Medicare and Medicaid Services.
Response: The DSH audit and report is a necessary element in the
administration of the Medicaid program. The purpose of the audit is to
ensure that States make DSH payments under their Medicaid program that
are in compliance with Section 1923 of the Social Security Act. DSH
payments are a small portion of a State's Medicaid program and the OMB
Circular A-133 direction is far larger in scope than this audit.
It would be inappropriate to make the requested revisions to OMB
Circular A-133 as OMB Circular A-133 specifically exempts Medicaid
payments made by the State because these Medicaid payments are not
considered to be ``federal awards expended under this Section [Section
205, Basis for Determining Federal Awards Expended]''. In addition,
Subpart E also indicates that the scope of the A-133 Audit shall cover
the entire operations of the auditee or a department, agency or other
organizational unit.
It should be noted that the Single State Audit Agency qualifies as
operating independently from the Medicaid Agency and, therefore, could
perform the DSH audit albeit separate from the Single State Audit Act.
Comment: One commenter requests confirmation that the audit would
be a Program Performance Audit of the State as defined in Government
Auditing Standards, July 1999, Chapter 2, and as such would not require
verification by a Certified Public Accounting firm as in the case of
financial audits that lead to the expression of an opinion as defined
in Chapter 3. One commenter noted that requiring the audits of the
States to be performed under Generally Accepted Government Auditing
Standards (GAGAS) will ensure that the reports are accurate and can be
relied upon by third party users. One commenter stated that there are
three sets of standards within GAGAS: Financial Audits, Attestation
Engagements, and Performance Audits and questioned which set of
standards would apply to the independent audit of DSH payments.
Response: The standards in GAGAS generally exceed the scope and
objectives of the DSH audit and report. GAGAS rules govern the audits
of government organizations, programs activities, functions or funds.
In general, government audits are either performance audits,
attestation engagements or financial audits.
In financial and performance audits, the focus is on the government
entity, its management of a program and/or the financial management and
reporting systems associated with that program. The DSH audit and
report is a review of a segment of the Medicaid program and therefore
does not fall within the scope of a performance or financial audit
under GAGAS rules.
Attestation engagements may take a narrower focus (less than full
program review) and, therefore, may seem to more directly fit with the
scope of the DSH audit and report. However, attestation agreements
under GAGAS rules include standards beyond non-governmental attestation
agreements and these additional standards exceed the scope of the DSH
audit and report.
The DSH audit and report is a necessary part of the administration
of the Medicaid program. The purpose of the audit is to ensure that
States make DSH payments under their Medicaid program that are in
compliance with Section 1923 of the Social Security Act. The audit does
not encompass the review of the State's Medicaid program, it simply
ensures that one portion of the program is conducted in compliance with
Federal statutory limits. In addition, the DSH audit will rely on
financial and cost report data provided by hospitals that are subject
to generally accepted accounting principles as part of their primary
reporting function.
4. Section 1115 Demonstrations
Comment: One commenter believes the proposed rule as presently
drafted will have a significant impact on hospitals if an exemption is
not provided. The State has operated its DSH program for a number of
years in strict accordance with the prescriptive terms negotiated
between the State and CMS.
Response: The MMA imposes audit and reporting requirements on all
States that make DSH payments. As part of this process, CMS must
determine if all hospitals receiving DSH payments under the Medicaid
State plan actually qualify to receive such payments and that actual
DSH payments do not exceed
[[Page 77942]]
the hospital-specific DHS limit for that same period. To the extent
that a State makes DSH payments under a waiver demonstration, the State
is not exempted from the rules surrounding DSH payments, particularly
those at 1923(g) of the Act, and the audit and reporting requirements
would still apply to that State.
Comment: Several commenters had questions regarding how States that
operate their Medicaid programs under Federal waivers would do their
Medicaid DSH reporting. The commenters suggest the regulation should
specify that the DSH reporting and audit requirements do not apply to
States that do not make DSH payments or are not required to comply with
DSH requirements pursuant to Federal waivers of DSH requirements. The
commenters urge CMS to exempt States with 1115 waivers from this rule
if the waivers are based on certified public expenditures (CPEs) for
Medicaid and DSH payments. One commenter stated that the recent
implementation of the State's 1115 waiver completely changes the way
DSH payments are calculated for the State's hospitals, therefore, this
audit requirement would be duplicative.
Response: These DSH audit and reporting requirements apply to
States with Section 1115 demonstrations to the extent that the waiver
list associated with the demonstration does not explicitly waive the
State from compliance with Section 1923 of the Act. The DSH audit and
reporting time frames for States with DSH programs and Section 1115
demonstrations are subject to the same time frames as those States
without 1115 demonstrations. The only exception would be if a State has
a demonstration project under Section 1115 that includes a waiver of
the requirements of Section 1923 so that the State does not make
Medicaid DSH payments at all. In that instance, since there are no DSH
payments, the DSH audit and reporting requirements would not apply.
5. Time Period Subject to DSH Audit and Report
Comment: One commenter asked for clarification of the treatment of
DSH payments when a State makes a portion of the fiscal year's DSH
payments after the end of its fiscal year. One commenter asked whether,
when DSH payments are made on an accrual accounting basis and adjusted
after the report has been filed, whether the State must file a
corrected report. Several commenters indicated that dissatisfied
hospitals have the ability to appeal their payments, a process that
could extend the period of time before the final payment is known. They
asked how to report regular Medicaid rate payments that are not known
at the end of any given State fiscal year. One commenter said that many
States allow Medicaid providers up to a year to submit claims following
the date of service. As such, the commenter indicated that there is
often a significant lag in payments to Medicaid hospitals and
uncompensated care figures would be overstated if only cost incurred
and payments received during a SFY are considered.
Response: Since the deadline for reporting the audit findings has
been extended to at least three full years after the close of the
Medicaid State plan rate year subject to audit, hospitals would have
received all Medicaid and DSH payments associated with that Medicaid
State plan rate year. This two-year period accommodates the one-year
concern expressed in many comments regarding claim lags and is
consistent with the varying hospital cost reporting periods and
adjustments and accommodates DSH payments made from different allotment
years.
It should be noted that, to the extent that a State makes a
retroactive adjustment to non-DSH payments after the completion of the
audit for that particular Medicaid State plan rate year, the hospital
would necessarily have received and booked the revenues in a subsequent
Medicaid State plan rate year. Under these circumstances, the revenue
adjustments would be measured during the audit of the Medicaid State
plan rate year in which the revenues were received.
The treatment of post-audit Medicaid payments, including regular
Medicaid rate payments, supplemental and enhanced payments, Medicaid
managed care payments, DSH, and ``self-pay'' revenues and other
collections including liens would be treated as revenues applicable to
the Medicaid State plan rate year in which they are received.
Comment: Several commenters noted that the State is required to
indicate the Medicaid Managed Care Organization Payments paid to the
hospital for the SFY being reported. Claims may be submitted to the
Medicaid Managed Care Organization (MCO) for payment up to one year
after the date of service. Therefore, payments made by the MCO for
claims with date of service in the SFY may be submitted up to a year
after the service date by the hospital. The payments would not be
available before 12 months after the SFY at a minimum. Obtaining the
amount paid by the MCO for the SFY being reported is not possible by
the end of the SFY.
Response: Based on the modifications to the audit and reporting
deadlines and the Medicaid two-year timely filing claim limit, there
should not be a significant adjustment to Medicaid payments that would
warrant a corrected report. To the extent that such an adjustment to
Medicaid payments occurs, no corrected audit or report is necessary. To
the extent that a State makes a retroactive adjustment to non-DSH
payments after the completion of the audit for that particular Medicaid
State plan rate year, the hospital would necessarily have received and
booked the revenues in a subsequent Medicaid State plan rate year.
Under these circumstances, the revenue adjustments would be measured
during the audit of the Medicaid State plan rate year in which the
revenues were received.
6. Verification I--Proper Reduction to Uncompensated Care Cost
Comment: Several commenters believe that different parts of the
regulation define ``uncompensated care costs'' differently, and they
should be modified and made consistent. The commenters provided
suggested changes in an effort to eliminate a contradiction between the
definitions, contained in Sec. Sec. 447.299(c)(15) and 455.204(c).
Several commenters believe that Verification 1 requires each
hospital receiving DSH payments reduce its uncompensated care costs by
the amount of DSH payments received in any given year. The commenters
argued that the statute clearly defines the DSH limit so that DSH
payments should not be offset against the hospital specific limits.
They noted that the language of Section 1923(j) only requires the
auditors to verify ```the extent to which'' the costs have been
reduced. Thus, if costs have not been reduced at all, the auditor would
verify that fact and the audit requirement would be met. The regulatory
language should be revised to be consistent with the statutory
requirement. Other commenters stated that the proposed rule requires an
audit verification that each disproportionate share hospital in the
State has reduced its uncompensated care costs in order to reflect the
total amount of claimed DSH expenditures. They are not clear how a
hospital can demonstrate this, as costs generally are not reduced by
expenditures. One commenter recognizes that CMS likely based its
formulation of the verification requirement on the statutory language,
which contains similarly confusing terminology, requiring the audit to
verify ``the extent to which hospitals in the State have reduced their
[[Page 77943]]
uncompensated care costs to reflect the total amount of claimed
expenditures made under [the Medicaid DSH statute].'' The commenter
suggests that a more useful interpretation of this statutory language
would be to require verification that DSH payments have not exceeded
uncompensated care costs.
Response: The purpose of the statute is for States to audit actual
DSH payments made under the approved Medicaid State plan against actual
eligible uncompensated hospital costs for the same time period. In
reviewing the meaning of the statutory language, we have determined
that verification 1 is designed to ensure that hospitals are able to
fully retain the DSH payments made to them for the uncompensated cost
of providing inpatient and outpatient hospital services to Medicaid
beneficiaries and individuals with no source of third party coverage
net of all Medicaid payments received and payments by or on behalf of
individuals with no source of third party coverage for the services
they received. We have revised the regulation text to make this
clearer.
7. Verification 2--Calculation of Eligible Uncompensated Care Cost,
Prospective Estimates Versus Reconciled Cost
Comment: Many commenters indicated that for States that determine
the individual hospital DSH limit prospectively, the one-year filing
requirement may be attainable (at least after these rules take effect)
if the requirement is only to validate the accuracy of the prospective
calculation. But for those States that do base the determination on
current year costs, a report based on a final audit of hospital cost
reports could not be submitted within one year. Final settlement of
hospitals' cost reports is typically contingent upon completion by a
Medicare intermediary of audits--a process that can take several years.
CMS should allow these States additional time to submit the audit
certifications, so these certifications can be based on the final
settled cost report. Alternatively, CMS could clarify the rule to
permit the required report to be based on a hospital's as-filed cost
report. If necessary, there could be later reconciling adjustment after
the cost report is finally settled and an audit certification can be
made.
Response: CMS recognizes that States may need to use estimates to
determine DSH payments made by States to individual qualifying
hospitals in an upcoming Medicaid State plan rate year. Section 1923(j)
of the Act requires States to report and audit hospital-specific DSH
payments and hospital-specific uncompensated care costs. To meet this
requirement, States must perform audits associated with defined periods
of time and must identify the actual costs incurred and payments
received during that defined time period. To respond to comments on the
practicality of audit timing, we have modified the time frame for the
audit and reporting requirements as discussed above. We also note that
we expect that reports and audits will be based on the best available
information. If audited Medicare cost reports are not available, the
DSH report and audit may need to be based on Medicare cost reports as
filed.
Comment: Numerous States indicated that if the audit requirement is
simply to verify the manner in which the DSH limit was applied
prospectively, the one-year timeline may be realistic for years
subsequent to the adoption of a final regulation for States using
prospective methods, and hospitals with fiscal years different than the
State's should not present as much of a concern, because the
prospectively determined limit would have been calculated based on cost
reports for earlier time periods. Accordingly, the commenters request
that CMS clarify that the proposed regulations are not intended to
disturb the use of prospective calculations to apply the individual
hospital DSH limit.
Response: This regulation is not intended to require States to
implement retrospective DSH methodologies. CMS recognizes that States
may need to use estimates to determine DSH payments in an upcoming
Medicaid State plan rate year. However, Section 1923(j) of the Act
requires confirmation that DSH payments made by States to individual
qualifying hospitals do not exceed the actual cost limitation imposed
by Congress.
Based on the revisions to the auditing and reporting timeframes,
which, in part, requires the Medicaid State Plan rate year 2005 and
2006 audits to be completed no later than the last day of Federal
fiscal year 2009, it is feasible for the audit to measure eligible
uncompensated care costs incurred against the DSH payments received in
a given time frame. The transition period included in the final
regulation ensures that States may adjust those estimates prospectively
to avoid any immediate adverse fiscal impact and to ensure that future
DSH payments do not exceed the hospital-specific DSH limits.
Comment: Several commenters noted that there is no current law
requiring that DSH payments made in a fiscal year correspond to costs
from that same fiscal year. In addition, CMS has never before imposed a
reconciliation requirement. A few commenters stated Section 1923(g) of
the Act does not require that the OBRA 1993 limits be recalculated and
reapplied to reflect subsequently available year-of-service data.
Response: Section 1923(j) of the Act requires States to report and
audit specific payments and specific costs. These reports must assess
compliance with the statutory hospital-specific limitations on the
level of DSH payments to which qualifying hospitals were entitled.
Section 1923(g)(1)(A) specifies that DSH payments cannot exceed, ``the
costs incurred during the year of furnishing hospital services (as
determined by the Secretary and net of payments under this title, other
than under this Section, and by uninsured patients * * *)''. The goal
of the regulation is to audit DSH payments made under the authority of
the Medicaid State plan and to ensure that States do not make DSH
payments that exceed the hospital-specific cost limit defined under the
Omnibus Budget Reconciliation Act of 1993.
CMS recognizes that States may need to use estimates to determine
DSH payments in an upcoming Medicaid State plan rate year. However, the
statute requires confirmation that DSH payments do not exceed the
actual cost limitation imposed by Congress.
Comment: Numerous commenters stated that the DSH reporting and
auditing requirements contained in MMA were intended only to ensure
compliance with the DSH requirements, not to change the DSH
requirements themselves. They asserted that nothing in the statute
either requires or encourages a change in CMS's longstanding policy
that DSH payments can be based on a prospective estimate of a
hospital's uncompensated care costs. They argued that the statute does
not require that payments be based on actual audited costs and nothing
in the statute requires CMS to impose this dramatic shift in policy.
This approach allows for adjustment during future years for reconciling
DSH payments to actual costs. Numerous commenters said that CMS has
always acknowledged that the law permits States to base their DSH
payments on a prospective estimate of a hospital's uncompensated care
costs for a given year, derived from the hospital's costs in prior
years, and many if not most States utilize this approach. A few
commenters noted that CMS has allowed States flexibility to use
estimates of current year uncompensated costs. One commenter stated the
statute provides that a DSH payment adjustment ``during a fiscal
[[Page 77944]]
year'' is considered non-compliant with the limit if the adjustment
exceeds the uncompensated costs for Medicaid and uninsured patients
incurred ``during the year'' and that CMS appears to be basing this
burdensome reconciliation requirement solely on this language. The
commenter believes that while the provision does limit current year
payments to current year costs, nothing in the language mandates the
use of actual audited costs. Indeed, the commenter indicated that
reliable estimates based on audited prior year data will produce
sufficient controls on the DSH payments and fulfill Congress' intent of
limiting DSH expenditures on a hospital-specific basis.
Response: Section 1923(g)(1)(A) of the Act specifies that DSH
payments cannot exceed, ``the costs incurred during the year of
furnishing hospital services (as determined by the Secretary and net of
payments under this title, other than under this Section, and by
uninsured patients * * *)''. The goal of the regulation is to audit DSH
payments made under the authority of the Medicaid State plan and to
ensure that States do not make DSH payments that exceed the hospital-
specific cost limit defined under the Omnibus Budget Reconciliation Act
of 1993.
Section 1923(j) of the Act expressly requires States to report and
audit specific payments and specific costs. As part of this process,
CMS must obtain all information necessary to determine if all hospitals
receiving DSH payments under the authority of the approved Medicaid
State plan actually qualify to receive such payments and that actual
DSH payments made by States do not exceed the hospital-specific limit
for the same period. DSH payments are limited by Federal law to each
qualifying hospital's specific eligible uncompensated care cost limit.
CMS recognizes that States may need to use estimates to determine
DSH payments in an upcoming Medicaid State plan rate year. However, the
statute requires confirmation that DSH payments do not exceed the
actual cost limitation imposed by Congress. CMS has modified the
regulation to include a transition period to ensure that States may
adjust those estimates prospectively to avoid any immediate adverse
fiscal impact and to ensure that future DSH payments do not exceed the
hospital-specific DSH limits.
Auditing actual payments made in a given year against estimated
hospital uncompensated care costs in that same year would not ensure
that DSH payments did not exceed actual uncompensated care costs.
Several Inspector General audits attest to the discrepancies in the
results. In fact, measuring the difference between DSH payments and
estimates of uncompensated care costs would never produce a true
determination of whether or not DSH payments in a given year exceeded
the Congressionally defined cost limit for that year.
Comment: Numerous commenters indicated that States cannot determine
the actual uncompensated care costs prior to or during the year that
DSH payments are made. The commenters stated that this could prevent
States from making prospective estimates of Medicaid shortfalls and
uninsured costs. The commenters recommend that States be allowed to
continue to utilize historical information to perform prospective DSH
limit calculations.
Response: CMS recognizes that States may need to use estimates to
determine DSH payments in an upcoming Medicaid State plan rate year.
However, CMS does not have authority to authorize payments that exceed
statutory hospital-specific limits and those limits are based on actual
uncompensated care costs. The goal of the regulation is to audit DSH
payments made under the authority of the Medicaid State plan and to
ensure that States do not make DSH payments that exceed those statutory
hospital-specific cost limits. The information necessary for such
confirmation is readily available to hospitals and the State based on
existing financial and cost reporting tools.
Comment: Many commenters noted that the proposed methodology would
be inconsistent with their approved Medicaid State plan and conflicts
with past CMS guidance and practice. They indicate that a retrospective
audit to determine the accuracy of the estimates used to determine
uncompensated care costs based on the approved prospective methodology
would require changing the State plan. They ask how this audit should
be conducted by States that already have CMS approval for use of
prospective methodologies, not to mention that a retroactive audit
could significantly affect already approved programs.
Response: This regulation is not intended to require States to
implement retrospective DSH methodologies. CMS recognizes that States
may need to use estimates to determine DSH payments in an upcoming
Medicaid State plan rate year. However, CMS cannot authorize DSH
payments that exceed the limitations imposed by Congress. States will
have to determine how to best ensure that prospective DSH methodologies
do not result in payments that exceed those limitations, either by
revising those methodologies or by providing for reconciliation of
prospective payments with those limits. CMS as always is available to
offer technical assistance to States in developing such methodologies.
CMS has modified the regulation to include a transition period to
ensure that States may adjust prospective estimates to avoid any
immediate adverse fiscal impact.
8. Fiscal Impact--Effect on Federal Financial Participation
Comment: A few commenters questioned whether CMS will withhold
Federal Financial Participation from the States until its Independent
Audit of DSH Payments is completed and filed with CMS.
Response: The final regulation defines the time periods applicable
to the auditing and reporting of DSH payments. These deadlines provide
sufficient time for States to comply with the statute. The final
regulation also provides that Federal financial participation for DSH
payments is not available to any State that has not submitted its
required audits and reports.
Comment: A few commenters said that the proposed regulation states
the penalty for failure to provide the required information by the
stipulated deadline but does not address the question of whether or not
CMS will require States to return DSH funds if the information
collected is unsatisfactory to CMS.
Response: The goal of the regulation is to audit DSH payments made
under the authority of the Medicaid State plan and to ensure that
States do not make DSH payments that exceed the hospital-specific cost
limit defined in Section 1923(g) of the Act. CMS has modified the
regulation to include a transition period to ensure that States have an
opportunity to refine audit and reporting practices and determine the
impact on the State DSH methodologies. The final regulation provides
that Federal financial participation for DSH payments is not available
to any State that has not submitted its required audits and reports.
However, CMS intends to work with States to ensure that the audits and
reports meet all statutory and regulatory requirements.
Comment: A few commenters asked for clarification on the actions
that may be taken against States if States are not found to be in
compliance with all verifications required as part of the audit (Sec.
455.204(c)).
Response: The final regulation defines the time periods applicable
to the auditing and reporting of DSH
[[Page 77945]]
payments. These deadlines provide sufficient time for States to comply
with the statute. The final regulation also provides that Federal
financial participation in DSH payments is not available to any State
that has not submitted its required audits and reports. As mentioned
above, CMS intends to work with States to ensure that the audits and
reports meet all statutory and regulatory requirements.
Comment: A few commenters said the proposed regulation is silent on
the question of post-audit adjustments. In some cases, audits will
reveal actual costs that were not included in the estimated
uncompensated care costs provided. In such cases, provided there are
funds remaining in the State's DSH allotment or other money available
for such purposes, the commenters recommended that States should be
permitted to compensate hospitals.
Response: CMS has modified the regulation to lengthen the time
frame for preparation of the required report and audit, and to include
a transition period to ensure that States have time to refine their
audit processes. The instance of post audit adjustments will be
significantly lessened as a result.
9. Verification Three--Data Sources Used in Calculation of Eligible
Uncompensated Care Costs
Comment: Many commenters requested clarity on the mechanics of
reconciliation. Although the MMA requires an annual certified public
audit, the proposed rule is unclear about how the audit will reconcile
DSH payments and the hospitals' calculation of actual compensated care.
Hospitals submit accurate data on Medicaid and uncompensated care at a
point in time. Data can change over time as claims and payment appeals
are settled.
Response: We believe that the three-year period allotted for
completion of the audit accommodates these concerns. Sufficient time is
available to ensure that necessary cost reports and other financial
data are available to make these determinations. This accommodates the
concern expressed in many comments regarding claims lags and is
consistent with the varying hospital cost report periods and
adjustments. CMS has developed a General DSH Audit and Reporting
Protocol to provide guidance to States, DSH hospitals and auditors in
the completion of the DSH audit. This protocol provides general
instructions regarding the calculations the auditor will make based on
the data provided.
10. Verification Four--Proper Accounting of Medicaid and Uninsured
Revenues
Comment: A few commenters noted that the audit and reporting
requirements are unnecessary in several States where the federal DSH
allocation to the States has consistently fallen short of the State's
aggregate DSH limit by at least $200 million in each of the past five
years.
Response: The Statewide aggregate DSH allotment is only one of the
limitations on DSH payments. The audit and reporting requirements also
concern hospital-specific limitations, which involve review of specific
payments and specific costs by individual hospital. The goal of the
audit and report is to ensure that DSH payments made by States under
the authority of the approved Medicaid State plan do not exceed the
hospital-specific uncompensated care cost limit as required by Section
1923(g) of the Act. Irrespective of a State's aggregate DSH allotment,
or overall levels of uncompensated care, a DSH hospital may not receive
more in DSH payments than the individual hospital's eligible
uncompensated care costs.
Comment: A few commenters stated that the financial exposure for
the Federal government through the use of estimated rather than
reconciled data is not significant, as total DSH expenditures are
limited by the Statewide DSH allotment. The benefit obtained through
the reconciliation mandate is therefore far outweighed by its costs.
Response: As discussed above, the Statewide DSH allotment and
hospital-specific limitations are separate and distinct. Section
1923(g)(1)(A) of the Act specifies that DSH payments cannot exceed,
``the costs incurred during the year of furnishing hospital services
(as determined by the Secretary and net of payments under this title,
other than under this Section, and by uninsured patients * * *)''.
Section 1923(j) of the Act and this regulation require States to audit
DSH payments made under the authority of the Medicaid State plan and to
ensure that States do not make DSH payments that exceed this hospital-
specific cost limit.
The data elements necessary for the State to complete the DSH audit
and report should, in part, be information the State already gathers to
administer the DSH program. Thus, CMS believes that the burden on the
State will not be substantial. The State will have some additional cost
associated with engaging an auditor but that cost is eligible for
Federal administrative matching funds.
Comment: Numerous commenters expressed concern about the proposed
rule because adoption would greatly reduce the DSH payments to
hospitals. Such a reduction would eliminate some of the future services
hospitals provide. The largest burden would be on the impoverished
communities since many of those people could not travel to receive
those services elsewhere.
Response: Hospitals should not realize a significant reduction in
DSH payments based on the audit and reporting requirements. Moreover,
any reduction would simply be the result of ensuring that limited State
DSH funds are used appropriately and meet the requirements of the
Medicaid statute. This rule will help to ensure that Medicaid DSH
payments appropriately recognize allowable unreimbursed Medicaid and
uninsured uncompensated care costs. The DSH law was enacted to
recognize needs of hospitals that serve a disproportionate number of
Medicaid and low-income patients. In 1993, Congress imposed hospital-
specific limitations on the level of DSH payments to which qualifying
hospitals were entitled. Section 1923(g)(1)(A) specifies that DSH
payments cannot exceed, ``the costs incurred during the year of
furnishing hospital services (as determined by the Secretary and net of
payments under this title, other than under this Section, and by
uninsured patients * * *)''. Congress clearly identified the DSH limit
as specific to the costs incurred for providing certain hospital
services to Medicaid individuals and individuals with no source of
third party coverage.
Comment: Several commenters expressed concern that the results of
audits may be used to attempt to take back money from States and/or
hospitals for failing to meet standards that they never knew existed,
long after hospital's fiscal year is over. If the State would be
required to return DSH money to the Federal Government, this would
necessitate the return of DSH money to the State by hospitals. This
would be extremely burdensome for hospitals, which undoubtedly would
already have spent that money serving their low-income and uninsured
patients. One commenter said that after-the-fact exposure is untenable
for States with balanced budget requirements.
Response: CMS has modified the regulation to include a transition
period to ensure that States may adjust uncompensated care estimates
prospectively to avoid any immediate adverse fiscal impact and to
assist States in ensuring that future DSH payments do not exceed the
hospital-specific DSH limit. To permit States an opportunity to
[[Page 77946]]
develop and refine audit procedures, audit findings from Medicaid State
plan rate year 2005-2010 will be limited to use for the purpose of
estimating prospective hospital-specific uncompensated care cost limits
in order to make actual DSH payments in the upcoming Medicaid State
plan rate years. CMS is not requiring retroactive collection for
Medicaid State plan rate years that have already passed. By using that
time to improve State DSH payment methodologies, States may avoid
circumstances in which DSH payments that exceed Federal statutory
limits must be recouped from hospitals. CMS will also be available to
provide necessary technical assistance to States to ensure proper
implementation of these requirements.
Comment: One commenter said that their State plan permitted DSH
payments to DSH-eligible, out-of-State hospitals that service the
State's Medicaid recipients. The commenter requested clarity regarding
the State's responsibility in terms of hospital-specific DSH limit
calculations and auditing and reporting requirements insofar as these
out-of-State hospitals are concerned.
Response: A State is required to audit payments and costs for only
those DSH hospitals that are located within the State. This method will
allow the auditor to recognize DSH payments received from other States
in addition to the DSH payments received by that hospital under the
``home-State's'' approved Medicaid State plan.
For States that make DSH payments to hospitals in other States, the
State must include in the reporting requirements the DSH payments made
to hospitals located outside of the State but would not be required to
audit those out-of-State DSH hospital's total DSH payments/total
eligible uncompensated care costs. This method will ensure that no DSH
hospital is audited more than one time per year for purposes of the DSH
auditing and reporting requirements under Section 1923(j) of the Act.
Comment: A few commenters asked whether CMS will require States to
include in the report information on patients from another State.
Response: The goal of the audit and report is to ensure that DSH
payments made by States under the authority of the approved Medicaid
State plan do not exceed the hospital-specific cost limit. In order to
do this, all applicable revenues must be offset against all eligible
costs. For purposes of determining the hospital-specific DSH limit,
revenues would include all Medicaid payments made to hospitals for
providing inpatient and outpatient hospital services to Medicaid
individuals (irrespective of the State in which the individual is
eligible) and all payments made by or on behalf of patients with no
source of third party coverage for the inpatient and outpatient
hospital services they received. For purposes of the DSH audit and to
determine whether hospital-specific cost limits have been exceeded, all
DSH payments made by States and received by a hospital would need to be
offset against the determined eligible uncompensated care cost limit.
Any Medicaid payments received by a hospital from any Medicaid
agency (in state or out of state) should be counted as revenue offsets
against total incurred Medicaid costs. Any DSH payments received by a
hospital from any Medicaid agency (in state or out of state) must be
counted as an offset against uncompensated care for purposes of the DSH
audit and ensuring that the hospital-specific DSH limit is not
exceeded.
Comment: One commenter requested instructions for reporting
information to CMS related to DSH payments on an annual basis. Annual
reporting requirements also contain specific reporting requirements
related to DSH payments. The commenter asked for clarification as to
whether the proposed rules supersede the reporting requirements
detailed in the March 26, 2004, Federal Register Notice [CMS-2062-N].
Response: All DSH reporting requirements published under CMS-2062-N
are superseded by Section 1923(j) of the Act and this implementing
regulation.
Comment: A few commenters noted the proposed Sec. 447.299(c)(8)
incorrectly refers to Section 1923(g) instead of referring to the
entire Section 1923.
Response: The regulation has been modified to reflect the correct
statutory citation.
Comment: A few commenters noted that the Reporting form was not
included with the proposed rules and requested a copy of the example
Reporting form.
Response: A modified Reporting form is included in this regulation.
Comment: One commenter noted that in FY 2003, total Federal DSH
allotments to States totaled just under $9 billion. The commenter
requests copies of any audit findings and/or programs associated with
CMS' historic and ongoing efforts to audit and/or verify the figures
used by States to justify Federal funds.
Response: The commenter may request information consistent with the
authority of the Freedom of Information Act.
Comment: One commenter noted CMS has not pointed to any systematic
findings that call into question the reasonableness of approved
methodologies.
Response: The statutory authority under MMA instructed States to
report and audit specific payments and specific costs. This rule does
not call into question the reasonableness of approved methodologies; it
simply implements the statutory reporting and auditing requirements to
determine whether DSH payments were proper with respect to the specific
DSH hospitals that were paid.
C. Regulatory Impact
Comment: Several commenters stated that there would be a
significant burden on the States for the reporting requirement in terms
of time and effort to prepare and submit the required information and
that CMS' estimate of the time needed for the proposed Sec. 447.299(c)
reporting requirements is underestimated. One commenter questioned
whether this estimate is based upon an assumption by CMS that States
have historically been collecting and verifying the information
required in the report to CMS. The commenter requested that CMS provide
details on how this estimate was calculated.
Response: CMS believes that since the audit relies on documents
already available to hospitals that the audit data burden will neither
be significant nor costly. The reporting of each year's audit findings
will be achieved through the completion of a one-page Reporting form.
The elements necessary for this report will be extrapolated from the
data and analysis performed by the auditor and will be based on
existing source documentation.
Comment: One commenter noted that if a State utilizes different
criteria for qualifying hospitals as a DSH than the Medicaid Inpatient
Utilization Rate or the Low-Income Utilization Rate, then these two
calculations would be unnecessary. The commenter asserted that
requiring a State to calculate and submit the Medicaid Inpatient
Utilization Rate and Low-Income Utilization Rate calculations would be
an additional burden. The commenter asked if CMS considered this added
effort in the estimate of States' time and effort to prepare and submit
the required information.
Response: Section 1923(j) of the Act imposes audit and reporting
requirements on States regarding payments to DSH eligible hospitals. As
part of this process, CMS must
[[Page 77947]]
determine if all hospitals receiving DSH payments under the Medicaid
State plan actually qualify to receive such payments. Sections
1923(b)(1)(A) and (B) of the Act require that all hospitals meeting the
Medicaid Inpatient Utilization Rate (MIUR) or the Low Income
Utilization Rate (LIUR) calculated therein are deemed DSH hospitals.
This is the minimum Federal standard. States have the right to use
alternative qualifying criteria that are broader. States that use only
the LIUR or only the MIUR to determine DSH qualification should report
on the statistic utilized in the approved Medicaid State plan for the
Medicaid State plan rate year under audit. State using a broader
methodology should use that statistic in lieu of the MIUR or LIUR.
We believe that since the audit relies on documents already
available to hospitals that the audit data burden will neither be
significant nor costly. The reporting of each year's audit findings
will be achieved through the completion of a one page Reporting form.
The elements necessary for this report will be extrapolated from the
data and analysis performed by the auditor and will be based on
existing source documentation.
Comment: A few commenters believe that the information collection
burden is significant, that in many cases the information requested is
ambiguous or inaccurate and there are likely more efficacious means of
implementing the statutory requirements, for instance, by more closely
tracking the S-10 categories. The commenters urge CMS to revise the
regulation to reduce the paperwork burden associated with the new audit
and reporting requirements and avoid imposing unnecessary additional
administrative costs on States and hospital providers by considering
less burdensome means of collecting necessary information.
Response: Hospitals will be required to provide the State with data
extracted from existing cost and financial reporting tools as well as
copies of the source documents. The State must provide these data as
well as Medicaid Management Information Systems and Medicaid State plan
information to the auditor. The source documents would include the
Medicare 2552-96 cost report, audited hospital financial statements and
hospital accounting records in combination with information provided by
the State's MMIS.
We believe that since the audit relies on documents already
available to hospitals that the audit data burden will neither be
significant nor costly. The reporting of each year's audit findings
will be achieved through the completion of a one page Reporting form.
The elements necessary for this report will be extrapolated from the
data and analysis performed by the auditor and will be based on
existing source documentation.
Worksheet S-10 is not part of the Medicare 2552-96 step-down
process used to allocate inpatient and hospital outpatient costs. The
cost allocation process utilized in the Medicare 2552-96 cost report is
considered a key component of determining Medicaid and uninsured
hospital costs.
Comment: One commenter said that while collection activities in
response to audit requirements are exempt from the Paperwork Reduction
Act, CMS should acknowledge that the new substantive requirements that
it is announcing in the form of audit standards will impose independent
new paperwork burdens on States separate and apart from the response to
the audits. For example, CMS' proposal that the audits verify that DSH
payments do not exceed actual year costs will impose a massive new DSH
reconciliation requirement on States so that the audits do not conclude
that they have exceeded the hospital-specific DSH limits. Therefore,
the commenters believe CMS should evaluate the paperwork burden
associated with new standards announced as part of the audit
requirements as well as the reporting requirements.
Response: The goal of the regulation is to audit DSH payments made
under the authority of the Medicaid State plan and to ensure that
States do not make DSH payments that exceed the hospital-specific cost
limit defined under Section 1923(g) of the Act. The information
necessary for such confirmation is readily available to hospitals and
the State based on existing financial and cost reporting tools. The
reporting of each year's audit findings will be achieved through the
completion of a one page Reporting form. The elements necessary for
this report will be based on existing source documentation.
Comment: Several commenters noted that the proposed rules will have
a significant economic impact and therefore, the Regulatory Flexibility
Act (RFA) requires CMS to analyze options for regulatory relief of
small businesses, such as hospitals. The newly announced DSH
requirements contained in the proposed rule and discussed throughout
this comment letter may result in decreased DSH funding for some
hospitals, jeopardizing their ability to provide broad access to
services for the uninsured and underinsured.
Response: CMS believes that this rule would not have a significant
economic impact on a substantial number of small entities. The
regulation requires States to audit and report DSH payments made to DSH
eligible hospitals in a given Medicaid State plan rate year. Hospitals
will only be required to provide data to States from existing primary
source documents such as the Medicare 2552-96 cost report, audited
hospital financials, and hospital accounting records. The regulation
also includes a transition period to ensure that no immediate fiscal
impact is realized by States or hospitals.
Comment: Many commenters noted that the cost for hospital audits
can reach $50,000 or higher per hospital and therefore contended that
the estimate clearly suggests the economic impact of this one audit
requirement will meet the test of a major rule under the Regulatory
Flexibility Act.
Response: Although the State will have some additional cost
associated with engaging an auditor, but that cost is eligible for
Federal administrative matching funds. The DSH audit and report is a
necessary element in the administration of the Medicaid program to
ensure that hospital-specific DSH limits are not exceeded by DSH
payments made under the approved Medicaid State plan for a given year.
Hospitals should not incur additional costs as they will be
required to provide the State with data extracted from existing
hospital cost and financial reporting tools supplemented with State
generated data from the State's Medicaid Management Information System.
IV. Changes to the Proposed Rule
As explained in our responses to comments, we have made the
following revisions to the DSH Auditing and Reporting regulations
published in the August 26, 2005 Proposed Rule:
A. Reporting Requirements
1. Audit Year and Submission Dates Defined
CMS has modified the regulation at Sec. 447.299(c) to address
concerns regarding the inability to complete the audit and report
within a year from the end of SFY 2005. The regulation has been
modified to identify the Medicaid State plan rate year 2005 as the
first time period subject to the audit. The basis for this modification
is recognition of varying fiscal periods between hospitals and States.
The Medicaid State plan rate year is the one uniform time period under
which all States must estimate uncompensated costs in order
[[Page 77948]]
to make DSH payments under the approved Medicaid State plan. The
regulation has also been modified to identify that each audit report
must be submitted to CMS within 90 days of the completion of the
independent certified audit. The reports associated with Medicaid State
plan rate years 2005 and 2006 are due no later than December 31, 2009.
Each subsequent audit report is due no later than December 31st of the
FFY ending three years after the Medicaid State plan rate year under
audit.
2. Report Data Elements
CMS has modified the regulation at Sec. 447.299(c) to address many
comments concerning the necessary data elements to fulfill the audit
and reporting requirements. Specifically, the regulation has been
modified to remove the following data elements:
1. Medicare provider number.
2. Medicaid provider number.
3. Type of hospital.
4. Type of hospital ownership.
5. Transfers.
6. Medicaid eligible and uninsured individuals.
In addition, the regulation at Sec. 447.299(c) has been modified
to add or clarify the following data elements which are necessary to
fulfill the auditing and reporting requirements:
1. Identification of facilities that are Institutes for Mental
Disease (IMD) receiving DSH payments;
2. Identification of out-of-state hospitals receiving DSH payments;
3. State estimate of hospital-specific DSH limit;
4. Medicaid inpatient utilization rate (if applicable);
5. Low-income utilization rate (if applicable);
6. State-defined DSH eligibility statistic (if applicable);
7. Total inpatient and outpatient Medicaid payments;
8. Total inpatient and outpatient Medicaid cost of care;
9. Total Medicaid inpatient and outpatient uncompensated care;
10. Total inpatient and outpatient uninsured and self-pay revenues;
11. Total applicable Section 1011 payments received by the
hospital;
12. Total inpatient and outpatient uninsured cost of care;
13. Total inpatient and outpatient uninsured uncompensated care;
14. Total eligible inpatient and outpatient uncompensated care.
The Reporting form has also been modified to reflect these
modifications.
B. Audit Requirements
1. Definitions
CMS has modified the regulation at Sec. 455.201 to clarify the
definition of independent certified audit to mean that the Single State
Audit Agency or any other CPE firm that operates independently from the
Medicaid agency is eligible to perform the DSH audit and to define
Medicaid State plan rate year as the time period subject to the audit.
The definition of State fiscal year has been removed.
2. Certified Independent Audit Requirements
Based on many comments regarding the potential immediate adverse
fiscal impact of the DSH audit on States, CMS has modified the
regulation at Sec. 455.204(a) to indicate conditions related to the
audit that States must meet in order to receive Federal
disproportionate share hospital payments. A transition period related
to audit findings for Medicaid State plan rate year 2005 through 2010
is included in this Section. Instructions regarding audit findings and
their applicability to Medicaid State plan rate year 2011 forward are
also included. The modifications are as follows:
Transition period. Findings of the 2005 and 2006 Medicaid
State plan rate year audit and report will be available to States
during their SFY 2010. These findings must be taken into consideration
for Medicaid State plan rate year 2011 uncompensated care cost
estimates and associated DSH payments.
Audit findings associated with Medicaid State plan rate
years 2007 through 2010 must be similarly considered for Medicaid State
plan rate years 2012 through 2015. Findings from Medicaid State plan
rate year 2005-2010 will be used only for the purpose of determining
prospective hospital-specific eligible uncompensated care cost limits
and associated DSH payments.
DSH payments that exceed the hospital-specific eligible
uncompensated care cost limit related to Medicaid State plan rate year
2011 must be returned to the Federal government or redistributed by
States to other qualifying hospitals.
In response to many public comments regarding the inability of
States to complete the audit within one year of the end of the State
fiscal year, CMS has modified the regulation at Sec. 455.204(b) to
indicate a new time period for the submission of the independent
certified audit. The new time period is as follows:
Identify that the Medicaid State plan rate year 2005 and
2006 audits must be completed no later than the last day of Federal
fiscal year 2009. Each subsequent audit beginning with Medicaid State
plan rate year 2007 must be completed by the last day of the Federal
fiscal year ending three years from the Medicaid State plan rate year
under audit. Therefore, for the 2007 Medicaid State plan rate year, the
audit must be completed by the last day of Federal fiscal year 2010.
The regulation was modified at 455.204(c) to include a new Section
identifying the primary sources and source documents from which States
will draw data necessary to complete the independent certified audit.
These documents are identified as:
The approved Medicaid State plan for the State plan rate
year under audit.
State Medicaid Management Information System payment and
utilization data.
The Medicare 2552-96 cost report or subsequent Medicare
defined hospital cost report tool.
DSH hospital audited financial statements and hospital
accounting records.
The regulation was modified to redesignate Sec. 455.204(c) as
Sec. 455.204(d) (1) through (6) to accommodate the new Sec.
455.204(c).
In addition, CMS developed a General DSH Auditing and Reporting
Protocol to provide States with guidance on the completion of the DSH
Audit and Report. This protocol will be available on the CMS Web site.
V. Collection of Information Requirements
Under the Paperwork Reduction Act of 1995, we are required to
provide 30-day notice in the Federal Register and solicit public
comment before a collection of information requirement is submitted to
the Office of Management and Budget (OMB) for review and approval. In
order to fairly evaluate whether an information collection should be
approved by OMB, Section 3506(c)(2)(A) of the Paperwork Reduction Act
of 1995 requires that we solicit comment on the following issues:
The need for the information collection and its usefulness
in carrying out the proper functions of our agency.
The accuracy of our estimate of the information collection
burden.
The quality, utility, and clarity of the information to be
collected.
Recommendations to minimize the information collection
burden on the affected public, including automated collection
techniques.
[[Page 77949]]
Therefore, we are soliciting public comment on each of these issues
for the following information collection requirements discussed below.
Section 447.299 Reporting Requirements
Paragraph (c) of this Section requires the States to submit to CMS
information for each DSH for the most recently-completed fiscal year
beginning with the first full State fiscal year (SFY) after the
enactment of Section 1001(d) of the MMA, which for all States will
begin with their respective SFY 2005 and each subsequent SFY. This
paragraph presents the information to be submitted.
The burden associated with this requirement is the time and effort
for the States to prepare and submit the required information. We
estimate that it will take each State approximately 30 minutes to
prepare and submit the information for each of its DSHs. On average,
each State has approximately 75 DSHs. Therefore, we estimate it will
take 38 hours per State to comply for a total of 1,976 annual hours.
The burden for this requirement is currently approved under OMB
0938-0746 with an expiration date of August 31, 2011.
Section 455.204 Condition for Federal Financial Participation
In summary, this Section states what information must be included
in the audit report and submitted to CMS.
The PRA exempts the information collection activities referenced in
this Section. In particular, 5 CFR 1320.4 excludes collection
activities during the conduct of administrative actions,
investigations, or audits involving an agency against specific
individuals or entities.
As required by Section 3504(h) of the Paperwork Reduction Act of
1995, we have submitted a copy of this final regulation to OMB for its
review of these information collection requirements described above.
If you comment on these information collection and recordkeeping
requirements, please mail copies directly to the following:
Centers for Medicare & Medicaid Services, Office of Strategic
Operations and Regulatory Affairs, Division of Regulations Development,
Attn.: Melissa Musotto, CMS-2198-F, Room C5-14-03, 7500 Security
Boulevard, Baltimore, MD 21244-1850.
Office of Information and Regulatory Affairs, Office of Management
and Budget, Room 10235, New Executive Office Building, Washington, DC
20503, Attn.: Katherine T. Astrich, CMS Desk Officer, CMS-2198-F,
Katherine_T._Astrich@omb.eop.gov. Fax (202) 395-6974.
VI. Regulatory Impact Analysis
We have examined the impact of this rule as required by Executive
Order 12866 (September 1993, Regulatory Planning and Review), the
Regulatory Flexibility Act (RFA) (September 19, 1980, Pub. L. 96-354),
Section 1102(b) of the Social Security Act, the Unfunded Mandates
Reform Act of 1995 (Pub. L. 104-4), and Executive Order 13132 on
Federalism, and the Congressional Review Act (5 U.S.C. 804(2)).
Executive Order 12866, as amended, directs agencies to asses all
costs and benefits of available regulatory alternatives and, if
regulation is necessary, to select regulatory approaches that maximize
net benefits (including potential economic, environmental, public
health and safety effects, distributive impacts and equity). A
regulatory impact analysis (RIA) must be prepared for major rules with
economically significant effects ($100 million or more in any 1 year).
This rule does not reach the economic threshold and thus is not
considered a major rule.
The RFA requires agencies to analyze options for regulatory relief
of small businesses. For purposes of the RFA, small entities include
small businesses, nonprofit organizations and government agencies. Most
hospitals and most other providers and suppliers are small entities,
either by nonprofit status or by having revenues of $7 million to $34.5
million in any 1 year. Individuals and States are not included in the
definition of a small entity. We are not preparing an analysis for the
RFA because the Secretary has determined and we certify that this rule
would not have a significant economic impact on a substantial number of
small entities. This rule will directly affect States.
In addition, Section 1102(b) of the Act requires us to prepare a
regulatory impact analysis if a rule may have a significant impact on
the operations of a substantial number of small rural hospitals. This
analysis must conform to the provisions of Section 604 of the RFA. For
purposes of Section 1102(b) of the Act, we define a small rural
hospital as a hospital that is located outside of a metropolitan
statistical area and has fewer than 100 beds. Therefore, the Secretary
has determined and we certify that this final rule will not have a
significant impact on the operations of a substantial number of small
rural hospitals.
Section 202 of the Unfunded Mandates Reform Act (UMRA) of 1995 also
requires that agencies assess anticipated costs and benefits before
issuing any rule whose mandates require spending in any 1 year of $100
million in 1995 dollars, updated annually for inflation. In 2008 that
threshold level is approximately $130 million. Since this rule would
not mandate spending on State, local, or tribal governments in the
aggregate, or by the private sector of $130 million or more in any 1
year, the requirements of the UMRA are not applicable.
Based upon the parameters of this rule and comments received, we do
not believe the costs incurred by States will be significant. The final
rule allows the DSH audits to be part of a hospital's annual financial
audit (for example, the auditors would follow the DSH limit protocol
provided in the regulation), which means a portion of the audit costs
could actually be borne by the hospitals and not the States. Based upon
comments received, it appears that most States want to incorporate the
DSH audit into the annual hospital financial audits. If that is the
case, the costs to the hospital should be minimal as well since the
annual hospital financial audit is already a requirement.
It is further unknown if any States will contract with an
independent accounting firm to conduct the audit. While there would be
a contracting cost to the State, it is unknown what that cost would be
and we believe it unlikely that States will avail themselves of this
option. The final rule does allow for the use of the Single State
Auditor to perform the DSH audit and if that is done, CMS would match
the State audit costs at the 50 percent administrative matching rate.
Regardless of the mechanism for conducting the DSH audit, the
auditor will be using existing documentation (for example, hospital
cost reports, hospital accounting records, and MMIS) and apply the
methodology provided by this rule, which should result in nominal
costs.
Executive Order 13132 establishes certain requirements that an
agency must meet when it promulgates a proposed rule (and subsequent
final rule) that imposes substantial direct requirement costs of State
and local governments, preempts State law, or otherwise has Federalism
implications. Since this rule would not impose any costs on State or
local governments, preempt State law, or otherwise have Federalism
implications, the requirements of E.O. 13132 are not applicable.
In accordance with the provisions of Executive Order 12866, this
regulation was reviewed by the Office of Management and Budget.
[[Page 77950]]
List of Subjects
42 CFR Part 447
Accounting, Administrative practice and procedure, Drugs, Grant
programs--health, Health facilities, Health professions, Medicaid,
Reporting and recordkeeping requirements, and Rural areas.
42 CFR Part 455
Fraud, Grant programs--health, Health facilities, Health
professions, Investigations, Medicaid, and Reporting and recordkeeping
requirements.
0
The Centers for Medicare & Medicaid Services amends 42 CFR chapter IV
as follows:
PART 447--PAYMENTS FOR SERVICES
0
1. The authority citation for part 447 continues to read as follows:
Authority: Sec 1102 of the Social Security Act (42 U.S.C. 1302).
0
2. Section 447.299 is amended by--
0
A. Redesignating existing paragraphs (c) and (d) as paragraphs (d) and
(e).
0
B. Adding a new paragraph (c) to read as set forth below.
Sec. 447.299 Reporting requirements.
* * * * *
(c) Beginning with each State's Medicaid State plan rate year 2005,
for each Medicaid State plan rate year, the State must submit to CMS,
at the same time as it submits the completed audit required under Sec.
455.204, the following information for each DSH hospital to which the
State made a DSH payment in order to permit verification of the
appropriateness of such payments:
(1) Hospital name. The name of the hospital that received a DSH
payment from the State, identifying facilities that are institutes for
mental disease (IMDs) and facilities that are located out-of-state.
(2) Estimate of hospital-specific DSH limit. The State's estimate
of eligible uncompensated care for the hospital receiving a DSH payment
for the year under audit based on the State's methodology for
determining such limit.
(3) Medicaid inpatient utilization rate. The hospital's Medicaid
inpatient utilization rate, as defined in Section 1923(b)(2) of the
Act, if the State does not use alternative qualification criteria
described in paragraph (c)(5) of this section.
(4) Low income utilization rate. The hospital's low income
utilization rate, as defined in Section 1923(b)(3) of the Act if the
State does not use alternative qualification criteria described in
paragraph (c)(5) of this section.
(5) State defined DSH qualification criteria. If the State uses an
alternate broader DSH qualification methodology as authorized in
Section 1923(b)(4) of the Act, the value of the statistic and the
methodology used to determine that statistic.
(6) IP/OP Medicaid fee-for-service (FFS) basic rate payments. The
total annual amount paid to the hospital under the State plan,
including Medicaid FFS rate adjustments, but not including DSH payments
or supplemental/enhanced Medicaid payments, for inpatient and
outpatient services furnished to Medicaid eligible individuals.
(7) IP/OP Medicaid managed care organization payments. The total
annual amount paid to the hospital by Medicaid managed care
organizations for inpatient hospital and outpatient hospital services
furnished to Medicaid eligible individuals.
(8) Supplemental/enhanced Medicaid IP/OP payments. Indicate the
total annual amount of supplemental/enhanced Medicaid payments made to
the hospital under the State plan. These amounts do not include DSH
payments, regular Medicaid FFS rate payments, and Medicaid managed care
organization payments.
(9) Total Medicaid IP/OP Payments. Provide the total sum of items
identified in Sec. 447.299(c)(6), (7) and (8).
(10) Total Cost of Care for Medicaid IP/OP Services. The total
annual costs incurred by each hospital for furnishing inpatient
hospital and outpatient hospital services to Medicaid eligible
individuals.
(11) Total Medicaid Uncompensated Care. The total amount of
uncompensated care attributable to Medicaid inpatient and outpatient
services. The amount should be the result of subtracting the amount
identified in Sec. 447.299(c)(9) from the amount identified in Sec.
447.299(c)(10). The uncompensated care costs of providing Medicaid
physician services cannot be included in this amount.
(12) Uninsured IP/OP revenue. Total annual payments received by the
hospital by or on behalf of individuals with no source of third party
coverage for inpatient and outpatient hospital services they receive.
This amount does not include payments made by a State or units of local
government, for services furnished to indigent patients.
(13) Total Applicable Section 1011 Payments. Federal Section 1011
payments for uncompensated inpatient and outpatient hospital services
provided to Section 1011 eligible aliens with no source of third party
coverage for the inpatient and outpatient hospital services they
receive.
(14) Total cost of IP/OP care for the uninsured. Indicate the total
costs incurred for furnishing inpatient hospital and outpatient
hospital services to individuals with no source of third party coverage
for the hospital services they receive.
(15) Total uninsured IP/OP uncompensated care costs. Total annual
amount of uncompensated IP/OP care for furnishing inpatient hospital
and outpatient hospital services to Medicaid eligible individuals and
to individuals with no source of third party coverage for the hospital
services they receive. The amount should be the result of subtracting
paragraphs (c)(12) and (c)(13), from paragraph (c)(14) of this section.
The uncompensated care costs of providing physician services to the
uninsured cannot be included in this amount. The uninsured
uncompensated amount also cannot include amounts associated with unpaid
co-pays or deductibles for individuals with third party coverage for
the inpatient and/or outpatient hospital services they receive or any
other unreimbursed costs associated with inpatient and/or outpatient
hospital services provided to individuals with those services in their
third party coverage benefit package. Nor does uncompensated care costs
include bad debt or payer discounts related to services furnished to
individuals who have health insurance or other third party payer.
(16) Total annual uncompensated care costs. The total annual
uncompensated care cost equals the total cost of care for furnishing
inpatient hospital and outpatient hospital services to Medicaid
eligible individuals and to individuals with no source of third party
coverage for the hospital services they receive less the sum of regular
Medicaid FFS rate payments, Medicaid managed care organization
payments, supplemental/enhanced Medicaid payments, uninsured revenues,
and Section 1011 payments for inpatient and outpatient hospital
services. This should equal the sum of paragraphs (c)(11) and (c)(15)
subtracted from the sum of paragraphs (c)(9), (c)(12) and (c)(13) of
this Section.
(17) Disproportionate share hospital payments. Indicate total
annual payment adjustments made to the hospital under Section 1923 of
the Act.
(18) States must report DSH payments made to all hospitals under
the authority of the approved Medicaid State plan. This includes both
in-State and out-of-State hospitals. For out-of-State hospitals, States
must report, at a minimum, the information identified in
[[Page 77951]]
Sec. 447.299(c)(1) through (c)(6), (c)(8), (c)(9) and (c)(17).
* * * * *
PART 455--PROGRAM INTEGRITY: MEDICAID
0
1. The authority citation for part 455 continues to read as follows:
Authority: Sec 1102 of the Social Security Act (42 U.S.C. 1302).
0
2. Add new subpart D to read as follows:
Subpart D--Independent Certified Audit of State Disproportionate Share
Hospital Payment Adjustments
Sec.
455.300 Purpose.
455.301 Definitions.
455.304 Condition for Federal financial participation (FFP).
Subpart D--Independent Certified Audit of State Disproportionate
Share Hospital Payment Adjustments
Sec. 455.300 Purpose.
This subpart implements Section 1923(j)(2) of the Act.
Sec. 455.301 Definitions.
For the purposes of this subpart--
Independent certified audit means an audit that is conducted by an
auditor that operates independently from the Medicaid agency or subject
hospitals and is eligible to perform the DSH audit. Certification means
that the independent auditor engaged by the State reviews the criteria
of the Federal audit regulation and completes the verification,
calculations and report under the professional rules and generally
accepted standards of audit practice. This certification would include
a review of the State's audit protocol to ensure that the Federal
regulation is satisfied, an opinion for each verification detailed in
the regulation, and a determination of whether or not the State made
DSH payments that exceeded any hospital's specific DSH limit in the
Medicaid State plan rate year under audit. The certification should
also identify any data issues or other caveats that the auditor
identified as impacting the results of the audit.
Medicaid State Plan Rate Year means the 12-month period defined by
a State's approved Medicaid State plan in which the State estimates
eligible uncompensated care costs and determines corresponding
disproportionate share hospital payments as well as all other Medicaid
payment rates. The period usually corresponds with the State's fiscal
year or the Federal fiscal year but can correspond to any 12-month
period defined by the State as the Medicaid State plan rate year.
Sec. 455.304 Condition for Federal financial participation (FFP).
(a) General rule. (1) The State must submit an independent
certified audit to CMS for each completed Medicaid State plan rate
year, consistent with the requirements in this subpart, to receive
Federal payments under Section 1903(a)(1) of the Act based on State
expenditures for disproportionate share hospital (DSH) payments for
Medicaid State plan rate years subsequent to the date the audit is due,
except as provided in paragraph (e) of this section.
(2) FFP is not available in expenditures for DSH payments that are
found in the independent certified audit to exceed the hospital-
specific eligible uncompensated care cost limit, except as provided in
paragraph (e) of this section.
(b) Timing. For Medicaid State plan rate years 2005 and 2006, a
State must submit to CMS an independent certified audit report no later
than the last day of calendar year 2009. Each subsequent audit
beginning with Medicaid State plan rate year 2007 must be completed by
the last day of the Federal fiscal year ending three years from the end
of the Medicaid State plan rate year under audit. Completed audit
reports must be submitted to CMS no later than 90 days after
completion. Post-audit adjustments based on claims for the Medicaid
State plan rate year paid subsequent to the audit date, if any, must be
submitted in the quarter the claim was paid.
(c) Documentation. In order to complete the independent certified
audit, States must use the following data sources:
(1) Approved Medicaid State plan for the Medicaid State plan rate
year under audit.
(2) Payment and utilization information from the State's Medicaid
Management Information System.
(3) The Medicare 2552-96 hospital cost report(s) applicable to the
Medicaid State plan rate year under audit. If the Medicare 2552-96 is
superseded by an alternate Medicare developed cost reporting tool
during an audit year, that tool must be used for the Medicaid State
plan rate year under audit.
(4) Audited hospital financial statements and hospital accounting
records.
(d) Specific requirements. The independent certified audit report
must verify the following:
(1) Verification 1: Each hospital that qualifies for a DSH payment
in the State is allowed to retain that payment so that the payment is
available to offset its uncompensated care costs for furnishing
inpatient hospital and outpatient hospital services during the Medicaid
State plan rate year to Medicaid eligible individuals and individuals
with no source of third party coverage for the services in order to
reflect the total amount of claimed DSH expenditures.
(2) Verification 2: DSH payments made to each qualifying hospital
comply with the hospital-specific DSH payment limit. For each audited
Medicaid State plan rate year, the DSH payments made in that audited
Medicaid State plan rate year must be measured against the actual
uncompensated care cost in that same audited Medicaid State plan rate
year. (3) Verification 3: Only uncompensated care costs of furnishing
inpatient and outpatient hospital services to Medicaid eligible
individuals and individuals with no third party coverage for the
inpatient and outpatient hospital services they received as described
in Section 1923(g)(1)(A) of the Act are eligible for inclusion in the
calculation of the hospital-specific disproportionate share limit
payment limit, as described in Section 1923(g)(1)(A) of the Act.
(4) Verification 4: For purposes of this hospital-specific limit
calculation, any Medicaid payments (including regular Medicaid fee-for-
service rate payments, supplemental/enhanced Medicaid payments, and
Medicaid managed care organization payments) made to a disproportionate
share hospital for furnishing inpatient hospital and outpatient
hospital services to Medicaid eligible individuals, which are in excess
of the Medicaid incurred costs of such services, are applied against
the uncompensated care costs of furnishing inpatient hospital and
outpatient hospital services to individuals with no source of third
party coverage for such services.
(5) Verification 5: Any information and records of all of its
inpatient and outpatient hospital service costs under the Medicaid
program; claimed expenditures under the Medicaid program; uninsured
inpatient and outpatient hospital service costs in determining payment
adjustments under this Section; and any payments made on behalf of the
uninsured from payment adjustments under this Section has been
separately documented and retained by the State.
(6) Verification 6: The information specified in paragraph (d)(5)
of this Section includes a description of the methodology for
calculating each hospital's payment limit under Section 1923(g)(1) of
the Act. Included in the description of the methodology, the
[[Page 77952]]
audit report must specify how the State defines incurred inpatient
hospital and outpatient hospital costs for furnishing inpatient
hospital and outpatient hospital services to Medicaid eligible
individuals and individuals with no source of third party coverage for
the inpatient hospital and outpatient hospital services they received.
(e) Transition Provisions: To ensure a period for developing and
refining reporting and auditing techniques, 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.
(Catalog of Federal Domestic Assistance Program No. 93.778, Medical
Assistance Program)
Dated: September 25, 2008.
Kerry Weems,
Acting Administrator, Centers for Medicare & Medicaid Services.
Approved: October 29, 2008.
Michael O. Leavitt,
Secretary.
Editorial Note: This document was received in the Office of the
Federal Register on Friday, December 12, 2008.
[FR Doc. E8-30000 Filed 12-18-08; 8:45 am]
BILLING CODE 4120-01-P