DEPARTMENT OF HEALTH & HUMAN SERVICES 
Centers for Medicare & Medicaid Services 
7500 Security Boulevard, Mail Stop S2-26-12 
Baltimore, Maryland   21244-1850 
 
                         
   
CMCS Informational Bulletin 
 
DATE:    August 18, 2020 
 
FROM:   Calder Lynch, Deputy Administrator and Director 
Center for Medicaid and CHIP Services (CMCS) 
 
SUBJECT:   Treatment of Third Party Payers (TPP) in Calculating Uncompensated Care 
Costs (UCC) 
 
 
This Center for Medicaid and CHIP Services Informational Bulletin (CIB) provides guidance to 
states on treatment of third party payers (TPP) in determining the hospital-specific Medicaid 
disproportionate share hospital (DSH) payment limits for the state plan rate year (SPRY) 2017 
DSH audits.  The CIB recommends using one of two approaches to properly report 
uncompensated care costs (UCC) if states decide not to include TPP payments as an offset for 
purposes of calculation of the hospital-specific DSH limit prior to the June 2, 2017, effective 
date of the Medicaid Program; Disproportionate Share Hospital PaymentsTreatment of Third 
Party Payers in Calculating Uncompensated Care Costs final rule, 82 Fed. Reg. 16114 (April 3, 
2017) (DSH TPP final rule). This guidance will be most relevant for state Medicaid personnel 
responsible for the DSH program and submission of the annual independent certified audit. 
 
In the April 3, 2017 issue of the Federal Register, the Centers for Medicare & Medicaid Service 
(CMS) published the DSH TPP final rule1. This rule (codified at 42 C.F.R.  447.299(c)(10)) 
clarifies federal requirements regarding the treatment of TPP payments in determining the 
hospital-specific Medicaid DSH payment limit, which is set by statute in section 1923(g) of the 
Social Security Act as a hospitals uncompensated costs incurred in providing inpatient and 
outpatient hospital services to Medicaid beneficiaries and uninsured patients. 
 
The DSH TPP final rule clarifies that for purposes of Medicaid DSH, the total cost of 
uncompensated care is the costs of inpatient and outpatient hospital services remaining after 
accounting for all third party revenues, including but not limited to, payments by Medicare and 
private insurance, associated with Medicaid eligible or uninsured individuals. The final rule took 
effect on June 2, 2017. 
 
Some states and hospitals have challenged our requirements in the final rule regarding the 
treatment of TPP payments in determining UCC for purposes of Medicaid DSH. Following the 
district court decision in Childrens Hosp. Assn of Texas v. Azar (CHAT), which vacated the 
DSH TPP final rule, we advised states that we would not be enforcing that rule as long as that 
district court decision remained operative. Additionally, CMS withdrew FAQs 33 & 34 from the 
Medicaid DSH guidance that was issued in January 2010 titled Additional Information on the 
DSH Reporting and Audit Requirements2, which provided instructions to states for offsetting 
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  TPP payments for services provided prior to June 2, 2017. On August 13, 2019, the United States 
Court of Appeals for the D.C. Circuit issued an opinion reversing the district court in CHAT, 
reinstating the final rule, and remanding the case for further proceedings. Childrens 
Hosp. Assn of Texas v. Azar, No. 18-5135 (D.C. Cir. 2019).  Additionally, we have received 
favorable rulings from two other appellate courtsnamely, the Fifth and Eighth Circuits. See 
Baptist Meml Hosp.-Golden-Triangle, Inc. v. Azar, 18-60592 (5th Cir. 2020); Missouri Hosp. 
Assn v. Azar, No. 18-1778 (8th Cir. 2019).   
 
Based on these court rulings, CMS will be enforcing the DSH TPP final rule as it applies to all 
hospital services furnished on or after June 2, 2017. To assist in complying with the applicable 
requirements, this bulletin provides states with guidance on how to properly report UCC for 
2017 if states decide not to include TPP payments as an offset for purposes of calculating the 
hospital-specific DSH limit for periods before the June 2, 2017 effective date of the DSH TPP 
final rule. 
 
CMS suggests one of two general approaches to comply with the requirements of the DSH TPP 
final rule for a portion of the 2017 SPRY, which is a similar recommendation to FAQ #213 on 
cost report proration in our Additional Information of the DSH Reporting and Audit 
Requirements  Part 2.  
 
Method #1:   
 
The state can determine each hospitals Medicaid and uninsured costs and TPP payments for 
services within the SPRY prior to June 2, 2017 and then separately determine the hospitals 
Medicaid and uninsured costs and TPP payments for services within the SPRY on and after June 
2, 2017.  For the UCC computation for the partial SPRY prior to June 2, 2017, if the state does 
not offset TPP payments in view of the withdrawal of FAQs 33 & 34, it nonetheless must include 
the TPP payments as an offset for the UCC computation for the partial SPRY on or after June 2, 
2017, consistent with the DSH TPP final rule.  The sum of the two partial periods UCC will 
equal the hospitals UCC for the SPRY. 
 
Method #2: 
 
The state can determine each hospitals Medicaid and uninsured costs as it otherwise would for 
the entire SPRY.  The state will also determine each hospitals TPP payments for the entire 
SPRY.  If the state chooses to not use TPP payments as a cost offset in view of CMSs 
withdrawal of FAQs 33 & 34, then the state would pro-rate the TPP payments for the entire 
SPRY to reflect the partial SPRY period on or after June 2, 2017, based on the percentage of the 
SPRY occurring on or after June 2, 2017. A reasonable percentage can be computed based on the 
number of days within the SPRY that occur on or after June 2, 2017, divided by the total number 
of days within the entire SPRY; the resulting fraction would be multiplied by TPP payments for 
the entire SPRY to obtain the pro-rated TPP payment amount attributable to the partial SPRY 
period on or after June 2, 2017. The hospitals Medicaid and uninsured costs for the entire SPRY 
would then only be offset by the portion of the TPP payments attributed to the period on or after 
June 2, 2017. 
 
Regardless of the method used, the state must submit the reporting required under by 42 CFR 
447.299(c), including total SPRY amounts for each data element in the order in which they are 
specified in regulation. The state should not modify the official data element report to include 
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  support for its total SPRY calculations or include additional columns. However, states may 
provide additional modified versions of the data element report to provide support for its 
calculations in determining total SPRY UCC amounts. Any methodology necessary to 
implement the TPP payments offset effective June 2, 2017 for a partial SPRY must be described 
either in the audit report itself or as part of supporting documentation submitted in addition to 
the audit report and the official data element report. 
 
If you have any questions or need additional information, please contact Richard Cuno at 410-
786-1111 or Richard.Cuno@cms.hhs.gov . 
  
1.  https://www.govinfo.gov/content/pkg/FR-2017-04-03/pdf/2017-06538.pdf 
2.  https://www.medicaid.gov/medicaid/downloads/part-1-additional-info-on-dsh-reporting-and-
auditing.pdf 
3.  https://www.medicaid.gov/medicaid/downloads/part-2-additional-info-on-dsh-reporting-and-
auditing.pdf 
 
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