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[Federal Register Volume 79, Number 232 (Wednesday, December 3, 2014)]
[Rules and Regulations]
[Pages 71679-71694]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-28424]

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 447

CMS-2315-F]

RIN 0938-AQ37

Medicaid Program; Disproportionate Share Hospital Payments--
Uninsured Definition

AGENCY: Centers for Medicare & Medicaid Services (CMS), HHS.

ACTION: Final rule.

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SUMMARY: This final rule addresses the hospital-specific limitation on 
Medicaid disproportionate share hospital (DSH) payments under the 
Social Security Act (the Act). Under this limitation, DSH payments to a 
hospital cannot exceed the uncompensated costs of furnishing hospital 
services by the hospital to individuals who are Medicaid-eligible or 
``have no health insurance (or other source of third party coverage) 
for the services furnished during the year.'' This rule provides that, 
in auditing DSH payments, the quoted test will be applied on a service-
specific basis; so that the calculation of uncompensated care for 
purposes of the hospital-specific DSH limit will include the cost of 
each service furnished to an individual by that hospital for which the 
individual had no health insurance or other source of third party 
coverage.

DATES: Effective December 31, 2014.

FOR FURTHER INFORMATION CONTACT: Robert Weaver, 410-786-5914; or Rory 
Howe, (410) 786-4878.

SUPPLEMENTARY INFORMATION:

[[Page 71680]]

I. Background

A. Introduction

    On December 19, 2008, we published a final rule in the Federal 
Register (73 FR 77904) entitled ``Medicaid Disproportionate Share 
Hospital Payments'' (hereinafter referred to as the 2008 DSH final 
rule) that implemented section 1001 of the Medicare Prescription Drug, 
Improvement and Modernization Act of 2003 (MMA) (Pub. L. 108-173), 
requiring State reports and audits to ensure the appropriate use of 
Medicaid Disproportionate Share Hospital (DSH) payments and compliance 
with the DSH limit imposed at section 1923(g) of the Social Security 
Act (the Act). The limit at section 1923(g) of the Act is commonly 
referred to as the hospital-specific DSH limit and specifies that only 
the uncompensated 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 DSH limit. The 
statute describes uninsured individuals as those ``who have no health 
insurance (or other source of third party coverage) for the services 
furnished during the year.''
    Citing an effort to adhere to an accurate representation of the 
broad statutory references to insurance or other coverage and to 
delineate more definitively the meaning of the term uninsured, we 
defined the phrase ``who have health insurance (or other third party 
coverage)'' to refer broadly 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. This regulatory definition was not the same 
as the preliminary guidance previously issued to states and providers 
in 1994.
    In an August 17, 1994 letter to State Medicaid Directors (SMD), CMS 
included a summary of the DSH provisions in the Omnibus Budget 
Reconciliation Act of 1993 (OBRA 93) (Pub. L. 103-66), as a preliminary 
interpretation. In that letter, we endorsed a service-specific approach 
in which individuals were considered ``uninsured'' for purposes of DSH 
to the extent that they did not have third party coverage for the 
specific hospital service that they received. A January 10, 1995 letter 
to the Chair of the State Medicaid Director's Association affirmed the 
service-specific interpretation of the definition of uninsured by 
clarifying that: ``it would be permissible for States to include in 
their determination of uninsured patients those individuals who do not 
possess health insurance, which would apply to the service which the 
individual sought''.
    The regulatory definition published in the 2008 DSH final rule was 
more restrictive than the service-specific definition and is applied on 
an individual-specific basis rather than a service-specific basis. This 
interpretation of the definition of ``uninsured'' superseded all prior 
interpretive issuances.
    After publication of the 2008 DSH final rule, numerous states, 
members of the Congress, and related stakeholders expressed their 
concern that the 2008 DSH final rule definition of the uninsured 
deviated from prior guidance and would have a significant financial 
impact on states and hospitals. This final rule is designed to mitigate 
some of the unintended consequences of the uninsured definition put 
forth in the 2008 DSH final rule and to provide additional clarity on 
which costs can be considered uninsured costs for purposes of 
determining the hospital-specific limit. Specifically, this final 
rule's interpretation and definition of ``uninsured'' affords states 
and hospitals maximum flexibility permitted by statute in calculating 
the hospital-specific DSH limit. Although this rule's definition of 
uninsured may affect the calculation of the hospital-specific DSH 
limit, the final rule does not modify the DSH allotment amounts and 
will have no effect on a state's ability to claim FFP for DSH payments 
made up to the published DSH allotment amounts.

B. Legislative History

    Title XIX of the 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 the DSH payments.
    The OBRA 93 was signed into law on August 10, 1993. Section 13621 
of OBRA 93 added section 1923(g) of the Act, limiting Medicaid DSH 
payments to a qualifying hospital to the amount of eligible 
uncompensated costs incurred. This hospital-specific limit requires 
that Medicaid DSH payments to a qualifying hospital not exceed the 
costs incurred by that hospital for providing inpatient and outpatient 
hospital services furnished during the year to Medicaid patients and 
individuals who have no health insurance or other source of third party 
coverage for the services provided during the year, less applicable 
revenues for those services.

C. Hospital-Specific DSH Limit

    Section 1923(g)(1) of the Act defines a hospital-specific limit on 
Federal financial participation (FFP) for DSH payments. Each state must 
develop a methodology to compute this hospital-specific limit for each 
DSH hospital in the state. As defined in section 1923(g)(1) of the Act, 
the state's methodology must calculate for each hospital, for each 
fiscal year, the costs incurred by that hospital for furnishing 
inpatient hospital and outpatient hospital services during the 
applicable state fiscal year to Medicaid individuals and individuals 
who have no health insurance or other source of third party coverage 
for the inpatient hospital and outpatient hospital services they 
receive, less all applicable revenues for these hospital services. This 
difference, if any, between incurred inpatient hospital and outpatient 
hospital costs and associated revenues is considered a hospital's 
uncompensated care cost (UCC) limit, or hospital-specific DSH limit. 
FFP is not available for DSH payments that exceed a hospital's UCC for 
furnishing inpatient hospital and outpatient hospital services to 
Medicaid eligible individuals and individuals who have no health 
insurance or other source of third party coverage for the services they 
receive in any given state plan rate year.
    To be considered as an inpatient or outpatient hospital service for 
purposes of Medicaid DSH, a service must meet the federal and state 
definitions of an inpatient hospital service or outpatient hospital 
service and must be included in the state's definition of an inpatient 
hospital service or outpatient hospital service under the approved 
state plan. While states may have some flexibility to define the scope 
of inpatient or outpatient hospital services, states must use 
consistent definitions. Hospitals may engage in any number of 
activities, or may furnish practitioner, nursing facility, or other 
services to patients that are not within the scope of inpatient 
hospital services or outpatient hospital services. These services are 
not considered inpatient or outpatient hospital services for purposes 
of the Medicaid DSH calculations.
    Sections 1923(a) and 1923(c) of the Act provide states some 
latitude in determining the level of DSH payment under the Medicaid 
State plan. Section 1923(g) of the Act, however, provides for hospital-
specific limitations on FFP for DSH payments to individual

[[Page 71681]]

hospitals. These limits provide that FFP is not available in payments 
that exceed the level of costs that are considered uncompensated care 
costs (UCCs) that are specifically defined as certain net costs. The 
first component of the net costs is described in statute as 
attributable to hospital costs incurred by individuals eligible for 
medical assistance under the state plan and net of payments made under 
title XIX of the Act. We currently implement this provision by allowing 
all medically necessary inpatient and outpatient costs associated with 
Medicaid eligible individuals authorized under section 1905 of the Act 
and covered under the approved Medicaid State plan regardless of 
whether those beneficiaries or hospitals were entitled to payment as 
part of the Medicaid benefit package under the state plan. To arrive at 
uncompensated Medicaid costs, all Medicaid payments received from the 
state for Medicaid hospital services, including supplemental payments, 
must be netted against those costs.
    The second type of costs allowable as part of the Medicaid DSH 
limit are described in statute as attributable to hospital costs 
incurred by individuals who have no health insurance or other source of 
third party coverage for services furnished during the year. To arrive 
at uncompensated costs for these services, all payments received for 
that care must be netted against those costs (without regard to whether 
the hospital received payments for services provided to indigent 
patients by a state or local governmental unit).

D. CMS Guidance Regarding the Definition of Uninsured

    Following the passage of the OBRA 93, we did not issue a rule 
implementing section 1923(g) of the Act. However, we did receive 
questions concerning the implementation of section 1923(g) of the Act 
from states, including many regarding the criteria used to determine 
which of a hospital's patients ``have no health insurance or other 
source of third party coverage for the services provided.'' In response 
to these questions, we issued a letter on August 17, 1994 to all SMD's 
delineating the Agency's interpretation of statutory provisions of 
section 13621 of OBRA 93.
    The SMD letter specifically established our interpretation of the 
term ``uninsured'' patients for purposes of the calculating OBRA 93 DSH 
limits. We developed a definition of ``individuals who have no health 
insurance or other source of third party coverage for the services 
provided'' based on the statutory language linking coverage and the 
provision of services throughout the year in which the service was 
provided. The August 17, 1994 SMD letter articulated this policy 
interpretation by stating that individuals who have no health insurance 
(or other source of third party coverage) for the services provided 
during the year include those ``who do not possess health insurance, 
which would apply to the service the individual sought treatment.'' We 
affirmed this guidance in a January 10, 1995 letter to the Chair of the 
SMD's Association. This interpretation remained in effect until the 
January 19, 2009 effective date of the 2008 DSH final rule implementing 
the DSH auditing and reporting requirements.

E. MMA and the 2008 DSH Final Rule

    Several United States Department of Health & Human Services Office 
of Inspector General (OIG) audits and United States Government 
Accountability Office (GAO) reports detailing improper DSH expenditures 
in some states, raised concern that we did not have sufficient 
authority to appropriately monitor state compliance with section 1923 
of the Act. In particular, concerns were expressed that states were not 
enforcing the OBRA 93 limits on DSH expenditures. Subsequently, 
Congress include in the MMA section 1001(d), which added new audit and 
reporting requirements to the Act. Specifically, it added section 
1923(j)(1) of the Act, which requires states to submit an annual report 
and audit to ensure the appropriate compliance with DSH limits imposed 
at section 1923(g) of the Act.
    In promulgating the 2008 DSH final rule, we defined the phrase 
``who have health insurance (or other third party coverage)'' by 
referencing individuals who have a legally liable third party payer for 
the services provided by a hospital and by referencing regulations that 
define creditable coverage under 45 CFR parts 144 and 146. The 
regulatory definition of creditable coverage in Parts 144 and 146 was 
developed to implement, in part, the Health Insurance Portability and 
Accountability Act (HIPAA) of 1996 (Pub. L. 104-191) and was designed 
to offer protection to the broadest number of individuals. This 
definition of creditable coverage, which did not exist in 1994 when we 
issued initial guidance on the Medicaid DSH definition of uninsured, is 
applied on an individual-specific basis (that is, does an individual 
have coverage) rather than on the existing service-specific 
interpretation (that is, does an individual have coverage for a 
service). Creditable coverage includes coverage of an individual under 
a group health plan, Medicare, Medicaid, a medical care program of the 
Indian Health Service (IHS) or tribal organization, and other examples 
as outlined in the rules relating to creditable coverage at Sec.  
146.113.
    The new interpretation of the definition of ``individuals who have 
no health insurance or other source of third party coverage for the 
services provided'' articulated in the 2008 DSH final rule, which 
relied on the existing regulatory definition of creditable coverage, 
superseded all prior interpretive issuances.

F. Concerns Raised

    Numerous states, members of the Congress, hospitals and related 
stakeholders expressed concerns following the publication of the 2008 
DSH final rule that the rule's definition of uninsured individuals 
would have a significant negative financial impact on states and 
hospitals. As states and hospitals began to complete the initial audits 
as defined in the final rule, they identified specific issues relating 
to the regulatory definition of uninsured adopted under the rule. 
Specific consequences regarding the practical application of the 
creditable coverage definition were identified and some stakeholders 
questioned the impact of the new definition of uninsured as it relates 
to individuals who had IHS and tribal health coverage for services and 
individuals who had exhausted their insurance benefits or who had 
reached their lifetime insurance limits. Uncompensated costs to 
hospitals for these services were no longer eligible DSH costs under 
the creditable coverage definition applied in the 2008 DSH final rule.
    The issue involving IHS and tribal programs arises because IHS 
coverage is within the scope of ``creditable coverage'' under the 
regulations in Parts 144 and 146, and thus individuals with this 
coverage could not be considered ``uninsured'' even if the IHS or 
tribal health program did not provide the service or authorize coverage 
through the contract health service program (through a purchase order 
or equivalent document). In that circumstance, the hospital would not 
be able to count, as costs eligible for Medicaid DSH payments, costs of 
uncompensated care associated with the provision of inpatient or 
outpatient hospital services to American Indians/Alaska Natives with 
access to IHS and tribal coverage (but no other source of third party 
payment).

[[Page 71682]]

    The IHS and Tribal health programs provide two primary types of 
services: Direct health care services and contract health services. 
Direct health care services are oftentimes limited to primary care 
services and are limited to eligible beneficiaries identified at 42 CFR 
Sec.  136.12. Many of the beneficiaries that receive direct care 
services have no other source of third party coverage. Contract health 
services (CHS) are services provided outside of an IHS or Tribal 
facility to an eligible beneficiary (Sec.  136.23). CHS appropriations 
are discretionary; therefore, coverage is determined based on a 
priority system. Coverage for CHS services is specifically authorized 
on a case-by-case basis through a CHS purchase order or equivalent 
document. IHS and tribal health programs can also issue referrals that 
do not authorize CHS coverage of a service.
    For Medicaid DSH purposes, we believe that American Indians/Alaska 
Natives are considered to have third party coverage for inpatient and 
outpatient hospital services received directly from IHS or tribal 
health programs (direct health care services) and for services 
specifically authorized under CHS. The service-specific determination 
of third party coverage status of American Indian/Alaska Natives for 
services not authorized to be within the scope of coverage by CHS 
should be made consistently with determinations made for non-IHS 
patients. This is the same treatment that, as we describe below, we 
will give to these services that are outside the scope of coverage from 
any other insurer or third party payer.
    The second issue concerns the interaction between the creditable 
coverage definition in the 2008 DSH final rule and hospital services 
provided to individuals with creditable coverage but without coverage 
for specific hospital services received. By using the current 
regulatory creditable coverage definition, an individual is considered 
either to have coverage, as broadly described in regulations, or not to 
have coverage during the period a hospital service was provided. Under 
the 2008 DSH final rule, if an individual had creditable coverage at 
the time of the service, that individual was not considered uninsured 
and the service costs would be excluded from the hospital-specific DSH 
limit calculation. In practical application, this definition appeared 
to exclude from uncompensated care for DSH purposes the costs of many 
services that were provided to individuals with creditable coverage but 
were outside the scope of coverage. Costs affected include those 
associated with individuals who have exhausted their insurance benefits 
or who have reached lifetime insurance limits for certain services, as 
well as services not included in a benefit package as covered, but 
those identified in section 1905 of the Act and covered under the 
approved Medicaid State plan.
    For purposes of defining uncompensated care costs for the Medicaid 
hospital-specific DSH limit, we believe that uncompensated costs of 
providing inpatient and outpatient hospital services to individuals who 
do not have coverage for those specific services should be considered 
costs for which there is no liable third party payer and thus eligible 
costs for Medicaid DSH payments. An example of a situation involves an 
individual with basic hospitalization coverage that has an exclusion 
for transplant services. Should the individual need the excluded 
service, the cost of that service could be included in the Medicaid 
hospital-specific DSH limit. Another example involves an individual 
with excluded benefits or services, or exhaustion of coverage or 
benefits for a limited covered service, due to a pre-existing condition 
(for example, cancer or diabetes). Although both examples involve 
medically necessary services for which an individual is uninsured, 
associated costs would have been prohibited from inclusion in 
calculating the hospital-specific DSH limit based on the 2008 DSH final 
rule and related guidance.
    If an individual is Medicaid eligible, all costs incurred in 
providing inpatient and outpatient hospital services identified in 
section 1905 of the Act and covered under the approved Medicaid state 
plan should be included in calculating Medicaid hospital costs, not 
uninsured hospital costs, for purposes of calculating the hospital-
specific DSH limit, regardless of whether the individual's benefits 
have been exhausted or whether coverage limits have been reached.

II. Provisions of the Proposed Regulations and Analysis of and 
Responses to Public Comments

    On January 18, 2012, we published a proposed rule entitled, 
Disproportionate Share Hospital Payments-Uninsured Definition 
(hereinafter referred to as the 2012 DSH proposed rule). In that rule, 
we proposed to add a new 42 CFR 447.298--Hospital-Specific 
Disproportionate Share Hospital Payment Limit-Definition of Individuals 
Who have no health Insurance (or Other Source of Third Party Coverage). 
Specifically, we proposed to describe the scope of the new regulation 
section and define the following terms:
     Individuals who have no health insurance (or other source 
of third party coverage) for the services furnished during the year.
     Health insurance coverage limit.
     No source of third party coverage for a specific inpatient 
hospital or outpatient service.
     Determination of an Individual's Third Party Coverage 
Status.
     Service-Specific Coverage Determination.
    In response to the 2012 DSH proposed rule, we received 71 public 
comments from State Medicaid agencies, provider associations, 
providers, and other interested parties. The following is a brief 
summary of each proposed provision, a summary of the public comments 
that we received related to that proposal, and our responses to the 
comments.

A. Effective Date

    We proposed this final rule effective for DSH audits and reports 
submitted for state plan rate year 2011 and after, which are due to CMS 
on December 31, 2014. In this final rule, we are making the effective 
date December 31, 2014. Medicaid DSH audits and reports required by 
section 1923(j) of the Social Security Act due to CMS on or after this 
date should rely on the provision of this final rule. We will continue 
to provide technical assistance and guidance to states to assure 
compliance with section 1923(j) of the Act. Comments and our response 
to comments on the effective date are as follows:
    Comment: Many commenters requested clarification on the effective 
date of the rule. Specifically, the commenters wanted to know which DSH 
audit year the modified definition of uninsured would apply to and made 
various suggestions regarding the effective date and the application of 
the modified definition. Some commenters suggested that CMS make this 
final rule effective retroactive to the effective date of the 2008 DSH 
final rule and requested that CMS rescind the discussion of creditable 
coverage in that rule (that is, the 2008 DSH final rule). Other 
commenters suggested CMS clarify if states could use either definition 
for periods prior to the effective date of this rule. Some commenters 
requested that CMS specify whether the new definition of uninsured 
would be applicable to pending DSH audits and reports and requested 
that CMS extend the deadline for states to submit pending DSH audits 
and reports so that accurate data on

[[Page 71683]]

costs and payments allowable under the definition will be captured.
    Response: This final rule has an effective date of December 31, 
2014. We did not see a clear basis consistent with the requirements of 
the Administrative Procedure Act to make this rule retroactive. The 
provisions of this final rule will thus apply to audits due on or after 
that date. The first Medicaid State Plan Rate Year (SPRY) for which 
audits are due after that date, to which the modified definition of 
uninsured is applicable, is SPRY 2011. We believe that this effective 
date will provide states and hospitals with adequate time to implement 
any necessary changes to their administrative process. Therefore, we 
are not extending the submission deadline for any DSH audits and 
reports.

B. Medicaid Eligible Individuals

    DSH payments are limited to the hospital-specific limit defined in 
section 1923(g)(1) of the Act. For each fiscal year, the state must 
calculate this limit for each hospital. We proposed that the limit is 
the costs incurred by that hospital for furnishing inpatient hospital 
and outpatient hospital services during the applicable state fiscal 
year to Medicaid individuals and individuals who have no health 
insurance or other source of third party coverage for the inpatient 
hospital and outpatient hospital services they receive, less all 
applicable revenues for these hospital services.
    If an individual is Medicaid eligible, all costs incurred in 
providing inpatient and outpatient hospital services identified in 
section 1905 of the Act and covered under the approved Medicaid state 
plan should be included in calculating Medicaid hospital costs, not 
uninsured hospital costs, for purposes of calculating the hospital-
specific DSH limit, regardless of whether the individual's benefits 
have been exhausted or whether coverage limits have been reached. 
Comments and our response to comments on Medicaid eligible individuals 
are as follows:
    Comment: Several commenters requested clarification on the 
inclusion of hospital costs relating to services furnished to Medicaid 
eligible individuals for purposes of calculating the hospital-specific 
DSH limit. A few commenters wanted clarification that costs of services 
furnished to Medicaid eligible individuals who have exhausted hospital 
benefits available under a state's Medicaid program will be included in 
the hospital-specific DSH limit calculation. Another commenter stated 
that the cost of hospital services furnished to Medicaid eligible 
individuals that are beyond state plan service limits would be 
allowable as uninsured costs when calculating the hospital-specific DSH 
limit.
    Response: We clarify that the cost of inpatient hospital and 
outpatient hospital services furnished to a Medicaid eligible 
individual who has exhausted applicable state coverage limits, and has 
no other source of third party coverage for the specific service, can 
be included as Medicaid shortfall in the hospital-specific DSH 
calculation.
    Comment: A few commenters requested clarification regarding the 
inclusion of inpatient hospital service costs and revenues in the 
hospital-specific DSH limit when an individual's Medicaid eligibility 
status ends prior to the completion of their inpatient stay. Commenters 
noted that under some Medicaid programs, hospitals are reimbursed by 
Medicaid on a per diem basis and may only bill for the days when 
patients are Medicaid eligible. For the days of care furnished when 
patients are not Medicaid eligible, the commenter requested 
clarification if the days of care would be considered uninsured for DSH 
purposes.
    Response: The hospital-specific limit is calculated by determining 
the uncompensated costs incurred in furnishing inpatient and outpatient 
hospital services to Medicaid eligible individuals and uninsured 
individuals. This final rule establishes a single determination of 
whether costs and revenues associated with a particular service are 
included in the hospital-specific DSH limit calculation. If an 
individual is Medicaid eligible for any day during a single inpatient 
stay for a particular service, states must classify the individual as 
Medicaid eligible for all costs and revenues associated with that 
particular service, including, but not limited to, revenues from all 
third party payors. If the individual is not Medicaid eligible and has 
a source of third party coverage for all or a portion of the single 
inpatient stay for a particular service, states cannot include any 
costs and revenues associated with that particular service when 
calculating the hospital-specific DSH limit. If the individual has no 
source of third party coverage for the specific inpatient hospital or 
outpatient hospital service furnished by the hospital, states should 
classify the individual as uninsured for the particular service and 
include the costs and revenues associated with that particular service 
when calculating the hospital-specific DSH limit.
    Comment: A few commenters requested clarification with respect to 
Medicaid spend-down. States impose monthly or other periodic ``spend-
down'' requirements on individuals that must be met for their incomes 
to qualify under Medicaid income eligibility criteria. Until an 
individual has satisfied his or her spend-down requirements, medical 
assistance is unavailable for services provided and these individuals 
must incur medical costs out-of-pocket. Commenters expressed that it is 
appropriate to treat these individuals as uninsured patients for 
services furnished to them prior to meeting Medicaid spend-down 
requirements.
    Response: To the extent that Medicaid does make any payment for a 
specific inpatient or outpatient hospital service furnished by the 
hospital to an individual who has not met spend-down obligations, and 
the individual has no source of third party coverage for the specific 
service, states must classify the individuals as uninsured for purposes 
of the hospital-specific DSH limit. After the individuals have been 
determined Medicaid eligible after meeting Medicaid spend-down 
requirements, states must classify them as Medicaid eligible for 
purposes of the hospital-specific DSH limit.
Uninsured and Underinsured Individuals
    Comment: A few commenters expressed concern about patients who are 
severely underinsured. One commenter provided a situation where the 
cost to provide care for a 7-day inpatient stay was approximately 
$7,000, but the patient's hospital insurance only paid the hospital 
approximately $2,250. The commenter asked CMS to define an exception 
that would allow these patients to be considered uninsured for purposes 
of the hospital-specific DSH limit.
    Response: To the extent that the hospital received payment for the 
service consisting of a 7-day hospital stay, the individual was 
``insured'' for that specific service. Only the uncompensated 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 DSH limit. The statute describes uninsured 
individuals as those ``who have no health insurance (or other source of 
third party coverage) for the services furnished during the year.'' We 
do not have the authority to craft an exception to include insured 
individuals whose insurance does not pay the full cost of covered 
services.
    Comment: A few commenters suggested that CMS should modify the 
definition of ``no source of third party coverage'' for a specific 
inpatient or

[[Page 71684]]

outpatient hospital service under Sec.  447.295(b) because it mentions 
only annual or lifetime limits. Commenters also suggested that CMS 
should revise the regulatory language to explicitly capture cost for 
individuals who ``have exhausted covered benefits.''
    Response: We have revised the regulations text to clarify that 
individuals who have exhausted benefits before obtaining services will 
be considered uninsured. In contrast, individuals who exhaust covered 
benefits during the course of a service will not be considered 
uninsured for that particular service. We will work with states and 
stakeholders to ensure that all stakeholders receive clear federal and 
state guidance regarding service-specific coverage determinations.
    Comment: A few commenters stated that the final rule should define 
whether an individual is uninsured on a service-specific basis.
    Response: This final rule implements a service-specific approach to 
define individuals who have no health insurance (or source of third 
party coverage) for purposes of calculating the hospital-specific DSH 
limit.
    Comment: Several commenters requested that Medicaid eligible 
individuals who have private insurance should be excluded from the 
hospital-specific DSH limit calculation. In determining uncompensated 
care, CMS requires hospitals to take into account all revenues and 
costs associated with the care and treatment of Medicaid patients. When 
Medicaid patients also have insurance, the commenters suggest factoring 
payments from commercial insurance may artificially lower a hospital's 
DSH limit, especially if the hospital serves a high percentage of 
Medicaid patients who have dual coverage.
    Response: To ensure payment accuracy and program integrity, the 
2008 DSH final rule and associated guidance clarified that all costs 
and revenues associated with Medicaid eligibles that have a source of 
private insurance coverage, including all third party payer revenues 
received by the hospital on behalf of the patient, must be included in 
the calculation of the hospital-specific DSH limit. Before this policy 
clarification, some states and hospitals were excluding costs and 
revenues, or simply revenues, associated with Medicaid eligible 
individuals with an additional source of coverage, such as Medicare or 
private insurance, when calculating hospital-specific DSH limits. This 
practice led to the artificial inflation of hospital-specific DSH 
limits and permitted some hospitals to be paid twice based on the same 
costs. The clarifying policy included in the 2008 DSH final rule and 
associated guidance promotes fiscal integrity by preventing duplicate 
payment to DSH hospitals. It also promotes program integrity by 
ensuring that hospitals receive Medicaid DSH payments only up to the 
uncompensated costs incurred in providing inpatient and outpatient 
hospital services to Medicaid individuals or individuals with no health 
insurance or other source of third party coverage.
Scope of Inpatient and Outpatient Hospital Services
    To be considered as an inpatient or outpatient hospital service for 
purposes of Medicaid DSH, a service must meet the federal and state 
definitions of an inpatient hospital service or outpatient hospital 
service and must be included in the state's definition of an inpatient 
hospital or outpatient hospital service under the approved state plan. 
Comments and our response to comments on the scope of inpatient and 
outpatient hospital services are as follows:
    Comment: Several commenters requested clarification on the scope of 
Medicaid inpatient and outpatient hospital services. Specifically, they 
requested CMS to confirm that it did not intend to narrow the scope of 
these services for DSH purposes from what is considered allowable under 
the Medicaid program section 1905(a) of the Act.
    Response: Within broad federal parameters, each state is 
responsible under Sec. Sec.  440.10 and 440.20 for defining the amount, 
duration, and scope of inpatient or outpatient hospital services. This 
final rule does not affect the ability for states to define the scope 
of inpatient or outpatient hospital services. For Medicaid eligible or 
uninsured individuals, all costs incurred in providing inpatient 
hospital and outpatient hospital services identified in section 1905 of 
the Act and covered under the approved Medicaid state plan should be 
included when calculating the hospital-specific DSH limit.
    Comment: A few commenters requested that CMS confirm that uninsured 
costs of hospital-based outpatient departments and clinics are to be 
included in the calculation of uncompensated care costs, irrespective 
of whether the hospital department or clinic is a federal qualified 
health care (FQHC) for Medicaid payment purposes.
    Response: Services that could be included in more than one benefit 
category must be treated consistently for payment purposes, since the 
payment methodologies are different for each benefit category. In 
particular, if a hospital elects to have a department meet the 
conditions to participate in Medicaid as a provider of FQHC services, 
and claims payment for its services as an FQHC, the services of that 
department are not considered outpatient hospital services. Although 
the FQHC may be provider based, its services are not recognized or paid 
as outpatient hospital services, but instead are covered and paid for 
as an FQHC service under section 1905(a)(2)(C) of the Act. Section 
1923(g) of the Act only permits costs and revenues associated with 
services furnished as inpatient hospital and outpatient hospital 
services to be included when calculating the hospital-specific DSH 
limit. Congress provided for a different, cost-based, payment 
methodology for FQHCs, under sections 1902(a)(15) and 1902(bb) of the 
Act and did not provide for DSH payments as part of that methodology. 
In sum, states cannot include costs and revenues associated with FQHC 
services because payment for the services is authorized under a 
statutory benefit separate and distinct from outpatient hospital 
services that entitles the provider to a cost-based payment rate.
    Comment: A few commenters noted the preamble in the proposed rule 
provided examples of hospital services that would have been prohibited 
from the hospital-specific DSH limit calculation based on the 
individual-specific approach set forth in the 2008 DSH final rule, but 
would be permissible under the service-specific approach in the 2012 
DSH proposed rule. The examples make reference to medically necessary 
hospital services furnished to individuals who did not have coverage 
for those specific services. Commenters requested CMS to clarify if 
hospitals had to verify with Medicaid that services to uninsured 
individuals meet Medicaid protocols, such as prior authorization, and 
medical necessity reviews.
    Response: Hospitals do not need to verify with Medicaid that 
services to uninsured individuals meet Medicaid protocols, such as 
prior authorization and medical necessity reviews. To the extent that 
there is a non-Medicaid third party payer that covers the service for 
the individual subject to reasonable conditions, we expect the hospital 
to take appropriate steps to ensure that the individual can take 
advantage of that coverage. Thus, we do not expect that hospitals will 
claim as uncompensated care services for which an insurer would have 
paid if the hospital had followed appropriate protocols. To the

[[Page 71685]]

extent that a hospital systematically fails to follow those protocols, 
there could be an issue for state regulatory authorities.
    Comment: Several commenters requested CMS to clarify statements in 
the preamble of the 2012 DSH proposed rule regarding the requirement 
that the definition of inpatient and outpatient hospital services for 
DSH purposes must be consistent with federal and state regulations and 
be included in a Medicaid state plan. With respect to being included in 
the state plan, several commenters noted possible scenarios where care 
and services may be available in an inpatient or outpatient basis, but 
the state plan might not cover the treatment at all, or might exclude 
it because the Medicaid individual had exceeded limits on amount or 
duration. Commenters cited transplants as a service that might not be 
available under a particular state's Medicaid program, but fits within 
the federal definition of a Medicaid inpatient hospital service.
    Response: For Medicaid eligible or uninsured individuals, only 
costs incurred in providing inpatient hospital and outpatient hospital 
services identified in section 1905 of the Act and that would meet the 
definition under the approved Medicaid state plan as inpatient hospital 
or outpatient hospital services should be included when calculating the 
hospital-specific DSH limit. Any services that fall outside of either 
definition are not eligible for inclusion in the calculation of the 
hospital-specific limit. For example, if transplant services are not 
covered under the approved state plan in a particular state, costs 
associated with those services cannot be included in calculating the 
hospital-specific DSH limit. In another example, a hospital might own 
and operate a nursing facility or a home health agency, employ 
physicians or other licensed practitioners, and bill for their 
professional services. While a hospital may have a connection to these 
services, they are not recognized as inpatient or outpatient hospital 
services and are not covered under the inpatient hospital or outpatient 
hospital Medicaid benefit service categories. Accordingly, the 
associated costs and revenues cannot be included in calculating the 
hospital-specific DSH limit.
    Services may be included in the DSH calculation if they are within 
the scope of the definition of inpatient or outpatient hospital 
services even if they are not covered under Medicaid because of amount 
or durational limits. States may establish reasonable limits on 
inpatient and outpatient services to ensure medical necessity or 
control utilization of services. Inpatient or outpatient hospital 
services furnished beyond state established limits on amount and 
duration may be included in the hospital-specific limit calculation to 
the extent that the services being sought are hospital services that 
the state Medicaid program would otherwise pay for if not for the 
limits being exceeded.
    Comment: Several commenters requested clarification of swing bed 
services and stated that because these services are categorically 
inpatient in nature they should be included in a the calculation of the 
hospital-specific DSH limit.
    Response: The commenters are referring to hospitals that have 
agreements to swing their acute hospital beds to long term care 
services in accordance with section 1913 of the Act. It is unclear if 
the commenters are referring to inpatient hospital care services or 
less acute nursing facility care services. The inpatient hospital care 
services must be included when calculating the hospital-specific DSH 
limit. The long term care services; however, are not inpatient hospital 
or outpatient hospital services and are covered under the nursing 
facility services benefit for Medicaid or skilled nursing facilities 
(SNF) benefit for Medicare. Therefore, these levels of services cannot 
be included in the calculation of the hospital-specific DSH limit.
    Comment: A commenter requested clarification of whether days of 
care provided while patients are waiting to be discharged due to lack 
of appropriate setting can be included in the calculation of the 
hospital-specific DSH limit.
    Response: Under Medicaid, these inpatient days are commonly 
referred to as inappropriate level of care days or administratively 
necessary care days. These days of care are recognized as inpatient 
hospital services under section 1905(a) of the Act and are explicitly 
acknowledged in section 1923(b) of the Act that requires these days to 
be included in the DSH eligibility formula.

C. Timing of Service Specific Determination

    We specified in the proposed rule the determination of an 
individual's status as having a source of third party coverage can 
occur only once per individual per service provided and applies to the 
entire service, including all elements as that service, or similar 
services, would be defined in Medicaid. Comments and our response to 
comments on the timing of service specific determination are as 
follows:
    Comment: Many commenters suggested that it would be appropriate to 
allow for redeterminations during a stay when coverage benefits are 
exhausted during a hospital stay. Commenters suggested various 
scenarios. For example, a patient with private insurance coverage is 
admitted to a hospital for treatment and 10 days following admission 
they reach their lifetime maximum coverage limit, but remain in the 
hospital for a total of 20 days. The commenters stated that a single 
determination would produce inequitable results. The commenters 
recommended that the patient should be considered uninsured for the 
remaining portion of their treatment after coverage limits are reached 
or exhausted during a hospital stay.
    Response: We are finalizing the provision of the proposed rule that 
the determination of an individual's status as having a source of third 
party coverage can occur only once per individual per service provided 
and applies to the entire service, including all elements as that 
service, or similar services, would be defined in Medicaid. When 
benefits have been exhausted for individuals with a source a third 
party coverage, only costs associated with separate services provided 
after the exhaustion of covered benefits are permitted for inclusion in 
the calculation of the hospital-specific DSH limit. Section 1923(g) of 
the Act specifies that only certain costs associated with ``individuals 
who are eligible for medical assistance under the state plan or who 
have no health insurance (or other source of third party coverage) for 
the services furnished during the year'' are included when calculating 
the hospital-specific DSH limit. Even if the third party coverage is 
exhausted or otherwise limited for a particular service, the individual 
still has a source of third party coverage for that particular service. 
Therefore, we are finalizing the single service determination as 
proposed.
    Comment: Many commenters suggested allowing revisions to an 
individual's insurance status during an inpatient hospital stay as 
necessary based on additional information received regarding the 
individual's coverage. The commenters noted that the coverage 
determination usually occurs at intake, then new information may be 
obtained that warrants a change from the initial determination, (for 
example, a patient is retroactively determined eligible for Medicaid, 
or the patient's third party insurance coverage has expired or has been 
exhausted).

[[Page 71686]]

    Response: We do not think the single coverage determination 
precludes corrections to the initial determination. When a hospital 
classifies an individual as uninsured at intake, then later determines 
that the individual had Medicaid or third party coverage for that 
particular service, we would expect the hospital to re-classify the 
individual for purposes of calculating the hospital-specific DSH limit. 
Any individuals that have a source of third party coverage for a 
particular service, even if that coverage is limited, are considered 
for Medicaid DSH purposes to have a source of third party coverage even 
if their initial determination at intake is uninsured.
    Comment: Several commenters expressed concern that a service-
specific coverage determination for each service rendered to each 
individual with third party liability could be unduly burdensome to 
hospitals, contracted DSH auditors and states. Commenters stated that 
CMS should issue clear instructions regarding acceptable implementation 
of this requirement, the level of detail of claims, and patient data 
needed.
    Response: We will work with states to ensure that all stakeholders 
receive clear federal and state guidance regarding service-specific 
coverage determinations. In general, it would be to the advantage of 
hospitals to engage in service-specific coverage determinations because 
it would result in more documented uncompensated care costs.
    Comment: One commenter recommended that CMS increase accountability 
and improve patient access to financial assistance by directing funding 
to states that condition hospital payments on provision of financial 
assistance to needy patients.
    Response: The comments are outside the scope of the proposed and 
final rule. Section 1923(c) of the Act provides states with 
considerable flexibility in establishing DSH payment methodologies as 
long as the DSH payments under the methodology do not exceed the 
state's federal DSH allotment and the hospital-specific DSH limit.
Co-Insurance, Co-Pays, and Deductibles
    Section 1923(g) of the Act excludes costs associated with 
individuals with a source of third party coverage for a service from 
the calculation of the hospital-specific DSH limit. In the 2012 DSH 
proposed rule, we stated that costs associated with unpaid coinsurance, 
deductibles, bad debts, and payer discounts for individuals with a 
source of third party coverage are excluded when calculating the 
hospital-specific DSH limit. In the proposed rule, we reiterated this 
statement and are finalizing those provisions as proposed without 
change. Comments and our response to comments regarding co-insurance, 
co-pays, and deductibles are as follows:
    Comment: A commenter requested clarification regarding how Medicaid 
programs should treat out-of-pocket costs relating to an inpatient 
stay. The commenter provided an example where a patient is admitted for 
an inpatient stay and his or her insurance does not provide any payment 
for the first 5 days of the stay. The insurance plan requires that the 
patient pay out-of-pocket until day six. The commenter requested 
clarification regarding the treatment of the first 5 days for purposes 
of calculating the hospital-specific DSH limit, including cases where 
the payment exclusion is due to an individual's pre-existing condition.
    Response: When an individual has a source of third party coverage 
for an inpatient or outpatient hospital service, the costs and revenues 
cannot be included in the calculation of the hospital-specific limit 
unless the individual is also Medicaid eligible. In the commenter's 
example, to the extent that the individual has a source of coverage for 
the specific inpatient hospital service, it could not be included in 
the calculation of the hospital-specific limit. Any uncompensated costs 
that hospitals incur for unpaid co-pays, co-insurance, or deductibles 
associated with a non-Medicaid eligible individual who has insurance 
cannot be included in the calculation of the hospital-specific limit. 
Exclusions relating to pre-existing conditions would depend on the 
terms and nature of the exclusion. If the exclusion bars coverage for 
particular services, the person would be considered uninsured. When the 
exclusion results in a higher deductible or cost sharing for services 
related to the preexisting condition, the person would be considered 
insured.
    Comment: Many commenters stated that patients with a high-
deductible plan/catastrophic plan should be consider uninsured for 
services until they meet their deductible or spending thresholds. The 
commenters stated that hospitals are bearing the burden of unreimbursed 
costs associated with high deductible amounts or catastrophic health 
plans where the individual has no means of paying the deductible 
amounts. Additionally, commenters noted that the unpaid deductible and 
copayments are the fastest growing part of uncompensated care costs and 
requested CMS to expand the definition of uninsured to include the 
underinsured costs associated with unpaid copayments and deductible in 
the hospital DSH limits.
    Response: We acknowledge concerns regarding the financial 
challenges that hospitals may encounter in providing services to 
individuals with high deductible or catastrophic coverage health plans. 
Section 1923(g) of the Act restricts the calculation of DSH-eligible 
uncompensated costs to those incurred in providing inpatient and 
outpatient hospital services to Medicaid-eligible individuals and those 
individuals with no source of third party coverage for the services 
they receive. When an individual's policy includes in its benefit 
package inpatient or outpatient hospital services obtained by the 
individual, we consider this person to have a source of third party 
coverage for services included in the benefit package unless the 
individual has exhausted insurance coverage prior to the service at 
issue. When benefits have been exhausted for individuals with a source 
a third party coverage, only costs associated with separate services 
provided after the exhaustion of covered benefits are permitted for 
inclusion in the calculation of the hospital-specific DSH limit. The 
individual is considered insured for the service even in instances when 
the policy requires the individual to satisfy a deductible and/or share 
in the overall cost of the hospital service.
    Comment: Several commenters stated that individuals whose only 
source of coverage is a limited benefit plan should be treated as 
uninsured for purposes of the DSH limit calculation. For example, if a 
patient has an extended stay in a hospital trauma center after a car 
accident, and the patients only coverage is through limited medical 
care payment under an auto insurance plan (a per accident amount), the 
hospital should be able to include as uncompensated cost the 
significant services provided once the per accident limitation are 
exceeded. The commenter asserts that these plans that are not health 
plans or health insurers, and the medical benefits they afford are 
incidental to the principle insurance benefits. These type of policies 
are defined as ``excepted benefits'' under the Health Insurance 
Portability and Accountability Act regulations at Sec.  148.220. In 
some cases, the legal liable third party may not be determined until 
years after the services were provided because the liability of these 
third parties are not established for specific services. A hospital's 
entitlement may not be certain until after legal proceedings or 
negotiations. Individuals, in these situations should

[[Page 71687]]

be treated as uninsured for the costs of services provided offset by 
the amount of any payment actually received by the hospital from a 
legally liable third party.
    Response: We have previously considered limited benefit plans and 
issued our position in the 2008 DSH final rule. In that final rule, we 
provided that these plans, such as auto insurance, would not be 
considered insurance except when they are legally liable to pay for 
hospital care. The change to a service-specific approach does not 
affect our previous guidance.
    The 2008 final DSH rule and related CMS guidance addressed the 
treatment of revenue offsets that must be applied against the cost of 
providing services to individuals with no source of third party 
coverage. The guidance addressed future revenue streams including, but 
not limited to, legal decisions, payment plans, and recoveries. The 
General DSH Audit and Reporting Protocol specified that that states, 
hospitals, and auditors, for purposes of individuals with no source of 
third party coverage, should not attempt to allocate payments received 
during the State plan rate year to services provided in prior periods. 
It, instead, required that all payments received in the year will be 
counted as revenue to the hospital in that same year. It was understood 
that some costs incurred during the state plan rate year under audit 
may be associated with future revenue streams (legal decisions, payment 
plans, and recoveries), but that the payments must not counted as 
revenue until actually received.
    When a hospital classifies an individual as uninsured at intake, 
then later determines that the individual had Medicaid or third party 
coverage for that particular service, we expect the hospital to re-
classify the individual for purposes of calculating the hospital-
specific DSH limit. Any individuals that have a source of third party 
coverage for a particular service, including limited coverage, are 
considered for Medicaid DSH purposes to have a source of third party 
coverage even if their initial determination at intake is uninsured. We 
recognize that corrections to the initial determination may be 
warranted based on information available only after the completion of 
the DSH audit and reports for a particular state plan rate year. In 
these instances, states are not required to correct the audit for the 
closed period to reclassify the individual. However, for individuals, 
states must still offset all associated revenues received by the third 
party payer against costs incurred for the uninsured in the year in 
which the revenue is received. If cumulative correcting adjustments 
would be significant on a state-wide basis due to a series of warranted 
corrections that arise post-audit (for example, widespread errors in 
individual coverage determinations), states should correct the audit 
and report by indicating post-audit adjustments and must reopen the 
audit to make a correction.
    Comment: A commenter recommended that costs associated with unpaid 
co-insurance, deductibles, and payer discounts that qualify as charity 
care be permitted in the calculation of the hospital-specific limit. 
The instructions for Form CMS 2552-10, Worksheet S-10 Hospital 
Uncompensated and Indigent Care Data specifically states that 
deductible and coinsurance payments for patients who are covered by 
public or private insurers, which the provider has a contractual 
relationship and are approved for charity care be included on line 20, 
column 2. The commenter believes that these instructions should be 
consistent for both the hospital-specific DSH limit calculation and the 
Medicare Form 2552-10, Worksheet S-10.
    Response: Medicare and Medicaid are separate programs and the 
statutory framework for each program is different. Costs that may be 
relevant for Medicare purposes, such as bad debt or charity care, are 
not relevant to Medicaid DSH. These costs are relevant to Medicare 
payment mechanisms that ensure that the Medicare program does not shift 
costs onto other payers, which do not apply in the Medicaid program. 
Section 112(b) of the Balance Budget Refinement Act (BBRA) requires 
that Medicare-participating hospitals submit in their Medicare cost 
reports data on costs incurred by a hospital for providing inpatient 
and outpatient hospital services for which no compensation is received. 
This provision specifically requires hospitals to include data on non-
Medicare bad debt, charity care, and charges for Medicaid and indigent 
care. While there may be overlaps between these costs as reported in 
Medicare cost reports and the costs considered under the Medicaid 
hospital-specific DSH limit at section 1923(g) of the Act, the Medicare 
reporting requirement is different and broader than the Medicaid 
hospital-specific DSH limit at section 1923(g) of the Act. Thus, the 
same data cannot be used for both purposes.
    Comment: A number of commenters stated bad debt and payer discounts 
should be included in the Hospital DSH limit.
    Response: As defined in the DSH audit reporting requirement in 
regulations at Sec.  447.299(c)(15), uncompensated care costs for 
inpatient and outpatient hospital services does not include bad debt or 
payer discounts related to services furnished to individuals who have 
health insurance or another third party payer.

D. Physician Services

    The hospital-specific DSH limit established in section 1923(g) of 
the Act permits the inclusion of inpatient and outpatient hospitals 
service costs only. Services that are not inpatient or outpatient 
hospital services, including physician services, must be excluded when 
calculating the hospital-specific DSH limit. Comments and our response 
to comments regarding physician services are as follows:
    Comment: Many commenters requested that unreimbursed physician 
costs associated with hospital services should be included in the 
hospital DSH limit calculation. Two common requests were that states be 
permitted to define their inpatient and outpatient hospital benefits 
services of physicians employed by the hospital. The commenters stated 
that since the costs of physicians furnishing services to the hospital 
are already allowable, they interpret this to refer to direct patient 
care furnished by physicians. Additionally, commenters stated that CMS 
could allow a hospital to include the cost of its salaried physicians 
in its DSH costs as long as those salaries were not greater than what 
is allowed under the Medicare program. Commenters believe if the 
hospitals do not separately bill for physician services then the costs 
hospitals incur to secure physician services to serve a hospital's 
Medicaid population are legitimate costs.
    Response: Section 1905(a) of the Act identifies categories of 
medical items and services eligible for federal matching payment under 
the Medicaid program. Inpatient hospital services, outpatient hospital 
services, and physician services are listed as separate and distinct 
categories of Medical assistance. Inpatient hospital services are 
defined in section 1905(a)(1) of the Act and implementing regulations 
at Sec.  440.10, outpatient hospital services are defined at section 
1905(a)(2)(A) of the Act and implementing regulations at Sec.  
440.20(a), and physician services are defined at section 1905(a)(5)(A) 
of the Act and implementing regulations at Sec.  440.50(a).
    The DSH limit provided in section 1923(g) of the Act, refers only 
to hospital services and does not include physician services or any 
other Medicaid services listed in section 1905(a) of the Act. 
Furthermore, state

[[Page 71688]]

DSH payments are made pursuant to section 1902(a)(13)(A)(iv) of the Act 
as part of state payment rates set for inpatient hospital services to 
take into account the situation of hospitals that serve a 
disproportionate share of low-income patients with special health 
needs. Section 1923(a)(1)(B) of the Act requires states in paying for 
inpatient hospital services, to increase payments to the hospitals 
consistent with the minimum DSH payment requirements set forth in 
section 1923(c) of the Act. While the term ``hospital services'' does 
expand DSH beyond just inpatient hospital services, this expansion is 
not unlimited, and the legislative history shows that the term is 
limited to include only outpatient hospital services.
    The distinction between physician services, inpatient and 
outpatient services is a long standing position and recognized 
throughout the Medicaid program as well as other insurance programs and 
hospital accounting practices. The Medicaid program has special 
requirements that are unique to each service type. Hospital services 
are subject to public process requirement in section 1902(a)(13)(A) of 
the Act and as previously mentioned, rates set under that process must 
include payment adjustment for DSH providers that comply with the 
requirement in section 1923 of the Act. Medicaid inpatient and 
outpatient hospital services are also subject to additional payment 
requirements known as Medicaid upper limits (UPLs) in regulations at 
Sec.  447.272 and Sec.  447.321, with inpatient hospital service also 
being limited to customary charges pursuant to section 1903(i)(3) of 
the Act and regulations at Sec.  447.271. Unlike hospital services, 
Medicaid physician services are subject to the general public notice 
requirements at Sec.  447.205, Medicaid economy, efficiency, and 
quality of care requirements, but not subject to any specific 
regulatory UPL requirements. With respect to primary care physician 
services are eligible for higher federal matching rate.
    As we explained in the preamble of the 2008 DSH final rule, 
physician professional services are generally not recognized or 
considered hospital service costs reporting process under either 
Medicaid or Medicare. Physician services cost identified as 
professional services are removed from the inpatient and outpatient 
hospital costs as part of the hospital cost step down process. The 
Medicare 2552 cost report does not include direct physician patient 
care services. These costs are identified, segregated, and are paid not 
as a hospital services but separately as professional services in 
accordance with a fee schedule established for physician services. 
Therefore, any physician costs attributable to professional services 
that are reimbursed as physician services under a state's Medicaid 
program, are not allowable in the DSH limit calculation, since by 
statute, the DSH limit can include only inpatient and outpatient 
hospital services.
    The general rule is that physician services that are covered and 
reimbursed as such under a state's Medicaid program are excluded from 
the DSH limit calculation. We realize in some instances, some states 
may set a single rate for an inpatient or outpatient hospital service 
and included in the rate is the costs of physician services. A 
hypothetical example might be a single per diem rate for a day of 
inpatient care, with no separate payment for physician services to a 
hospital or physician. In that instance, the physician cannot bill the 
patient or the Medicaid program for their professional services since 
it is already included in the per diem rate paid to the hospital. We do 
not feel this is the customary practice, but where this practice is 
used, the entire bundle of services included in the per diem hospital 
payment rate, including any physician and practitioner services, would 
be considered part of the inpatient or outpatient hospital services.
    Comment: A commenter noted that exclusion of physician 
uncompensated care costs in the DSH limit calculation has had a 
detrimental financial impact on children's hospitals and fails to 
recognize the increasing important role of hospital based physicians in 
guaranteeing Medicaid and low-income children access to primary and 
specialty care. Commenters stated data indicates that hospitals now 
employ approximately 25 percent of all active physicians, and these 
employment relationships are expected to increase as more integrated 
care models enter the market place. Therefore, they believe it is 
critical for CMS to recognize the safety net role of children hospital 
and the financial losses that hospitals absorb should be eligible for 
inclusion in the hospital-specific DSH limit under section 1923(g) 
definition because they represent losses incurred by a DSH eligible 
hospital for services to Medicaid beneficiaries.
    Response: We appreciate and value the contribution children's 
hospitals, the physicians they employ to assure Medicaid, and other low 
income children have access to needed care and services. While the 
Medicaid statute does not contemplate DSH payments beyond inpatient 
hospital services that exceed the uncompensated care cost incurred for 
inpatient and outpatient hospital services furnished to Medicaid and 
uninsured individuals, states have the option to increase Medicaid 
payments rate for physician services for services furnished in 
children's hospital settings. Physician payment rates are not subject 
to the same limitations as payments to hospital services.
    Comment: A few commenters stated many safety net hospitals, 
particularly those located in inner-cities and rural areas, employ 
physicians in order to provide access to critical hospital inpatient 
and outpatient services for their communities. The commenters stated 
that the costs associated with employing physicians are legitimate 
hospital costs and should be included in the calculations of the 
hospital-specific DSH limitations. These commenters stated that 
excluding these costs from this calculation only further threatens the 
tenuous financial status of safety net hospitals and their ability to 
maintain services for underserved populations.
    Response: We value and appreciate all health care providers that 
participate in the Medicaid program to make health care available in 
the communities they serve. Hospital services and physician services 
are separate and distinct services. The DSH limit in section 1923(g) of 
the Act is specific to only hospital services. Physician professional 
services recognized, billed, or paid as such under a state's Medicaid 
program are not allowable costs for purposes of Medicaid DSH. To the 
extent that states wish to provide incentives for physicians to work in 
underserved areas, states have the option to target adjustments to 
physician payment rates.
    Comment: A commenter stated that it appears CMS has approved 
waivers in two states that allow state Medicaid programs to reimburse 
hospitals for hospital-based physician costs. These costs associated 
with securing physician services to serve a hospital's Medicaid 
population are legitimate unreimbursed costs if the hospital does not 
separately bill for the services. The waivers seem to instruct that 
both costs and payments be excluded from DSH audits. If this is the 
case, this option would achieve the same result and could be considered 
by CMS as an alternative for the DSH limit calculation.
    Response: We believe the commenter may be referring to Section 1115 
waivers. Section 1115 of the Act gives the Secretary of Health and 
Human Services (the Secretary) authority to approve experimental, 
pilot, or demonstration projects that promote the objectives of the 
Medicaid and Children's Health Insurance Program (CHIP) programs. The 
purpose of these demonstrations, give states additional

[[Page 71689]]

flexibility to design and improve their programs, to demonstrate and 
evaluate policy approaches such as:
     Expanding eligibility to individuals who are not otherwise 
Medicaid or CHIP eligible.
     Providing services not typically covered by Medicaid.
     Using innovative service delivery systems that improve 
care, increase efficiency, and reduce costs.
    In general, the section 1115 demonstrations are approved for a 
five-year period and can be renewed, typically for an additional 3 
years. The demonstrations must be ``budget neutral'' to the federal 
government, which means that during the course of the project federal 
Medicaid expenditures will not be more than federal spending could have 
been without the use of 1115 waiver authority. Several states have 
requested and have approved section 1115 demonstration proposals that, 
in part, allow the state to use savings generated by the overall 
demonstration project for payments to hospitals for unreimbursed 
physician costs provided by hospital employees or contractors. For DSH 
purposes, these are considered to be payment for physician services 
and; therefore, neither the costs nor payments related to physician 
services are included in the DSH limit calculation.

E. Prisoners

    The preamble to the proposed rule clarified that the proposed 
change in the definition of uninsured would not have any impact on how 
prisoners are treated in the DSH limit calculation. The DSH limit 
includes hospital services to individuals who are Medicaid eligible or 
who have no health insurance. Current DSH inmate guidance issued to 
states in a letter dated August 8, 2002, addressed only the uninsured 
possibility, and clarified that prisoners would not qualify for DSH 
under that authority. That guidance stated that since the federal, 
state, or local agencies that hold individuals in custody are 
responsible to cover their basic needs (including medical needs), they 
are legally liable for medical care and are a source of third party 
coverage.
    The preamble discussion may have created some unnecessary confusion 
because it did not address Medicaid eligible inmates. We received many 
comments pointing to prior CMS guidance related to inmate and 
eligibility Medical Assistance. Medicaid generally does not pay for 
medical care and services to inmates. This is known as the inmate of a 
public institution exclusion. This exclusion is not absolute as there 
is an exception regarding patients in a medical institution. Pursuant 
to Medicaid policy set forth in a 1997 letter to all state Medicaid 
Directors, we interpreted this exception to allow Medicaid to pay for 
inpatient care furnished to inmates that have been determined to be 
eligible for Medicaid under a state's program. In adopting the service 
specific definition of uninsured, we did not mean to suggest a change 
in long standing inmate policy under the regular program. With respect 
to DSH, in those cases in which a Medicaid eligible individual meets 
the patient in a medical institution exception--(that is, a Medicaid 
eligible inmate is transferred to a hospital to be a patient for 
inpatient services), the state Medicaid agency has determined the 
individual to be eligible for Medicaid, and makes a regular hospital 
payment, DSH can be used to make up any shortfall. The costs of the 
service less non-DSH payments would be factored into the limit 
calculation. (Services received or costs incurred as a patient in a 
prison hospital, or in a dedicated prison ward, cannot be included in 
the calculation of the hospital-specific DSH limit since these entities 
could not meet the hospital conditions of participation related to 
patient rights.) The exception to the exclusion is limited to inpatient 
services, so any outpatient services obtained by an inmate would not be 
reimbursable under regular Medicaid or could not be included in the 
calculation of DSH.
    Comment: Many commenters suggested CMS not to change current non-
DSH Medicaid inmate policy. We also received many inquiries related to 
Medicaid eligibility related to inmates.
    Response: We agree eligibility for Medicaid and inmates is a 
separate policy area outside of the DSH program. In this final rule we 
are not making any changes to current Medicaid non-DSH inmate policy 
and we are not addressing specific inquiries related to that policy 
because it is outside the scope of this rule.

F. Indian Health Services

    In the 2012 DSH proposed rule, we specified that, for Medicaid DSH 
purposes, American Indians/Alaska Natives are considered to have third 
party coverage for inpatient and outpatient hospital services received 
directly from IHS or tribal health programs (direct health care 
services) and for services specifically authorized under CHS. The 
service-specific determination of third party coverage status of 
American Indian/Alaska Natives for services not authorized to be within 
the scope of coverage by CHS should be made in the same way as all 
other patients. This is the same treatment that we apply to services 
that are outside the scope of coverage from any other insurer or third 
party payer. Comments and our response to comments regarding Indian 
Health Services are as follows:
    Comment: Many commenters stated that the regulation should allow 
hospitals to count unfunded and unreimbursed costs attributed to IHS 
facilities, tribal program, and contract health services toward the 
hospital-specific DSH limit. Commenters recommended that any subsequent 
cash settlement should be treated as a cash collection from the 
uninsured in the ensuing DSH audit cycle. Another commenter expressed 
concern that when Indian Health Care Providers render services to IHS-
eligible persons the uncompensated costs associated with the service 
could not be included in calculating the hospital-specific DSH limit.
    Response: The determining factor in deciding whether an American 
Indian or Alaska Native has health insurance for an inpatient or 
outpatient hospital service is if the providing entity is an IHS 
facility or tribal health program. In the case of contract services, 
the coverage of the services is specifically authorized via a purchase 
order or equivalent document because individuals in these circumstances 
are considered to have a source of third party payment. The cost of 
services and any revenues received would be excluded from the DSH 
calculation. Individuals obtaining inpatient or outpatient hospital 
services from a non-IHS or tribal facility without a purchase order (or 
other authorization) would be considered uninsured for these services. 
The costs of these services and revenues received could be included in 
the DSH limit calculation.
    Comment: A few commenters stated hospitals participate in the CHS 
program through a formal arrangement that includes a purchase order or 
its equivalent. A strict reading of the regulatory language suggest 
that hospitals' formal arrangements with the CHS program would 
disqualify those unreimbursed costs as eligible to be counted for 
purposes of calculating the DSH limit. The commenters requested that 
CMS clarify that these unfunded services would be eligible for costs.
    Response: An American Indian or Alaska Native would be considered 
to have no health insurance when he or she obtains services without a 
purchase order or equivalent authorization to pay for them. If contract 
providers have

[[Page 71690]]

provided needed services that were not pursuant to a purchase order, 
the American Indian or Alaska Native would be considered uninsured 
(absent private coverage) and the costs and any revenues associated 
with these services could be included in the limit.
    Comment: A commenter indicated that CMS did not engage in tribal 
consultation on the 2012 DSH proposed rule as required under section 
5006(e) of the American Recovery and Reinvestment Act or Executive 
Order 13174, ``Consultation with Tribal Governments.'' Therefore, CMS 
should engage in consultation with the American Indians and Alaska 
Native tribes before issuing a final rule.
    Response: We solicited input on the proposed rule from IHS, Tribal, 
and urban programs on March 16, 2012 during an All Tribes' Call. The 
purpose of the call was to solicit input regarding how implementation 
or changes to regulatory provisions would affect American Indians and 
Alaska Native beneficiaries and the operation of the Indian health 
program delivery system.
    Comment: A commenter, recognizing that the statute only addresses 
``a State or local unit of government within a State,'' recommends that 
CMS include a provision in the final regulation that would treat IHS 
and tribal hospitals similarly to ``a State or unit of local government 
within a State'' for purposes of section 1923(g)(1)(A) of the Act.
    Response: The comments are outside the scope of the proposed and 
final rule.
    Comment: A few commenters expressed concern regarding the proposed 
rule's reliance on the definition of creditable coverage under 45 CFR 
parts 144 and 146.
    Response: In this final rule, we are defining ``individuals who 
have no health insurance (or other source of third party coverage) for 
the services furnished during the year'' for purposes of calculating 
the hospital-specific DSH limit on a service-specific basis rather than 
on an individual basis, and thus do not make reference to the 
regulatory definition of creditable coverage. The definition instead 
requires a determination of whether, for each specific service 
furnished during the year, the individual has third party coverage.

G. Affordable Care Act

    In response to the 2012 DSH proposed rule, we received a number of 
comments requesting clarification regarding how this final rule 
interacts with the Affordable Care Act. Comments and our response to 
comments on the Affordable Care Act are as follows:
    Comment: A commenter stated that CMS should issue guidance on the 
definition of uninsured addressing issues that may be raised by the 
changes to the health insurance landscape when the remaining Affordable 
Care Act reforms take effect in 2014, including implementation of state 
Health Insurance Exchanges and individual mandates. After the 
implementation of state-based exchanges in 2014, the definition of 
uninsured should include people who do not qualify for exchange-based 
coverage because of immigration status; people who receive an 
affordability waiver of the individual mandate; patients with coverage 
that meets the essential health benefits standards or catastrophic plan 
requirements but does not cover a provided service, and other uninsured 
consumers.
    Response: Absent a legislative change to the DSH law, we believe 
the determination of uninsured status will continue to be a fact-based 
determination that occurs at the time a patient presents to a hospital. 
Undoubtedly, some or all of the individuals in the populations the 
commenters cited would be considered uninsured when presenting to the 
hospital.
    Comment: A commenter stated that, with the reduction in DSH dollars 
in accordance with the Affordable Care Act, it is critical to require 
that hospitals collect information for each patient to determine their 
status as uninsured. The commenter stated that these issues should be 
addressed in the proposed rule implementing provisions of the 
Affordable Care Act requiring a reduction to DSH allotments. The 
commenter recommended various reporting activities, to ensure DSH funds 
are used to pay for the uninsured.
    Response: The comments are outside the scope of this regulation.

H. DSH Audit Oversight

    Comment: Several commenters provided inquiries related to the DSH 
Audit and Reports that are required by section 1923(j) of the Act and 
implemented in regulations Parts 447 and 455. The commenters generally 
requested greater CMS oversight to the Medicaid DSH audit program, 
clearer guidance, better communication between state programs, 
auditors, and hospitals, or highlighted other programmatic concerns 
related to the audits.
    Response: While the methods and procedures related to state reports 
and audits is outside the scope of this regulation, we will continue to 
provide technical assistance and guidance to states to assure 
compliance with section 1923(j) of the Act.
    Comment: Several commenters stated that CMS should conduct ongoing 
evaluation of how DSH funds are distributed within a state and how 
funds are used by states and hospitals to adequately address the needs 
of remaining uninsured patients. Commenters stated that it will be 
critical to ensure the diminishing uncompensated care funding like DSH, 
and related policies, is properly targeted and allocated to those 
providers who continue to serve the uninsured.
    Response: States are required under section 1923(j) of the Act to 
report information about their DSH program and have it independently 
audited. We will continue to review this information.

III. Provisions of the Final Rule

A. Definition of Uninsured Under Section 1923(g) of the Act

    We are finalizing with one clarifying change to the provisions in 
the 2012 DSH proposed rule. Specifically, we have revised the 
regulations text to clarify the definition of ``health care coverage 
limit'' to include other coverage limits than annual and lifetime 
limits. We are adding a new Sec.  447.295 Hospital-Specific 
Disproportionate Share Hospital Payment Limit--Definition of 
Individuals Who Have no Health Insurance (or Other Source of Third 
Party Coverage) for the Services Furnished During the Year and the 
Determination of an Individual's Third Party Coverage Status. 
Specifically, Sec.  447.295(a) describes the scope of the new 
regulatory section and its focus on defining the term ``individuals who 
have no health insurance (or other source of third party coverage) for 
the services furnished during the year.''
    Section 447.295(b) defines through regulation ``individuals who 
have no health insurance (or other source of third party coverage) for 
the services furnished during the year'' for purposes of calculating 
the hospital-specific DSH limit as described in section 1923(g) of the 
Act effective for 2011. Section 447.295(b) also provides specific 
definitions for the terms ``service-specific coverage determination'' 
and ``health insurance coverage limit.''
    In this final rule, we are defining ``individuals who have no 
health insurance (or other source of third party coverage) for the 
services furnished during the year'' for purposes of calculating the 
hospital-specific DSH limit on a service-specific basis rather than on 
an individual basis, and thus do not make reference to the regulatory

[[Page 71691]]

definition of creditable coverage. The definition instead requires a 
determination of whether, for each specific service furnished during 
the year, the individual has third party coverage.
    We are also implementing the definition of ``no source of third 
party coverage for a specific inpatient or outpatient service'' to mean 
that the service is not within a covered benefit package under a group 
health plan or health insurance coverage (including the Medicare 
program), and is not covered by another legally liable third party. We 
are specifying that services beyond health coverage limits on insurance 
coverage, including annual or lifetime limits, will not be considered 
to be within a covered benefit package.
    Because funding limitations for services furnished through the IHS 
or tribal health programs are similar in nature to benefit limitations, 
we consider them as such for this purpose. This final rule considers 
services furnished to American Indians/Alaska Natives to be covered by 
IHS or tribal health programs only to the extent that the individuals 
receive services directly from IHS or tribal health programs (direct 
health care services) or when IHS or a tribal health program has 
authorized coverage through the contract health service program 
(through a purchase order or equivalent document).
    We are not including in this final rule a single test for how a 
``service'' is defined for these purposes because of the variance in 
the types of services that are at issue. However, we are including at 
Sec.  447.295(c)(1) ``Determination of an Individual's Third Party 
Coverage Status,'' the principle that a ``service'' should include the 
same elements that would be included for the same or similar services 
under Medicaid generally. The intent is that the hospital will 
generally determine that an individual is either insured or not insured 
for a given hospital stay, and will not separate out component parts of 
the hospital stay based on the level of payment received.
    Section 447.295(c) specifies that the determination of an 
individual's third party coverage status is a service-specific measure 
for purposes of calculating the hospital-specific DSH limit, based on 
the coverage and benefit exclusions of health insurers and the 
availability of coverage for that service from other third party 
carriers. This final rule establishes that the determination of an 
individual's status as an ``individual who has no health insurance (or 
other source of third party coverage)'' for purposes of calculating the 
Medicaid hospital-specific DSH limit be based on coverage for the 
particular inpatient or outpatient hospital service provided to an 
individual under the terms of an insurance or other coverage plan, or 
actual coverage for the service through such a plan or another third 
party. The determination is not based on payment.

B. Lifetime Limits, Limited Coverage Plans, and Exhausted Benefits

    This final rule clarifies the definition of ``individuals who have 
no health insurance (or other source of third party coverage) for the 
services furnished during the year'' so that inpatient and outpatient 
hospital costs associated with individuals who have third party 
coverage but have reached annual or lifetime insurance limits or have 
otherwise exhausted covered benefits can be included in calculating the 
hospital-specific DSH limit. For purposes of the preceding sentence, 
the only costs that are permitted for inclusion in the calculation of 
the limit are for separate services provided after the exhaustion of 
covered benefits. Additionally, inpatient and outpatient hospital costs 
of services provided to individuals whose coverage specifically 
excludes the hospital service provided can be included in calculating 
the hospital-specific DSH limit. This interpretation and definition of 
``uninsured'' affords states and hospitals maximum flexibility 
permitted by statute in calculating the hospital-specific DSH limit. 
This clarification is effective for DSH audits and reports submitted 
following the effective date of the rule, thus avoiding any unintended, 
and potentially significant, financial impact resulting from the 2008 
DSH final rule.
    While this final rule provides some relief for certain costs by 
allowing their inclusion in the calculation of the hospital-specific 
DSH limit, we believe that it is equally important to address those 
costs that are currently prohibited from inclusion and for which this 
rule provides no change in treatment under title XIX of the Act. For 
the reasons described below, we continue to believe that currently 
prohibited costs are not appropriate for purposes of Medicaid DSH and 
are not consistent with statutory language with respect to the 
hospital-specific DSH limit.

C. Bad Debt and Unpaid Coinsurance and Deductibles

    This final rule clarifies the definition of ``individuals who have 
no health insurance (or other source of third party coverage) for the 
services furnished during the year'' such that costs associated with 
bad debt, including any unpaid coinsurance and deductibles required 
under third party coverage, and payer discounts under such coverage 
cannot be included in calculating the hospital-specific DSH limit for 
individuals with a source of third party coverage. In these instances, 
the cost of the service in question was provided to an individual with 
a source of third party coverage for the service, and the amount due 
represents uncollected revenues not uninsured costs. This clarification 
ensures that this final rule is consistent with existing DSH statute, 
regulations, and longstanding CMS policy.
    Section 1923(g) of the Act requires that costs associated with 
individuals with a source of third party coverage be excluded from the 
calculation of the hospital-specific DSH limit. The current DSH 
regulations, as modified by the 2008 DSH final rule, also prohibit the 
inclusion of costs associated with unpaid coinsurance, deductibles, bad 
debt, and payer discounts for individuals with a source of third party 
coverage. This final rule makes no change to the allowability of these 
costs.

D. Prisoners

    This final rule clarifies that the final definition of 
``individuals who have no health insurance (or other source of third 
party coverage) for the services furnished during the year'' maintains 
the current position that individuals who are inmates in a public 
institution are considered to have a source of third party coverage as 
described in guidance issued to states in a letter dated August 8, 
2002. The final rule does not make any changes to current Medicaid Non-
DSH inmate policy.

E. Clarification of the Application of the Definition of ``Individuals 
Who Have No Health Insurance (or Other Source of Third Party Coverage) 
for the Services Furnished During the Year'' for Purposes of 
Calculating Hospital-Specific DSH Limits

    Section 447.295(d) specifies that costs considered for purposes of 
calculating the hospital-specific limit are limited to net costs 
incurred for individuals who have no health insurance or source of 
third party coverage for the services furnished during the year. This 
section ensures that the regulatory definition of ``individuals who 
have no health insurance (or other source of third party coverage) for 
the services furnished during the year'' is appropriately applied for 
purposes of calculating hospital-specific DSH limits.

[[Page 71692]]

IV. Waiver of 60-Day Delay in the Effective Date

    We ordinarily provide a 60-day delay in the effective date of the 
provisions of a major rule, pursuant to 5 U.S.C. 801(a)(3). However, if 
we find, for good cause, that notice and public procedure are 
impracticable, unnecessary, or contrary to the public interest, and 
incorporates a statement of the finding and the reasons in the rule 
issued, the 60-day delay in the effective date can take effect as we 
determine in 5 U.S.C. 808(2)).
    We find good cause to provide a 30-day delayed effective date 
instead of a 60-day delayed effective date. Many states and hospitals 
continue to apply the pre-DSH audit transition period definition of 
``uninsured'' articulated in the August 17, 1994 letter to State 
Medicaid Directors. This rule, effective for the first audits due after 
the DSH audit transition period, realigns the definition of 
``uninsured'' with the pre-DSH audit transition period definition. We 
find that a 30-day delay in the effective date would be sufficient to 
permit implementation of this definition, and that additional time 
would be unnecessary, because this rule conforms the audit standards to 
the practice and procedure that many states and hospitals followed 
through the DSH audit transition period and are following now.
    This rule ensures that audit standards for state DSH payments made 
to hospitals during the DSH audit transition period will not exceed the 
hospital-specific limit as a result of using the old definition.

V. Collection of Information Requirements

    This rule does not impose any new or revised reporting, 
recordkeeping, or third-party disclosure requirements. Additionally, it 
does not impact any auditing or reporting requirements/burden 
associated with section 1923(j) of the Act or information collections 
under the CMS-2552 (OMB control number 0938-0050) cost report. 
Consequently, the rule does not require additional review by the Office 
of Management and Budget under the authority of the Paperwork Reduction 
Act of 1995 (44 U.S.C. 3501 et seq.).

VI. Regulatory Impact Analysis

A. Overall Impact

    We have examined the impact of this rule as required by Executive 
Order 12866 on Regulatory Planning and Review (September 30, 1993), 
Executive Order 13563 on Improving Regulation and Regulatory Review 
(January 18, 2011), the Regulatory Flexibility Act (RFA) (September 19, 
1980, Pub. L. 96-354), section 1102(b) of the Social Security Act, 
section 202 of the Unfunded Mandates Reform Act of 1995 (March 22, 
1995; Pub. L. 104-4), Executive Order 13132 on Federalism (August 4, 
1999) and the Congressional Review Act (5 U.S.C. 804(2)).
    Executive Orders 12866 and 13563 direct agencies to assess 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). We do not 
have definitive national data that isolates the impact of this rule on 
hospital-specific DSH limits or national DSH payments. Due to the lack 
of this data we are unable to predict and estimate the impacts of this 
final rule, including those of individual hospitals or groups of 
hospitals. However, a rough calculation for one large hospital system 
indicates that that system alone would experience rule-induced transfer 
impacts of over $100 million in the next year. As a result, this rule 
has been designated an ``economically significant'' rule under section 
3(f)(1) of Executive Order 12866, since it may have an economic impact 
in excess of $100 million. Furthermore, it is a major rule under the 
Congressional Review Act. Accordingly, we have prepared a Regulatory 
Impact Analysis (RIA) that, to the best of our ability, presents the 
costs and benefits of the rulemaking. In accordance with the provisions 
of Executive Order 12866, this regulation was reviewed by the Office of 
Management and Budget.
    The RFA requires agencies to analyze options for regulatory relief 
of small entities. For purposes of the RFA, small entities include 
small businesses, nonprofit organizations, and small governmental 
jurisdictions. Most hospitals and most other providers and suppliers 
are small entities, either by nonprofit status or by having revenues of 
$7.5 million to $38.5 million in any 1 year. Individuals and States are 
not included in the definition of a small entity.
    As its measure of significant economic impact on a substantial 
number of small entities, HHS uses a change in revenue of more than 3 
to 5 percent. This rule affects the calculation of the hospital-
specific DSH limit. States may reduce Medicaid DSH payments to certain 
providers and increase DSH payments to other providers as a result of 
changes to the hospital-specific DSH limit, so it is possible that this 
rule could result in a change of more than 3 to 5 percent of total 
hospital revenue due to the overall size of the Medicaid DSH program. 
Regardless, states alone are responsible in the management of their DSH 
allotment, retain the same flexibility to design DSH payment 
methodologies under the state plan, and are not required to increase or 
to decrease payments to providers as a result of this rule. 
Additionally, we do not have national data that isolates the impact of 
this rule on hospital-specific DSH limits or national DSH payments. 
Based on the lack of data and the factors described above, we cannot 
predict an accurate estimate of the impact on individual hospitals. As 
a result, this final rule may have a significant economic impact on a 
substantial number of small entities. This analysis, combined with the 
preamble, constitutes our final analysis for the RFA.
    In addition, section 1102(b) of the Social Security 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 for Medicare payment regulations and 
has fewer than 100 beds. This rule affects the calculation of the 
hospital-specific DSH limit. States may reduce Medicaid DSH payments to 
certain providers and increase DSH payments to other providers as a 
result of changes to the hospital-specific DSH limit, so it is possible 
that this rule may have a significant impact on small rural hospitals 
due to the overall size of the Medicaid DSH program. Regardless, states 
alone are responsible for the management of their DSH allotment, retain 
the same flexibility to design DSH payment methodologies under the 
state plan, and are not required to increase or to decrease payments to 
providers as a result of this rule. Additionally, we do not have 
national data that isolates the impact of this rule on hospital-
specific DSH limits or national DSH payments. Based on the lack of data 
and the factors described above, we cannot predict an accurate estimate 
of the impact on small rural hospitals.
    Section 202 of the Unfunded Mandates Reform Act 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 2014, that 
threshold is approximately

[[Page 71693]]

$141 million. This rule has no consequential mandate on state, local, 
or tribal governments or on the private sector.
    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a final rule that imposes 
substantial direct requirement costs on state and local governments, 
preempts state law, or otherwise has Federalism implications. Since 
this regulation does not impose any costs on state or local 
governments, the requirements of Executive Order 13132 are not 
applicable.
    Pursuant to E.O. 13175 and the CMS Tribal Consultation Policy 
(November 2011), CMS consulted with Tribal officials prior to the 
formal promulgation of this regulation.

B. Anticipated Effects

1. Effects on State Medicaid Programs
    CMS does not anticipate that the final rule will have significant 
financial effects on State Medicaid Programs. Federal share DSH 
allotments, which are published by CMS in an annual Federal Register 
notice, limit the amount of Federal financial participation (FFP) that 
can be paid annually to a state for aggregate DSH payments made to 
hospitals. This final rule does not modify the DSH allotment amounts 
and will have no effect on a state's ability to claim FFP for DSH 
payments made up to the published DSH allotment amounts.
    This final rule, however, may affect the calculation of the 
hospital-specific DSH limit established at section 1923(g) of the Act. 
This hospital-specific limit requires that Medicaid DSH payments to a 
qualifying hospital not exceed the costs incurred by that hospital for 
providing inpatient and outpatient hospital services furnished during 
the year to Medicaid patients and individuals who have no health 
insurance or other source of third party coverage for the services 
provided during the year, less applicable revenues for those services. 
This final rule defines ``individuals who have no health insurance (or 
other source of third party coverage) for the services furnished during 
the year'' for purposes of calculating the hospital-specific DSH limit 
effective for 2011. This final rule also provides additional 
clarification to states and hospitals regarding costs eligible for 
inclusion in the calculation of the hospital-specific DSH limit. The 
provisions of this rule may have an effect on the calculation of the 
hospital's specific DSH limit amount for some hospitals depending upon 
the method utilized by the hospital or state in calculating the limit 
prior to the effective date of the final rule.
    States retain considerable flexibility in setting DSH State plan 
payment methodologies to the extent that these methodologies are 
consistent with section 1923(c) of the Act and all other applicable 
statute and regulations. Some states may determine that implementing a 
retrospective DSH payment methodology or a DSH reconciliation in their 
state plan is a reasonable way to manage its DSH allotment and ensure 
that payments made in excess of hospital-specific DSH limits are 
redistributed to hospitals that have not exceeded their limits. 
Although the state may have to modify definitions provided to hospitals 
in determining the hospital-specific DSH limit, the potential effect on 
the calculation of these limits would not result in an increase or 
decrease in the amount of FFP available to states for aggregate DSH 
payments made to hospitals.
2. Effects on Providers
    This final rule defines ``individuals who have no health insurance 
(or other source of third party coverage) for the services furnished 
during the year'' for purposes of calculating the hospital-specific DSH 
limit effective for 2011. This final rule also provides additional 
clarification to states and hospitals regarding costs eligible for 
inclusion in the calculation of the hospital-specific DSH limit. This 
final rule may affect the calculation of the hospital-specific DSH 
limit established at section 1923(g) of the Act. Hospitals, if directly 
affected by the final rule, should have higher DSH eligible costs. This 
increase in eligible costs would result in an increase in the hospital-
specific DSH limit of these affected hospitals. In particular, DSH 
hospitals that provide a high volume of hospital services to American 
Indians/Alaska Natives where CHS payment is not authorized, individuals 
with creditable coverage but without coverage for the hospital services 
received as it relates to DSH costs, or individuals with limited 
coverage plans, lifetime limits, or exhausted benefits, may recognize 
an increase in their hospital-specific DSH limit. States are not 
required to increase DSH payments to affected hospitals based on 
increases in hospital-specific DSH limits.
    The increased DSH limits, however, may mitigate the potential 
return of DSH payments to hospitals that would have been considered to 
exceed the hospital-specific DSH limit absent the provisions of this 
final rule. Additionally, states may reduce Medicaid DSH payments to 
certain providers and increase DSH payments to other providers as a 
result of changes to the hospital-specific DSH limit. Regardless, 
states alone are responsible in the management of their DSH allotment, 
retain the same flexibility to design DSH payment methodologies under 
the state plan, and are not required to increase or to decrease 
payments to providers as a result of this rule. We do not have national 
data that isolates the impact of this rule on hospital-specific DSH 
limits or national DSH payments. Based on the lack of data and the 
factors described above, we cannot predict an accurate estimate of the 
impact on individual hospitals or groups of hospitals.

C. Alternatives Considered

    In developing this rule, the following alternatives were 
considered. We considered not revising the definition of uninsured for 
purposes of determining the Medicaid DSH hospital-specific limit. 
However, we believe the individual-specific application of the 
definition of ``uninsured'' under the current rule effectively 
precludes recognition of uncompensated care costs for many services for 
which an individual is uninsured and has no third party coverage. Costs 
affected also include those associated with individuals who have 
reached health coverage limits, including annual or lifetime insurance 
limits, for certain services; have limited coverage through IHS or 
tribal health programs; or have inadequate insurance benefit packages.
    An alternative approach that we considered when developing this 
rule was to broaden even further the definition of uninsured to take 
into account costs associated with bad debt and prisoners. However, we 
believe that such an approach would not be consistent with the intent 
of both the hospital-specific limit and with the general exclusion of 
payment for services furnished to prisoners.

D. Accounting Statement and Table

    As required by OMB Circular A-4 (available at http://www.whitehouse.gov/omb/circulars_a004_a-4/), we have prepared an 
accounting statement table showing the classification of the impacts 
associated with implementation of this final rule.

[[Page 71694]]

                            Accounting Table
------------------------------------------------------------------------
               Category                             Estimate
------------------------------------------------------------------------
Transfers............................  Qualitative assessment of impacts
                                        as a result of this final rule
                                        may result in transfers that
                                        exceed $100 million in a given
                                        year.
                                       To: Hospitals whose DSH limits
                                        increase.
                                       From: Other disproportionate
                                        share hospitals.
------------------------------------------------------------------------

E. Conclusion

    For the reasons discussed above, this rule has been designated an 
``economically significant'' rule under section 3(f)(1) of Executive 
Order 12866, since it may have an economic impact in excess of $100 
million on a substantial number of small entities or on a substantial 
number of small rural hospitals. We do not have definitive national 
data that isolates the impact of this rule on hospital-specific DSH 
limits or national DSH payments. Due to the lack of this data we are 
unable to predict and estimate the impacts of this final rule, 
including those of individual hospitals or groups of hospitals.
    In accordance with the provisions of Executive Order 12866, this 
regulation was reviewed by the Office of Management and Budget.

List of Subjects in 42 CFR Part 447

    Accounting, Administrative practice and procedure, Drugs, Grant 
programs--health, Health facilities, Health professions, Medicaid, 
Reporting and recordkeeping requirements, Rural areas.

    For the reasons set forth in the preamble, the Centers for Medicare 
& Medicaid Services amends 42 CFR part 447 as set forth below:

Title 42--Public Health

PART 447--PAYMENTS FOR SERVICES

0
1. The authority citation for part 447 continues as follows:

    Authority: Sec. 1102 of the Social Security Act (42 U.S.C. 
1302).

Subpart E--Payment Adjustments for Hospitals That Serve a 
Disproportionate Number of Low-Income Patients

0
2. Add Sec.  447.295 to read as follows:

Sec.  447.295--Hospital-Specific  Disproportionate Share Hospital 
Payment Limit: Determination of Individuals without Health Insurance or 
Other Third Party Coverage.

    (a) Basis and purpose. This section sets forth the methodology for 
determining the costs for individuals who have no health insurance or 
other source of third party coverage for services furnished during the 
year for purposes of calculating the hospital-specific disproportionate 
share hospital payment limit under section 1923(g) of the Act.
    (b) Definitions.
    Individuals who have no health insurance (or other source of third 
party coverage) for the services furnished during the year means 
individuals who have no source of third party coverage for the specific 
inpatient hospital or outpatient hospital service furnished by the 
hospital.
    Health insurance coverage limit means a limit imposed by a third 
party payer that establishes a maximum dollar value or maximum number 
of specific services, for benefits received by an individual.
    No source of third party coverage for a specific inpatient hospital 
or outpatient hospital service means that the service is not included 
in an individual's health benefits coverage through a group health plan 
or health insurer, and for which there is no other legally liable third 
party. When a health insurance coverage limit is imposed by a third 
party payer, specific services beyond the limit would not be within the 
individual's health benefit package from that third party payer. For 
American Indians/Alaska Natives, IHS and tribal coverage is only 
considered third party coverage when services are received directly 
from IHS or tribal health programs (direct health care services) or 
when IHS or a tribal health program has authorized coverage through the 
contract health service program (through a purchase order or equivalent 
document). Administrative denials of payment, or requirements for 
satisfaction of deductible, copayment or coinsurance liability, do not 
affect the determination that a specific service is included in the 
health benefits coverage.
    (c) Determination of an individual's third party coverage status. 
Individuals who have no source of third party coverage for a specific 
inpatient hospital or outpatient hospital service must be considered, 
for purposes of that service, to be uninsured. This determination is 
not dependent on the receipt of payment by the hospital from the third 
party.
    (1) The determination of an individual's status as having a source 
of third party coverage must be a service-specific coverage 
determination. The service-specific coverage determination can occur 
only once per individual per service provided and applies to the entire 
service, including all elements as that service, or similar services, 
would be defined in Medicaid.
    (2) Individuals who are inmates in a public institution or are 
otherwise involuntarily in secure custody as a result of criminal 
charges are considered to have a source of third party coverage.
    (d) Hospital-specific DSH limit calculation. Only costs incurred in 
providing inpatient hospital and outpatient hospital services to 
Medicaid individuals, and revenues received with respect to those 
services, and costs incurred in providing inpatient hospital and 
outpatient hospital services, and revenues received with respect to 
those services, for which a determination has been made in accordance 
with paragraph (c) of this section that the services were furnished to 
individuals who have no source of third party coverage for the specific 
inpatient hospital or outpatient hospital service are included when 
calculating the costs and revenues for Medicaid individuals and 
individuals who have no health insurance or other source of third party 
coverage for purposes of section 1923(g)(1) of the Act.

    Dated: September 26, 2014.
Marilyn Tavenner,
Administrator, Centers for Medicare & Medicaid Services.
    Dated: November 19, 2014.
Sylvia M. Burwell,
Secretary, Department of Health and Human Services.
[FR Doc. 2014-28424 Filed 11-28-14; 11:15 am]
BILLING CODE 4120-01-P
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