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###### Department of Health and Human Services

###### Centers for Medicare & Medicaid Services 

          - [CMS-2243-N] 
          - RIN 0938-AO75 

# AGENCY:

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

# ACTION:

Notice. 

# SUMMARY:

                        Consistent with the provisions of section 1923 of the Social Security Act, as amended by section 1001(a) of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 and section 6054 of the Deficit Reduction Act of 2005, this notice announces the final Federal share disproportionate share hospital (DSH) allotments for Federal fiscal year (FFY) 2005, the preliminary Federal share DSH allotments for FFY 2006, and the preliminary Federal share DSH allotments for FFY 2007. This notice also announces the final FFY 2005, the preliminary FFY 2006, and the preliminary FFY 2007 limitations on aggregate DSH payments that States may make to institutions for mental disease and other mental health facilities. In addition, this notice includes background information describing the                               ( print page 58399)                            methodology for determining the amounts of States' FFY DSH allotments.                     

# FOR FURTHER INFORMATION CONTACT:

Richard Strauss, (410) 786-2019. 

# SUPPLEMENTARY INFORMATION:

## I. Background 

### A. Disproportionate Share Hospital Allotments for Federal Fiscal Year 2003 

Under section 1923(f)(3) of the Social Security Act (the Act), States' Federal fiscal year (FFY) 2003 disproportionate share hospital (DSH) allotments are calculated by increasing the amounts of the FFY 2002 allotments for each State (as specified in the chart, entitled “DSH Allotment (in millions of dollars),” contained in section 1923(f)(2) of the Act) by the percentage change in the Consumer Price Index for all Urban Consumers (CPI-U) for the prior fiscal year. The allotment, determined in this way, is subject to the limitation that an increase to a State's DSH allotment for a fiscal year cannot result in the DSH allotment exceeding the greater of the State's DSH allotment for the previous fiscal year or 12 percent of the State's total medical assistance expenditures for the allotment year (this is referred to as the 12 percent limit). 

Because the actual FFY 2002 DSH allotments were determined in accordance with section 1923(f)(4) of the Act rather than the amount specified in the chart in section 1923(f)(2) of the Act, for most States the calculation of States' FFY 2003 allotments was not based on the States’ actual FFY 2002 DSH allotments. The exception to this is the calculation of the FFY 2003 DSH allotments for certain “Low-DSH States” (defined in section 1923(f)(5) of the Act). Under the Low-DSH State provision, there is a special calculation methodology for the Low-DSH States only. Under this methodology, the FFY 2003 allotments were determined by using (that is, increasing) such States' actual FFY 2002 DSH allotments (not their FFY 2002 allotments specified in the chart in section 1923(f)(2) of the Act) by the percentage change in the CPI-U for the previous fiscal year. 

### B. DSH Allotments for FFY 2004 

Section 1001(a) of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) (Pub. L. 108-173, enacted on December 8, 2003) amended section 1923(f)(3) of the Act to provide for a “Special, Temporary Increase In Allotments On A One-Time, Non-Cumulative Basis.” Under this provision, States' FFY 2004 DSH allotments were determined by increasing their FFY 2003 allotments by 16 percent, and the fiscal year DSH allotment amounts so determined were not subject to the 12 percent limit. 

### C. DSH Allotments for Non-Low DSH States for FFY 2005, and Fiscal Years Thereafter 

Under the methodology contained in section 1923(f)(3)(C) of the Act, as amended by section 1001(a)(2) of the MMA, the non-Low-DSH States' DSH allotments for FFY 2005 and subsequent fiscal years continue at the same level as the States' DSH allotments for FFY 2004 until a “fiscal year specified” occurs. The “fiscal year specified” is the first fiscal year for which the Secretary estimates that a State's DSH allotment equals (or no longer exceeds) the DSH allotment as would have been determined under the statute in effect before the enactment of the MMA. We determine whether the fiscal year specified has occurred under a special parallel process. Specifically, under this process, a DSH allotment is determined for FFYs after 2003 by increasing the State's DSH allotment for the previous fiscal year by the percentage change in the CPI-U for the prior fiscal year, subject to the 12 percent limit. The fiscal year specified will be the fiscal year when the DSH allotment calculated under this special parallel process finally equals or exceeds the FY 2004 DSH allotment, as determined under the MMA provisions. Once the fiscal year specified occurs for a State, that State's fiscal year DSH allotment will be calculated by increasing the State's previous actual fiscal year DSH allotment (which would be equal to the FY 2004 DSH allotment) by the percentage change in the CPI-U for the previous fiscal year, subject to the 12 percent limit. The following example illustrates how the fiscal year DSH allotment would be calculated for fiscal years after FFY 2004. 

# Example.

A State's FFY 2003 DSH allotment is $100 million. Under the MMA, the State's FFY 2004 DSH allotment would be $116 million ($100 million increased by 16 percent). The State's DSH allotment for FFY 2005 and subsequent fiscal years would continue at the $116 million FFY 2004 DSH allotment for fiscal years following FFY 2004 until the “fiscal year specified” occurs. In the separate parallel process, we determine whether the fiscal year specified has occurred by calculating the State's DSH allotments in accordance with the statute in effect before the enactment of the MMA. Under this special process, we determine the State's DSH allotment each fiscal year by increasing the State's DSH allotment for the previous fiscal year (as also determined under the special parallel process) by the percentage change in the CPI-U for the previous fiscal year, and subject to the 12 percent limit. Assume for purposes of this example that, in accordance with this special process, the State's FFY 2007 DSH allotment was determined to be $115 million and the percentage change in the CPI-U for FFY 2007 (the previous fiscal year) relevant for the calculation of the FFY 2008 DSH allotment was 2 percent. That is, the percentage change for the CPI-U for FFY 2007, the year before FFY 2008, was 2 percent. Therefore, the State's special parallel process FFY 2008 DSH allotment amount would be calculated by increasing the special parallel process FFY 2007 DSH allotment amount of $115 million by 2 percent; this results in a special DSH allotment process amount for FFY 2008 of $117.3 million. Since $117.3 million is greater than $116 million (the FFY 2004 DSH allotment calculated under the MMA), we would determine that FFY 2008 is the “fiscal year specified” (the first year that the FFY 2004 allotment equals or no longer exceeds the parallel process allotment). We would then determine the State's FFY 2008 allotment as the State's actual FFY 2007 DSH allotment ($116 million) increased by the percentage change in the CPI-U for FFY 2007 (2 percent). Therefore, the State's FFY 2008 DSH allotment would be $118.32 million ($116 million increased by 2 percent); for purposes of this example, the application of the 12 percent limit has no effect. For FFY 2009 and thereafter, the State's DSH allotment would be calculated by increasing the State's previous fiscal year's DSH allotment by the percentage change in the CPI-U for the previous fiscal year, subject to the 12 percent limit. 

However, as amended by section 1001(b)(4) of the MMA, section 1923(f)(5)(B) of the Act also contains new criteria for determining whether a State is a Low-DSH State, beginning with FFY 2004. This provision is described in section I.D. 

                    Finally, this notice implements the provisions of section 6054 of the Deficit Reduction Act (DRA) of 2006 Public Law 109-171, enacted February 8, 2006) with respect to the determination of the DSH allotment for the District of Columbia. Under section 6054 of the DRA, for purposes of determining only the FFY 2006 and subsequent fiscal year DSH allotments for the District of Columbia, the table in section 1923(f)(2) of the Act is amended by increasing the FFY DSH allotment amounts indicated in that table for the District of Columbia for FFYs 2000, 2001, and 2002 to $49 million for each of those fiscal years. Before the DRA amendment, the amount in the chart in section 1923(f)(2) of the Act for the District of Columbia for each of those fiscal years was $32 million. This DRA provision increases the fiscal year DSH allotment for the District of Columbia effective with the FFY 2006 DSH allotment. This change is because the DSH allotments for FFY 2003 are based on the amounts of States' DSH allotments for FFY 2002 as contained in the chart in section 1923(f)(2) of the Act. Since (for purposes of ultimately                           ( print page 58400)                        determining the FFY 2006 allotment) the DRA provision increases the FFY 2002 allotment for the District of Columbia, as indicated above, the FFY 2003 allotment was increased. Furthermore, for this purpose, the FFY 2004 allotment for the District of Columbia would then be determined by increasing the FFY 2003 allotment (as so determined) by 16 percent. For fiscal years subsequent to FFY 2006, the DSH allotments are determined as described above. The preliminary FFY 2006 DSH allotment for the District of Columbia contained in this notice reflects the provision of section 6054 of the DRA.                 

As described below, in accordance with section 6054 of the DRA, the FFY 2006 DSH allotment for the District of Columbia is $57,692,600. As amended by section 6054 of the DRA, the FFY 2002 DSH allotment amount for the District of Columbia contained in the chart in section 1923(f)(2) of the Act was increased to $49,000,000. In accordance with section 1923(f)(3)(A) of the Act, the FFY 2003 DSH allotment is determined by increasing the $49,000,000 DSH Allotment for FFY 2002 (as referenced in section 1923(f)(2) of the Act) by the percentage change in the CPI-U for 2002 (in this case, 1.5 percent) to $49,735,000. In accordance with section 1923(f)(3)(C)(i) of the Act, the FFY 2004 DSH allotment is determined by increasing the $49,735,000 FFY 2003 DSH allotment amount by 16 percent to $57,692,600. In accordance with the provisions of section 1923(f)(3)(C) of the Act, the District of Columbia's DSH allotments for FFYs 2005, 2006, and 2007 are also $57,692,600. Finally, in accordance with section 6054 of the DRA, the District of Columbia's DSH allotment is increased as described above, effective beginning with FFY 2006. 

### D. DSH Allotments for Low-DSH States for FFYs 2004, and Fiscal Years Thereafter 

Section 1001(b)(1) of the MMA amended section 1923(f)(5) of the Act regarding the calculation of the fiscal year DSH allotments for “Low-DSH” States for FFY 2004 and subsequent fiscal years. Specifically, under section 1923(f)(5)(B) of the Act, as amended by section 1001(b)(4) of the MMA, a State is considered a Low-DSH State for FFY 2004 if its total DSH payments under its State plan for FFY 2000 (including Federal and State shares) as reported to us as of August 31, 2003, are greater than 0 percent and less than 3 percent of the State's total FFY 2000 expenditures under its State plan for medical assistance. For States that meet the new Low-DSH criteria, their FFY 2004 DSH allotments are calculated by increasing their FFY 2003 DSH allotments by 16 percent. Therefore, for FFY 2004, Low-DSH States' fiscal year DSH allotments are calculated in the same way as the DSH allotments for regular States, which under section 1923(f)(3) of the Act get the special temporary increase for FFY 2004. 

Furthermore, for States meeting the new MMA's Low-DSH definition, the DSH allotments for FFYs 2005 through 2008 will continue to be determined by increasing the previous fiscal year's DSH allotment by 16 percent. The Low-DSH States' DSH allotments for FFYs 2004 through 2008 are not subject to the 12 percent limit. The Low-DSH States' DSH allotments for FFYs 2009 and subsequent fiscal years are calculated by increasing those States' DSH allotments for the prior fiscal year by the percentage change in the CPI-U for that prior fiscal year. For FFYs 2009 and thereafter, the DSH allotments so determined would be subject to the 12-percent limit. 

### E. Institutions for Mental Diseases DSH Limits for FFYs 1998 and Thereafter 

Under section 1923(h) to the Act, Federal financial participation (FFP) is not available for DSH payments to institutions for mental diseases (IMDs) and other mental health facilities that are in excess of State-specific aggregate limits. Under this provision, this aggregate limit for DSH payments to IMDs and other mental health facilities is the lesser of a State's FFY 1995 total computable (State and Federal share) IMD and other mental health facility DSH expenditures applicable to the State's FFY 1995 DSH allotment (as reported on the Form CMS-64 as of January 1, 1997), or the amount equal to the product of the State's current year total computable DSH allotment and the applicable percentage. 

Each State's IMD limit on DSH payments to IMDs and other mental health facilities was calculated by first determining the State's total computable DSH expenditures attributable to the FFY 1995 DSH allotment for mental health facilities and inpatient hospitals. This calculation was based on the total computable DSH expenditures reported by the State on the Form CMS-64 as mental health DSH and inpatient hospital as of January 1, 1997. We then calculate an “applicable percentage.” The applicable percentage for FFY 1998 through FFY 2000 (1995 IMD DSH percentage) is calculated by dividing the total computable amount of IMD and mental health DSH expenditures applicable to the State's FFY 1995 DSH allotment by the total computable amount of all DSH expenditures (mental health facility plus inpatient hospital) applicable to the FFY 1995 DSH allotment. For FFY 2001 and thereafter, the applicable percentage is defined as the lesser of the applicable percentage as calculated above (for FFYs 1998 through 2001) or 50 percent for FFY 2001; 40 percent for FFY 2002; and 33 percent for each subsequent FFY. 

The applicable percentage is then applied to each State's total computable FFY DSH allotment for the current FFY. The State's total computable FFY DSH allotment is calculated by dividing the State's Federal share DSH allotment for the FFY by the State's Federal medical assistance percentage (FMAP) for that FFY. 

In the final step of the calculation of the IMD DSH Limit, the State's total computable IMD DSH limit for the FFY is set at the lesser of the product of a State's current fiscal year total computable DSH allotment and the applicable percentage for that fiscal year, or the State's FFY 1995 total computable IMD and other mental health facility DSH expenditures applicable to the State's FFY 1995 DSH allotment as reported on the Form CMS-64. 

The MMA legislation did not amend the Medicaid statute with respect to the calculation of the IMD DSH limit. 

###                     F. DSH Allotments and IMD DSH Limits Published in the                     *Federal Register*                     on August 26, 2005                 

                    On August 26, 2005, we published a notice (70 FR 50358) in the                     **Federal Register**                     that announced the final Federal share DSH allotments for Federal fiscal years (FFYs) 2003 and 2004, and the preliminary Federal share DSH allotments for FFY 2005. It also announced the final FFYs 2003 and 2004, and the preliminary FFY 2005, limitations on aggregate DSH payments that States may make to institutions for mental disease (IMDs) and other mental health facilities.                 

###                     G. Publication in the                     *Federal Register*                     of Preliminary and Final Notice for DSH Allotments and IMD DSH Limits                 

                    In general, we initially determine States' DSH allotments and IMD DSH limits for a fiscal year using estimates of medical assistance expenditures, including DSH expenditures in their Medicaid programs. These estimates are provided by States each year on the August quarterly Medicaid budget reports (Form CMS-37) before the Federal fiscal year for which the DSH allotments and IMD DSH limits are being determined. The DSH allotments and IMD DSH limits determined using                           ( print page 58401)                        these estimates are referred to as “                    *preliminary.*                    ” Only after we receive States” reports of the actual related medical assistance expenditures through the quarterly expenditure report (Form CMS-64), which occurs after the end of the fiscal year, are the “                    *final*                    ” DSH Allotments and IMD DSH limits determined.                 

                    As indicated in the section I.F. of this notice, the notice published in the                     **Federal Register**                     on August 26, 2005 announced the final FFYs 2003 and 2004 DSH allotments and the final FFYs 2003 and 2004 IMD DSH limits (since they were based on the actual expenditures related to those years), the                     *preliminary*                     FFY 2005 DSH allotments (based on estimates), and the preliminary IMD DSH limits (since they were based on the preliminary DSH allotments for FFY 2005).                 

                    This notice announces the                     *final*                     FFY 2005 DSH allotments and the                     *final*                     FFY 2005 IMD DSH limits (since these are now based on the actual expenditures for those fiscal years), the preliminary FFY 2006 and FFY 2007 DSH allotments (based on estimates), and the                     *preliminary*                     IMD DSH limits for FFY 2006 and FFY 2007 (since they are based on the                     *preliminary*                     DSH allotments for FFY 2006 and FFY 2007, respectively).                 

## II. Calculation of the Final FFY 2005 Federal Share State DSH Allotments, the Preliminary FFY 2006 Federal Share State DSH Allotments, and the Preliminary FFY 2007 Federal Share State DSH Allotments 

                    Chart 1 of the Addendum to this notice provides the States' “final” FFY 2005 DSH allotments. The final FFY 2005 DSH allotments for each State were computed in accordance with the provisions of the Medicaid statute as amended by the MMA. As required by the provisions of the MMA, the final FFY 2004 DSH allotments for the “Low-DSH” States and all the other States were calculated by increasing the FFY 2003 DSH allotments by 16 percent. In the notice published on March 26, 2004 in the                     **Federal Register**                    , we explained the definition and determination of the “Low-DSH” States under the MMA provisions. However, for following fiscal years, the DSH allotments are determined under a process which incorporates a parallel process described in section I.C. of this notice. Under that parallel process, States final FFY 2005 DSH allotments were determined using the States' expenditure reports (Form CMS-64) for FFY 2005.                 

Chart 3 of the Addendum to this notice provides the States' “preliminary” FFY 2006 DSH allotments. These preliminary allotments were determined using the States' August 2005 expenditure estimates submitted by the States on the Form CMS-37. We will publish the final FFY 2006 DSH allotments for each State following receipt of the States' four quarterly Medicaid expenditure reports (Form CMS-64) for FFY 2006. 

## III. Calculation of the FFYs 2005 Through 2007 IMD DSH Limits 

Section 1923(h) of the Act specifies the methodology to be used to establish the limits on the amount of DSH payments that a State can make to IMDs and other mental health facilities. FFP is not available for IMD/DSH payments that exceed the lesser of the State's FFY 1995 total computable mental health DSH expenditures applicable to the State's FFY 1995 DSH allotment as reported to us on the Form CMS-64 as of January 1, 1997; or the amount equal to the product of the State's current FFY total computable DSH allotment and the applicable percentage. We are publishing the final FFY 2005 IMD DSH limit, the preliminary FFY 2006 IMD DSH limit, and the preliminary FFY 2007 IMD DSH limit, along with an explanation of the calculation of these limits. 

For FFY 2003 and following fiscal years, the applicable percentage is the lesser of 33 percent or the 1995 DSH IMD percentage of the amount computed for FFY 2000. This percentage was applied to the State's fiscal year total computable DSH allotment. This result was then compared to the State's FFY 1995 total computable mental health DSH expenditures applicable to the State's FFY 1995 DSH allotment as reported on the Form CMS-64 as of January 1, 1997. The lesser of these two amounts was the State's limitation on total computable IMD/DSH expenditures for FFY 2003 and following fiscal years. 

Charts 4, 5, and 6 of the Addendum to this notice detail each State's final IMD/DSH limitation for FFY 2005, the preliminary IMD/DSH limitation for FFY 2006, and the preliminary IMD/DSH limitation for FFY 2007, respectively, in accordance with section 1923(h) of the Act. 

## IV. Collection of Information Requirements 

This document does not impose information collection and recordkeeping requirements. Consequently, it need not be reviewed by the Office of Management and Budget under the authority of the Paperwork Reduction Act of 1995 (44 U.S.C. 35). 

## V. Regulatory Impact Statement 

We have examined the impact of this rule as required by Executive Order 12866 (September 1993, Regulatory Planning and Review), the Regulatory Flexibility Act (RFA) (September 19, 1980, Pub. L. 96-354), section 1102(b) of the Social Security Act, the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4), and Executive Order 13132. 

Executive Order 12866 directs 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). A regulatory impact analysis (RIA) must be prepared for major rules with economically significant effects ($100 million or more in any 1 year). This notice does not reach the economic threshold and thus is not considered a major rule. 

The RFA requires agencies to analyze options for regulatory relief of small businesses. For purposes of the RFA, small entities include small businesses, nonprofit organizations, and small governmental jurisdictions. Most hospitals and most other providers and suppliers are small entities, either by nonprofit status or by having revenues of $6 million to $29 million in any 1 year. Individuals and States are not included in the definition of a small entity. Due to the various controlling statutes, the effects on providers are not impacted by a result of any independent regulatory impact and not this notice. The purpose of the notice is to announce the latest distributions as required by the statute. 

In addition, section 1102(b) of the Act requires us to prepare a regulatory impact analysis if a rule may have a significant impact on the operations of a substantial number of small rural hospitals. This analysis must conform to the provisions of section 604 of the RFA. For purposes of section 1102(b) of the Act, we define a small rural hospital as a hospital that is located outside of a Core-Based Statistical Area for Medicaid payment regulations and has fewer than 100 beds. 

                    The MMA set statutorily defined limits on the amount of Federal share DSH expenditures available for FFY 2004 and subsequent fiscal years. Specifically, section 1001 of the MMA increased the DSH allotment for States beginning with fiscal year 2004. While overall the statute mandated some increases in DSH payments, we do not                           ( print page 58402)                        believe that this notice will have a significant economic impact on a substantial number of small entities.                 

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. That threshold level is currently approximately $120 million. This notice will have no consequential effect 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 proposed rule (and subsequent final rule) that imposes substantial direct requirement costs on State and local governments, preempts State law, or otherwise has Federalism implications. Since this notice does not impose any costs on State or local governments, the requirements of E.O. 13132 are not applicable. 

In accordance with the provisions of Executive Order 12866, this notice was reviewed by the Office of Management and Budget. 

## Addendum 

This addendum contains the charts 1 through 6 (including associated keys) that are referred to in the preamble of this notice.
      ( print page 58403)          ( print page 58404)          ( print page 58405)          ( print page 58406)          ( print page 58407)          ( print page 58408)          ( print page 58409)          ( print page 58410)          ( print page 58411)          ( print page 58412)          ( print page 58413)          ( print page 58414)    
Authority:Section 1923(a)(2), (f), and (h) of the Social Security Act (42 U.S.C. 1396r-4(a)(2), (f), and (h), and Pub. L. 105-33).

(Catalog of Federal Domestic Assistance Program No. 93.778, Medical Assistance Program) 

Dated: August 30, 2006. 

Mark B. McClellan, 

Administrator, Centers for Medicare & Medicaid Services. 

Dated: September 14, 2006. 

Michael O. Leavitt, 

Secretary. 

BILLING CODE 4120-01-P

                    BILLING CODE 4120-01-C                          ( print page 58415)    

[FR Doc. 06-8421 Filed 9-29-06; 8:45 am] 

BILLING CODE 4120-01-P