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[Federal Register Volume 78, Number 181 (Wednesday, September 18, 2013)]
[Rules and Regulations]
[Pages 57293-57313]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-22686]

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 447

[CMS-2367-F]
RIN 0938-AR31

Medicaid Program; State Disproportionate Share Hospital Allotment 
Reductions

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

ACTION: Final rule.

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SUMMARY: The statute, as amended by the Affordable Care Act, requires 
aggregate reductions to state Medicaid Disproportionate Share Hospital 
(DSH) allotments annually from fiscal year (FY) 2014 through FY 2020. 
This final rule delineates a methodology to implement the annual 
reductions for FY 2014 and FY 2015. The rule also includes additional 
DSH reporting requirements for use in implementing the DSH health 
reform methodology.

DATES: Effective Date: These regulations are effective on November 18, 
2013.

FOR FURTHER INFORMATION CONTACT: Rory Howe, (410) 786-4878; or Richard 
Strauss, (410) 786-2019.

SUPPLEMENTARY INFORMATION: 

I. Executive Summary

A. Purpose

    The statute as amended by the Affordable Care Act sets forth 
aggregate reductions to state Medicaid disproportionate share hospital 
(DSH) allotments annually from fiscal year (FY) 2014 through FY 2020. 
This final rule delineates the DSH Health Reform Methodology (DHRM) to 
implement the annual reductions for FY 2014 and FY 2015.

B. Summary of the Major Provisions

    The statute as amended by the Affordable Care Act directs the 
Secretary to implement the annual DSH allotment reductions using a 
DHRM. This rule amends part 447 by establishing the DHRM. The DHRM 
incorporates five factors identified in the statute.

C. Costs and Benefits

    Taking these five factors into account for each state, the DHRM 
will generate a state-specific DSH allotment reduction amount for FY 
2014 and FY 2015. The total of all DSH allotment reduction amounts will 
equal the aggregate annual reduction amounts identified in the statute 
for FY 2014 and FY 2015. To determine the effective annual DSH 
allotment for each state, the state-specific annual DSH allotment 
reduction amount will be applied to the unreduced DSH allotment amount 
for its respective state.

II. Background

A. Introduction

    As a result of the Affordable Care Act, millions of Americans will 
have access to health insurance coverage through qualified health plans 
offered through Health Insurance Exchanges (also called Marketplaces) 
or through Medicaid and Children's Health Insurance Program. This 
increase in the number of individuals having access to health insurance 
is expected to significantly reduce levels of uncompensated care 
provided by hospitals.
    On the assumption that the number of uninsured people will fall 
sharply beginning in 2014, the statute reforms an existing Medicaid 
payment program for hospitals which serve a disproportionate share of 
low income patients, and therefore, may have uncompensated care costs. 
Under sections 1902(a)(13)(A)(iv) and 1923 of the Social Security Act 
(the Act), states are required to make payments to qualifying 
``disproportionate share'' hospitals (DSH payments). Section 2551 of 
the Affordable Care Act amended section 1923(f) of the Act, by adding 
paragraph (7), to provide for aggregate reductions in federal funding 
under the Medicaid program for such DSH payments for the 50 states and 
the District of Columbia. This reform of the DSH payment authority is 
consistent with the reduction of uncompensated care costs (particularly 
those associated with the uninsured) expected to result from the 
expansion of coverage under the statute.
    Section 1923(f)(7)(A)(i) of the Act requires that the Secretary of 
Health and Human Services (the Secretary) implement the aggregate 
reductions in federal funding for DSH payments through reductions in 
annual state allotments of federal funding for DSH payments (state DSH 
allotments), and accompanying reductions in payments to each state. The 
amount of federal funding for DSH payments for each state is limited to 
an annual state DSH allotment in accordance with section 1923(f) of the 
Act. Section 1923(f)(7) of the Act requires the use of a DHRM to 
determine the percentage reduction in each annual state DSH allotment 
to achieve the required aggregate annual reduction in federal DSH 
funding.

[[Page 57294]]

    Section 1923(f)(7)(B) establishes the following five factors that 
must be considered in the development of the DHRM. The methodology 
must:
     Impose a smaller percentage reduction on low DSH states.
     Impose larger percentage reductions on states that have 
the lowest percentages of uninsured individuals during the most recent 
year for which such data are available.
     Impose larger percentage reductions on states that do not 
target their DSH payments on hospitals with high volumes of Medicaid 
inpatients.
     Impose larger percentage reductions on states that do not 
target their DSH payments on hospitals with high levels of 
uncompensated care.
     Take into account the extent to which the DSH allotment 
for a state was included in the budget neutrality calculation for a 
coverage expansion approved under section 1115 as of July 31, 2009.
    The statutory provision for each factor contains explicit 
principles, described below, to apply when calculating the annual DSH 
allotment reduction amounts for each state through the DHRM.

B. Legislative History and Overview

    The Omnibus Budget Reconciliation Act of 1981(OBRA'81) (Pub. L. 97-
35, enacted on August 31, 1981) amended section 1902(a)(13) of the Act 
to require that Medicaid payment rates for hospitals ``take into 
account the situation of hospitals that serve a disproportionate share 
of low-income patients with special needs.'' Over the more than 30 
years since this requirement was first enacted, the Congress has set 
forth in section 1923 of the Act policies, payment targets, and limits 
to ensure greater oversight, transparency, and targeting of funding to 
hospitals.
    To qualify as a DSH under section 1923(b) of the Act, a hospital 
must meet two minimum qualifying criteria in section 1923(d) of the 
Act. The first criterion is that the hospital has at least two 
obstetricians who have staff privileges at the hospital and who have 
agreed to provide obstetric services to Medicaid individuals. This 
criterion does not apply to hospitals in which the inpatients are 
predominantly individuals under 18 years of age or hospitals that do 
not offer nonemergency obstetric services to the general public as of 
December 22, 1987. The second criterion is that the hospital has a 
Medicaid inpatient utilization rate (MIUR) of at least 1 percent.
    Under section 1923(b) of the Act, a hospital meeting the minimum 
qualifying criteria in section 1923(d) of the Act is deemed as a DSH if 
the hospital's MIUR is at least one standard deviation above the mean 
MIUR in the state, or if the hospital's low-income utilization rate 
exceeds 25 percent. States have the option to define disproportionate 
share hospitals under the state plan using alternative qualifying 
criteria as long as the qualifying methodology comports with the 
deeming requirements of section 1923(b) of the Act. Subject to certain 
federal payment limits, states are afforded flexibility in setting DSH 
state plan payment methodologies to the extent that these methodologies 
are consistent with section 1923(c) of the Act. Section 1923(f) of the 
Act limits federal financial participation (FFP) for total statewide 
DSH payments made to eligible hospitals in each federal FY to the 
amount specified in an annual DSH allotment for each state. Although 
there have been some special rules for calculating DSH allotments for 
particular years or sets of years, section 1923(f)(3) of the Act 
establishes a general rule that state DSH allotments are calculated on 
an annual basis in an amount equal to the DSH allotment for the 
preceding FY increased by the percentage change in the consumer price 
index for all urban consumers for the previous FY. The annual 
allotment, after the consumer price index increase, is limited to the 
greater of the DSH allotment for the previous year or 12 percent of the 
total amount of Medicaid expenditures under the state plan during the 
FY. Allotment amounts were originally established in the Medicaid 
Voluntary Contribution and Provider Specific Tax Amendments of 1991 
(Pub. L. 102-234 enacted on December 12, 1991) based on each state's 
historical DSH spending.
    Section 1923(g) of the Act also limits FFP for DSH payments by 
imposing a hospital-specific limit on DSH payments. FFP is not 
available for DSH payments that exceed the hospital's uncompensated 
cost of providing inpatient hospital and outpatient hospital services 
to Medicaid eligible individuals and the uninsured, minus payments 
received by the hospital by or on the behalf of those patients.
    The statute requires annual aggregate reductions in federal DSH 
funding from FY 2014 through FY 2020. The aggregate annual reduction 
amounts are as follows:
     $500 million for FY 2014.
     $600 million for FY 2015.
     $600 million for FY 2016.
     $1.8 billion for FY 2017.
     $5 billion for FY 2018.
     $5.6 billion for FY 2019.
     $4 billion for FY 2020.
    To implement these annual reductions, the statute requires that the 
Secretary reduce annual state DSH allotments, and payments to states, 
based on a DHRM specified in section 1923(f)(7)(B) of the Act. The 
proposed DHRM relied on the five statutorily identified factors 
collectively to determine a state-specific DSH allotment reduction 
amount to be applied to the allotment that is calculated under section 
1923(f) of the Act prior to the reductions under section 1923(f)(7) of 
the Act.

C. The Impact of a State's Decision To Adopt the New Low-Income Adult 
Coverage Group

    The statute provides significant federal financial support for 
states to extend coverage to low-income adults under section 
1902(a)(10)(A)(i)(VIII) of the Act. For a state that implements the new 
adult coverage group, the federal government will cover 100 percent of 
the cost of coverage for newly eligible individuals from 2014 through 
2016 and no less than 90 percent thereafter. Hospitals will also 
receive full Medicaid reimbursement for many previously uninsured 
patients. So on balance, we believe both hospitals and states stand to 
benefit greatly from expanding Medicaid. In addition, new premium tax 
credits and cost sharing reductions will be available to low-income 
individual in all states.
    Implementation of the Affordable Care Act's coverage expansion is 
expected to affect the amount of uncompensated care and the percentage 
of uninsured individuals within states. Generally, we expect that 
states that do not implement the new coverage group would have 
relatively higher rates of uninsurance, and more uncompensated care, 
than states that adopt the new coverage group.
    Because states that implement the new coverage group would likely 
have reductions in the rates of uninsurance, the reduction in DSH 
funding may be greater for such states compared to states that do not 
implement the new coverage group. Consequently, hospitals in states 
implementing the new coverage group that serve Medicaid patients may 
experience a deeper reduction in DSH payments than they would if all 
states were to implement the new coverage group.
    Currently, we do not have sufficient information on the relative 
impacts that would result from state decisions to implement the new 
coverage group, and thus, we proposed a DHRM only for the first 2 years 
during which the DSH funding reductions are in effect. We

[[Page 57295]]

intend to continue evaluating potential implications for accounting for 
coverage expansion in the DHRM. Accordingly, we proposed to establish a 
DHRM that would be in effect for FY 2014 and FY 2015 and we did not 
include a method to account for coverage expansion decisions in 
Medicaid for FY 2014 and FY 2015.

D. DHRM Data Sources

    The statute establishes parameters regarding data and/or suggested 
data sources for specific factors in the development of the DHRM. We 
proposed to utilize for the DHRM, wherever possible, data sources and 
metrics that are transparent and readily available to CMS, states, and 
the public, such as: United States Census Bureau data; Medicaid DSH 
data reported as required by section 1923(j) of the Act; existing state 
DSH allotments; and Form CMS-64 Medicaid Budget and Expenditure System 
(MBES) data. We proposed to utilize the most recent year available for 
all data sources. For one data source, we intend to collect information 
directly from state Medicaid agencies outside of this rule.
    Specifically, we intended for states to submit the information used 
to determine which hospitals are deemed disproportionate share under 
section 1923(b) of the Act. Although we do not currently collect this 
information, because states are required to make DSH payments to 
hospitals that are DSH eligible, states should have this information 
readily available. To ensure that all hospitals are properly deemed 
disproportionate share, states must determine the mean MIUR for 
hospitals receiving Medicaid payments in the state and the value of one 
standard deviation above the mean. We also proposed to rely on data 
derived from Medicaid DSH audit and reporting data. The data is 
reported by states as required by section 1923(j) of the Act and the 
``Medicaid Disproportionate Share Hospital Payments'' final rule 
published on December 19, 2008 (73 FR 77904) (and herein referred to as 
the 2008 DSH final rule) requiring state reports and audits to ensure 
the appropriate use of Medicaid DSH payments and compliance with the 
DSH limit imposed at section 1923(g) of the Act. This is the only 
comprehensive data source for DSH hospitals that identifies hospital-
specific DSH payments, hospital-specific uncompensated care costs, and 
hospital-specific Medicaid utilization in a manner consistent with 
Medicaid DSH program requirements.
    To date, we have received rich, comprehensive audit and reporting 
data from each state that makes Medicaid DSH payments. To facilitate 
the provision of high quality data, we provided explicit parameters in 
the 2008 DSH final rule and associated policy guidance for calculating 
and reporting data elements. The 2008 DSH final rule included a 
transition period in which states and auditors could develop and refine 
audit and reporting techniques. This transition period covered data 
reported relating to state plan rate years 2005 through 2010. We 
recognize that the DSH audit and reporting data during this transition 
period may vary in its quality and accuracy from state to state and 
have considered utilizing alternative uncompensated cost data and 
Medicaid utilization data from sources such as the Medicare Form CMS-
2552. The DSH audit and reporting data, however, remains the only 
comprehensive reported data available that is consistent with Medicaid 
program requirements. States are already required to report this data 
by the last day of the federal fiscal year ending 3 years from the 
Medicaid state plan rate year under audit as required by the 2008 DSH 
final rule. However, state submitted audit and reporting data is 
subject to detailed CMS review and may require significant resources to 
ensure that it is compiled and prepared for use in the proposed DHRM. 
This means that the data used for the methodology may not be the most 
recently submitted data, but instead the most recent data available for 
use in this context. We have been actively engaged in reviewing state 
audits and reports to ensure quality and accuracy. Consistent with 
ongoing efforts to ensure that the reported data is of the highest 
quality possible as we move through the transition period, we intend to 
issue additional detailed guidance to states by the end of calendar 
year (CY) 2013 that would be applicable to audits and reports due by 
the end of CY 2014.
    As required by the statute, the DHRM must impose the larger 
percentage DSH allotment reductions on the states that have the lowest 
percentages of uninsured individuals. Although other sources of this 
information could be considered for this purpose, the statute 
explicitly refers to the use of data from the Census Bureau for 
determining the percentage of uninsured for each state. We identified 
and considered two Census Bureau data sources for this purpose, the 
American Community Survey (ACS); and the Annual Social and Economic 
Supplement to the Current Population Survey (CPS). In consultation with 
the Census Bureau, we proposed to use the data from the ACS for the 
following reasons. First, the ACS is the largest household survey in 
the United States; in that regard, the annual sample size for the ACS 
is over 30 times larger than that for the CPS--about 3 million for the 
ACS versus 100 thousand for the CPS. The ACS is conducted continuously 
each month throughout the year, with the sample for each month being 
roughly 1/12th of the annual total, while the CPS is conducted in the 
first 4 months following the end of the survey year. Finally, although 
the definition of uninsured and insured status is the same for the ACS 
and the CPS, the CPS considers the respondents as uninsured if they are 
uninsured at any time during the year whereas the ACS whether the 
respondent has coverage at the time of the interview, which are 
conducted at various times throughout the year. For these reasons, and 
with the recommendation of the Census Bureau, we determined that the 
ACS is the appropriate source for establishing the percentage of 
uninsured for each state for purpose of the proposed DHRM.
    In addition to Census Bureau data, we considered using various 
alternative data with different population parameters and/or different 
definitions of uninsured individuals, but ultimately decided to utilize 
the ACS as the source for establishing the percentage of uninsured for 
each state. We are also considering adjusting the definition of the 
uninsured for reductions applicable for FY 2016 and beyond reductions 
through separate rulemaking.

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

    In response to the publication of the State Disproportionate Share 
Hospital Allotment Reductions proposed rule, we received 87 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. General Comments on the Proposed Rule

    In addition to the comments we received on the proposed rule's 
discussion of specific aspects of the State DSH Allotment Reductions 
(which we address later in this final rule), commenters also submitted 
the following more general observations on the reductions. A discussion 
of these

[[Page 57296]]

comments, along with our responses, appears below.
    Comment: Many commenters expressed appreciation for the overall 
approach of the proposed rule. Some commenters expressed support that 
the statutory DSH reductions are implemented through reductions to DSH 
allotment instead of reductions to the Federal Medical Assistance 
Percentage (FMAP) for states.
    Response: The final rule implements annual aggregate reductions in 
federal DSH allotments in accordance with the statutory direction and 
does not modify the FMAP for states.
    Comment: Many commenters expressed support for delaying the 
implementation of the annual aggregate reductions to state DSH 
allotments through Congressional legislation adopting the President's 
Budget for Fiscal Year (FY) 2014 legislative proposal or other 
legislation such as the House Bill H.R.1920--DSH Reduction Relief Act 
of 2013. The commenters provided various reasons for the requested 
delay including the need for sufficient time for the full 
implementation of Affordable Care Act and potential implications of 
significant changes to the number of uninsured individuals and Medicaid 
individuals after implementation of the Affordable Care Act. 
Additionally, one commenter recommended that the DSH allotment 
reductions remain in full effect as legislated and proposed.
    Response: We note that the FY 2014 President's Budget proposes a 
legislative change to delay the start of the Medicaid DSH allotment 
reductions while reallocating the scheduled $500 million aggregate 
reduction to FY 2016 and FY 2017. In the absence of a legislative 
change, the aggregate reductions in federal DSH funding will begin with 
FY 2014 as required by current law. HHS has no flexibility to institute 
a delay of the DSH allotment reductions without congressional action.
    Comment: A few commenters stated that states should retain 
flexibility in design of their DSH programs and how DSH payments are 
targeted to hospitals as long as funds are spent on patient care.
    Response: This final rule will not affect the considerable 
flexibility afforded states 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. States will retain the ability to preserve existing DSH 
payment methodologies or to propose modified methodologies by 
submitting state plan amendments. Although the final rule implements 
statutory direction to impose larger percentage reductions on states 
that do not target their DSH payments on hospitals with high volumes of 
Medicaid inpatients and on states that do not target their DSH payments 
on hospitals with high levels of uncompensated care, states will retain 
the flexibility to make payments that are both consistent with section 
1923(c) of the Act, and within reduced DSH allotment amounts.
    Comment: Many commenters expressed support for the proposal for an 
initial DHRM that would be applicable only for the first 2 years during 
which the DSH funding reductions are in effect.
    Response: We have finalized the DHRM only for FY 2014 and FY 2015.
    Comment: Some commenters expressed general opposition to the 
Medicaid DSH allotment reductions required by statute citing, in part, 
the timing and amounts of the reductions. Another commenter opposed the 
proposed rule because it would result in a reduction of DSH payments.
    Response: Federal statute requires annual aggregate reductions in 
federal DSH funding that begin with FY 2014. Federal DSH allotments 
will remain available at reduced levels for states to continue to make 
DSH payments to hospitals that serve a disproportionate share of low-
income individuals and qualify for DSH payments under federal and state 
requirements. As noted above, the FY 2014 President's Budget proposes a 
legislative change to delay the start of the Medicaid DSH allotment 
reductions, but without a change in law, these final regulations will 
implement the reductions beginning with FY 2014.
    Comment: Some commenters expressed support for the Medicaid DSH 
program and recommended that Medicaid DSH payments continue to ensure 
that hospitals are able to provide uncompensated care for uninsured 
individuals.
    Response: The proposed rule does not eliminate DSH payments or 
affect state flexibility in setting DSH payments. The rule implements 
annual aggregate reductions in federal DSH funding for FY 2014 and FY 
2015. For FY 2014 and thereafter, federal DSH allotments will remain 
available at reduced levels for states to continue to make DSH payments 
to hospitals that serve a disproportionate share of low-income 
individuals and qualify for DSH payments under federal and state 
requirements.
    Comment: Some commenters recommended that Medicaid DSH allotments 
be restored if expanded health care coverage resulting from the 
Affordable Care Act does not occur.
    Response: While the statute specifies annual reduction amounts 
independent of the extent to which expanded health care coverage 
resulting from the Affordable Care Act occurs, we are confident that 
health insurance coverage will increase significantly as a result of 
the Act. The final rule implements provisions of the federal statute 
relating to federal DSH funding for FY 2014 and 2015.
    Comment: A commenter expressed concern that CMS would not have 
sufficient time to review, consider, and incorporate state feedback 
based on public comments on the proposed rule and calculate state DSH 
allotments for FY 2014 in a timely manner.
    Response: We reviewed and considered public comment carefully and 
thoroughly, and issued this final rule in a timely manner incorporating 
input from public comment. Additionally, we anticipate timely 
calculating DSH allotments and state-specific reductions for FY 2014.
    Comment: A few commenters questioned our regulatory interpretation 
of the provisions specified in section 1923(g)(1)(a) of the Act. 
Regulatory policy requires that all revenue received by a hospital for 
providing services to Medicaid-eligible individuals with an additional 
source of third-party coverage be offset against the cost of providing 
such services when calculating the hospital-specific DSH limit. These 
commenters requested that we amend these regulations to specify that 
revenues received by a hospital from third party coverage for services 
provided to Medicaid-eligible individuals must only offset costs of 
providing such services to the extent of the Medicaid payment for 
purposes of calculating the hospital-specific limit and DSH 
qualification.
    Response: This regulation does not address the calculation of 
hospital-specific DSH payment limits under section 1923(g) of the Act; 
it only addresses the statutorily-required Medicaid DSH allotment 
reductions. Changes to existing DSH calculation rules are outside the 
scope of this rule.
    Comment: One commenter submitted a comment regarding the Medicare 
DSH program.
    Response: Comments on the Medicare DSH program are outside the 
scope of this rule on Medicaid DSH allotment reductions and were 
addressed in separate rulemaking issued by us in August of this year.
    Comment: One commenter recommended that we analyze state-by-state 
Medicaid and Medicare payment

[[Page 57297]]

differentials to lower DSH allotment reduction amounts for states with 
payment disparity between the two programs. The commenter also 
recommended that we offset Medicaid DSH reduction amounts for states 
that have global, risk-based payment arrangements.
    Response: The Medicaid and the Medicare programs are distinct 
programs authorized by different sections of the statute and the 
Medicare and Medicaid DSH rules have somewhat different purposes and 
statutory directives. The Affordable Care Act directed the manner in 
which Medicaid DSH reductions should be implemented. As directed by 
statute, the final DHRM imposes larger percentage reductions on states 
that do not target their DSH payments on hospitals with high levels of 
uncompensated care. Uncompensated care cost, as defined in this final 
rule, already includes the amount Medicaid payments fall short of 
hospital costs (the Medicaid shortfall). The final rule's treatment of 
Medicaid shortfall is consistent with other existing statutory and 
regulatory Medicaid DSH definitions of uncompensated care cost.
    We are committed to supporting innovative care delivery models and 
payment models with potential to improve care, improve health, and 
reduce costs, and states can structure their DSH funding to help 
promote those goals. We encourage states and providers to contact CMS 
to obtain more information regarding opportunities to implement 
innovative care delivery models and payment models.
    Comment: Many commenters recommended that we finalize the 
provisions of the January 18, 2012 proposed rule entitled, ``Medicaid 
Disproportionate Share Hospital Payments--Uninsured Definition.'' That 
proposed rule would define ``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.
    Response: Comments on the January 18, 2012 proposed rule are 
outside the scope of the proposed rule on Medicaid DSH allotment 
reductions and will be finalized in future rulemaking.
    Comment: Several commenters requested clarification regarding how 
state-specific DSH allotment reductions in the proposed rule would 
affect the determination of the limit on Medicaid DSH payments to 
institutions for mental diseases (IMD). Some of the commenters 
recommended that we proportionately reduce the IMD DSH limit based on 
the aggregate DSH allotment reduction. One commenter expressed support 
for state flexibility in determining the effects of the aggregate DSH 
allotment reductions on the IMD DSH limit.
    Response: Effective for FY 2014 and FY 2015, we will calculate the 
IMD DSH limit under section 1923(h) of the Act based on the DSH 
allotment after reductions implemented by the final rule to ensure that 
the IMD limit experiences a corresponding reduction consistent with the 
overall reductions in annual state DSH allotments.
    Comment: Some commenters requested that we clarify when and how we 
will recoup state-specific DSH allotment reduction amounts from states.
    Response: The final rule implements aggregate reductions in federal 
funding for DSH payments through reductions in annual state-specific 
DSH allotment reductions in accordance with section 1923(f)(7) of the 
Act. This section requires the use of a DHRM to determine the 
percentage reduction in each annual state DSH allotment to achieve the 
required aggregate annual reduction in federal DSH funding; there is no 
``recoupment'' process because the DSH reductions are prospective, not 
retrospective.
    Comment: One commenter requested clarification on how the amount of 
the FY 2014 unreduced DSH allotment for Tennessee and for the State of 
Hawaii for FY 2014 as included in the proposed rule was determined, and 
how the low-DSH state status for these state was determined.
    Response: The amounts of the states' unreduced DSH allotments and 
the treatment of the states' low DSH status, as reflected in the Table 
1 of the proposed rule, were only for the purpose of illustrating the 
DSH Health Reform Methodology for all states. Such amounts were 
determined in accordance with the existing methodology for determining 
the amounts of states' unreduced fiscal year DSH allotments. For this 
purpose, and in accordance with the existing methodology for 
determining states' unreduced allotments, the illustrative unreduced 
DSH allotments for FY 2014 in Table 1 of the proposed rule were based 
on the states' FY 2013 DSH allotments. Those allotments were increased 
by the estimated percentage increase in the consumer price index for 
all urban consumers (CPIU) for FY 2013.
    As noted by the commenter, the current statute at section 
1923(f)(6)(A) of the Act does not authorize a FY 2014 DSH allotment for 
the State of Tennessee. However, for the state of Hawaii, the current 
statute at section 1923(f)(6)(B)(iii)(II) of the Act does authorize a 
FY 2014 DSH allotment for such state. Furthermore, such provision 
explicitly indicates that Hawaii shall be treated as a low-DSH state.
    In summary, a FY 2014 DSH allotment for the State of Tennessee and 
the State of Hawaii was included in Table 1 of the proposed rule for 
illustrative purposes only. However, an allotment for the State of 
Tennessee would be available only if the statute was amended to provide 
for a FY 2014 DSH allotment for the state. In addition, a statutory 
amendment would be needed for Tennessee to be considered a low-DSH 
state.

B. DHRM Overview

    We proposed to apply the DHRM to the unreduced DSH allotment amount 
on an annual basis for FY 2014 and FY 2015. Under the DHRM, we 
considered the five factors identified in the statute to determine each 
state's annual state-specific annual DSH allotment reduction amount. 
Limitations on the availability of data relating to some of the five 
factors affect the calculation, and therefore, we solicited comment 
regarding readily available data sources that may be useful.
    The proposed DHRM utilized available data and a series of 
interacting calculations that result in the identification of state-
specific reduction amounts that, when summed, equal the aggregate DSH 
allotment reduction amount identified by the statute for each 
applicable year. The proposed DHRM accomplished this through the 
summarized steps discussed in the proposed rule (78 FR 28555). In 
addition, we solicited public comment and input regarding alternate 
assignments. We also solicited comments on how these weights would 
impact specific hospital types. The manner in which each of these 
factors were considered and calculated in the proposed DHRM was 
described in greater detail in the proposed rule (78 FR 28555).
    Comment: One commenter recommended corrections and clarification 
corrections to multiple terms defined in Sec.  447.294(b).
    Response: We addressed the need for technical correction and 
clarification by modifying the language of Sec.  447.294(b) in this 
final rule. Specifically, we modified the definitions in Sec.  
447.294(b) for ``Mean high level of uncompensated care factor (HUF) 
reduction percentage,'' ``State group,'' ``Total Medicaid cost,'' and 
``Uncompensated care costs'' by correcting a typographical error and 
adding clarifying language.

[[Page 57298]]

    Comment: One commenter recommended that CMS clarify for which years 
states are required to submit annual MIUR data as proposed at Sec.  
447.294(d).
    Response: We are finalizing Sec.  447.294(d) to include additional 
clarifying language regarding the required state submission of MIUR 
data. We finalized this section to specify that states must initially 
provide the data for following Medicaid State Plan Rate Years (SPRY) as 
defined in Sec.  455.301: 2008, 2009, 2010, 2011 by June 30, 2014. 
States must also provide this data for each subsequent SPRY to CMS by 
June 30 of each year. To determine which SPRY data must be submitted, 
subtract three years from the calendar year in which the data is due. 
This means that the SPRY 2012 data must be submitted to CMS by June 30, 
2015.
    Comment: One commenter requested changes to Sec.  447.294(f) to 
clarify that the state-specific DSH allotment reduction amounts in the 
proposed rule only applies to FY 2014 and FY 2015 DSH allotments.
    Response: We are finalizing Sec.  447.294(f) to specify that the 
state-specific DSH allotment reduction amounts in the proposed rule 
only applies to FY 2014 and FY 2015 DSH allotments.
    Comment: One commenter recommended corrections to multiple 
instances when Sec.  447.294(e)(10) was mistakenly referenced instead 
of Sec.  447.294(e)(12). The commenter also noted that Sec.  
447.294(e)(10) mistakenly refers to the ``HMF'' instead of the ``HUF.''
    Response: We are correcting these references in this final rule.
    Comment: Many commenters expressed support that the proposed rule 
would not reflect state decisions to implement the new coverage group, 
would not cause undue harm to states that have not implemented or not 
decided to implement the new coverage group, and that the DHRM is only 
for the first 2 years during which the DSH funding reductions are in 
effect to allow continued evaluation of potential implications for 
accounting for coverage expansion in the DHRM.
    Response: We intend to address the issue more completely in 
separate rulemaking for DSH allotment reductions for FY 2016 and 
thereafter.
    Comment: Some commenters expressed support that the proposed DHRM 
does not reward states that do extend coverage to low-income adults 
under section 1902(a)(10)(A)(i)(VIII) of the Act. A few of these 
commenters suggested that CMS develop a mechanism in the DHRM to ensure 
that states that do not extend coverage to low-income adults under 
section 1902(a)(10)(A)(i)(VIII) of the Act do not receive a lower DSH 
reduction as a result of their decision.
    Response: Currently, we do not have data or other information on 
the relative impacts that would result from state decisions to 
implement the new coverage group, and thus, we proposed a DHRM only for 
the first 2 years during which the DSH funding reductions are in 
effect. The data that the reductions are based on for the first two 
years will not reflect state decisions to implement the new coverage 
group. Such data will be available in 2016. We intend to address this 
issue more completely in separate rulemaking for DSH allotment 
reductions for FY 2016 and thereafter including consideration of 
proposals that would take account of the decisions of states to expand 
coverage.
    Comment: A few commenters expressed concern that the states that 
implemented various health reforms, including expanding Medicaid 
eligibility, prior to enactment of the Affordable Care Act would be 
unfairly penalized by the DHRM and would be forced to subsidize those 
states that have opted not to expand coverage. One of the commenters 
suggested that CMS modify the uninsured data to reflect the anticipated 
decrease in the uninsured for states that have indicated their intent 
to, but have not yet begun to, extend coverage to low-income adults 
under section 1902(a)(10)(A)(i)(VIII) of the Act.
    Response: The statute provides significant federal financial 
support for states to extend coverage to low-income adults under 
section 1902(a)(10)(A)(i)(VIII) of the Act. For a state that implements 
the new adult coverage group, the state and its hospitals will receive 
full Medicaid reimbursement for many previously uninsured patients. 
Therefore, we believe both hospitals and states stand to benefit 
greatly from expanding Medicaid.
    As discussed in the proposed rule, implementation of the new 
coverage group is expected to affect the amount of uncompensated care 
and the percentage of uninsured individuals within states. Generally, 
we expect that states that do not implement the new coverage group 
would have relatively higher rates of uninsured, and more uncompensated 
care than states that adopt the new coverage group. We also recognize 
that are other factors that affect state rates of uninsurance, 
including coverage differences among states prior to the implementation 
of the Affordable Care Act. Because there is a fixed amount of DSH 
funding, states that implement the new coverage group would likely 
experience a reduction in DSH funding that would be greater than if all 
states had taken such action. Hospitals in those states would similarly 
be disadvantaged. However, these effects would not be experienced until 
after FY 2014 and FY 2015 based on current data reporting timelines. 
Accordingly, and considering the limits on funding for Medicaid DSH in 
the Affordable Care Act, we intend to account for the different 
circumstances among states in the formula in future rulemaking when the 
relevant data will be available.
    For FY 2014 and 2015, we are finalizing the proposal to establish a 
DHRM that does not include a method to account for differential 
coverage expansions in Medicaid. We intend to address this issue more 
completely in separate rulemaking for DSH allotment reductions for FY 
2016 and thereafter.
    Comment: Many commenters expressed support for the uninsured 
percentage factor (UPF) calculation and another requested that the DHRM 
incorporate an adjustment into the UPF calculation to reduce the number 
of uninsured individuals in states that extend coverage to low-income 
adults under section 1902(a)(10)(A)(i)(VIII) of the Act so as to not 
unfairly penalize states that do not extend coverage to the new adult 
group. Another commenter asked that CMS create a separate DSH pool that 
would allocate funds directly to hospitals with high levels of 
uncompensated care in states that do not extend coverage to low-income 
adults because the hospitals would not benefit from the Medicaid 
coverage expansion. An additional commenter requested that CMS consider 
accounting for potential additional Medicaid payment shortfall, in 
additional to uninsured-related uncompensated care, when determining 
the relative impacts that would result from state decisions to 
implement the new low-income adults coverage group. Another commenter 
stated that CMS did not specify the data sources that DHRM would rely 
on to determine annual state-specific DSH allotment reduction amounts 
and expressed concern that the proposed rule states that the data used 
will reflect differential state decisions to implement the new low-
income adults coverage group under section 1902(a)(10)(A)(i)(VIII) of 
the Act.
    Response: We disagree that the proposed methodology would unfairly 
penalize states that do not extend coverage to low-income adults under 
section 1902(a)(10)(A)(i)(VIII) of the Act. The data that the 
reductions are based on for these 2 years will not reflect state

[[Page 57299]]

decisions to implement the new coverage group. Data reflecting the 
effects of the decision to implement the new coverage group may not be 
available to consider the impact of such a decision until 2016. We 
intend to address this issue more completely in separate rulemaking for 
DSH allotment reductions for FY 2016 and thereafter.
    Additionally, we intend to publish a separate DHRM technical guide 
that provides information regarding the DHRM calculation, including the 
additional information regarding data sources.
    Comment: Several commenters recommended that CMS ensure through 
future rulemaking that states that extend coverage to low-income adults 
under section 1902(a)(10)(A)(i)(VIII) of the Act do not receive 
increased DSH allotment reductions as a result of anticipated 
reductions in uninsurance rates. A few other commenters recommended 
that CMS ensure through future rulemaking that states that do not 
extend coverage to low-income adults under section 
1902(a)(10)(A)(i)(VIII) of the Act do not receive increased DSH 
allotment reductions as a result of anticipated reductions in 
uninsurance rates.
    Response: We intend to address this issue more completely in such 
separate rulemaking for DSH allotment reductions for FY 2016 and 
thereafter.
    Comment: One commenter indicated that the proposed rule favors 
states that do not implement the new low-income adults coverage group 
under section 1902(a)(10)(A)(i)(VIII) of the Act by not relying on 
uninsured data that would be available reflecting the differential 
decisions by states to adopt the new adult coverage group. The 
commenter indicates that CMS is violating statute by not relying on 
uninsurance data from ``the most recent year for which the data are 
available.'' Another commenter requested that we specify which year's 
United States Census Bureau's American Community Survey (ACS) data we 
will use for the DHRM and is concerned that the use of recent data will 
adversely affect states implementing the new low-income adults coverage 
group.
    Response: We disagree that the proposed methodology favors states 
that do not implement the new low-income adults coverage group under 
section 1902(a)(10)(A)(i)(VIII) of the Act or that the proposed 
methodology would violate statutory provisions. The uninsured data is 
derived from the 1-year estimates data of the number of uninsured 
identified by the ACS. The statute references use of uninsured data 
from the United States Census Bureau and the methodology relies on the 
most recent available data. The data from the ACS will not be available 
for the period including January 1, 2014, or later until after the 
calculation of the DSH allotment reduction amounts for both FY 2104 and 
FY 2015. Therefore, because of the lag in the data, this final rule 
will rely on uninsured individual data for periods prior to January 1, 
2014.
    Comment: One commenter stated that the DHRM in the proposed rule 
would violate the statute by separating states into state groups based 
on their status as low-DSH states. The commenter's suggested violation 
is based on not following the statutory language directing ``smaller'', 
not the ``smallest'' reductions for low-DSH states and the language 
that requires the ``largest'' percentage reductions for states that 
have the lowest percentage of uninsured individuals and do not target 
DSH payments to hospitals with high levels of Medicaid inpatients and 
high levels of uncompensated care.
    Response: We disagree that the proposed methodology violates 
statutory provisions. The methodology in the proposed rule, which we 
are adopting in this final rule, imposes smaller percentage reductions 
on low-DSH states compared to non-low DSH states and, within each state 
group, imposes larger percentage reductions on states that have the 
lowest percentages of uninsured individuals and on states that do not 
target their DSH payments to hospitals with high volumes of Medicaid 
inpatients and high levels of uncompensated care.
    Comment: A commenter recommended that CMS implement the statutory 
DSH allotment reductions through pro rata reductions based on the size 
of the existing DSH allotment instead of relying on the five factors 
identified in the statute. The commenter also offers an alternative 
through use of the pro rata method for half of the allotment reduction 
amount and using the five statutory factors for the remaining amount. 
The commenter believes that the pro rata reductions would take into 
account the current DSH funding structure and would be less disruptive.
    Response: Section 1923(f)(7)(B) of the Act establishes five factors 
that must be considered in the development of the DHRM, and in the DHRM 
which we proposed and are making final, we give weight to each of those 
five factors. The five factors implicitly take into account the size of 
the existing state DSH allotments, and the reduction is applied to the 
existing state DSH allotment.
    Comment: A commenter recommended that CMS incentivize states to 
target more DSH payment to hospitals with high volumes of Medicaid 
inpatients and high levels of uncompensated care.
    Response: The statute requires that the DHRM methodology impose 
larger percentage DSH reductions on states that do not target their DSH 
payments on hospitals with high volumes of Medicaid inpatients and high 
levels of uncompensated care. While states have considerable 
flexibility in determining DSH payments, we believe that the statutory 
provision as implemented by DHRM will promote state targeting of DSH 
payments to hospitals with high volumes of Medicaid inpatients and 
hospitals with high levels of uncompensated care.
    Comment: Two commenters recommended that the DHRM should first 
reduce unspent DSH allotment amounts prior to imposing additional 
reduction amounts to protect states that use their full DSH allotment.
    Response: We did not propose to reallocate unreduced DSH allotments 
calculated under section 1923(f) of the Act. The suggested method could 
serve to penalize unfairly states that do not currently expend their 
entire DSH allotment. We are finalizing the structure of proposed DHRM 
that considers five factors identified by section 1923(f)(7)(B) of the 
Act when determining state-specific allotment reduction amounts.
    Comment: A commenter recommended that the DHRM should avoid 
imposing retroactive reductions to state DSH allotments and instead 
establish prospective DSH allotment reductions adjustments that rely on 
final or completed data from previous years.
    Response: The final rule establishes prospective DSH allotment 
reductions based on the most recent prior year data and does not impose 
retroactive allotment adjustments.
    Comment: A commenter expressed concern that the DHRM relies on 
existing unreduced DSH allotments as the basis for application of the 
DHRM because the allotments are highly inequitable. The commenter 
recommended that CMS reallocate DSH allotments based on states' 
uncompensated care costs prior to applying the annual DSH allotment 
reductions.
    Response: The DHRM builds upon the existing unreduced DSH 
allotments because the statutory DHRM authority does not authorize 
reallocation of state DSH allotments under section 1923(f) of the Act. 
This section of the Act establishes the specific methodology required 
for calculating annual state DSH allotments. Although there have been 
some special rules for calculating

[[Page 57300]]

DSH allotments for particular years or sets of years, section 
1923(f)(3) of the Act establishes a general rule that state DSH 
allotments are calculated on an annual basis in an amount equal to the 
DSH allotment for the preceding FY increased by the percentage change 
in the consumer price index for all urban consumers for the previous 
FY. Neither the statute nor this rule affects this calculation.
    Uncompensated care costs are a factor under the DHRM in determining 
state-specific allotment reduction amounts because the statute directs 
that the DHRM impose larger percentage DSH allotment reductions on 
states that do not target DSH payments on hospitals with high levels of 
uncompensated care. But this factor does not reallocate existing DSH 
allotments, and this rule finalizes the use of existing unreduced DSH 
allotments as proposed.
    Comment: Some commenters expressed concern that the application of 
the High Volume of Medicaid Inpatients Factor (HMF) and High Level of 
Uncompensated Care Factor (HUF) would not be consistent with the stated 
intention of those two factors. The commenters recommended that the 
proposed DHRM should consider any state DSH payment amount made to a 
hospital with either high Medicaid volume or high levels of 
uncompensated care as properly targeted for both the HMF and HUF.
    Response: We disagree with the commenters that the proposed 
application of the HMF and HUF would be inconsistent with the stated 
intention of those two factors, which are discussed further in sections 
E. and F. of this rule. The factors are designed and implemented to 
ensure that the DHRM imposes larger percentage DSH allotment reductions 
on states that do not target DSH payments on hospitals with high levels 
of uncompensated care and on states that do not target DSH payments on 
hospitals with high volumes of Medicaid inpatients. The HMF 
independently evaluates how states target DSH payments to high Medicaid 
volume hospitals and the HUF independently evaluates how states target 
DSH payments to hospitals with high levels of uncompensated care. The 
allotment reduction amount will be mitigated under both the HMF and HUF 
for DSH payment amounts that states target to hospitals with both a 
high volume of Medicaid inpatients and a high level of uncompensated 
care.
    Comment: One commenter recommended that any overpayment amount 
identified through annual independent certified DSH audits conducted as 
required by section 1923(j) of the Act that is not redistributed to 
other DSH hospitals in accordance with the approved Medicaid state plan 
count toward the aggregate annual DSH allotment reductions prior to 
applying the DHRM. Another commenter recommended that we account for 
redistributions that would have occurred if the data is outside of the 
regulatory transition period and requested clarification on how 
redistributions would be accounted for after the transition period.
    Response: This rule concerns only the DSH allotment reductions 
under section 1923(f)(7) of the Act, as added by section 2551 of the 
Affordable Care Act, and this comment is outside the scope of this 
rule. We view the treatment of the findings of the annual independent 
certified audits and reports required by section 1923(j) of the Act and 
implementing regulations as separate from the DSH allotment reductions 
directed by the Act.
    Comment: One commenter recommended that CMS add an additional 
factor to the DHRM based on whether a state is over or under the median 
amount of Medicaid DSH allotment per uninsured individual. The 
commenter stated that the proposed DHRM does not address the existing 
disparity in the relationship among state's DSH allotment relative to 
the number of uninsured individuals and that the DHRM causes this 
relationship to be further out of balance. The commenter believes that 
the inequitable relationship is furthered by the proposed DHRM, and 
noted that the illustrative example displayed Florida as having a 4.74 
percent allotment reduction while Louisiana had a 3.46 percent 
reduction.
    Response: Although the proposed DHRM does not alleviate all 
potential differences among states in existing unreduced DSH 
allotments, the DHRM does provide potential relief. While the statutory 
provisions implemented by this final rule do not direct CMS to 
reallocate unreduced DSH allotments calculated in section 1923(f) of 
the Act, each of the five DHRM factors do take into account the size of 
the existing state DSH allotments. Most notably, the Low DSH Adjustment 
Factor (LDF) imposes smaller percentage reductions on low DSH states 
that historically have received lower DSH allotments relative to their 
total Medicaid expenditures than non-low DSH states.
    Additionally, we do not believe that the commenter's example 
demonstrates that the proposed DHRM will necessarily further the 
disparity among states' uninsured per capita DSH allotment amounts. 
Although states with smaller unreduced allotments may receive larger 
percentage reductions than states with larger unreduced allotments, the 
final DHRM does account for the size of state allotments prior to 
reduction.
1. Factor Weighting
    Comment: Many commenters expressed support for CMS's assignment of 
a 33 and \1/3\ percent weight to the Uninsured Percentage Factor (UPF) 
and a 66 and \2/3\ percent combined weight for the two DSH payment 
targeting factors (a 33 and \1/3\ percent weight for the HUF, and a 33 
and \1/3\ percent weight for the HMF). The commenters indicated that 
this was the most reasonable approach for assigning factor weights.
    Response: We incorporated this weighting in the final rule. We 
intend to continue to monitor the impact of the weighting methodology 
for FY 2014 and FY 2015 and will reevaluate this approach for future 
rulemaking.
    Comment: A few commenters recommended that CMS increase the weight 
of the HUF and reduce the weight of the HMF, stating that the weighting 
accounts for the care provided to Medicaid hospitals is duplicated or 
unbalanced. One of the commenters believes that the alternate weighting 
would compensate for the fact that both the HMF and the HUF incorporate 
Medicaid data, whereas uninsured care is only reflected in the HUF.
    Response: We recognize that relationships among the data used in 
the UPF, HMF, and HUF exist; however, we view the DHRM factors as 
distinct and non-duplicative. The UPF, HMF, and HUF each compare data 
among states using three core measures: percentage of uninsured 
individuals, DSH payments targeted to hospitals with high volumes of 
Medicaid inpatients, and DSH payments targeted to hospitals with high 
levels of uncompensated care, respectively. The interactions among 
these related factors are varied and inconsistent. Depending on the 
cost, payment, and volume of Medicaid and uninsured patients, a 
hospital with a high volume of Medicaid inpatients may have no 
uncompensated care cost. Alternatively, a hospital with low Medicaid 
volume may have high uncompensated care costs which may be a function, 
in part, of the high percentage of uninsured individuals in the state. 
The fact that the HMF and the HUF both rely on Medicaid data is not 
dissimilar to the UPF and HUF relying on uninsured data.
    Comment: One commenter recommended that CMS increase the weight of 
the UPF, based on the

[[Page 57301]]

importance of DSH payments to hospitals that serve patients regardless 
of their ability to pay.
    Response: We appreciate the important role of hospitals that serve 
patients regardless of their ability to pay. However, we believe that 
the weighting in the proposed rule is a reasonable approach that gives 
the statutory factors equal weight and have incorporated this method in 
the final rule. We intend to continue to monitor the impact of the 
weighting methodology for FY 2014 and FY 2015 and will reevaluate this 
approach for future rulemaking.
    Comment: A commenter recommended that CMS decrease the weight of 
the UPF to incentivize states to extend coverage to low-income adults 
under section 1902(a)(10)(A)(i)(VIII) of the Act.
    Response: As noted above, because of data lags, we do not have the 
data to support an approach in the first 2 years that reflects state 
decisions to implement the new coverage group, and thus, we proposed 
and are finalizing a DHRM only for the first 2 years during which the 
DSH funding reductions are in effect. We intend to address this issue 
more completely in separate rulemaking for DSH allotment reductions for 
FY 2016 and thereafter.
    Comment: One commenter recommended that CMS decrease the weight of 
the HUF to recognize the benefits of DSH payments in certain states 
that are designed to exclusively offset uninsured costs and to promote 
access to care.
    Response: We appreciate the important role of hospitals that serve 
uninsured patients. The proposed DHRM would promote the state targeting 
of DSH payments to hospitals with high levels of uncompensated care 
costs, which include the cost incurred providing services to the 
uninsured. A state that targets DSH payments to hospitals based on the 
volume of uncompensated care costs for the uninsured would most likely 
benefit from the proposed methodology. We believe that the weighting in 
the proposed rule is a reasonable approach that incentivizes states to 
target their DSH payments and have incorporated this method in the 
final rule. We intend to continue to monitor the impact of the 
weighting methodology for FY 2014 and FY 2015 and will reevaluate this 
approach for future rulemaking.
    Comment: Two commenters recommended that CMS decrease the weight of 
the HUF due to the limitations of the formula, lack of complete data, 
and the potential for paradoxical outcomes when comparing hospital 
levels of uncompensated care.
    Response: Due to data limitations, we recognize that the HUF 
formula may produce very limited outcomes due to the limited data 
available at this time. However, we expect any impact resulting from 
such outcomes to be minimal and we believe that the proposed method 
represents the most reasonable method for determining hospitals with 
high levels of uncompensated care costs given limited data 
availability. Therefore, we have incorporated the proposed weighting 
method in the final rule. We intend to continue to monitor the impact 
of the weighting methodology for FYs 2014 and 2015 and will reevaluate 
this approach for future rulemaking. Additionally, by collecting the 
total cost, we are positioned through separately issued rulemaking for 
FY 2016 to substitute total cost for the denominator in step one of the 
HUF calculation to optimize the method for determining hospitals with 
high levels of uncompensated care.
    Comment: Some commenters recommended that CMS reduce the weight of 
the UPF to zero at least until such time as CMS has data to measure the 
impact of state decisions to implement the new low-income adults 
coverage group under section 1902(a)(10)(A)(i)(VIII) of the Act.
    Response: We believe that the proposed weighting is the most 
reasonable approach and have finalized this method in this final rule. 
We intend to continue to monitor the impact of the weighting 
methodology for FY 2014 and FY 2015 and will reevaluate this approach 
for future rulemaking.
    Comment: One commenter expressed concern that CMS assigned any 
weight to the HMF because a hospital having high Medicaid inpatient 
days do not always indicate large Medicaid short-falls and 
uncompensated care costs, because some states have relatively higher 
average MIURs than other states, and because relying on Medicaid days 
is inconsistent with federal, state, and industry efforts to reduce 
inpatient hospital use and lower readmissions. The commenter recommends 
that CMS assign zero weight to the HMF and instead only consider 
hospital's actual Medicaid shortfall.
    Response: We have finalized the rule to continue to assign weight 
to the HMF. In promoting states to target current and future DSH 
payments to hospitals that have higher volumes of Medicaid inpatients, 
we believe that the HMF accomplishes its design and is consistent with 
the statutory direction that the DHRM impose larger percentage 
reductions on states that do not target their DSH payments on hospitals 
with high volumes of Medicaid inpatients. Section 
1923(f)(7)(B)(i)(II)(aa) of the Act defines hospitals with high volumes 
of Medicaid inpatients as those defined in section 1923(b)(1)(A) of the 
Act.
    Comment: A few commenters urged CMS to ensure that the two 
targeting factors do not penalize states that align DSH qualifying 
criteria very closely with federal deeming criteria at section 1923(b) 
of the Act. Specifically, the commenters recommended that the DHRM 
account for differences among states based on how states established 
their DSH qualifying criteria or target payments to hospitals that are 
deemed DSH based on low-income utilization rate (LIUR) alone. One 
commenter stated that states that primarily pay hospitals that are 
federally deemed hospitals will be negatively affected if the 
substantial payments are made to hospitals deemed based on the LIUR 
threshold, not the MIUR threshold.
    Response: We have finalized the proposed DHRM that promotes state 
targeting of payments to hospitals that would qualify for DSH payments 
based on MIUR deeming requirements defined in section 1923(b)(1)(A) of 
the Act. This final rule establishes this targeting factor consistent 
with the statutory direction to impose larger percentage reductions on 
states that do not target their DSH payments on hospitals with high 
volumes of Medicaid inpatients and do not target their DSH payments on 
hospitals with high levels of uncompensated care The HMF provides 
mitigation of the state-specific DSH reduction amount for states that 
have been targeting and would in the future target DSH payments to 
these federally deemed hospitals. Hospitals with high LIURs may also 
high levels of uncompensated care costs. If those LIUR-deemed hospitals 
have high levels of uncompensated care, the HUF will provide mitigation 
of the state-specific DSH reduction amount for states that have been 
targeting and would in the future target DSH payments to those 
hospitals.
    Comment: A commenter recommended that the DHRM impose a sliding 
scale for HMF and HUF reduction amounts based on the amount of 
aggregate state DSH payments received by DSH hospitals net of provider 
taxes compared to the unreduced DSH allotment.
    Response: Medicaid DSH payment amount data sources used in the DHRM 
rely on existing federal statute and regulatory definitions of DSH 
payments. Changes to these existing definitions are outside the scope 
of this rule.

[[Page 57302]]

    Comment: A few commenters recommended that we finalize our proposal 
to rely on state-specific thresholds when ranking hospitals for 
purposes of the HMF and HUF. One commenter stated that the method is a 
more accurate gauge of a hospital's true level of Medicaid volume and 
uncompensated care than a national comparison.
    Response: We agree that the DHRM, including the HMF and HUF, is 
designed to employ the most equitable method for comparing how states 
target DSH payments for purposes of determining state-specific DSH 
allotment reduction amounts. We have finalized the HMF and HUF to rely 
on state-specific thresholds when ranking hospitals. However, we intend 
to continue to monitor the impact of the DHRM in effect for FY 2014 and 
FY 2015 and will reevaluate the DHRM for future rulemaking.
    Comment: A commenter expressed general support for the DHRM and 
recommended that the final rule include a process to allow states to 
verify the calculation of the aggregate DSH payments made to non-high 
Medicaid volume hospitals used for the HMF and the calculation of the 
aggregate uncompensated care levels used for the HUF.
    Response: To determine the aggregate DSH payments made to non-high 
Medicaid volume hospitals used for the HMF and the calculation of the 
aggregate uncompensated care levels used for the HUF, we utilize 
Medicaid DSH annual audit and reporting data required by section 
1923(j) of the Act and implementing regulations. States submit this 
data annually to CMS. We appreciate the interest in ensuring that 
accurate data is used to calculate state-specific DSH allotment 
reductions; therefore, we recommend that states review this data to 
verify its accuracy prior to their annual submission of the data to 
CMS.
    Comment: Some commenters requested clarity on the years of the DSH 
audit and reporting data used in the DHRM. One commenter also 
recommended that we clarify the meaning of usable form.
    Response: For hospitals that receive DSH payments and are included 
in the DSH audit and reporting data, we proposed and are finalizing the 
use of the most recent complete DSH audit and reporting data for 
purposes of the DHRM. It requires considerable resources to review, 
compile, and consolidate DSH audit and reporting data. For purposes of 
this rule, we intend to use the most recent DSH audit and reporting 
data available at the time of allotment reduction calculation based on 
the existing DSH audit and reporting process. Additionally, we intend 
to publish a separate DHRM technical guide that provides information 
regarding the DHRM calculation and associated data sources.
    Comment: Some commenters indicated that a state excluded private 
hospitals from the DSH audit and reporting data for all years after 
SPRY 2009 and are concerned that this would adversely affect the 
calculation of the state-specific DSH allotment reduction for that 
particular state. One commenter recommended that we use SPRY 2008 DSH 
audit and reporting data and not data from other years for the DHRM for 
FY 2014 and FY 2015. Another commenter recommended that we require 
states to report DSH payments of zero for any hospitals that forfeit 
their DSH payments and are excluded from DSH audit and reporting 
requirements.
    Response: If there are concerns regarding the accuracy of the DSH 
audit and reporting data submitted by states, including incorrectly 
excluded hospitals, we recommend that the interested parties work with 
the state and CMS through the DSH audit and reporting process. Federal 
statute and implementing regulations only require the reporting of 
information for hospitals receiving DSH payments in a particular year. 
If hospitals do not receive DSH payments, including those hospitals 
that have worked with their state to forego DSH payments, the state 
should not report information for those hospitals as part of the DSH 
reporting requirements.
    Comment: One commenter recommended that we require states to submit 
Medicare provider numbers for all DSH hospitals.
    Response: We are finalizing the proposal to collect Medicare 
provider numbers through the DSH audit and reporting process to align 
DSH hospital data from various sources, including DSH audit and 
reporting data and Medicare cost report data.
    Comment: Some commenters requested that CMS publish all hospital-
specific data used in the DHRM for all proposed and final rules 
relating to state-specific DSH allotment reductions for transparency, 
to facilitate data review and validation.
    Response: We intend to publish a separate DHRM technical guide that 
provides information regarding the DHRM calculation and associated data 
sources.
    Comment: Some commenters recommended that CMS allow all states to 
supplement and to revise DSH audit and reporting data after the state 
submission of the audits and reports to CMS. Additionally, the 
commenter recommended the use of the last available data that relates 
to those hospitals that no longer participate in the DSH audit process.
    Response: The final rule relies on DSH audit and reporting data as 
submitted by states in accordance with section 1923(j) of the Act and 
implementing regulations. The implementing regulations and associated 
policy guidance address circumstances in which the state should submit 
a corrected audit and report for a particular state plan rate year and 
when a state should include the adjustment in more recent years. States 
should follow existing guidance regarding when and how to submit 
corrected audits and report. For purposes of this rule, we intend to 
use the most recent complete national DSH audit and reporting data 
available at the time of allotment reduction calculation based on the 
existing DSH audit and reporting process.
    Comment: Several commenters expressed concern regarding the use of 
DSH audit and reporting data for the DHRM. The commenters cited various 
reasons causing concern regarding data quality including the use of 
out-of-date data, the lag between DSH policy changes and audit and 
reporting data, the use of data used from a regulatory transition 
period, and the use incomplete data. Some commenters recommended that 
CMS use uniform data wherever possible among all hospitals for use in 
the DHRM and that CMS consider weighting more heavily the factors that 
have the most accurate data. Another commenter recommended that we 
consider initiating a separate survey to determine uncompensated care 
costs for a more recent year.
    Response: The Medicaid DSH audit and reporting data is the only 
comprehensive reported data available that is consistent with Medicaid 
program requirements. We have finalized reliance on this data in the 
DHRM because it represents the best available data that is consistent 
with existing program definitions. To date, we have received rich, 
comprehensive audit and reporting data from each state that makes 
Medicaid DSH payments. To facilitate the provision of high quality 
data, we provided explicit parameters in the 2008 DSH final rule and 
associated policy guidance for calculating and reporting data elements. 
The 2008 DSH final rule included a transition period in which states 
and auditors could develop and refine audit and reporting techniques. 
This transition period covered data reported relating to state

[[Page 57303]]

plan rate years 2005 through 2010. We recognize that the DSH audit and 
reporting data during this transition period may vary in its quality 
and accuracy from state to state and have finalized the collection of 
additional information that will allow us to ensure collection of the 
information necessary to best implement state-specific DSH allotment 
reductions beyond FY 2015. Consistent with ongoing efforts to ensure 
that the reported data is of the highest quality possible as we move 
through the transition period, we intend to issue additional detailed 
guidance to states by the end of CY 2013 that would be applicable to 
audits and reports due to us by the end of CY 2014.
    Comment: Many commenters recommended that CMS use uncompensated 
care costs from worksheet S-10 from the CMS-2552-10 cost report when 
determining uncompensated care costs for purposes of the DHRM. The 
commenters cited various reasons for the recommendation including, the 
S-10's broader definition of uncompensated care costs, reduced state 
burden of reporting total cost directly to CMS. Many commenters also 
recommended that we modify worksheet S-10 to ensure meaningful use for 
purposes of the DHRM in future years. Citing quality concerns of 
reported data, some commenters also recommended against the worksheet 
S-10 of the CMS-2552-10 to determine uncompensated care costs for the 
DHRM. The commenters recommend that CMS develop an unspecified 
alternate source to determine uncompensated care costs.
    Response: Worksheet S-10 of the CMS-2552-10 cost report does not 
define uncompensated care cost in a manner consistent with the existing 
Medicaid program definition under section 1923(g) of the Act. To ensure 
program consistency, the definition under section 1923(g) of the Act is 
also used for purposes of this rule.
    Comment: A few commenters recommended that we utilize the 
Healthcare Cost Report Information System (HCRIS) to determine total 
hospital cost for the DHRM.
    Response: We recognize that total hospital cost information is 
available from HCRIS. Data for all Medicaid DSH hospitals, however, is 
not in this database. A misalignment of Medicaid DSH audit and 
reporting data and Medicare hospital cost data also exists, so we have 
finalized our proposal for states to report provider numbers in their 
annual DSH audit and reporting submissions. We will continue to 
evaluate utilizing HCRIS data as a potential source of total cost for 
purposes of future rulemaking.
    Comment: Many commenters recommend that we rely on existing 
reporting mechanisms instead of requesting additional data from states, 
including obtaining total cost information directly from the Medicare 
cost reports rather than collecting directly from states through 
Medicaid DSH audits and reports. Some additional commenters recommended 
that we align the Medicaid and Medicare method for calculating and/or 
capturing cost.
    Response: The Medicaid program and the Medicare program are 
separate programs authorized by different sections of the statute and 
while we try whenever possible to align the rules and reporting, it is 
not always possible to do so. To ensure efficient operations and to 
ease administrative burden on states and providers, we utilize 
information available to us through existing reporting. The DSH audit 
and reporting relies on existing financial and cost reporting tools 
currently used by all hospitals participating in the Medicare program 
and available state and hospital data. These documents include the 
Medicare 2552 cost report, audited hospital financial statements and 
accounting records, and information provided by the states' Medicaid 
Management Information Systems (MMIS) and the approved Medicaid State 
plan governing the Medicaid payments made during the audit period. The 
final rule requires the collection of additional information to 
facilitate the generation of usable data from existing mechanisms. The 
rule requires the calculation and collection of total cost information 
through cost report and Medicaid DSH audit and reporting processes to 
ensure data uniformity and consistency. Additionally, we will use 
provider numbers submitted annually by states through Medicaid DSH 
audits and reports to resolve a misalignment of Medicaid DSH audit and 
reporting data and Medicare hospital cost data.
    Comment: Two commenters recommended that we use alternative data 
sources when determining total hospital costs for childrens' hospitals.
    Response: We recognize that some childrens' hospitals may not file 
a Medicare 2552 cost report or may file a partial Medicare 2552 cost 
report. If a hospital does not file or files only a partial Medicare 
2552 cost report, the state remains responsible for reporting the 
information which would have otherwise been available on the Medicare 
2552 from each hospital to determine total cost. To meet federal DSH 
audit and reporting requirements, states may require such hospitals to 
provide the same data to the state as if they were filing the Medicare 
2552.
    Comment: One commenter recommended that we publish a preliminary 
collection of data that would be used for the DHRM and allow an 
opportunity for data correction prior to the calculation of state-
specific DSH allotment reduction amounts.
    Response: To ensure efficient operations, to ease administrative 
burden on states and providers, and to ensure accurate reporting, the 
final rule utilizes information available to us through existing 
reporting mechanisms. The DSH audit and reporting relies on existing 
financial and cost reporting tools currently used by all hospitals 
participating in the Medicare program and available state and hospital 
data. All of these data sources are subject to audit, review, or 
certification prior to submission to CMS. These documents include the 
Medicare 2552 cost report, audited hospital financial statements and 
accounting records, and information provided by the states' MMIS and 
the approved Medicaid state plan governing the Medicaid payments made 
during the audit period. We intend to publish a separate DHRM technical 
guide that provides information regarding the DHRM calculation and its 
data sources.
2. Comments on Future Rulemaking
    Comment: We received many comments providing recommendations and 
requested considerations for the DHRM after FY 2015. The comments 
included recommendations to modify the definition of uncompensated care 
costs, recommendations to conduct studies evaluating the impact of DSH 
allotment reduction implementation, recommendations on factor 
weighting, recommendations on data sources and data collection methods, 
requests for engagement of the provider community prior to future 
rulemaking, recommendations regarding state decisions to implement the 
low-income adults group, and recommendations to finalize future fiscal 
year's DHRMs in increments.
    Response: We appreciate all comments and recommendations regarding 
future rulemaking. The Affordable Care Act provides an increase in 
coverage options available through the Marketplace and state Medicaid 
programs that will coincide with the DSH allotment reductions 
implemented through this rule. We intend to consider the valuable input 
from these comments and the information that will be available to us 
beginning in 2014 for determining the

[[Page 57304]]

methods for DSH allotment reductions for FY 2016 and thereafter.

C. Factor 1--Low DSH Adjustment Factor (LDF)

    The first factor considered in the proposed DHRM is the Low DSH 
Adjustment Factor identified at section 1923(f)(7)(B)(ii) of the Act, 
which requires that the DHRM impose a smaller percentage reduction on 
``low DSH states'' that meet the criterion described in section 
1923(f)(5)(B) of the Act. To qualify as a low DSH state, total 
expenditures under the state plan for DSH payments for FY 2000, as 
reported to us as of August 31, 2003, had to have been greater than 
zero but less than 3 percent of the state's total Medicaid state plan 
expenditures during the FY. Historically, low DSH states have received 
lower DSH allotments relative to their total Medicaid expenditures than 
non-low DSH states.
    We proposed to apply the Low DSH Adjustment Factor (LDF) by 
imposing a greater proportion of the annual DSH funding reduction on 
non-low DSH states. The factor is calculated and applied as discussed 
in greater detail in the proposed rule (78 FR 28555 through 28556). We 
received a number of public comments on the proposed Factor 1--LDF. A 
discussion of these comments, with our responses, appears below.
    Comment: One commenter agrees that the Commonwealth of Pennsylvania 
is appropriately classified as a non-low DSH state, expressed 
uncertainty regarding the future status of Pennsylvania as a non-low 
DSH states, and opposed the DSH allotment reductions because a greater 
proportion of the funding reduction is imposed on non-low DSH states.
    Response: We agree with the commenter that Pennsylvania was 
correctly classified as a non-low DSH state. The statue establishes the 
criterion in section 1923(f)(5)(B) of the Act to classify states as 
low-DSH. Regarding the comments in opposition to imposing greater 
reductions on non-low DSH states, the proposed and final rule are 
consistent with the statutory direction to impose a smaller percentage 
DSH allotment reduction on low DSH states.
    Comment: One commenter expressed support that low DSH states do not 
receive a larger percentage reduction than all other states due to the 
interaction with other DHRM factor requirements directed by the 
statute.
    Response: We appreciate the commenter's support but note that while 
the proposed and final LDF is consistent with the statutory direction 
to impose a smaller percentage DSH allotment reduction on low DSH 
states, it is possible that the overall reduction percentage may be 
higher for a low DSH state than a non-low DSH state on the basis of 
other factors identified by the statute.
    Comment: One commenter opposed the LDF and indicated that the 
methodology used to calculate the LDF was flawed and creates 
substantial disparate treatment between low DSH states and non-low DSH 
states. Specifically, the commenter stated that it is inappropriate to 
use the mean unreduced DSH allotment as a percentage of Medicaid 
service expenditures as a measure to compare low DSH and non-low DSH 
state groups. The commenter estimated that some low DSH states have a 
higher mean unreduced DSH allotment as a percentage of Medicaid service 
expenditures than some non-low DSH states and that states with the 
greatest such percentages would not necessarily receive greater 
percentage reductions than other states. The commenter recommends that 
CMS use a fixed LDF of 50 percent.
    Response: This final rule does not reallocate unreduced DSH 
allotments calculated in section 1923(f) of the Act or alleviate all 
potential differences among states in existing unreduced DSH 
allotments. The DHRM does provide potential relief by imposing smaller 
percentage reductions on low DSH states which historically have 
received lower DSH allotments relative to their total Medicaid 
expenditures than non-low DSH states. This historical difference serves 
as the basis for assigning the LDF value. Although we considered 
alternate methods for determining a value, we believe that the LDF best 
addresses this historical difference while adhering to statutory 
direction.
    Comment: A commenter recommended that CMS not rely on estimated 
Medicaid services expenditures and instead rely on actual expenditures 
as the basis for calculating the LDF due to potential inaccuracy, 
particularly given the potential impact of states' decisions to adopt 
the new low-income adult coverage group under the Medicaid program.
    Response: We have modified the final rule to use actual 
expenditures instead of estimated expenditures. We believe that the use 
of actual expenditures for the affected year is a more appropriate 
method for capturing the relationship between state groups for the 
reduction year. Additionally, the impact of state decisions to adopt 
the new low-income adult coverage group will not be captured in the 
DHRM for FY 2014 or FY 2015.
    Comment: One commenter identified an error in the proposed rule's 
illustrative table of DSH allotment reductions because it misclassified 
Arkansas and Arizona.
    Response: In the illustrative table in the proposed rule, we 
inadvertently transposed Arkansas and Arizona. We will ensure that this 
error does not occur when determining final state-specific DSH 
allotment reduction amounts.
    Comment: One commenter requested clarification regarding the data 
sources used to calculate the LDF.
    Response: We intend to publish a separate DHRM technical guide that 
provides information regarding the DHRM calculation, including the 
additional information regarding data sources.

D. Factor 2--Uninsured Percentage Factor (UPF)

    The second factor considered in the proposed DHRM is the Uninsured 
Percentage Factor (UPF) identified at section 1923(f)(7)(B)(i)(I) of 
the Act, which requires that the DHRM impose larger percentage DSH 
allotment reductions on states that have the lowest percentages of 
uninsured individuals. The statute also requires that the percentage of 
uninsured individuals is determined on the basis of data from the 
Census Bureau, audited hospital cost reports, and other information 
likely to yield accurate data, during the most recent year for which 
such data are available.
    To determine the percentage of uninsured individuals in each state, 
the proposed DHRM relied on the total population and uninsured 
population as identified in the most recent ``1-year estimates'' data 
available from the ACS conducted by the Census Bureau. The Census 
Bureau generates ACS ``1-year estimates'' data annually based on a 
point-in-time survey of approximately 3 million individuals. For 
purposes of the proposed DHRM, we utilized the most recent ACS data 
available at the time of the calculation of the annual DSH allotment 
reduction amounts.
    The UPF, as applied through the proposed DHRM, has the effect of 
imposing lower relative DSH allotment reductions on states that have 
the highest percentage of uninsured individuals. The UPF would mitigate 
the DSH reduction for states with the highest percentage of uninsured 
individuals.
    The proposed UPF is determined separately for each state group as 
described in greater detail in the proposed rule (78 FR 28556). We 
proposed to utilize preliminary DSH

[[Page 57305]]

allotment estimates to develop the DSH reduction factors. We received a 
number of public comments on the proposed Factor 2--UPF. A discussion 
of these comments, with our responses, appears below.
    Comment: Many commenters support the DHRM's identification of 
uninsured individuals based on 1-year estimates of the number of 
uninsured from the U.S. Census Bureau's American Community Survey.
    Response: We are finalizing the use of 1-year estimates of the 
number of uninsured from the American Community Survey.
    Comment: Many commenters expressed concern that the uninsured 
individual data used for the UPF may undercount the numbers of 
undocumented individuals as reported and estimated through the ACS.
    Response: We received information from the Census Bureau in 
response to the comments. According to the Census Bureau, the foreign-
born population includes anyone who is not a U.S. citizen at birth. 
This includes two groups: (1) Naturalized U.S. citizens; and (2) 
noncitizens. Noncitizens include lawful permanent residents 
(immigrants), temporary migrants (such as foreign students), 
humanitarian migrants (such as refugees and asylees), and persons not 
lawfully present in the United States.
    The Census Bureau collects data from all foreign born who 
participate in its censuses and surveys, regardless of legal status. 
Thus, unauthorized migrants are included in ACS estimates of the total 
foreign-born population. However, the Census Bureau only asks foreign-
born respondents if they are naturalized U.S. citizens or noncitizens, 
so it is not possible to tabulate separate estimates of unauthorized 
migrants using the ACS. The Census Bureau believes estimates of the 
foreign-born population in the ACS do include unauthorized immigrants. 
Accordingly, we have finalized our proposed use of ACS data without an 
adjustment in the uninsured data.

E. Factor 3--High Volume of Medicaid Inpatients Factor (HMF)

    The third factor considered in the proposed DHRM is the High Volume 
of Medicaid Inpatients Factor (HMF) identified at section 
1923(f)(7)(B)(i)(II)(aa) of the Act, which requires that the DHRM 
impose larger percentage DSH allotment reductions on states that do not 
target DSH payments to hospitals with the highest volumes of Medicaid 
inpatients. For purposes of the DHRM, the statute defines hospitals 
with high volumes of Medicaid patients as those defined in section 
1923(b)(1)(A) of the Act. These hospitals must meet minimum qualifying 
requirements at section 1923(d) of the Act and have an MIUR that is at 
least one standard deviation above the mean MIUR for hospitals 
receiving Medicaid payments in the state. Every hospital that meets 
that definition is deemed a disproportionate share hospital and is 
statutorily required to receive a DSH payment. The HMF, through the 
proposed DHRM, provides the mitigation of the DSH reduction amount for 
states that have been targeting and would in the future target DSH 
payments to these federally-deemed hospitals.
    States that have been and continue to target a large percentage of 
their DSH payments to hospitals that are federally-deemed as a DSH 
based on their MIUR would receive the lowest reduction amounts relative 
to their total spending. States that target the largest amounts of DSH 
payments to hospitals that are not federally-deemed based on MIUR would 
receive larger reduction amounts under this factor. The current DSH 
allotment amounts are unrelated to the amounts of MIUR-deemed hospitals 
and their DSH-eligible uncompensated care costs. By basing the HMF 
reduction on the amounts that states do not target to hospitals with 
high volumes of Medicaid inpatients, this proposed methodology 
incentivizes states to target DSH payments to such hospitals.
    To ensure that all deemed disproportionate share hospitals receive 
a required DSH payments, states are already required to determine the 
mean MIUR for hospitals receiving Medicaid payments in the state and 
the value of one standard deviation above the mean. We proposed to rely 
on MIUR information for use in the DHRM that we intend to collect from 
states on an annual basis outside of this rule. When a state does not 
timely submit this separately required MIUR information, for purposes 
of this factor, we will assume that the state has the highest value of 
one standard deviation above the mean reported among all other states.
    The calculation of the HMF will rely on extant data that should be 
readily available to states. The following data elements are used in 
the HMF calculation: the preliminary unreduced DSH allotment for each 
state, the DSH hospital payment amount reported for each DSH in 
accordance with Sec.  447.299(c)(17), the MIUR for each DSH reported in 
accordance with Sec.  447.299(c)(3), and the value of one standard 
deviation above the mean MIUR for hospitals receiving Medicaid payments 
in the state reported separately.
    The proposed HMF is a state-specific percentage that is calculated 
separately for each state group (low DSH and non-low DSH) as described 
in greater detail in the proposed rule (78 FR 28556 through 28557).
    Section 1923(f)(7)(B)(i) of the Act specifies that the DHRM impose 
larger percentage reductions on states that do not target their DSH 
payments on hospitals with high volumes of Medicaid inpatients. Section 
1923(f)(7)(B)(i)(II)(aa) defines hospitals with high volumes of 
Medicaid inpatients as those defined in section 1923(b)(1)(A) of the 
Act.
    Comment: Many commenters expressed support for the HMF, including 
specific components of the HMF methodology.
    Response: We appreciate the commenter's support and have finalized 
the HMF as proposed, unless otherwise specified.
    Comment: One commenter recommended that CMS add additional 
protection for hospitals that have MIURs that are significantly in 
excess of one standard deviation above the mean MIUR for hospitals 
receiving Medicaid payments in the state because these hospitals are 
key public services hospitals.
    Response: We agree that these hospitals are key public services 
hospitals. The threshold used in the DHRM for the HMF is expressly 
identified by statute. The HMF already considers any state DSH payments 
made to hospitals that are in excess of one standard deviation above 
the mean as payments that are targeted consistent with the statutory 
MIUR threshold. Therefore, we anticipate that DHRM will incentivize and 
promote state targeting of DSH payments to any hospitals exceeding this 
threshold, including those hospitals that significantly exceed it.
    Comment: A few commenters recommended modifications to the 
definition used to determine high Medicaid volume hospitals. The 
recommendations include allowing Medicaid discharges in addition to 
Medicaid days as part of the determination process and weighting the 
methodology to include outpatient hospital services.
    Response: The threshold used in the DHRM for the HMF to designate a 
high volume Medicaid hospital is expressly identified by statute. We 
believe that this threshold is appropriate and anticipate that the DHRM 
will incentivize and promote state targeting

[[Page 57306]]

of DSH payments to any hospitals exceeding this threshold.
    Comment: One commenter supports the proposed HMF, but recommends 
that CMS add additional protection for any hospital that has an MIUR 
that is at least three standard deviations above the mean MIUR for 
hospitals receiving Medicaid payments in the state by mandating that 
states make DSH payments to such hospitals for their entire hospital-
specific limit.
    Response: We designed the DHRM to preserve the considerable 
flexibility afforded states 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. Therefore, we are not adopting the commenter's 
recommendation. However, we will consider further targeting in future 
rulemaking.
    Comment: One commenter recommended that the DHRM rely on MIUR data 
derived from the original DSH payment calculation instead of actual 
data derived from the Medicaid DSH audits and reports.
    Response: The proposed and final rules do not rely on Medicaid DSH 
audit and reporting data for MIUR data. Instead, we will rely on MIUR 
information that we will collect from states on an annual basis outside 
of this rule.
    Comment: One commenter requested clarification regarding which MIUR 
data we will use for the DHRM.
    Response: We will rely on MIUR information that we collect from 
states on an annual basis outside of this rule. We have already 
initiated collection for applicable Medicaid state plan rate years. We 
also intend to publish a separate DHRM technical guide that provides 
information regarding the DHRM calculation, including the additional 
information regarding data sources.

F. Factor 4--High Level of Uncompensated Care Factor (HUF)

    The fourth factor considered in the DHRM is the HUF identified at 
section 1923(f)(7)(B)(i)(II)(bb) of the Act, which requires that the 
DHRM impose larger percentage DSH allotment reductions on states that 
do not target DSH payments on hospitals with high levels of 
uncompensated care. We proposed to rely on the existing statutory 
definition of uncompensated care cost used in determining the hospital-
specific limit on 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 FY, the difference between the costs 
incurred by that hospital for furnishing inpatient hospital and 
outpatient hospital services during the applicable state FY to Medicaid 
eligible 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 limit, or 
hospital-specific DSH limit.
    For purposes of this rule, we proposed to rely on this definition 
of uncompensated cost for the calculation of the HUF, as reported by 
states on the most recent available DSH audit and reporting data. For 
the proposed DHRM, hospitals with high levels of uncompensated care are 
defined based on a comparison with other Medicaid DSH hospitals in 
their state. Any hospital that exceeds the mean ratio of uncompensated 
care costs to total Medicaid and uninsured inpatient and outpatient 
hospital service costs within its state is considered a hospital with a 
high level of uncompensated care. This data is consistent with existing 
Medicaid DSH program definition of uncompensated care and is readily 
available to states and us.
    The following data elements are used in the HUF calculation:
     The preliminary unreduced DSH allotment for each state;
     DSH hospital payment amounts reported for each DSH in 
accordance with Sec.  447.299(c)(17);
     Uncompensated care cost amounts reported for each DSH in 
accordance with Sec.  447.299(c)(16);
     Total Medicaid cost amounts reported for each DSH in 
accordance with Sec.  447.299(c)(10); and
     Total uninsured cost amounts reported for each DSH in 
accordance with Sec.  447.299(c)(14).
    The statute also requires that uncompensated care used in this 
factor of the DHRM exclude bad debt. The proposed rule relied on the 
uncompensated care cost data derived from Medicaid DSH audit and 
reporting required by section 1923(f) of the Act and implementing 
regulations. This uncompensated care data excludes bad debt, including 
unpaid copayments and deductibles, associated with individuals with a 
source of third party coverage for the service received during the 
year.
    The HUF is a state-specific percentage that is calculated 
separately for each state group (low DSH and non-low DSH) as described 
in greater detail in the proposed rule (78 FR 28557).
    We proposed to modify DSH reporting requirements to collect total 
hospital cost from Medicare cost report data for all DSH hospitals. 
Through separately issued rulemaking for FY 2016 and thereafter, we 
intend to substitute total cost for the denominator in step one of the 
HUF calculation above. Since total cost is unavailable at this time, we 
solicited comment on alternatives to the use of total uncompensated 
care cost as the denominator to alleviate this data issue.
    Understanding potential data limitations and that the proposed 
methodology does not precisely distinguish how states direct DSH 
payments among hospitals that are identified as at or above the mean 
uncompensated care, we solicited comments on alternative methodologies 
regarding state targeting of DSH payments to hospitals with high levels 
of uncompensated care.
    Comment: Many commenters expressed support for the HUF, including 
specific components of the HUF methodology.
    Response: We have finalized the HUF as proposed, unless otherwise 
specified.
    Comment: A commenter expresses concern that the DHRM would penalize 
states and some of their hospitals if states target their DSH payments 
based on indigent care levels alone, instead of on Medicaid factors.
    Response: We have finalized the proposed DHRM that promotes state 
targeting of payments to hospitals that would qualify for DSH payments 
based on MIUR deeming requirements defined in section 1923(b)(1)(A) of 
the Act. The final rule establishes this targeting factor consistent 
with the statutory direction to impose larger percentage reductions on 
states that do not target their DSH payments on hospitals with high 
volumes of Medicaid inpatients and do not target their DSH payments on 
hospitals with high levels of uncompensated care. The HMF provides 
mitigation of the state-specific DSH reduction amount for states that 
have been targeting and would in the future target DSH payments to 
these types of hospitals. Hospitals with high levels of indigent care 
levels may also have high levels of uncompensated care costs. If those 
hospitals have high levels of uncompensated care, the HUF will provide 
mitigation of the state-specific DSH reduction amount for states that 
have been targeting and would in the

[[Page 57307]]

future target DSH payments to those hospitals.
    Comment: Some commenters recommended that the DHRM remove DSH 
payments made to high volume Medicaid hospitals prior to determining 
the amount of DSH payments made to hospitals that are not targeted to 
hospitals with high levels of uncompensated care.
    Response: We have finalized the proposed DHRM that promotes, 
through the HUF, state targeting of payments to hospitals with high 
levels of uncompensated care independent of the hospitals' status as a 
high volume Medicaid hospital. This final rule establishes this 
targeting factor consistent with the statutory direction to impose 
larger percentage reductions on states that do not target their DSH 
payments on hospitals with high levels of uncompensated care.
    The DHRM, through the HMF, already provides mitigation of the 
state-specific DSH reduction amount for states that have been targeting 
and would in the future target DSH payments to high volume Medicaid 
hospitals. If DSH payments to those hospitals were also excluded for 
purposes of the HUF, the protection would be afforded to states even if 
the hospitals had low levels of uncompensated care. This is inherently 
counter to this factor, which is designed to promote state targeting of 
DSH payment to hospitals with high levels of uncompensated care costs. 
If the high Medicaid volume hospitals also have high levels of 
uncompensated care, the HUF will also provide additional mitigation of 
the state-specific DSH reduction amount based on state DSH payments 
targeted to these hospitals.
    Comment: A few commenters stated that the proposed HUF properly 
accounts for hospital size, but does not adequately account for the 
amount of care provided to Medicaid and uninsured patients. The 
commenter recommends that we further adjust each hospital's 
uncompensated care level by adding an additional weight to each 
hospital based on each hospital's total Medicaid and uninsured costs 
when calculating the UPF.
    Response: Though total hospital volume is accounted for, in part, 
by basing HUF reductions on the total payments not targeted to 
hospitals that have high levels of uncompensated care, we recognize 
that the proposed HUF does not provide for an ideal accounting of the 
volume of each hospital's amount of care provided to Medicaid and 
uninsured patients when determining which hospitals have high levels of 
uncompensated care. Regardless, we are concerned that adding an 
adjustment for total Medicaid and uninsured volume would unfairly and 
adversely affect smaller hospitals. We have initiated a resolution to 
the identified volume concern by finalizing the collection of total 
cost data. We intend to substitute total cost for the denominator in 
step one of the HUF calculation to alleviate the identified concern for 
future periods.
    Comment: Some commenters expressed concern that the HUF does not 
rely on an accurate measure of uncompensated care and may potentially 
produce paradoxical outcomes when comparing hospital levels of 
uncompensated care. One commenter agreed with the proposal that total 
cost would be a better denominator in step one of the HUF calculation, 
but recommended that CMS utilize Medicare cost report data to determine 
uncompensated care costs for FY 2014 and FY 2015.
    Response: We recognize that the HUF may produce isolated 
paradoxical outcomes due to the limited data available at this time. 
However, we believe the method proposed does represent the most 
reasonable method for determining hospitals with high levels of 
uncompensated care costs given limited data availability. We expect any 
impact resulting from such outcomes to be minimal and we believe the 
method proposed represents the most reasonable method for determining 
hospitals with high levels of uncompensated care costs given limited 
data availability. Additionally, through separately issued rulemaking 
for FY 2016 and thereafter, we intend to substitute total cost for the 
denominator in step one of the HUF calculation to optimize the method 
for determining hospitals with high levels of uncompensated care.
    We agree that total cost is a better denominator in step one of the 
HUF calculation. To address misalignment of Medicaid DSH audit and 
reporting data and Medicare hospital cost data, we have finalized our 
proposal for states to report provider numbers in their annual DSH 
audit and reporting submissions. Additionally, we have finalized the 
collection of total cost data, which will be audited consisted with 
other DSH audit and reporting data used by this proposed rule. We 
intend to utilize this information to determine the optimum method for 
calculating uncompensated cost for FY 2016 and thereafter.
    Comment: One commenter expressed concerns that the HUF does not 
properly address the statutory direction to impose larger percentage 
reductions on states that do not target their DSH payments on hospitals 
high levels of uncompensated care because Medicaid DSH audit and 
reporting data does not include all hospitals in a state.
    Response: We recognize that the DSH audit and reporting data does 
not include uncompensated care information for all hospitals; however, 
the Medicaid DSH audit and reporting data represent the only existing 
uncompensated care cost data consistent with the existing statutory 
definition of uncompensated care cost used in determining the hospital-
specific limit on FFP for DSH payments. We disagree with the commenter 
that the HUF does not address the statutory direction to impose larger 
percentage reductions on states that do not target their DSH payments 
on hospitals high levels of uncompensated care. The proposed and final 
HUF is designed to promote state targeting of DSH payments to hospitals 
with high levels of uncompensated care based on imposing reductions 
based on the payments to non-high level uncompensated care hospitals.
    Comment: Two commenters requested clarification regarding the term 
``weighted mean'' used for purposes of the HUF calculation.
    Response: We have removed the term ``weighted'' when referencing 
means in the final rule to alleviate potential confusion. We intend to 
publish a separate DHRM technical guide that provides additional 
information regarding the DHRM calculation.
    Comment: Two commenters recommended that we include bad debt, 
including unpaid copayments and deductibles, in the definition of 
uncompensated care costs used for purposes of the UPF. The commenter 
also recommended that CMS change the treatment of bad debt when 
calculating the hospital-specific DSH limit at section 1923(g) of the 
Act.
    Response: The statute requires that the uncompensated care 
definition used in the UPF exclude bad debt. We have finalized the rule 
to rely on the uncompensated care cost data derived from Medicaid DSH 
audit and reporting data. Consistent with statutory direction, this 
uncompensated care data excludes bad debt, including unpaid copayments 
and deductibles, associated with individuals with a source of third 
party coverage for the service received during the year. Additionally, 
changes to calculating the hospital-specific DSH limit are outside the 
scope of the proposed rule. We issued policy on hospital-specific DSH 
limits through separate rulemaking. The regulation does not implement 
or otherwise address the calculation of hospital-

[[Page 57308]]

specific DSH payment limits under section 1923(g) of the Act.
    Comment: One commenter recommended that we permit the use of 
average hospital cost-center specific ratios instead of cost center-
specific cost-to-charge ratios in the definition of uncompensated care 
costs used for purposes of the UPF. Two commenters also recommended the 
inclusion of Graduate Medical Education (GME) costs in the 
uncompensated care cost definition.
    Response: The Medicaid DSH audit and reporting rule data is the 
only data source available to us consistent with the statutory 
definition of uncompensated care cost for determining hospital-specific 
DSH limits. We are finalizing the reliance on this data in the UPF 
because it represents the best available data that is consistent with 
program definitions. Further, changes to calculating the hospital-
specific DSH limit are outside the scope of the proposed rule.

G. Factor 5--Section 1115 Budget Neutrality Factor (BNF)

    The statute requires that we take into account the extent to which 
a state's DSH allotment was included in the budget neutrality 
calculation for a coverage expansion that was approved under section 
1115 as of July 31, 2009. Prior to the implementation of this proposed 
rule, these states possess full annual DSH allotments as calculated 
under section 1923(f) of the Act. Under an approved section 1115 
demonstration, however, the states may have limited authority to make 
DSH payments under section 1923 of the Act because all or a portion of 
their DSH allotment was included in the budget neutrality calculation 
for a coverage expansion under an approved section 1115 demonstration 
or to fund uncompensated care pools and/or safety net care pools. For 
applicable states, DSH payments under section 1923 of the Act are 
limited to the DSH allotment calculated under section 1923(f) of the 
Act less the allotment amount included in the budget neutrality 
calculation. If a state's entire DSH allotment is included in the 
budget neutrality calculation, it would have no available DSH funds 
with which to make DSH payments under section 1923 of the Act for the 
period of the demonstration.
    Consistent with the statute, for states that include their DSH 
allotment in budget neutrality calculations for coverage expansion 
under an approved section 1115 demonstration as of July 31, 2009, we 
proposed to exclude from DSH allotment reduction, for the HMF and the 
HUF factors, the amount of DSH allotment that each state currently 
continues to divert specifically for coverage expansion in the budget 
neutrality calculation. Amounts of DSH allotment included in budget 
neutrality calculations for non-coverage expansion purposes under 
approved demonstrations would still be subject to reduction. 
Uncompensated care pools and safety net care pools are considered non-
coverage expansion purposes. For section 1115 demonstrations not 
approved as of July 31, 2009, any DSH allotment amounts included in 
budget neutrality calculations, whether for coverage expansion or 
otherwise, under a later approval would also be subject to reduction.
    We proposed to determine for each reduction year if any portion of 
a state's DSH allotment qualifies for consideration under this factor. 
To qualify annually, CMS and the state would have to have included its 
DSH allotment in the budget neutrality calculation for a coverage 
expansion that was approved under section 1115 as of July 31, 2009, and 
would have to continue to do so at the time that reduction amounts are 
calculated for each FY.
    The proposed DHRM took into account the extent to which the DSH 
allotment for a state was included in the budget neutrality calculation 
approved under section 1115 as of July 31, 2009 by excluding amounts 
diverted specifically for a coverage expansion and automatically 
assigning qualifying states an average reduction amount (based on the 
state group) for any DSH allotment diverted for non-coverage expansion 
purposes and any amounts diverted for coverage expansion if the section 
1115 demonstration was or is approved after July 31, 2009. DSH 
allotment reductions relating to two DHRM factors (the HUF and the HMF) 
are determined based on how states target DSH payments to certain 
hospitals. Since states qualifying under the budget neutrality 
provision would have limited or no relevant data for these two factors, 
we would be unable to evaluate how they spent the portion of their DSH 
allotment that was diverted for non-coverage expansion. Accordingly, we 
proposed to maintain the HUF and HMF formula for DSH payments for which 
qualifying states would have available data. Because we would not have 
DSH payment data for DSH allotment amounts diverted for non-coverage 
expansion, we proposed to assign average HUF and HMF reduction 
percentages for the portion of their DSH allotment that they were 
unable to use to target payments to disproportionate share hospitals. 
Instead of assigning the average percentage reduction to non-qualifying 
amounts, we considered using various alternative percentages. 
Additionally, for qualifying allotment amounts diverted specifically 
for coverage expansion, we considered applying the BNF reduction 
exclusion to the UPF in addition to the HMF and HUF. We solicited 
comment regarding the use of different percentages for the reductions 
to non-qualifying diversion amounts and regarding alternative BNF 
methodologies that may prove preferable alternatives.
    Through the Affordable Care Act, the statute provided states with 
other, non-DSH funds to finance coverage expansions, thus limiting the 
need for the diverted DSH under demonstrations. Accordingly, the group 
of states affected by this factor today may change at a later time, 
depending on how and whether their coverage continues to be financed as 
part of their demonstrations. In addition, based on changes in the 
health coverage landscape, we will reevaluate this policy in future 
rulemaking.
    Comment: Some commenters requested clarification regarding how CMS 
will determine the amount of the DSH allotment included in the 
calculation of budget neutrality that will not be considered an amount 
included for coverage expansion.
    Response: For states whose DSH allotment was included in the budget 
neutrality calculation for a coverage expansion that was approved under 
section 1115 as of July 31, 2009, we will determine the amount of the 
state's DSH allotment included in the budget neutrality calculation for 
coverage expansion for the specific fiscal year subject to reduction. 
This amount is not subject to reductions under the HMF and HUF 
calculations. The DSH allotment amount included in the budget 
neutrality calculation remaining after the identification of the amount 
for coverage expansion is the DSH allotment amount that will be 
considered not included for coverage expansion. We intend to publish a 
separate DHRM technical guide that provides information regarding the 
DHRM calculation, including the additional information regarding the 
BNF calculation.
    Comment: One commenter recommended that CMS modify the BNF to 
include safety net care pool and uncompensated care pool amounts to be 
treated the same as coverage expansion initiatives. Another commenter 
expressed support for the exclusion of uncompensated care and safety 
net care

[[Page 57309]]

pools from consideration as coverage expansion for purposes of the BNF.
    Response: The proposed and final DHRM takes into account the extent 
to which the DSH allotment for a state was included in the budget 
neutrality calculation approved under section 1115 of the Act as of 
July 31, 2009, by excluding from the HMF and HUF amounts diverted 
specifically for a coverage expansion. Uncompensated care pools and 
safety net care pools do not result in coverage expansion, so they are 
excluded from consideration as coverage expansion for purposes of this 
factor. Accordingly, we finalized this provision of the rule as 
proposed.
    Comment: A few commenters recommended that CMS modify the BNF date 
of July 31, 2009, to July 31, 2010, or to include all approved 
demonstrations regardless of the approval date.
    Response: The statute requires that we take into account the extent 
to which a state's DSH allotment was included in the budget neutrality 
calculation for a coverage expansion that was approved under section 
1115 of the Act as of July 31, 2009, specifically. Subsequent to this 
date, the Affordable Care Act provided states with other, non-DSH funds 
for such coverage expansions, thus limiting the need for the diverted 
DSH under demonstrations. Therefore, we are finalizing the rule as 
proposed. Based on changes in the health coverage landscape, we will 
reevaluate this policy in future rulemaking.
    Comment: A commenter asked that we ensure that the DHRM gives full 
consideration to the statutory direction regarding the BNF and does not 
unfairly penalize states for which their DSH allotment was included in 
the budget neutrality calculation for a coverage expansion that was 
approved under section 1115 of the Act as of July 31, 2009.
    Response: We do not believe that the BNF unfairly penalizes 
qualifying states under this factor. The proposed and final DHRM takes 
into account the extent to which the DSH allotment for a state was 
included in the budget neutrality calculation approved under section 
1115 of the Act as of July 31, 2009 by excluding from the HMF and HUF 
amounts diverted specifically for a coverage expansion and 
automatically assigning qualifying states an average HMF and HUF 
reduction amount (based on the state group) for any DSH allotment 
diverted for non-coverage expansion purposes and any amounts diverted 
for coverage expansion if the demonstration under section 1115 of the 
Act was or is approved after July 31, 2009.

IV. Provisions of the Final Regulations

    The final rule is substantively the same as the method in the 
proposed rule, but includes some technical updates, corrections, and 
clarifications after reviewing the public comments as noted in section 
III of this final rule.

V. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995, we are required to 
provide 60-day notice in the Federal Register and solicit public 
comment before a collection of information requirement is submitted to 
the Office of Management and Budget (OMB) for review and approval. To 
fairly evaluate whether an information collection should be approved by 
OMB, section 3506(c)(2)(A) of the Paperwork Reduction Act of 1995 
requires that we solicit comment on the following issues:
     The need for the information collection and its usefulness 
in carrying out the proper functions of our agency.
     The accuracy of our estimate of the information collection 
burden.
     The quality, utility, and clarity of the information to be 
collected.
     Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    To derive average costs, we used data from the U.S. Bureau of Labor 
Statistics for all salary estimates. The salary estimates include the 
cost of fringe benefits, based on the December 2012 Employer Costs for 
Employee Compensation report by the Bureau.
    In our May 15, 2013 (78 FR 28551), proposed rule, we solicited 
public comment on each of the section 3506(c)(2)(A)-required issues for 
the following information collection requirements (ICRs). We received 
the following comment:
    Comment: A commenter stated that the burden estimate of 4 hours to 
comply with the added DSH reporting requirements at Sec.  447.299 is 
understated due to the amount of time required for the state to review 
the requirements, modify state rules, consult legal counsel, hold 
public hearings, and otherwise implement the new requirements.
    Response: We disagree that the burden estimate associated with the 
added DSH reporting requirements should be increased and believe that 
our initial estimate is accurate. States are already required to submit 
an annual DSH audit and associated report to CMS. This rule simply adds 
three additional data elements (Medicaid provider number, Medicare 
provider number, and total cost) to the existing reporting that should 
be easily accessible to states.

ICRs Regarding Reporting Requirements (Sec.  447.299)

    Beginning with each state's Medicaid state plan rate year 2005, for 
each Medicaid state plan rate year, the state must submit to CMS, at 
the same time as it submits the completed DSH audit required under 
Sec.  455.204, the following information for each DSH hospital to which 
the state made a DSH payment to permit verification of the 
appropriateness of such payments.
    The ongoing burden associated with the requirements under Sec.  
447.299 is the time and effort it would take each of the 50 state 
Medicaid Programs and the District of Columbia to complete the annual 
Medicaid DSH reporting requirements. Based on the information in this 
rule, we estimate that it will take an additional 4 hours per state 
(from 38 approved hours to 42 total hours) to complete the DSH 
reporting spreadsheets. Consequently, we also estimate an additional 
204 (4 hr x 51 respondents) annual hours for all states and the 
District of Columbia and an additional aggregate cost of $8,136.54 (51 
x [$51 x 2 hr] + [$28.77 x 2 hr]).
    In deriving these figures, we used the following hourly labor rates 
and estimated the time to complete each task: $51 per hour and an 
additional 102 hours (204 hr x 0.5) for management and professional 
staff to review and prepare reports, and $28.77 per hour and an 
additional 102 hours (204 hr x 0.5) for office staff to prepare the 
reports.
    The preceding requirements and burden estimates will be added to 
the existing PRA-related requirements and burden estimates that have 
been approved by OMB under OCN 0938-0746 (CMS-R-266). The revised total 
burden estimates equal 51 annual respondents, 51 annual responses, and 
2,142 annual hours.

Submission of PRA-Related Comments

    We have submitted a copy of this rule to OMB for its review of the 
rule's information collection and recordkeeping requirements. These 
requirements are not effective until they have been approved by the 
OMB.
    To obtain copies of the supporting statement and any related forms 
for the proposed paperwork collections referenced above, access CMS' 
Web site at http://www.cms.hhs.gov/Paperwork@cms.hhs.gov, or call the 
Reports Clearance Office at 410-786-1326.
    We invite public comments on this rule's information collection 
requirements. If you would like to

[[Page 57310]]

comment, please submit your comments to the Office of Information and 
Regulatory Affairs, Office of Management and Budget, Attention: CMS 
Desk Officer, (CMS-2367-F) Fax: (202) 395-6974; or Email: OIRA_submission@omb.eop.gov.
    Comments must be received by October 18, 2013.

VI. Regulatory Impact Analysis

A. Statement of Need

    The Affordable Care Act amended the Act by requiring aggregate 
reductions to state Medicaid DSH allotments annually from FY 2014 
through FY 2020. This final rule delineates the DHRM to implement the 
annual reductions for FY 2014 and FY 2015.

B. 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 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). This rule 
has been designated an ``economically significant'' rule measured by 
the $100 million threshold, under section 3(f)(1) of Executive Order 
12866. 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.
    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) 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 2013, that 
threshold is approximately $141 million. This final rule contains 
reporting requirements on states which would be $8,136.54 annually.
    Executive Order 13132 establishes certain requirements that an 
agency must meet when it issues 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 rule does not impose any costs on state or 
local governments, the requirements of Executive Order 13132 are not 
applicable.
    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 
less than $7.0 million to $35.5 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. Since states are responsible in the management of the 
reduced allotments, we cannot predict the exact impact on individual 
hospitals. However, the aggregate estimated reduction of DSH allotment 
reductions at the state level is generally less than 6 percent of total 
Medicaid DSH allotment amounts. We estimate that the reduction in 
payments resulting from the DSH allotment reductions will account for 
significantly less than 3 to 5 percent of total hospital revenue. 
Therefore, we do not believe that this threshold will be reached by the 
requirements in this final rule.
    In addition, section 1102(b) of the Act requires us to prepare a 
regulatory impact analysis if a rule may have a significant impact on 
the operations of a substantial number of small rural hospitals. This 
analysis must conform to the provisions of section 604 of the RFA. For 
purposes of section 1102(b) of the Act, we define a small rural 
hospital as a hospital that is located outside of a Metropolitan 
Statistical Area for Medicare payment regulations and has fewer than 
100 beds. 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. We are not preparing an analysis for section 
1102(b) of the Act because we do not believe that this threshold will 
be reached by the requirements in this final rule.
    Executive Order 13132 establishes certain requirements that an 
agency must meet when it issues 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 regulation does not impose any costs on state 
or local governments, the requirements of Executive Order 13132 are not 
applicable.

C. Anticipated Effects

1. Effects on State Medicaid Programs
    Effective for FY 2014, the DSH allotment reductions will have a 
direct effect on the ability for some or all states to maintain state-
wide Medicaid DSH payments at FY 2013 levels. Federal share DSH 
allotments, which are published by CMS in an annual Federal Register 
notice, limit the amount of FFP in the aggregate that states can pay 
annually in DSH payments to hospitals. This final rule will reduce 
state DSH allotment amounts and therefore, will limit the states' 
ability to make DSH payments and claim FFP for DSH payments at FY 2013 
levels. By statute, the rule will reduce state DSH allotments by 
$500,000,000 for FY 2014 and $600,000,000 for FY 2015. The rule will 
reduce total FFP claimed by states by similar amounts, although it may 
not equal the exact amount of the allotment reductions. At this time, 
we cannot anticipate how states will change their existing DSH 
methodologies in response to the rule, and therefore cannot provide a 
specific estimate of the total federal financial impact for FY 2014 and 
FY 2015.
    The final rule utilizes a DHRM that would mitigate the negative 
impact on states that continue to have high percentages of uninsured 
and are targeting DSH payments on hospitals that have a high volume of 
Medicaid inpatient and on hospitals with high levels of uncompensated 
care.
    Additionally, the final rule requires additional annual DSH 
reporting requirements on states. For more information regarding the 
effects of these requirements on states, see section V. of this final 
rule.
2. Effects on Providers
    The final rule will affect certain providers through the reduction 
of state DSH payments. However, we cannot estimate the impact on 
individual providers or groups of providers. This final rule will not 
affect the considerable flexibility afforded states in setting DSH 
state plan payment methodologies to the extent that these

[[Page 57311]]

methodologies are consistent with section 1923(c) of the Act and all 
other applicable statute and regulations. States will retain the 
ability to preserve existing DSH payment methodologies or to modify 
methodologies by submitting state plan amendments to us. Some states 
may determine that implementing a proportional reduction in DSH 
payments for all qualifying hospitals is the preferred method to 
account for the reduced allotment. Alternatively, states could 
determine that the best action is to propose a methodology that will 
direct DSH payments reductions to hospitals that do not have high 
Medicaid volume or do not have high levels of uncompensated care. 
Regardless, the rule incentivizes states to target DSH payments to 
hospitals that are most in need of Medicaid DSH funding based on their 
serving a high volume of Medicaid inpatients and having a high level of 
uncompensated care.
    This final rule also does not 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.
    Although this rule would reduce state DSH allotments, the 
management of the reduced allotments still largely remains with the 
states. Given that states would retain the same flexibility to design 
DSH payment methodologies under the state plan and that individual 
hospital DSH payment limits would not be reduced, we cannot predict 
whether and how states would exercise their flexibility in setting DSH 
payments to account for their reduced DSH allotment and how this would 
affect individual providers or specific groups of providers.

D. Alternatives Considered

    The Affordable Care Act specifies the annual DSH allotment 
reduction amounts for FY 2014 and FY 2015. Therefore, we were unable to 
consider alternative reduction amounts. Alternatives to the proposed 
DHRM methodology are discussed through the preceding section of this 
rule.

E. 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 in Table 1 showing the classification of the 
impacts associated with implementation of this final rule.

                                          Table 1--Accounting Statement
----------------------------------------------------------------------------------------------------------------
                                                                                       Units
                                                                 -----------------------------------------------
                    Category                         Estimates                     Discount rate      Period
                                                                    Year dollar      (percent)        covered
----------------------------------------------------------------------------------------------------------------
Costs:
    Cost of Reporting Requirement (in millions).           0.008            2013               7       2014-2015
                                                           0.008            2013               3       2014-2015
Transfers:
    Reductions in Disproportionate Share                    -548            2013               7       2014-2015
     Hospital Allotment (in millions)...........
                                                            -549            2013               3       2014-2015
----------------------------------------------------------------------------------------------------------------
    From Whom to Whom...........................         Federal Government to the States on behalf of the
                                                                           Beneficiaries
----------------------------------------------------------------------------------------------------------------

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 chapter IV as set forth below:

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. Section 447.294 is added to read as follows:

Sec.  447.294  Medicaid disproportionate share hospital (DSH) allotment 
reductions for Federal fiscal year 2014 and Federal fiscal year 2015.

    (a) Basis and purpose. This section sets forth the DSH health 
reform methodology (DHRM) for calculating State-specific annual DSH 
allotment reductions from Federal fiscal year 2014 and Federal fiscal 
year 2015 as required under section 1923(f) of the Act.
    (b) Definitions. For purposes of this section--
    Aggregate DSH allotment reductions mean the amounts identified in 
section 1923(f)(7)(A)(ii) of the Act.
    Budget neutrality factor (BNF) is a factor incorporated in the DHRM 
that takes into account the extent to which the DSH allotment for a 
State was included in the budget neutrality calculation for a coverage 
expansion approved under section 1115 as of July 31, 2009.
    DSH payment means the amount reported in accordance with Sec.  
447.299(c)(17).
    Effective DSH allotment means the amount of DSH allotment 
determined by subtracting the State-specific DSH allotment reduction 
from a State's unreduced DSH allotment.
    High level of uncompensated care factor (HUF) is a factor 
incorporated in the DHRM that results in larger percentage DSH 
allotment reduction for States that do not target DSH payments on 
hospitals with high levels of uncompensated care.
    High Medicaid volume hospital means a disproportionate share 
hospital that has an MIUR at least one standard deviation above the 
mean MIUR for hospitals receiving Medicaid payments in the State.
    High uncompensated care hospital means a hospital that exceeds the 
mean ratio of uncompensated care costs to total Medicaid and uninsured 
inpatient and outpatient hospital service costs for all 
disproportionate share hospitals within a state.
    High volume of Medicaid inpatients factor (HMF) is a factor 
incorporated in

[[Page 57312]]

the DHRM that results in larger percentage DSH allotment reduction for 
States that do not target DSH payments on hospitals with high volumes 
of Medicaid inpatients.
    Hospital with high volumes of Medicaid inpatients means a 
disproportionate share hospital that meets the requirements of section 
1923(b)(1)(A) of the Act.
    Low DSH adjustment factor (LDF) is a factor incorporated in the 
DHRM that results in a smaller percentage DSH allotment reduction on 
low DSH States.
    Low DSH State means a State that meets the criterion described in 
section 1923(f)(5)(B) of the Act.
    Mean HUF reduction percentage is determined by calculating the 
quotient of each state's HUF reduction amount divided by its unreduced 
DSH allotment, then calculating the mean for each state group, then 
converting the result to a percentage.
    Medicaid inpatient utilization rate (MIUR) means the rate defined 
in section 1923(b)(2) of the Act.
    Non-high Medicaid volume hospital means a disproportionate share 
hospitals that does not meet the requirements of section 1923(b)(1)(A) 
of the Act.
    State group means similarly situated States that are collectively 
identified by DHRM as defined in Sec.  447.294(e)(1).
    State-specific DSH allotment reduction means the amount of annual 
DSH allotment reduction for a particular State as determined by the 
DHRM.
    Total Medicaid cost means the amount for each hospital reported in 
accordance with Sec.  447.299(c)(10).
    Total population means the 1-year estimates data of the total non-
institutionalized population identified by United States Census 
Bureau's American Community Survey.
    Total uninsured cost means the amount reported for each DSH in 
accordance with Sec.  447.299(c)(14).
    Uncompensated care cost means the amount reported for each hospital 
in accordance with Sec.  447.299(c)(16).
    Uncompensated care level means a hospital's uncompensated care cost 
divided by the sum of its total Medicaid cost and its total uninsured 
cost.
    Unreduced DSH allotment means the DSH allotment calculated under 
section 1923(f) of the Act prior to annual reductions under this 
section.
    Uninsured percentage factor (UPF) is a factor incorporated in the 
DHRM that results in larger percentage DSH allotment reductions for 
States that have the lowest percentages of uninsured individuals.
    Uninsured population means 1-year estimates data of the number of 
uninsured identified by United States Census Bureau's American 
Community Survey.
    (c) Aggregate DSH allotment reduction amounts. The aggregate DSH 
allotment reduction amounts are as provided in section 
1923(f)(7)(A)(ii) of the Act.
    (d) State data submission requirements. States are required to 
submit the mean MIUR, determined in accordance with section 
1923(b)(1)(A) of the Act, for all hospitals receiving Medicaid payments 
in the State and the value of one standard deviation above such mean. 
States must provide the data for State Plan Rate Year (SPRY) 2008, SPRY 
2009, SPRY 2010, and SPRY 2011 by June 30, 2014. States must provide 
this data for each subsequent SPRY to CMS by June 30 of each year. To 
determine which SPRY's data the state must submit, subtract 3 years 
from the calendar year in which the data is due. For example, SPRY 2012 
data must be submitted to CMS by June 30, 2015.
    (e) DHRM methodology. Section 1923(f)(7) of the Act requires 
aggregate annual reduction amounts for FY 2014 and FY 2015 to be 
reduced through the DHRM. The DHRM is calculated on an annual basis 
based on the most recent data available to CMS at the time of the 
calculation. The DHRM is determined as follows:
    (1) Establishing State groups. For each FY, CMS will separate low-
DSH States and non-low DSH states into distinct State groups.
    (2) Aggregate DSH allotment reduction allocation. CMS will allocate 
a portion of the aggregate DSH allotment reductions to each State group 
by the following:
    (i) Dividing the sum of each State group's preliminary unreduced 
DSH allotments by the sum of both State groups' preliminary unreduced 
DSH allotment amounts to determine a percentage.
    (ii) Multiplying the value of paragraph (e)(2)(i) of this section 
by the aggregate DSH allotment reduction amount under paragraph (c) of 
this section for the applicable fiscal year.
    (iii) Applying the low DSH adjustment factor under paragraph (e)(3) 
of this section.
    (3) Low DSH adjustment factor (LDF) calculation. CMS will calculate 
the LDF by the following:
    (i) Dividing each State's preliminary unreduced DSH allotment by 
their respective total Medicaid service expenditures.
    (ii) Calculating for each State group the mean of all values 
determined in paragraph (e)(3)(i) of this section.
    (iii) Dividing the value of paragraph (e)(3)(ii) of this section 
for the low-DSH State group by the value of paragraph (e)(3)(ii) for 
the non-low DSH state group.
    (4) LDF application. CMS will determine the final aggregate DSH 
allotment reduction allocation for each State group through application 
of the LDF by the following:
    (i) Multiplying the LDF by the aggregate DSH allotment reduction 
for the low DSH State group.
    (ii) Utilizing the value of paragraph (e)(4)(i) of this section as 
the aggregate DSH allotment reduction allocated to the low DSH State 
group.
    (iii) Subtracting the value of paragraph (e)(4)(ii) of this section 
from the value of paragraph (e)(2)(ii) of this section for the low DSH 
State group; and
    (iv) Adding the value of paragraph (e)(4)(iii) of this section to 
the value of paragraph (e)(2)(ii) of this section for the non-low DSH 
State group.
    (5) Reduction factor allocation. CMS will allocate the aggregate 
DSH allotment reduction amount to three core factors by multiply the 
aggregate DSH allotment reduction amount for each State group by the 
following:
    (i) UPF--33 and \1/3\ percent.
    (ii) HMF--33 and \1/3\ percent.
    (iii) HUF--33 and \1/3\ percent.
    (6) Uninsured percentage factor (UPF) calculation. CMS will 
calculate the UPF by the following:
    (i) Dividing the total State population by the uninsured in State 
for each State.
    (ii) Determining the uninsured reduction allocation component for 
each State as a percentage by dividing each State's value of paragraph 
(e)(6)(i) of this section by the sum of the values of paragraph 
(e)(6)(i) of this section for the respective State group (the sum of 
the values of all States in the State group should total 100 percent).
    (iii) Determine a weighting factor by dividing each State's 
unreduced DSH allotment by the sum of all preliminary unreduced DSH 
allotments for the respective State group.
    (iv) Multiply the weighting factor calculated in (e)(6)(iii) of 
this section by the value of each State's uninsured reduction 
allocation component from paragraph (e)(6)(ii) of this section.
    (v) Determine the UPF as a percentage by dividing the product of 
paragraph (e)(6)(iv) of this section for each State by the sum of the 
values of paragraph (e)(6)(iv) of this section for the respective State 
group (the sum of the values of all States in the State group should 
total 100 percent).
    (7) UPF application and reduction amount. CMS will determine the 
UPF

[[Page 57313]]

portion of the final aggregate DSH allotment reduction allocation for 
each State by multiplying the State's UPF by the aggregate DSH 
allotment reduction allocated to the UPF factor under paragraph (e)(5) 
of this section for the respective State group.
    (8) High volume of Medicaid inpatients factor (HMF) calculation. 
CMS will calculate the HMF by determining a percentage for each State 
by dividing the State's total DSH payments made to non-high Medicaid 
volume hospitals by the total of such payments for the entire State 
group.
    (9) HMF application and reduction amount. CMS will determine the 
HMF portion of the final aggregate DSH allotment reduction allocation 
for each State by multiplying the State's HMF by the aggregate DSH 
allotment reduction allocated to the HMF factor under paragraph (e)(5) 
of this section for the respective State group.
    (10) High level of uncompensated care factor (HUF) calculation. CMS 
will calculate the HUF by determining a percentage for each State by 
dividing the State's total DSH payments made to non-High Uncompensated 
Care Level hospitals by the total of such payments for the entire State 
group.
    (11) HUF application and reduction amount. CMS will determine the 
HUF portion of the final aggregate DSH allotment reduction allocation 
by multiplying each State's HUF by the aggregate DSH allotment 
reduction allocated to the HUF factor under paragraph (e)(5) of this 
section for the respective State group.
    (12) Section 1115 budget neutrality factor (BNF) calculation. This 
factor is only calculated for States for which all or a portion of the 
DSH allotment was included in the calculation of budget neutrality 
under a section 1115 demonstration for the specific fiscal year subject 
to reduction pursuant to an approval on or before July 31, 2009. CMS 
will calculate the BNF for qualifying states by the following:
    (i) For States whose DSH allotment was included in the budget 
neutrality calculation for a coverage expansion that was approved under 
section 1115 as of July 31, 2009, (without regard to approved 
amendments since that date) determining the amount of the State's DSH 
allotment included in the budget neutrality calculation for coverage 
expansion for the specific fiscal year subject to reduction. This 
amount is not subject to reductions under the HMF and HUF calculations.
    (ii) Determining the amount of the State's DSH allotment included 
in the budget neutrality calculation for non-coverage expansion 
purposes for the specific fiscal year subject to reduction.
    (iii) Multiplying each qualifying State's value of paragraph 
(e)(12)(ii) of this section by the mean HMF reduction percentage for 
the respective State group.
    (iv) Multiplying each qualifying State's value of paragraph 
(e)(12)(ii) of this section by the mean HUF reduction percentage for 
the respective State group.
    (v) For each State, calculating the sum of the value of paragraphs 
(e)(12)(iii) and of (e)(12)(iv) of this section.
    (13) Section 1115 budget neutrality factor (BNF) application. This 
factor will be applied in the State-specific DSH allotment reduction 
calculation.
    (14) State-specific DSH allotment reduction calculation. CMS will 
calculate the state-specific DSH reduction by the following:
    (i) Taking the sum of the value of paragraphs (e)(7), (e)(9), and 
(e)(11) of this section for each State.
    (ii) For States qualifying under paragraph (e)(12) of this section, 
adding the value of paragraph (e)(12)(v) of this section.
    (iii) Reducing the amount of paragraph (e)(14)(i) of this section 
for each State that does not qualify under paragraph (e)(12)(v) of this 
section based on the proportion of each State's preliminary unreduced 
DSH allotment compared to the national total of preliminary unreduced 
DSH allotments so that the sum of paragraph (e)(14)(iii) of this 
section equals the sum of paragraph (e)(12)(v) of this section.
    (f) Annual DSH allotment reduction application. For each fiscal 
year 2014 and fiscal year 2015, CMS will subtract the State-specific 
DSH allotment amount determined in paragraph (e)(14) of this section 
from that State's final unreduced DSH allotment. This amount is the 
State's final DSH allotment for the fiscal year.

0
3. Section 447.299 is amended by:
0
A. Redesignating paragraph (c)(18) as (c)(21).
0
B. Adding paragraphs (c)(18), (c)(19) and (c)(20).
0
C. Revising newly redesignated paragraph (c)(21).
    The additions and revisions read as follows:

Sec.  447.299  Reporting Requirements.

* * * * *
    (c) * * *
    (18) Medicaid provider number. The provider identification number 
assigned by the Medicaid program.
    (19) Medicare provider number. The provider identification number 
assigned by the Medicare program.
    (20) Total hospital cost. The total annual costs incurred by each 
hospital for furnishing inpatient hospital and outpatient hospital 
services.
    (21) Reporting. States must report DSH payments made to all 
hospitals under the authority of the approved Medicaid State plan. This 
includes both in-State and out-of-State hospitals. For out-of-State 
hospitals, States must report, at a minimum, the information identified 
in Sec.  447.299(c)(1) through (c)(6), (c)(8), (c)(9), (c)(17), 
(c)(18), and (c)(19).
* * * * *
(Catalog of Federal Domestic Assistance Program No. 93.778, Medical 
Assistance Program)

    Dated: August 29, 2013.
Marilyn Tavenner,
Administrator, Centers for Medicare & Medicaid Services.
    Approved: September 9, 2013.
Kathleen Sebelius,
Secretary, Department of Health and Human Services.
[FR Doc. 2013-22686 Filed 9-13-13; 4:15 pm]
BILLING CODE 4120-01-P
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