[Federal Register Volume 89, Number 37 (Friday, February 23, 2024)]
[Rules and Regulations]
[Pages 13916-13948]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-03542]



[[Page 13915]]

Vol. 89

Friday,

No. 37

February 23, 2024

Part V





Department of Health and Human Services





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Centers for Medicare & Medicaid Services





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42 CFR Parts 433, 447, 455, et al.





Medicaid Program; Disproportionate Share Hospital Third-Party Payer 
Rule; Final Rule

Federal Register / Vol. 89, No. 37 / Friday, February 23, 2024 / 
Rules and Regulations

[[Page 13916]]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 433, 447, 455, and 457

[CMS-2445-F]
RIN 0938-AV00


Medicaid Program; Disproportionate Share Hospital Third-Party 
Payer Rule

AGENCY: Centers for Medicare & Medicaid Services (CMS), Department of 
Health and Human Services (HHS).

ACTION: Final rule.

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SUMMARY: This final rule primarily addresses recent legislative changes 
to the Social Security Act as a result of the Consolidated 
Appropriations Act, 2021 changes to the hospital-specific limit on 
Medicaid disproportionate share hospital (DSH) payments. This final 
rule affords States and hospitals more clarity on how the limit, the 
changes that took effect on October 1, 2021, will be calculated. 
Additionally, this final rule enhances administrative efficiency by 
making technical changes and clarifications to the DSH program.

DATES: 
    Effective date: These regulations are effective on April 23, 2024.
    Applicability date: Sections 447.295(b) and (d), 447.299(c)(6), 
(7), (10), and (16), and 455.304(d)(1), (3), (4), and (6) are 
applicable as of October 1, 2021 (see section III. of this final rule 
for additional information).

FOR FURTHER INFORMATION CONTACT: Lia Adams, (410) 786-8258, Charlie 
Arnold, (404) 562-7425, Richard Cuno, (410) 786-1111, Stuart Goldstein, 
(410) 786-0694, Charles Hines, (410) 786-0252, and Mark Wong, (415) 
744-3561, for Medicaid Disproportionate Share Hospital Payments and 
Overpayments.
    Jennifer Clark, (410) 786-2013, for Children's Health Insurance 
Program (CHIP).

SUPPLEMENTARY INFORMATION:

I. Background

A. Overview

    Title XIX of the Social Security Act (the Act) established the 
Medicaid program as a Federal-State partnership for the purpose of 
providing and financing medical assistance to specified groups of 
eligible individuals. States have considerable flexibility in designing 
their programs but must abide by requirements specified in the Federal 
Medicaid statute and regulations. Each State is responsible for 
administering its Medicaid program in accordance with an approved State 
plan, which specifies the scope of covered services, groups of eligible 
individuals, payment methodologies, and all other information necessary 
to assure the State plan describes a comprehensive and sound structure 
for operating the Medicaid program, and ultimately, provides a clear 
basis for claiming Federal matching funds.
    Section 1902(a)(13)(A)(iv) of the Act requires that States consider 
the situation of hospitals that serve a disproportionate share of low-
income patients with special needs, in a manner consistent with section 
1923 of Act, in determining payments. The purpose of the proposed rule 
\1\ and this final rule is to update the regulatory requirements of the 
disproportionate share hospital (DSH) program in response to the 
Consolidated Appropriations Act, 2021 (herein, referred to as the CAA 
2021) (Pub. L. 116-260, December 27, 2020) and to further improve upon 
the program. More specifically, the provisions of this final rule seek 
to implement the DSH-related provisions of the CAA 2021 concerning the 
treatment of third-party payments for purposes of calculating Medicaid 
hospital-specific DSH limits. We note that the CAA 2021 also created 
new supplemental payment reporting requirements through the addition of 
section 1903(bb) of the Act; however, DSH payments were specifically 
excluded from these requirements, and we have issued guidance on those 
requirements.\2\
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    \1\ 88 FR 11865.
    \2\ ``New Supplemental Payment Reporting and Medicaid 
Disproportionate Share Hospital Requirements under the Consolidated 
Appropriations Act, 2021,'' State Medicaid Director Letter #21-006, 
December 10, 2021. Available at https://www.medicaid.gov/federal-policy-guidance/downloads/smd21006.pdf.
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    This final rule also revises regulatory payment and financing 
definitions and other regulatory language that could be subject to 
misinterpretation, refines administrative procedures used by States to 
comply with Federal regulations, and removes regulatory requirements 
that have been difficult to administer and do not further the program's 
objectives.
    We are finalizing all provisions as proposed, although we note that 
the regulations have some minor phrasing changes for consistency with 
current style guidelines. For the CAA 2021-related provisions of this 
final rule, we are finalizing an applicability date of October 1, 2021, 
to align with the effective date in the statute. This information is 
noted in each of the CAA 2021-related provision sections and discussed 
in section III. of this final rule. The remaining provisions of this 
final rule are effective 60 days after publication of the final rule.

B. Disproportionate Share Hospital (DSH) Payments

1. Background
    States are statutorily required to make DSH payments to qualifying 
hospitals that serve patients who are uninsured and enrolled in the 
Medicaid program, as described in section 1923(d) of the Act. States 
generally have flexibility regarding the specific hospitals to which 
they make payments and how they determine the amount of those payments, 
within certain parameters. Section 1902(a)(13)(A)(iv) of the Act 
requires that States consider the situation of hospitals that serve a 
disproportionate number of low-income patients with special needs, in a 
manner consistent with section 1923 of the Act. DSH payments are not 
considered part of base payments or supplemental payments to providers, 
as they are made under distinct statutory authority. Section 1923 of 
the Act contains specific requirements related to DSH payments, 
including aggregate annual State-specific DSH allotments that limit 
Federal financial participation (FFP) for Statewide total DSH payments 
under section 1923(f) of the Act, and hospital-specific limits on DSH 
payments under section 1923(g) of the Act. Under the statutory 
hospital-specific limits, a hospital's DSH payments may not exceed the 
costs incurred by that hospital in furnishing inpatient and outpatient 
hospital services during the year to certain Medicaid beneficiaries and 
the uninsured, less payments received under title XIX (other than 
section 1923 of the Act) and payments by uninsured patients. In 
addition, section 1923(a)(2)(D) of the Act requires States to provide 
an annual report to the Secretary describing the DSH payment 
adjustments made to each DSH.
    Section 1001(d) of the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003 (MMA) (Pub. L. 108-173, December 8, 2003) 
added section 1923(j) of the Act to require States to report additional 
information about their DSH programs. Section 1923(j)(1) of the Act 
requires States to submit an annual report including an identification 
of each hospital that received a DSH payment adjustment during the 
preceding fiscal year (FY) and the amount of such adjustment, and such 
other information as the Secretary determines necessary to ensure the 
appropriateness of the DSH payment

[[Page 13917]]

adjustments for such FY. Additionally, section 1923(j)(2) of the Act 
requires States to submit an independent certified audit of the State's 
DSH program, including specified content, annually to the Secretary.
2. Consolidated Appropriations Act, 2021 (CAA 2021) DSH Requirements
    The CAA 2021 was enacted on December 27, 2020. It modified the 
Medicaid statute in several ways, including by updating section 1923 of 
the Act. Specifically, Division CC, Title II, section 203 of the CAA 
2021 (herein referred to as section 203) amended section 1923(g) of the 
Act, which describes the methodology for calculating hospital-specific 
Medicaid DSH limits. This provision took effect October 1, 2021. For 
purposes of calculating the hospital-specific DSH limit, section 203 of 
the CAA 2021 modified the calculation of the Medicaid portion of the 
hospital-specific DSH limit to include only costs and payments for 
services furnished to beneficiaries for whom Medicaid is the primary 
payer for such services, as specified in section 1923(g)(1)(B)(i) of 
the Act. Accordingly, the limit excludes costs and payments for 
services provided to Medicaid beneficiaries with other sources of 
coverage, including Medicare and commercial insurance. Section 1923(g) 
of the Act, as modified by the CAA 2021, includes an exception to this 
methodology for hospitals in and above the 97th percentile of all 
hospitals with respect to inpatient days made up of patients who, for 
such days, were entitled to Medicare Part A benefits and to 
supplemental security income (SSI) benefits (97th percentile 
hospitals). This exception, as described in section 1923(g)(2)(B) of 
the Act, applies to hospitals that are in or above the 97th percentile, 
either with respect to the number of inpatient days or percentage of 
total inpatient days that were made up of such days. The exception 
provides qualifying hospitals with a hospital-specific limit that is 
the higher of that calculated under the methodology in which costs and 
payments for Medicaid patients are counted only for beneficiaries for 
whom Medicaid is the primary payer, or the methodology in effect on 
January 1, 2020. From June 2, 2017, to the passage of the CAA 2021, 
payments made by all third-party payers (TPP), such as Medicare, other 
insurers, and beneficiary cost sharing, would all be included in the 
calculation of hospital-specific DSH limits, in accordance with the 
``DSH Payments--Treatment of Third-Party Payers in Calculating 
Uncompensated Care Costs'' final rule in the April 3, 2017, Federal 
Register (82 FR 16114), which delineated the treatment of TPP and the 
calculation of hospital-specific DSH limits.
    We acknowledge there are data limitations, which we describe later 
in this rule, that have delayed CMS' ability to clarify which hospitals 
qualify for the exception for 97th percentile hospitals. We proposed 
how we would determine which hospitals qualify for this exception and 
are finalizing as proposed.
3. Annual DSH Audits and Overpayments
    The ``Medicaid Program; Disproportionate Share Hospital Payments'' 
final rule published in the December 19, 2008, Federal Register (73 FR 
77904) (and herein referred to as the 2008 DSH audit final rule) sets 
forth the data elements necessary to comply with the requirements of 
section 1923(j) of the Act related to auditing and reporting of DSH 
payments under State Medicaid programs. The regulations at 42 CFR 
447.299(c) finalized in the 2008 DSH audit final rule outline 18 data 
elements States must submit to CMS, at the same time as the State 
submits the completed audit required under 42 CFR 455.304, to permit 
CMS verification of the appropriateness of such payments. One such data 
element is the total uncompensated care cost, which equals the total 
cost of care for furnishing inpatient hospital and outpatient hospital 
services to Medicaid eligible individuals and to individuals with no 
source of third-party coverage for the hospital services they receive, 
less the sum of other payment sources listed in Sec.  447.299(c)(16). 
Despite the robust data, potential data gaps may exist as a result of 
an auditor identifying an area, or areas, in which documentation is 
missing or unavailable for certain costs or payments that are required 
to be included in the calculation of the total eligible uncompensated 
care costs.
    Consequently, at times we are unable to determine whether a DSH 
overpayment to a provider has occurred, the root causes of any 
overpayments, and the amount of the overpayments associated with each 
cause. In current practice, an auditor may include a finding (or 
``caveat'') in the audit, stating that the missing information may 
impact the calculation of total eligible uncompensated care costs, 
rather than making a determination of the actual financial impact of 
the identified issue. This lack of transparency results in uncertainty 
even if costs are ultimately correct and restricts CMS' and States' 
ability to ensure proper recovery of all FFP associated with DSH 
overpayments identified through annual DSH audits in instances where 
errors did occur.
    In the past, the Office of Inspector General (OIG) and the 
Government Accountability Office (GAO) have raised concerns similar to 
ours regarding oversight of the Medicaid DSH program. The 2008 DSH 
audit final rule addressed concerns raised by OIG \3\ by implementing 
in regulations the independent certified audit requirements under 
section 1923(j) of the Act, by requiring States to include data 
elements as specified in Sec.  447.299(c) with their annual audits. In 
2012, GAO published the report ``Medicaid: More Transparency of and 
Accountability for Supplemental Payments are Needed.'' \4\ Although 
Medicaid DSH payments are not ``supplemental payments,'' as described 
previously, they are akin to supplemental payments, and thus, GAO's 
report did not focus on supplemental payments exclusively. As part of 
the report, GAO analyzed the 2010 DSH audits for 2007 DSH payments and 
found DSH payments that did not comply with the audit requirements 
specified in part 455, subpart D. For each of the required DSH audit 
elements, there were a number of hospitals for which GAO could not 
determine compliance due to data reliability or documentation issues. 
For example, GAO could not determine compliance with the requirement 
that uncompensated care costs are accurately calculated for 33.7 
percent of hospitals analyzed by GAO. The report highlights that, 
although the independent certified audit requirements have allowed us 
to identify various compliance issues and quantify some provider 
overpayments, in some instances, findings remain unquantified.
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    \3\ Audit of Selected States' Medicaid Disproportionate Share 
Hospital Programs,'' March 2006 (A-06-03-00031), https://www.oig.hhs.gov/oas/reports/region6/60300031.pdf.
    \4\ https://www.gao.gov/assets/660/650322.pdf.
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    We agree with the report that more transparency is needed, but to 
obtain the necessary overpayment amounts under current reporting 
processes, CMS or the State would have to conduct a secondary review or 
audit, which would be burdensome and largely redundant. By requiring 
States to submit to CMS in the annual reports described in Sec.  
447.299(c) a dollar estimate of any Medicaid DSH provider overpayments, 
we ensure this calculation occurs with the primary audit and eliminates 
redundancy in reviewing documentation. As discussed further in section 
II. of this final rule, this is intended to further enhance our

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oversight to better ensure the integrity of hospital-specific limit 
calculations.
    Amounts in excess of the hospital-specific limit are regarded as 
overpayments to providers, under 42 CFR part 433, subpart F. Section 
1903(d)(2)(C) of the Act provides that, when an overpayment by a State 
is discovered, the State has a 1-year period to recover or attempt to 
recover the overpayment before an adjustment is made to FFP to account 
for the overpayment. FFP is not available for DSH payments that are 
found in the independent certified audit to exceed the hospital-
specific limit. Currently, regulations in Sec.  433.316 provide for 
determining the date of discovery of an overpayment, which is necessary 
to determine the statutory 1-year period, but it does not specify how 
this relates to the independent certified DSH audits required under 
section 1923(j)(2) of the Act and 42 CFR part 455, subpart D.
    Accordingly, the discovery of overpayments necessitates the return 
of the Federal share, or redistribution by the State of the overpaid 
amounts to other qualifying hospitals, in accordance with the State's 
approved Medicaid State plan. While the preamble to the 2008 DSH audit 
final rule generally addressed the return or redistribution of provider 
overpayments identified through DSH audits, it did not include specific 
procedural requirements for returning or redistributing overpayments. 
Therefore, we have identified this area as an opportunity to strengthen 
program oversight and integrity protections, specifically with respect 
to the overpayment and redistribution reporting process and 
requirements for identifying the financial impact of audit findings. In 
the proposed rule, we proposed requirements to enhance these areas, 
which we are now finalizing as proposed.
4. DSH Health Reform Reduction Methodology
    Section 2551 of the Affordable Care Act \5\ (ACA) amended section 
1923(f) of the Act to require aggregate reductions to State Medicaid 
DSH allotments annually from FY 2014 through FY 2020, to account for 
the then-anticipated decrease in uncompensated care resulting from 
expansions of coverage authorized by the ACA. The ACA specified in 
section 1923(f)(7)(B) of the Act certain factors CMS must consider in 
implementing these reductions and left certain components of the 
methodology to the Secretary of Health and Human Services to define (as 
described later in this section). The methodology is referred to as the 
DSH Health Reform Methodology (DHRM). We published a final rule in 
October 2013 that delineated a methodology to implement the annual 
reductions only for FY 2014 and FY 2015 to accommodate data refinement 
and methodology improvement for later reduction years. However, 
Congress has since modified section 1923(f)(7) of the Act several times 
such that the reductions have never taken effect. In the September 25, 
2019, Federal Register, we published a final rule \6\ (2019 final rule) 
delineating a revised methodology for the calculation of DSH allotment 
reductions, which at that time were scheduled to begin in 2020. 
Congress has since further delayed the start of these reductions until 
FY 2024. The CAA 2021 modified section 1923(f) of the Act such that the 
reductions occur from FY 2024 through FY 2027, in the amount of $8 
billion each year.
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    \5\ Patient Protection and Affordable Care Act of 2010, Public 
Law 111-148, as amended by the Health Care and Education 
Reconciliation Act of 2010, Public Law 111-152.
    \6\ 84 FR 50308.
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    Section 1923(f)(7) of the Act requires the Secretary to develop a 
methodology to determine the annual, State-by-State DSH allotment 
reduction amounts based on five factors: uninsured factor (UPF); 
Medicaid volume factor (HMF); uncompensated care factor (HUF); low DSH 
State factor (LDF); and the budget neutrality factor (BNF). The 2019 
final rule assigned weights to the annual reduction amount for the 
three core factors: UPF, HMF, and HUF. The remaining two factors, the 
LDF and the BNF, affect the allocation of the reduction amounts within 
the three core factors. The LDF accomplishes this allocation at the 
front end of the calculations by shifting a portion of the reduction 
amount specified under section 1923(f)(7)(A)(ii) of the Act to non-low 
DSH States. Following this step, we determine the reduction 
calculations prescribed by the three core factors. We then perform 
additional reductions associated with the BNF within the HMF and HUF 
for States that divert DSH allotment amounts under section 1115 
demonstrations. We then reallocate these reduction amounts away from 
States that do not divert DSH allotment amounts under section 1115 
demonstrations, to comply with the aggregate reduction amounts 
specified under statute at section 1923(f)(7)(A)(ii) of the Act. The 
five factors are specified in section 1923(f)(7)(B) of the Act as 
follows:
    <bullet> UPF--The statute requires that States with lower 
uninsurance rates receive higher percentage DSH reductions. 
Calculations performed under this factor utilize Census Bureau data 
that is subject to a 1-year lag.
    <bullet> HMF--The statute requires that States that target DSH 
payments to hospitals with high Medicaid volume receive a lower 
percentage reduction in their DSH allotment. Calculations performed 
under this factor utilize DSH audit data that is on a 3-year lag.
    <bullet> HUF--As required by statute, States that target DSH 
payments to hospitals with high levels of uncompensated care receive a 
lower percentage reduction in their DSH allotment. Calculations 
performed under this factor utilize DSH audit data that is on a 3-year 
lag.
    <bullet> Low DSH State factor--Section 1923(f)(7)(B)(ii) of the Act 
requires that statutorily defined ``low DSH States'' \7\ receive a 
lower overall DSH reduction percentage than non-low DSH States. To 
accomplish this, low DSH States and non-low DSH States are separated 
into two cohorts before applying the reduction methodology.
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    \7\ Section 1923(f)(5)(B) describes low DSH States as ``State[s] 
in which the total expenditures under the State plan (including 
Federal and State shares) for [DSH] adjustments under this section 
for fiscal year 2000, as reported to the Administrator of the 
Centers for Medicare and Medicaid Services as of August 31, 2003, is 
greater than 0 but less than 3 percent of the State's total amount 
of expenditures under the State plan for medical assistance during 
the fiscal year.''
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    <bullet> BNF--DSH allotment amounts diverted for coverage expansion 
under section 1115 demonstrations approved as of July 31, 2009, receive 
a limited protection from reduction.
5. Modernizing the Publication of Annual DSH and Children's Health 
Insurance Program (CHIP) Allotments
    Section 447.297 provides a process and timeline for us to publish 
preliminary and final annual DSH allotments and national expenditure 
targets in the Federal Register. The current requirements specify that 
we publish DSH preliminary allotments and national expenditure targets 
by October 1 of each Federal fiscal year (FFY) and publish the final 
allotments and national expenditure targets by April 1 of that FFY. We 
have found the current regulatory Federal Register publication process 
to be time consuming and administratively burdensome for us, and 
ultimately unnecessary in light of more timely notification practices 
already taking place.
    Similarly, section 2104 of the Act provides appropriations for FY 
CHIP allotments for FYs 1998 through 2029. Regulations at 42 CFR 
457.609 describe the process for calculating State CHIP

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allotments for a FY after FY 2008. Section 457.609(h) provides that 
CHIP allotments for a FY may be published as preliminary or final 
allotments in the Federal Register as determined by the Secretary. 
Similar to the current DSH allotment publication process, we have found 
the current FY CHIP allotment publication regulations administratively 
burdensome and less efficient than other means of notification. We 
proposed to codify the process already taking place while eliminating 
inefficient and duplicative publication requirements, and we are 
finalizing those proposals in this final rule.

II. Provisions of the Final Rule and Responses to Comments

A. When Discovery of Overpayment Occurs and Its Significance (Sec.  
433.316)

    Section 1903(d)(2)(C) of the Act provides that, when an overpayment 
by a State is discovered, the State has a 1-year period to recover or 
attempt to recover the overpayment before an adjustment is made to FFP 
to account for the overpayment. Currently, regulations in Sec.  433.316 
provide for determining the date of discovery of an overpayment to a 
provider, which is necessary to determine the statutory 1-year period, 
in three distinct cases: (1) when the overpayment results from a 
situation other than fraud, under Sec.  433.316(c); (2) when the 
overpayment results from fraud, under Sec.  433.316(d); and (3) when 
the overpayment is identified through a Federal review, under Sec.  
433.316(e). It is not explicitly clear in the current regulations how 
the date of discovery is determined when an overpayment is discovered 
through the annual DSH independent certified audit required under Sec.  
455.304. Therefore, we believe a regulatory change is appropriate to 
specify the date of discovery of overpayments, as it relates to the 
annual DSH independent certified audit.
    Accordingly, we proposed to redesignate paragraphs (f) through (h) 
of Sec.  433.316 as paragraphs (g) through (i), respectively, and to 
add a new paragraph (f). In the new paragraph (f), we proposed that, in 
the case of an overpayment identified through the DSH independent 
certified audit required under part 455, subpart D, we would consider 
the overpayment as discovered on the earliest of either the date that 
the State submits the DSH independent certified audit report required 
under Sec.  455.304(b) to CMS, or of any of the dates specified in 
Sec.  433.316(c): paragraph (c)(1) (the date on which any Medicaid 
agency official or other State official first notifies a provider in 
writing of an overpayment and specifies a dollar amount that is subject 
to recovery); paragraph (c)(2) (the date on which a provider initially 
acknowledges a specific overpaid amount in writing to the Medicaid 
agency); and paragraph (c)(3) (the date on which any State official or 
fiscal agent of the State initiates a formal action to recoup a 
specific overpaid amount from a provider without having first notified 
the provider in writing). We noted that this change would afford more 
clarity concerning the independent certified DSH audit and the 
requirements on States based on those audits.
    We received public comments on this proposal. The following is a 
summary of the public comments we received and our responses. Because 
of its relationship with the proposed provisions at Sec.  447.299(f) 
and (g), which pertain to the treatment of overpayments, these topics 
overlapped in the comments received. Here, we specifically address 
comments that referenced the date of discovery, the aspect specific to 
this proposal, but recommend that the reader review and consider the 
comments received and our responses on all three provisions (that is, 
Sec. Sec.  433.316(f) and 447.299(f) and (g)) in tandem.
    Comment: A couple commenters were opposed to the date an 
overpayment is considered ``identified'' as being the date of audit 
submission. They cited issues such as a need to perform additional 
review and secondary auditing, or to adequately account for 
redistributions of Medicaid DSH payments in excess of the hospital-
specific limit (if provided for under the State plan), or to compute 
alternate payment methodologies for specialty hospitals that exceed the 
hospital-specific DSH limit.
    Response: We are finalizing this provision as proposed. We 
understand the concern expressed by the commenters but disagree that 
the method for determining the date of discovery of an overpayment 
should be changed from the proposal. Finalizing the date of discovery 
to include the date the audit is submitted is consistent with our 
approach to determining the date that other overpayments are discovered 
as described in Sec.  433.316(c). Specifically, Sec.  433.316(c)(1) and 
(3) refer to the date on which a State official (or fiscal agent) first 
notifies a provider in writing of a specific overpayment amount subject 
to recovery or begins a formal action to recoup that amount without 
prior written notification. Section 433.316(c)(2) refers to the date on 
which a provider acknowledges a specific overpaid amount in writing to 
the State Medicaid agency. Each of these focuses on the date the State 
provides, or receives from a relevant third party, written notification 
(or initiates a recoupment action without prior written notification to 
the provider) of a specific overpaid amount. Similarly, the independent 
certified audit formalizes the identification of a specific overpayment 
amount when it is submitted.
    We also note that finalizing the date of State submission of the 
independent certified audit to CMS as an available date for discovery 
of an overpayment, as opposed to the date the State's auditor first 
identifies an amount to the State before the State submits the audit to 
CMS, affords the State an opportunity to review and make appropriate 
adjustments, as is typical with similar audit data. The State has up to 
90 days after receipt of the independent certified audit to review it 
before it must be submitted to CMS in accordance with Sec.  455.304(b) 
which we believe is ample time to review DSH audit findings and resolve 
any disagreement with the audit's contents and/or with overpayment 
determinations by working with the State's auditor.
    In addition, we believe the concerns expressed by commenters are 
mitigated by other provisions we are finalizing in this rule at Sec.  
447.299(f) and (g). Specifically, by clarifying under Sec.  447.299(f) 
that amounts identified in DSH audits that exceed the hospital-specific 
DSH limit are to be treated as overpayments, States are afforded the 
opportunities provided under other overpayment circumstances, which 
includes the opportunity for a downward adjustment of an overpayment 
amount under Sec.  433.320(c) as appropriate. This addresses concerns 
about the fact that the overpayment amount identified in an audit may 
be subject to change. In addition, we note that States have 2 years to 
complete redistributions under the provision we are finalizing at Sec.  
447.299(g), when in other circumstances, such as returning Federal 
share, a State only has 1 year to take action on an overpayment. This 
affords States ample time to compute and perform redistributions of 
payments to particular hospitals in excess of the hospital-specific DSH 
limit. Finally, if a State plans to utilize an alternate payment 
methodology to address circumstances when a hospital may exceed its DSH 
limit, such as by decreasing supplemental payments, this methodology 
would need to be reflected in the State plan. Like DSH payment 
redistribution methodologies, a State should have this methodology in 
place

[[Page 13920]]

well in advance of identifying DSH overpayments for a given year. We 
note that, in our experience, payment adjustments necessary to 
implement an alternate payment methodology typically are performed far 
in advance of the timing of the DSH audit for the relevant year. 
Nevertheless, if a State intends to utilize an alternate payment 
methodology in the event that overpayments are identified in a DSH 
audit, and that State has this methodology reflected in its State plan, 
we do not anticipate that the work necessary to implement the 
alternative payment methodology would be any more complex or burdensome 
than the work necessary to implement DSH overpayment redistribution 
methodologies; as such, we do not agree the possible existence of an 
alternate payment methodology would require more time for States once 
an overpayment is identified.

B. DSH Health Reform Reduction Methodology (Sec.  447.294)

    As discussed in section I.B.4. of this final rule, section 
1923(f)(7)(B)(iii) of the Act requires that the methodology for 
calculating each State's Medicaid DSH allotment reduction, as first 
established by the ACA, consider 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 (that is, a section 1115 
demonstration to provide coverage to individuals not otherwise eligible 
for Medicaid) as of July 31, 2009. In the 2019 final rule, we finalized 
a policy to exclude from DSH allotment reductions the amount of DSH 
allotment States had approved as of July 31, 2009, under a coverage 
expansion section 1115 demonstration. Any DSH allotment amounts 
included in budget neutrality calculations for non-coverage expansion 
purposes (for example, where DSH allotment amounts included in budget 
neutrality calculations have been used to match State expenditures for 
approved delivery system reform initiatives) under approved section 
1115 demonstrations are still subject to reduction regardless of when 
they were approved. Further, the preamble to the 2019 final rule 
indicates that for any section 1115 demonstrations not approved as of 
July 31, 2009, these DSH allotment amounts included in budget 
neutrality calculations, whether for coverage expansion or otherwise, 
would also be subject to reduction. We note that all section 1115 
demonstrations approved as of or before July 31, 2009, have expired and 
the protection does not apply to renewals or extensions of those 
section 1115 demonstrations. Therefore, there no longer exist any 
amounts related to coverage expansion to be excluded from future DSH 
allotment reductions scheduled to begin in FY 2024.
    In the absence of DSH audit data relating to how States expend DSH 
allotment amounts diverted under section 1115 demonstrations, we 
propose to assign average HUF and HMF reduction percentages to these 
amounts.\8\ We believe this approach is a reasonable method to 
determine reductions for the HUF and HMF factors, given the absence of 
relevant, hospital-specific DSH payment data for these payments. We 
considered using alternative percentages higher or lower than the 
average but settled on average percentages due to concerns that 
alternative percentages might provide an unintended benefit or penalty 
to these States for DSH diversions approved under a demonstration under 
section 1115 of the Act.
---------------------------------------------------------------------------

    \8\ 84 FR 50308 at 50328, wherein we discuss the policy to 
assign average amounts in the 2019 final rule.
---------------------------------------------------------------------------

    While the provisions of Sec.  447.294(e)(12) are clear that we will 
assign average reductions to amounts associated with non-coverage 
expansion purposes in effect as of July 31, 2009, only the preamble to 
the 2019 final rule addresses the amounts diverted under a section 1115 
demonstration approved after July 31, 2009. Additionally, the 
regulations are not specific regarding how these amounts are determined 
and accounted for in the DSH allotment reduction methodology. As such, 
we proposed to update the regulations at Sec.  447.294(e)(12) to 
clearly specify that amounts diverted under a section 1115 
demonstration approved after July 31, 2009, are subject to average 
reductions under the HUF and HMF so that the regulation may better 
reflect the policy finalized in the 2019 final rule preamble.
    In addition, we proposed to remove the language, ``for the specific 
fiscal year subject to reduction'' in Sec.  447.294(e)(12) introductory 
text and (e)(12)(i), because we are concerned that the current 
regulatory language could lead to anomalous results, as discussed later 
in this section. We proposed that the determination of diverted amounts 
that are subject to average reductions under the HUF and HMF would 
align with the State plan rate year (SPRY) for the DSH audits utilized 
in the DSH allotment reduction calculations, as specified in Sec.  
447.294(d), rather than the fiscal year subject to reduction. For 
example, when calculating the statutorily required DSH allotment 
reductions for FY 2024 (the fiscal year subject to reduction), we would 
utilize data from each State's SPRY 2019 DSH audit data because this 
would be the most recent data available to us. For States that do not 
divert their entire DSH allotment, we would include the amount of each 
State's DSH allotment diverted under a section 1115 demonstration for 
the time period that aligns with the associated SPRY (in this example, 
SPRY 2019). A discussion of States that divert their entire DSH 
allotment follows this discussion. Each State would then be assigned 
the average HUF and HMF reduction amounts for the State's respective 
State group based on this diverted amount.
    Section 477.294(e)(12) introductory text and (e)(12)(i) currently 
align the amount of DSH allotment diverted under a section 1115 
demonstration for a fiscal year with the fiscal year of the DSH 
allotment subject to reduction under section 1923(f)(7)(A)(ii) of the 
Act. We recognize that this non-alignment between the SPRY 2019 DSH 
audit data that we would use to determine the HUF and HMF, and the FY 
2024 section 1115 demonstration budget neutrality calculation diversion 
amount that would be used under the current regulation, could result in 
inappropriate and illogical outcomes. For example, in a case where a 
State claimed all or almost all of its DSH allotment amount for DSH 
expenditures for the SPRY DSH audit utilized in the DHRM (here, SPRY 
2019), but later diverted a large portion of its DSH allotment amount 
under a section 1115 demonstration during a year subject to DSH 
allotment reductions (here, FY 2024), the State could receive a 
reduction on an amount (including both DSH payments and DSH allotment 
diverted under a section 1115 demonstration) that is excess of the 
amount available under its current DSH allotment subject to reductions. 
Therefore, we stated our belief that our proposed approach is 
reasonable because in the absence of DSH audit data relating to how 
States expend DSH allotment amounts diverted under section 1115 
demonstrations, CMS will assign average HUF and HMF reduction 
percentages to these diverted amounts. As such, it is appropriate that 
the amounts diverted under section 1115 demonstrations should align 
with the SPRY of the DSH audit used in the DHRM and that the amounts 
subject to reduction do not exceed what States could have expended, 
either through DSH payments or diverted DSH allotment amounts, during 
the associated SPRY. We considered leaving the current regulatory text 
unchanged.

[[Page 13921]]

However, we stated our belief it is important to update the current 
regulation in the interest of clarity and transparency and to avoid a 
potential outcome wherein a State might receive an inappropriately 
large reduction due to a misalignment of time periods for elements of 
the reduction methodology. Accordingly, we proposed to revise Sec.  
477.294(e)(12) introductory text to remove language indicating that the 
BNF and budget neutrality calculations are applied to each State's 
amount of DSH allotment diverted under a section 1115 demonstration 
``for the specific fiscal year subject to reduction.'' Further, we 
proposed to amend Sec.  477.294(e)(12)(ii) to specify that the budget 
neutrality calculations are performed on the amount of each State's DSH 
allotment diverted under an approved section 1115 demonstration during 
the period that aligns with the associated SPRY DSH audit utilized in 
the DSH allotment reductions.
    For States that divert their entire DSH allotment, and as such do 
not complete DSH audits, we are unable to use a DSH audit SPRY. 
Therefore, we proposed to apply reductions under the HMF and HUF to the 
DSH allotment that the State would have had available during the 
demonstration year (DY) coinciding with the SPRY DSH audits utilized in 
the DHRM. We also proposed to prorate the FFY allotment amount to 
determine this reduction in cases where the DY of the section 1115 
demonstration crosses two FFYs. For example, as stated previously we 
would use SPRY 2019 DSH audit data for FFY 2024 DSH allotment 
reductions. However, if a State that diverts its entire DSH allotment 
has a DY that begins July 1, 2018, and ends June 30, 2019, we would 
have to determine the reduction amount associated with the diverted DSH 
allotment to reflect the amount of the FFY 2018 DSH allotment available 
from July 1, 2018, through September 30, 2018, and the amount of FFY 
2019 DSH allotment available from October 1, 2018, through June 30, 
2019. We stated that we did not believe it would be appropriate to 
calculate the reduction associated with the diverted DSH allotment 
using the full FFY 2019 DSH allotment because the diverted DSH funds 
would not have been available for the full DY ending June 30, 2019. For 
a State that diverts part of its DSH allotment, it would have a SPRY 
DSH audit already utilized in the DHRM. We would use the diverted DSH 
amount from the same SPRY, which may also involve prorating diverted 
DSH amounts from a DY, depending on whether the DY as specified in the 
section 1115 demonstration aligns with the SPRY. In previous 
rulemaking, we proposed and finalized a policy to utilize the most 
recent year available for all data sources and to align the SPRY of 
data sources whenever possible.\9\ Providing this clarification in 
regulation through this rulemaking would accomplish this goal.
---------------------------------------------------------------------------

    \9\ 82 FR 35155 at 35157; 84 FR 50308 at 50322.
---------------------------------------------------------------------------

    We received public comments on these proposals. The following is a 
summary of the public comments we received and our responses.
    Comment: One commenter suggested that CMS use hospital-specific 
section 1115 supplemental payment data in measuring DSH targeting 
factors for diversion funds as the commenter was concerned that using 
averages would not encourage States to target DSH payments to the 
hospitals that need them the most. The commenter also added that CMS is 
statutorily required to collect hospital-specific data under section 
1115 demonstrations in accordance with division CC, title II, section 
202 of the CAA, 2021 (herein referred to as section 202). The commenter 
appears to be under the impression that the supplemental payment 
reporting requirement under section 202 applies to DSH payments.
    Response: We thank the commenter for the suggestion. However, this 
recommendation is outside the scope of the proposed rule, so 
implementing it would require further rulemaking. Our current 
regulations at Sec.  447.294(e)(12) and (13) specify that DSH diversion 
amounts paid under a section 1115 demonstration will receive average 
reduction amounts, for the respective State group (that is, low DSH and 
non-low DSH), under the HMF and HUF. We did not propose to amend this 
aspect of Sec.  447.294(e)(12) and (13), so changes to this calculation 
are beyond the scope of this rule. Further, the detailed supplemental 
reporting required under section 202 would not apply to the 
demonstration year DSH diversion payments that we proposed to align 
with the SPRY DSH audit data for use in the DHRM for DSH allotment 
reductions for several years. The new reporting requirements in section 
1903(bb)(1)(B) of the Act, as amended by section 202 of the CAA 2021, 
do not apply to payments made before October 1, 2021. We will calculate 
the statutorily required DSH allotment reductions utilizing the most 
recently available DSH audit information and will align amounts 
diverted under section 1115 demonstrations with the SPRY of the DSH 
audit used in the DHRM. Therefore, the detailed supplemental payment 
reporting data required under section 202 will be available starting 
with the FY 2022, which would align with the SPRY 2022 DSH audit data. 
Given the timelines associated with the submission of the independent 
certified audit, which must be completed by September 30 of the year 
ending three years from the respective Medicaid SPRY and submitted to 
CMS by December 31 of that year, we could not utilize this required 
data any earlier than to calculate the DSH allotment reductions 
scheduled for FY 2027, the last year of currently scheduled DSH 
allotment reductions. As such, we would not have this reporting 
information available to calculate the DSH allotment reductions for FY 
2024 through FY 2026. Moreover, the HUF calculations require additional 
information which is not required under section 202 but that is 
available in the SPRY DSH audits.
    We are finalizing the provision as proposed, with a minor phrasing 
change to Sec.  447.294(e)(12) replacing ``pursuant to'' with ``in 
accordance with'' to align with current style guidelines.

C. Hospital-Specific Disproportionate Share Hospital Payment Limit 
(Sec.  447.295)

    From June 2, 2017 to October 1, 2021 (the effective date of the CAA 
2021), costs and payments for hospital services furnished to 
beneficiaries who were eligible for Medicaid, even when there was a 
third-party payer such as Medicare or other insurer that pays primary 
to Medicaid for inpatient and outpatient hospital services, would all 
be included in the calculation of Medicaid shortfall portion of the 
hospital-specific DSH limits in accordance with the ``DSH Payments--
Treatment of Third-Party Payers in Calculating Uncompensated Care 
Costs'' final rule in the April 3, 2017, Federal Register. Since 
October 1, 2021, the amendments to section 1923(g) of the Act made by 
section 203 of the CAA 2021 changed the methodology for calculating the 
Medicaid shortfall portion (Medicaid costs less Medicaid payments) of 
the hospital-specific DSH limit to only include costs and payments for 
hospital services furnished to beneficiaries for whom Medicaid is the 
primary payer. Additionally, the CAA 2021 amended section 1923(g)(2) of 
the Act to provide an exception for certain hospitals that are in the 
97th percentile or above of all hospitals with respect to the number of 
Medicare SSI days (that is, inpatient days made up of patients who, for 
such days, were entitled to Medicare Part A benefits and to SSI 
benefits) or percentage of Medicare SSI days to total inpatient

[[Page 13922]]

days. In Sec.  447.295(b), we proposed to add the definition of ``97th 
percentile hospital'' to mean a hospital that is in at least the 97th 
percentile of all hospitals nationwide with respect to the hospital's 
number of Medicare SSI days or percentage of inpatient days that are 
Medicare SSI days, for the hospital's most recent cost reporting 
period. For hospitals that meet this criteria, section 1923(g)(2)(A) of 
the Act specifies that the hospital-specific DSH limit is the higher of 
the amount determined under the methodology as amended by section 203 
of the CAA 2021 or the amount determined under the methodology in 
effect on January 1, 2020 (described previously), which we proposed to 
implement in paragraph (3) of the definition of hospital-specific DSH 
limit calculation in Sec.  447.295(d). As further discussed later in 
this section, we also proposed in the definition of 97th percentile 
hospital that CMS would identify the 97th percentile hospitals, for 
each Medicaid SPRY beginning on or after October 1, 2021, using 
Medicare cost reporting and claims data sources, as well as 
supplemental security income eligibility data provided by the Social 
Security Administration. We stated that we would publish lists 
identifying each 97th percentile hospital annually in advance of 
October 1 of each year and would revise a published list only to 
correct a mathematical or other similar technical error that is 
identified to CMS during the one-year period beginning on the date the 
lists are published.
    We also explained in the preamble to the proposed rule that we 
interpreted these new requirements to be applicable for SPRYs 
``beginning on or after'' October 1, 2021, the effective date of the 
CAA 2021. Previously, certain statutory references to ``fiscal year,'' 
such as in section 1923(g)(1) and (2) and (j)(1) of the Act, have also 
been interpreted as referring to each State's SPRY, instead of the FFY, 
when establishing requirements for the hospital-specific DSH limit (and 
audit requirements to ensure that payments comply with hospital-
specific DSH limits). In the 2008 DSH audit final rule, CMS indicated 
that this interpretation was in ``recognition of varying fiscal periods 
between hospitals and States'' and that ``[t]he Medicaid [SPRY] is the 
period which each State has elected to use for purposes of DSH payments 
and other payments made in reference to annual limits.'' Further, we 
stated our belief that interpreting this provision to be applicable on 
an FFY basis would impose an excessive burden on States and hospitals. 
In particular, we explained our belief that such an interpretation 
would create a significant burden in situations when a hospital would 
qualify to meet the exception for 97th percentile hospitals for a 
portion of its SPRY, but not for the full SPRY, if qualification were 
determined on the basis of the FFY. This result would be likely to 
occur, given that the majority of States have SPRYs that do not align 
with the FFY. In these instances, States would need to prorate the 
uncompensated care costs, for affected hospitals, within a SPRY 
accordingly since the methodology for calculating the Medicaid 
shortfall portion of the hospital-specific DSH limit may not be 
consistent for the entire SPRY if the hospital qualified as a 97th 
percentile hospital for only a portion of the SPRY. As such, we 
proposed that section 203 of the CAA 2021, including the 97th 
percentile exception, be effective starting with each State's first 
SPRY beginning on or after October 1, 2021. For example, if a State's 
SPRY begins July 1, then the amendments made by section 203 of the CAA 
2021 would be effective starting with the SPRY beginning July 1, 2022. 
Conversely, if a State's SPRY begins each year on October 1, then such 
amendments would be effective starting with the SPRY beginning October 
1, 2021.
    Hospitals meeting the definition of a 97th percentile hospital, and 
therefore, qualifying for the 97th percentile exception will, by 
statute, calculate their hospital-specific DSH limit using the higher 
value of either the hospital-specific DSH limit amount determined for 
the hospital under section 1923(g)(1)(A) of the Act as amended by 
section 203 of the CAA 2021, or the amount determined for the hospital 
under section 1923(g)(1)(A) of the Act as in effect on January 1, 2020. 
Where section 1923(g)(2)(A)(ii) of the Act, as amended by section 203 
of the CAA 2021, refers to ``the amount determined for the hospital 
under paragraph (1)(A) as in effect on January 1, 2020,'' we interpret 
this to refer to the hospital-specific limit calculation methodology 
that was in effect on January 1, 2020, and not the specific dollar 
amount that was applicable on that date.
    We proposed to revise Sec.  447.295(d) to reflect the statutory 
changes made by section 203 of the CAA 2021 to update the methodology 
for the calculation of the hospital-specific DSH limit to only include 
costs and payments for hospital services furnished to beneficiaries for 
whom Medicaid is the primary payer. In addition, we proposed to revise 
Sec.  447.295(d) to specify the methodology that hospitals meeting the 
exception for 97th percentile hospitals would utilize in the 
calculation of the hospital-specific DSH limit. Specifically, in Sec.  
447.295(d)(1), we proposed to specify that for each State's Medicaid 
SPRYs beginning prior to October 1, 2021 and subject to proposed 
paragraph (d)(3), only costs incurred in providing inpatient hospital 
and outpatient hospital services to Medicaid individuals, and revenues 
received with respect to those services, and costs incurred in 
providing inpatient hospital and outpatient hospital services, and 
revenues received with respect to those services, for which a 
determination has been made in accordance with Sec.  447.295(c) that 
the services were furnished to individuals who have no source of third-
party coverage for the specific inpatient hospital or outpatient 
hospital service are included when calculating the costs and revenues 
for Medicaid individuals and individuals who have no health insurance 
or other source of third-party coverage for purposes of section 
1923(g)(1) of the Act.
    In Sec.  447.295(d)(2), we proposed to specify the applicable costs 
and revenues associated with services furnished to Medicaid individuals 
and individuals who have no health insurance or other source of third-
party coverage for purposes of determining the hospital-specific DSH 
limit under section 1923(g)(1) of the Act. We proposed that for each 
State's first Medicaid SPRY beginning on or after October 1, 2021, and 
thereafter, subject to proposed paragraph (d)(3), only costs incurred 
in providing inpatient hospital and outpatient hospital services to 
Medicaid individuals when Medicaid is the primary payer for such 
services, and revenues received with respect to those services, would 
be included in the Medicaid shortfall portion of the hospital-specific 
DSH limit calculation. Furthermore, we proposed to specify that only 
costs and revenues for which a determination has been made in 
accordance with Sec.  447.295(c) that the services were furnished to 
individuals who have no source of third-party coverage for the specific 
inpatient hospital or outpatient hospital service would be included in 
the uninsured shortfall portion of hospital-specific DSH limit 
calculation.
    As noted previously, we proposed to implement the 97th percentile 
hospital exception in proposed Sec.  447.295(d)(3), which would specify 
that, effective for each State's first Medicaid SPRY beginning on or 
after October 1, 2021, and thereafter, the hospital-specific DSH limit 
for a 97th percentile hospital defined in proposed paragraph (b) would 
be the higher of the values from

[[Page 13923]]

the calculations described in proposed paragraphs (d)(1) and (2).
    We also proposed to develop a data set (compiling cost report, 
claims, and eligibility data) to determine which hospitals, ranked on a 
national level, qualify to meet the statutory 97th percentile hospital 
exception. We proposed to publish these data for use in determining 
which hospitals qualify as a 97th percentile hospital on an annual 
basis, electronically or in another format as determined by CMS, prior 
to the SPRY to which the data would apply. We would determine which 
hospitals qualify as a 97th percentile hospital on an annual basis 
prior to each SPRY beginning on or after October 1. In this way, we 
explained that we would be able to qualify hospitals on the basis of 
SPRYs, while also accounting for non-alignment of SPRYs across States. 
Again, this would not be done on the basis of the FFY, but rather would 
be an annual process to qualify hospitals for each SPRY. We indicated 
that we would publish these data once a year, prior to October 1. Each 
State could then use these data to determine which hospitals qualify 
for the 97th percentile hospital exception for the State's SPRY that 
begins between that October 1 and September 30 of the following 
calendar year.
    We proposed to determine a hospital's qualification for the 97th 
percentile exception for each SPRY on a prospective basis. We explained 
our belief that this is a reasonable interpretation in that the statute 
specifically refers to the ``most recent cost reporting period'' in 
determining a hospital's qualification ``for the fiscal year,'' which, 
as noted, we interpret to mean SPRY. That is, we believe it is 
reasonable to interpret the reference to the ``most recent cost 
reporting period'' in section 1923(g)(2)(B) of the Act to mean the most 
recent cost reporting period for which there is a cost report available 
before the beginning of the SPRY for which the 97th percentile 
hospitals are being identified.
    By applying this exception prospectively, we eliminate the need to 
retroactively rank and qualify hospitals based on actual Medicare SSI 
days and ratios for services furnished during the SPRY. This 
application would allow for States and hospitals to know prior to the 
beginning of the SPRY which hospitals qualify for the exception. That 
knowledge would allow States and hospitals to gauge how payments should 
be made and measured against hospital-specific DSH limits and provide 
greater payment predictability than a retroactive application. We 
believe this interpretation to also be the most feasible from an 
operational standpoint for CMS, States, and hospitals.
    To compile this source of data, we explained that we would use data 
originating from various systems and sources, including the Healthcare 
Cost Report Information System (HCRIS) and Medicare Provider Analysis 
and Review (MEDPAR) files, and SSI eligibility data from the Social 
Security Administration (SSA). Utilizing HCRIS, we would identify the 
universe of hospitals that have filed a Medicare cost report and each 
hospital's most recent cost reporting period, including acute care 
hospitals paid under the inpatient prospective payment system (IPPS), 
critical access hospitals, inpatient rehabilitation facilities, and 
inpatient psychiatric facilities.
    We explained that we would then determine each hospital's Medicare 
SSI days for discharges occurring in the hospital's most recent cost 
reporting period, regardless of the length of that cost reporting 
period, using a data set that combines MEDPAR claims data and SSI 
eligibility data. We would utilize Medicare SSI days for discharges 
occurring in the cost reporting period, rather than Medicare SSI days 
occurring within the cost reporting period because the MEDPAR data show 
the Medicare SSI day count for each inpatient stay as a whole. This 
approach is consistent with how Medicare uses these data to develop the 
Medicare SSI days ratios for Medicare DSH purposes. Section 
1886(d)(5)(F)(vi) of the Act, in describing the Medicare SSI percentage 
within the Medicare ``disproportionate patient percentage,'' refers to 
the ``number of such hospital's patient days for such period.'' Then, 
the implementing regulations at 42 CFR 412.106 describe the Medicare 
SSI days used for Medicare DSH as patient days that ``are associated 
with discharges that occur during that period.'' This approach means if 
an inpatient stay begins in one cost reporting period but ends in the 
next cost reporting period, we would not count any of the inpatient 
stay's days toward the day count for the first cost reporting period, 
but instead count all of this inpatient stay's days toward the day 
count for the second cost reporting period. This approach does not 
favor the counting of days in one cost reporting period over others. On 
average, exclusion of days for inpatient stays that straddle between 
one cost reporting period and the hospital's next cost reporting period 
would be offset by any inclusion of days for inpatient stays that 
straddle between that one cost reporting period and the hospital's 
previous cost reporting period. Therefore, we can ensure we do not 
overinclude or underinclude Medicare SSI days for inpatient stays that 
straddle two cost-reporting periods.
    To determine each hospital's percentage of Medicare SSI days to 
total inpatient days, we proposed that we would divide the Medicare SSI 
days by each hospital's total inpatient days for that same cost 
reporting period from HCRIS to obtain a percentage. We would then 
compile two lists--one that ranks the hospitals based on the absolute 
number of Medicare SSI days and another that ranks them by the 
percentage of inpatient days that are Medicare SSI days, respectively. 
A hospital may qualify to meet the 97th percentile exception based on 
its rankings on either of the two lists.
    We proposed to utilize the Medicare SSI days and total inpatient 
days data to mathematically determine a threshold of acceptance to 
identify hospitals meeting the 97th percentile exception. The array 
includes either the values of Medicare SSI days or the percentage of 
inpatient days that are Medicare SSI days, for the universe of 
hospitals nationwide identified through this data process. For the 
Medicare SSI days, the 97th percentile threshold would be rounded to 
the nearest whole number, with x.5 or higher rounded up, and less than 
x.5 rounded down. Any hospital with Medicare SSI days for its most 
recent cost reporting period greater than or equal to the 97th 
percentile threshold would qualify as a 97th percentile hospital. For 
the percentage of inpatient days that are Medicare SSI days, all values 
would be rounded to the fourth decimal place (0.xxxx, alternatively 
stated as xx.xx percent), including each hospital's own percentage and 
the 97th percentile threshold. Values of 0.xxxx5 or higher would be 
rounded up, and less than 0.xxxx5 would be rounded down. Any hospital 
that has a percentage of total inpatient days that are Medicare SSI 
days from its most recent cost reporting period that is greater than or 
equal to the 97th percentile threshold would qualify as a 97th 
percentile hospital. We proposed that the ranking would be on a 
national level, as the statutory language under section 203 of the CAA 
2021 refers to ``97th percentile of all hospitals,'' which we believe 
is most consistent with a national, rather than a State-level ranking.
    To follow the statutory requirement to utilize information from the 
most recent cost reporting period, we proposed to utilize each 
hospital's most recent cost reporting period for which there is a filed 
cost report in HCRIS, at a particular point in time in advance of the 
SPRY to which the 97th percentile qualification would apply. A filed 
cost

[[Page 13924]]

report would first have an ``as submitted'' status in HCRIS, which 
subsequently would change to ``amended,'' ``settled without audit,'' 
``settled with audit,'' or ``reopened'' status, which indicates a final 
report that was previously reopened and re-settled. We considered 
utilizing the most recent settled cost reporting period, but we 
explained that we had determined that the use of the as-submitted cost 
report would result in the use of more current and more consistent 
reporting periods across hospitals, consistent with the statutory 
directive to rely on ``the most recent cost reporting period.'' 
Moreover, we explained that we had determined that the total inpatient 
days seldom change between the as-submitted and the settled cost 
reports. The total inpatient days count is the primary data element 
needed from the cost report in order for us to determine which 
hospitals meet the 97th percentile exception. However, if the most 
recent cost reporting period for which there is an as-submitted cost 
report happens to already have an amended cost report, a settled cost 
report, or a reopened cost report as of the date that CMS obtains data 
from HCRIS for use in determining which hospitals meet the 97th 
percentile hospital exception, we proposed that we would use the total 
inpatient day count from the amended cost report, settled cost report, 
or reopened cost report for that period because that is the most 
updated information available for that period.
    In the proposed rule, we described the cost report status changes, 
from the cost report's initial submission to its potential reopening 
after settlement. Consistent with that expected workflow, when there is 
more than one cost report for a hospital for its most recent cost 
reporting period in the HCRIS database as of the snapshot date, we will 
select the latest cost report based on the following order of the cost 
report status codes as they appear in HCRIS, from earliest to latest: 1 
(as submitted), 5 (amended), 2 (settled without audit) or 3 (settled 
with audit), 4 (reopened). If there happens to be both a ``settled 
without audit'' cost report record and a ``settled with audit'' cost 
report record for a hospital for the same cost reporting period in the 
HCRIS database, we will determine the later of the two based on the 
date that record is processed into HCRIS, consistent with our stated 
intention to use the most up-to-date information available as of the 
snapshot date. We also noted that we have observed in rare cases that, 
for a given cost reporting period, a hospital may have one or more 
versions of the cost report (that is, ``amended,'' ``settled without 
audit,'' ``settled with audit,'' and/or ``reopened'') without having 
the initial version of the cost report (``as submitted'') in the HCRIS 
database as of the snapshot date. Regardless, as long as the cost 
reporting period is the most recent period for which a cost report 
record exists for the hospital in the HCRIS database, we will follow 
the sorting order described above in choosing the latest cost report 
from the relevant cost reporting period.
    We proposed to utilize both covered and non-covered Medicare Part A 
days when collecting data and calculating hospital percentiles. The 
statutory language in section 1923(g)(2)(B)(i) of the Act as modified 
by section 203 of the CAA 2021 specifically refers to patients who were 
entitled to benefits under part A of title XVIII. A patient's status as 
entitled to benefits under part A of title XVIII does not depend on 
whether payment for a particular inpatient day was available under 
Medicare Part A payment principles, and a qualifying Medicare 
beneficiary remains entitled to benefits under Part A even if Medicare 
payment is not available with respect to a particular inpatient 
day.\10\ As such, we believe the calculations must include all Medicare 
Part A inpatient days, whether covered or non-covered. Further, this is 
consistent with CMS' use of covered and non-covered days in the 
Medicare SSI days ratio calculations for Medicare DSH payment purposes 
under section 1886(d)(5)(F)(vi)(I) of the Act, which describes a 
hospital's inpatient days for patients who were entitled to benefits 
under part A of title XVIII and were entitled to SSI benefits under 
title XVI of the Act.
---------------------------------------------------------------------------

    \10\ See Becerra v. Empire Health Found., for Valley Hosp. Med. 
Ctr., 142 S. Ct. 2354 (2022).
---------------------------------------------------------------------------

    Hospitals may provide acute inpatient hospital services, as well as 
other inpatient hospital services, in distinct part units of the 
hospital. The distinct part units of a hospital that provide inpatient 
hospital services, which are reported separately on the hospital's 
Medicare cost report, are rehabilitation distinct part units and 
psychiatric distinct part units. We proposed to include all inpatient 
days for inpatient hospital services reported on each hospital's 
Medicare cost report, including days furnished in distinct part units 
of the hospital that provide inpatient hospital services, for purposes 
of determining a hospital's Medicare SSI days and total inpatient days. 
We note that Medicare pays for services furnished in these distinct 
part units under different payment systems from the acute care 
inpatient hospital services provided by the hospitals. However, for 
Medicaid purposes, the DSH uncompensated care costs of the hospital are 
inclusive of the costs of inpatient and outpatient hospital services 
furnished by the hospital, including those furnished in these distinct 
parts. Therefore, we believe the hospital's Medicare SSI days and total 
inpatient days should be inclusive of these distinct part unit days and 
not limited to acute inpatient hospital days. In this final rule, we 
are also clarifying that days in which a swing bed in a hospital, 
including a critical access hospital, is used for skilled nursing 
facility or nursing facility services are not to be included in 
determining a hospital's Medicare SSI days and total inpatient days, 
because those days are for nursing facility services rather than 
inpatient hospital services.
    In determining when we can begin to collect and assemble the 
necessary data prior to the beginning of each upcoming SPRY that begins 
on or after October 1 each year, we proposed to use HCRIS data as it 
exists as of March 31, in advance of October 1 of that same calendar 
year. Using the HCRIS data as of March 31, we explained that we would 
identify each hospital's most recent cost reporting period for which 
the hospital has an available cost report and also identify the total 
inpatient days from the latest cost report available for that most 
recent cost reporting period. We also proposed to use the latest 
available MEDPAR files and SSI eligibility data, as of the same March 
31 date, to determine the Medicare SSI days data that correspond to 
that same most recent cost reporting period for each hospital.
    For example, for the 97th percentile determination applicable to 
SPRYs beginning October 1, 2023, through September 30, 2024, (that is, 
SPRYs beginning during FFY 2024), we explained that we would determine 
a hospital's most recent cost reporting period in which it has a cost 
report in HCRIS as of March 31, 2023. For instance, if a hospital's 
most recent cost reporting period with a cost report in HCRIS as of 
March 31, 2023, is from July 1, 2021, to June 30, 2022, we would take 
the total inpatient day count from that cost report. Then we would 
utilize the MEDPAR files and SSI eligibility data available as of March 
31, 2023, to determine the hospital's Medicare SSI days for the 
discharges occurring in that same cost reporting period of July 1, 
2021, to June 30, 2022.
    We explained that using the most recently available data as of 
March 31 in

[[Page 13925]]

advance of October 1 each year would allow us a reasonable 6-month 
timeframe to pull data from each of these data sources, address any 
potential data issues, complete the necessary compiling and 
calculations, perform any data integrity checks, determine the 97th 
percentile and the hospitals meeting the threshold based either on the 
Medicare SSI days or the percentage of total inpatient days that are 
Medicare SSI days, and make the results available prior to October 1. 
States would then have the 97th percentile results applicable to the 
State's SPRY that begins between October 1 of that calendar year and 
September 30 of the following calendar year. The March 31 date would 
establish a snapshot for a point in time each year that is reasonably 
close to October 1 of that same calendar year that we would use to 
determine what is the ``most recent'' data available for application to 
the upcoming SPRYs, while allowing us sufficient time to process the 
data and make the results available before the start of those SPRYs. We 
want to make clear that the March 31 snapshot date is not the actual 
date we will be pulling the cost report data from HCRIS, but rather the 
date by which a cost report must be processed into HCRIS to be 
captured. Prospectively, we may pull the cost report data anytime over 
the 6 months following the March 31 snapshot date. Similarly, for the 
Medicare SSI days, we will use MEDPAR claims data with matched SSI 
eligibility data for claims processed through the March 31 snapshot 
date. Again, prospectively, we may pull the Medicare SSI days data from 
this MEDPAR snapshot for each hospital's relevant cost reporting period 
anytime over the 6 months following the March 31 snapshot date. Note, 
for the 97th percentile determination for SPRYs beginning during FFYs 
2022, 2023, and 2024, we are pulling the data at the time we are 
finalizing this rule, to allow for public release of the 97th 
percentile hospital lists shortly after the issuance of this final 
rule.
    Given the timing of this rulemaking and the October 1, 2021, 
effective date of the amendments made by section 203 of the CAA 2021, 
we proposed to produce the 97th percentile hospital data for both SPRYs 
beginning during FFY 2022 and SPRYs beginning during FFY 2023 using the 
necessary Medicare SSI days and cost report information as it would 
have been available to us under the timelines in the proposed rule. For 
example, for the data necessary to determine hospitals meeting the 97th 
percentile exception for SPRYs beginning during FFY 2022, we proposed 
that we would obtain a snapshot of the HCRIS, MEDPAR, and SSI 
eligibility data as would have been available on March 31, 2021.
    While we proposed to include all hospitals that provide Medicaid-
covered inpatient services and file a Medicare cost report in our data 
set, we noted that there would be circumstances resulting in some 
hospitals being omitted from the data set. We explained that we would 
begin gathering all necessary data after March 31 of each year, based 
on the data availability described previously, to develop the data set 
to rank and indicate which hospitals qualify to meet the 97th 
percentile hospital exception for each State's upcoming SPRY that 
begins on or after October 1 of that year. In accordance with 42 CFR 
413.24(f)(2), cost reports are generally due 5 months from the end of 
each hospital's cost-reporting period. For example, a hospital with a 
cost reporting year end of September 30 would generally be expected to 
file a cost report by the end of February the following year, while a 
hospital with a cost reporting year end of June 30 would generally be 
expected to file its cost report by the end of November of that year. 
However, we also wanted to build in a reasonable window for late filing 
and cost report processing into HCRIS. Therefore, we proposed to 
include in the data set any hospital that has filed a cost report 
dating back to at least September 30, 3 years prior to capture as many 
hospitals as possible in our data set. We explained that it is unlikely 
that there would be a delay greater than 3 years from when a hospital's 
cost report is generally due to when that cost report is captured in 
HCRIS. For example, when we begin the data development process for data 
available through March 2023, we would exclude a hospital from the data 
set that does not have a cost report in HCRIS from a cost reporting 
period ending by September 30, 2020, or later. We proposed this cutoff 
to capture as many hospitals in our data set as possible, but to also 
prevent significant variability in the cost-reporting periods by 
excluding Medicare hospitals whose most recent cost-reporting period 
for which there is a cost report in HCRIS dates back more than 3 years. 
This cutoff is intended to help exclude hospitals that may be inactive 
or terminated from our data set.
    As noted earlier in this section, we also proposed to include in 
the data set only hospitals that file a Medicare cost report. Because 
the Medicare cost report data are the source of total inpatient days, 
it is necessary for a hospital to file a Medicare cost report to 
calculate a hospital's Medicare SSI day as a percentage of total 
inpatient days. We explained that we cannot perform the calculations 
without this cost report information. Therefore, we proposed to include 
only hospitals that file a Medicare cost report in the data set. 
Section 1923(g)(2)(B) of the Act recognizes the necessity of the 
Medicare cost report for the implementation of the 97th percentile 
exception by basing the qualification for the exception on the number 
or percentage of Medicare SSI days for the ``most recent cost reporting 
period.'' Therefore, we explained our belief that it is appropriate and 
consistent with the statutory requirements to include only these 
hospitals that have submitted Medicare cost reports in the data set for 
both 97th percentile exception lists. We noted that we did not 
anticipate this to be a problem, since any hospital serving Medicaid 
patients but that does not file a Medicare cost report, would not 
qualify for the 97th percentile hospital exception. In accordance with 
Sec.  413.24(f), Medicare-participating hospitals are required to file 
cost reports, which are generally due 5 months after the close of each 
cost reporting period. In accordance with Medicare Provider 
Reimbursement Manual, Part II, Section 110, hospitals with no Medicare 
utilization do not need to file a cost report, and hospitals meeting 
low Medicare utilization thresholds may file a less than full cost 
report with limited information. Because a hospital would only qualify 
for the 97th percentile hospital exception with a relatively high 
volume of Medicare SSI days, a hospital with no or low Medicare 
utilization, and therefore, with no cost report or with a less than 
full cost report which would not have inpatient days data, would not 
qualify for the 97th percentile hospital exception.
    Given that we proposed to use snapshot cost report, claims, and 
eligibility data in advance of October 1 each year to produce 
nationwide lists applicable for each State's upcoming SPRY beginning on 
or after that October 1, we proposed that we would not modify the 97th 
percentile qualification results based on a request by one or more 
individual hospitals (or by one or more States, with respect to one or 
more individual hospitals) to update or reconsider hospital cost 
report, claims, or eligibility data. The snapshot approach recognizes 
that, at a given point in time, a hospital's most recent cost reporting 
period for which there is a cost report available in HCRIS, as well as 
the hospital's number of total

[[Page 13926]]

inpatient days as reported in that most recent cost report and number 
of Medicare SSI days as determined from MEDPAR and SSI eligibility data 
sources, may be subject to future revision. However, to determine 
qualification for the 97th percentile hospital exception, we must 
select a point in time to capture snapshot data, and the resulting 
lists must provide reasonable certainty to hospitals and States 
nationwide regarding which hospitals qualify for the exception. We do 
not believe it would be prudent or reasonable to continuously revisit 
the 97th percentile hospital qualifications based on changing cost 
report, claims, or eligibility data, outside of the snapshot parameters 
established in this final rule.
    Nonetheless, we recognized in the proposed rule that there is a 
possibility of a mathematical or other similar technical error by CMS 
that could lead to a misidentification of the hospitals that qualify 
for the 97th percentile exception. In such a circumstance, we noted our 
belief that it would be appropriate for us to correct our error, 
recognizing that this could result in some hospitals being determined 
eligible for the 97th percentile hospital exception that previously 
(erroneously) were not so listed, and other hospitals losing their 
previous (erroneous) designation as qualifying for the exception. At 
the same time, we observed that we must balance this consideration with 
the recognition that the published lists will be relied upon by States 
and hospitals for identifying which hospitals qualify for the 
exception, hospital-specific limits will be set accordingly, and DSH 
payments will be made; all interested parties (including hospitals, the 
States, and CMS) have an interest in finality for these payments after 
a reasonable time. Accordingly, we proposed to allow 1 year from the 
posting of the 97th percentile hospital lists for States, hospitals, 
CMS, or other interested parties to identify any mathematical or other 
similar technical error made by CMS, according to instructions that 
would appear on the published lists. Upon CMS verification that an 
error occurred that affected the hospitals appearing on a list of 97th 
percentile hospitals for a given year, we would determine and publish a 
revised list as soon as practicable. We noted our belief that 1 year is 
a reasonable timeline for identifying any mathematical or other similar 
technical error made by CMS and would also allow a corrected qualifying 
list to be available in advance of the start of the independent DSH 
audit for the respective SPRY in most instances. For example, if we 
publish the qualifying lists in 2023 for application retroactively to a 
SPRY that begins October 1, 2021 (that is, SPRY 2022), we would post a 
corrected qualifying list, if necessary, sometime in 2024. Then, when 
the independent audit is performed for that SPRY in 2025, the final 
97th percentile qualification lists would be available and not subject 
to any further changes. Accordingly, in paragraph (2) of the proposed 
definition of 97th percentile hospital in Sec.  447.295(b), we proposed 
that CMS would publish lists identifying each 97th percentile hospital 
annually in advance of October 1 of each year. We proposed that CMS 
would revise a published list only to correct a mathematical or other 
similar technical error made by CMS that is identified to CMS during 
the one-year period beginning on the date the list is published.
    We proposed that the effective date for this and other CAA 2021-
related proposals, noted in the respective sections, be applicable to 
fiscal years beginning on or after October 1, 2021, to align with the 
effective date of the CAA 2021.
    We received public comments on these proposals. The following is a 
summary of the public comments we received and our responses.
    Comment: Many commenters expressed opposition to the statutory 
changes required under section 203 of the CAA 2021. Commenters 
expressed concerns regarding the financial impact to hospitals that 
anticipated decreases in the hospital-specific DSH limits will have on 
hospitals and their ability to provide services. Two commenters 
indicated that the exception for 97th percentile hospitals was not 
adequate to protect financially vulnerable hospitals. A commenter 
indicated that they believe the 97th percentile threshold is arbitrary. 
Another commenter expressed the opinion that the methodology specified 
under section 203 of the CAA 2021 incorrectly assumes that hospitals 
receive the entirety of a Medicare or Medicaid payment rate, and 
explained that, due to how a particular State may limit Medicaid 
payment of Medicare cost sharing amounts, hospitals are not paid the 
full payment for care provided to patients dually eligible for Medicare 
and Medicaid. A commenter noted the projected financial loss that would 
be incurred under the new methodology in which costs and payments for 
Medicaid patients are counted only for beneficiaries for whom Medicaid 
is the primary payer for hospitals that care for a high number of 
Medicaid/SSI-eligible beneficiaries with complicated health care needs. 
The commenter pointed out that many of those Medicaid eligible 
individuals who are disabled will also become eligible for Medicare 
after a 2-year waiting period, making the costs associated with their 
care ineligible for inclusion in the new hospital-specific DSH limit 
calculation. Commenters urged CMS to monitor the financial impacts to 
hospitals and to work with Congress to mitigate the potential negative 
effects of section 203 of the CAA 2021.
    Response: We appreciate the impact that the statutory changes made 
by section 203 of the CAA 2021 may have on hospitals. States' policies 
for Medicaid payment of Medicare cost sharing amounts for dually 
eligible beneficiaries do vary, and we acknowledge that there could be 
uncompensated care costs after all applicable Medicare and Medicaid 
payments; with the statutory changes, such uncompensated care costs 
would not be included in the hospital-specific DSH limit to the extent 
that Medicare, not Medicaid, is the primary payer of such services. 
However, we are required by statute to implement the new methodology 
for determining hospital-specific DSH limits, including the exception 
for 97th percentile hospitals, as specified under section 1923(g) of 
the Act. We do note that, despite the statutory changes made by section 
203 of the CAA 2021, there remains considerable flexibility for 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 statutes and regulations. However, we intend to 
continue to monitor the financial impact that these statutory changes 
have on hospitals and provide information and technical assistance as 
Congress may request, as necessary to address any negative impact on 
providers.
    Comment: Several commenters expressed support for the proposals to 
implement the amendments made by section 203 of the CAA 2021, to the 
hospital-specific DSH limit calculations for the Medicaid shortfall 
calculation to include only Medicaid costs and payments when Medicaid 
is the primary payer. One commenter commended CMS for engaging in 
rulemaking to address the statutory requirements.
    Response: We appreciate the support.
    Comment: Several commenters requested clarification regarding how 
CMS defines ``primary payer'' and when Medicaid is considered to be the 
primary payer for inpatient and

[[Page 13927]]

outpatient hospital services provided to Medicaid beneficiaries.
    Response: This rule does not change existing rules related to 
Medicaid's status as primary payer for a particular service. This rule 
addresses the calculation of hospital-specific limits as amended by 
section 203 of the CAA 2021. This limits the Medicaid shortfall to the 
costs and payments associated with inpatient and outpatient services 
where Medicaid is the primary payer, providing an exception for 97th 
percentile hospitals. We will continue to rely on existing rules 
governing third party liability and when Medicaid is a primary payer, 
such as those at section 1902(a)(25)(A) of the Act and Sec. Sec.  
433.135 through 433.154. Medicaid is generally the ``payer of last 
resort,'' meaning that Medicaid only pays claims for covered items and 
services if there are no other liable third-party payers for the same 
items and services, which concept is implied in the above statute and 
regulations.\11\
---------------------------------------------------------------------------

    \11\ See discussion at pages 20-22 of the Coordination of 
Benefits and Third-Party Liability In Medicaid Handbook: 2020, 
available at: https://www.medicaid.gov/sites/default/files/2020-08/COB-TPL-Handbook.pdf.
---------------------------------------------------------------------------

    In the proposed rule, we also stated that for purposes of 
calculating the hospital-specific DSH limit, section 203 of the CAA 
modified the calculation of the Medicaid portion of the hospital-
specific DSH limit to include only costs and payments for services 
furnished to beneficiaries for whom Medicaid is the primary payer for 
such services, as specified in section 1923(g)(1)(B)(i) of the Act.\12\ 
Accordingly, the limit generally excludes costs and payments for 
services provided to Medicaid beneficiaries with other sources of 
coverage, including Medicare and commercial insurance. Through previous 
rulemaking, we established, for the purpose of the hospital-specific 
DSH limit, how to determine whether third party coverage exists for a 
hospital service. In the December 3, 2014, Federal Register, CMS 
published the final rule entitled ``Medicaid Program; Disproportionate 
Share Hospital Payments--Uninsured Definition'' (Uninsured Rule).\13\ 
In that final rule, we indicated that we would apply a single, service-
specific determination of third-party coverage status for an entire 
hospital service for purposes of hospital-specific DSH limit 
calculations.\14\ While the Uninsured Rule focused on the determination 
of whether an individual is insured for a particular hospital service, 
the statutory changes made by section 203 of the CAA now call for a 
similar, single, service-specific determination to be made with respect 
to services provided to individuals with Medicaid coverage, to 
ascertain whether Medicaid is the primary payer for the service.
---------------------------------------------------------------------------

    \12\ 88 FR 11865 at 11688.
    \13\ 79 FR 71679.
    \14\ 79 FR 71679 at 71683.
---------------------------------------------------------------------------

    Before the statutory amendments made by section 203 of the CAA 
2021, section 1923(g)(1)(A) of the Act included in the Medicaid 
shortfall portion of the hospital-specific DSH limit calculation costs 
and payments of individuals ``eligible for medical assistance under the 
State plan.'' As discussed in the Uninsured Rule, costs and payments 
associated with the provision of inpatient and outpatient hospital 
services for all Medicaid eligible individuals would have been captured 
in the Medicaid shortfall portion of the calculation, regardless of 
whether that individual's Medicaid benefit was exhausted, or a Medicaid 
coverage limit had been reached for the associated inpatient or 
outpatient hospital service.\15\ Similarly, due to the previous 
statutory language indicating that individuals need only to have 
Medicaid eligibility without regard to Medicaid coverage for the 
particular service, inpatient and outpatient hospital services for 
Medicaid eligible individuals should have been captured in the Medicaid 
shortfall, even where the individual's Medicaid benefits were limited 
and did not extend to inpatient or outpatient hospital services at all. 
Because the individual was eligible for some Medicaid coverage during 
the service period, the individual would have been included in the 
Medicaid shortfall portion of the hospital-specific DSH limit, not in 
the uninsured shortfall portion.
---------------------------------------------------------------------------

    \15\ 79 FR 71679 at 71682.
---------------------------------------------------------------------------

    However, section 1923(g)(1)(B)(i) of the Act, as amended by section 
203 of the CAA 2021, now specifies that the Medicaid shortfall portion 
of the hospital-specific DSH limit will be limited to costs and 
payments of furnishing hospital services to ``[i]ndividuals who are 
eligible for medical assistance under the State plan or under a waiver 
of such plan and for whom the State plan or waiver is the primary 
pay[e]r for such services.'' We interpret the statutory change 
specifying that Medicaid must be the primary payer ``for such 
services'' to direct a service-specific approach to determining 
Medicaid's status as primary payer, consistent with how, under the 
Uninsured Rule, we determine an individual's status as uninsured for a 
particular hospital service.
    Following the service-specific approach to determining an 
individual's insured status as outlined in the Uninsured Rule,\16\ to 
similarly determine whether Medicaid is the primary payer for a given 
hospital service furnished to a Medicaid beneficiary, the beneficiary 
must have Medicaid coverage for the hospital service, and there must 
not be any third-party coverage that is primary for the particular 
hospital service, and Medicaid must be the primary payer for the 
service. When Medicaid is determined to not be the primary payer for 
that service, then the associated costs and payments for that specific 
hospital service would not be included in the calculation of the 
hospital-specific DSH limit (unless so provided for a qualifying 
hospital under the 97th percentile exception).
---------------------------------------------------------------------------

    \16\ 79 FR 71679 at 71683.
---------------------------------------------------------------------------

    Comment: One commenter questioned whether Medicaid would be 
considered the primary payer or if a patient would be considered 
uninsured if the patient has some Medicaid coverage but does not have 
Medicaid coverage for the particular inpatient and outpatient hospital 
services.
    Response: As discussed previously in this final rule, only costs 
and payments for inpatient and outpatient hospital services for which 
Medicaid is the primary payer under a single, service-specific 
determination can be included in the Medicaid shortfall portion of the 
hospital-specific DSH limit. Specifically, the statute now requires 
that Medicaid be the ``primary pay[e]r for such services'' (meaning 
``hospital services'' as stated in section 1923(g)(1)(A)(i) of the Act) 
furnished to an individual eligible under the Medicaid State plan or 
waiver, for costs and payments associated with the services to be 
included in the Medicaid shortfall portion of the hospital-specific DSH 
limit calculation. Medicaid would not be considered the primary payer 
for hospital services, for purposes of the calculation of the hospital-
specific DSH limit, for an individual who had Medicaid coverage for 
inpatient and/or outpatient hospital services but had reached coverage 
limits or otherwise exhausted the Medicaid hospital benefit prior to 
obtaining these services. As a result, such an individual, as long as 
there is not third-party coverage for the inpatient and/or outpatient 
hospital services, would be considered uninsured for those hospital 
services and the associated costs and payments would be captured in the 
uninsured portion of the hospital-specific DSH limit calculation. 
Similarly, the costs

[[Page 13928]]

and payments associated with the provision of hospital services 
provided to an individual with a limited Medicaid benefit package, 
which does not cover such inpatient and/or outpatient hospital 
services, would also be captured in the uninsured portion of the 
hospital-specific DSH limit calculation, provided they do not have 
third-party coverage for such services. Hospitals qualifying to meet 
the exception for 97th percentile hospitals would calculate the 
hospital-specific limit that is the higher value of that calculated 
under the methodology in which costs and payments for Medicaid patients 
are counted in the Medicaid shortfall calculation only for services 
furnished to beneficiaries for whom Medicaid is the primary payer, or 
the methodology in effect on January 1, 2020.
    For purposes of the methodology in effect on January 1, 2020, costs 
and payments associated with the universe of Medicaid eligible 
individuals would be captured in the Medicaid portion of the hospital-
specific DSH limit calculation regardless of whether or not the 
individual had Medicaid coverage for inpatient and/or outpatient 
hospital services and regardless of whether any such coverage had been 
exhausted. We note that while the change in policy as a result of the 
amendments made by section 203 of the CAA 2021 results in different 
treatment of some Medicaid eligible individuals for purposes of 
calculating hospital-specific DSH limits (based on whether the 
individual's Medicaid benefits include coverage of inpatient and/or 
outpatient hospital services, and whether the individual's Medicaid 
benefits for hospital services have been exhausted or coverage limits 
have been reached), this change does not affect the costs and payments 
captured in hospital-specific DSH limit calculations overall, provided 
that the individual has no other health insurance or other source of 
third-party coverage for inpatient and/or outpatient hospital services, 
as relevant. Rather, the change merely affects whether particular costs 
and payments are captured in the Medicaid or uninsured shortfall 
portion of the hospital-specific DSH limit calculation.
    Comment: Some commenters had specific questions regarding who is 
considered the primary payer in cases involving dually eligible 
individuals when coverage limits, whether through Medicare or private 
insurance, have been reached or have otherwise been exhausted. 
Commenters inquired about the scenarios when third-party coverage has 
reached its limit or is exhausted prior to an individual obtaining an 
inpatient or outpatient hospital service versus when the third-party 
insurer's coverage limit is reached, or coverage otherwise exhausted at 
some point during the provision of the service. One commenter 
questioned if Medicaid would be considered the primary payer for 
patients residing in an institution for mental diseases who are dually 
eligible for Medicare and Medicaid whose Medicare benefits are 
exhausted during the stay. Commenters questioned whether Medicaid 
actually has to pay on the claim for Medicaid to be considered the 
primary payer.
    Response: As discussed in the Uninsured Rule, we determine whether 
an individual is insured for a particular service based on whether that 
individual has third party coverage for the single, specific inpatient 
hospital service, regardless of whether that individual was insured for 
the full service or service period or only a portion (for example, due 
to coverage limits being reached or coverage otherwise exhausted).\17\ 
In the Uninsured Rule, we explained that the single, service-specific 
approach means, for the purpose of the hospital-specific DSH limit, 
third party coverage is determined for a given hospital stay, without 
separating the component parts of the inpatient hospital services of 
that hospital stay. The single, service-specific approach also applies 
here to determine whether Medicaid is the primary payer for a 
particular hospital stay; we will look to whether there is third party 
coverage that pays primary over Medicaid for the inpatient hospital 
services of the stay. For example, if an individual has Medicare or 
private insurance that only provided coverage for the first 5 out of 10 
days of a hospital inpatient stay (whether in a hospital that is an 
institution for mental diseases or not), Medicaid would not be 
considered the primary payer for any portion of that inpatient stay, 
even after the Medicare or private insurance coverage limit has been 
reached in the middle of the stay. However, if the dually eligible 
individual is either not insured for or has exhausted their Medicare or 
other third-party coverage prior to obtaining the inpatient or 
outpatient hospital service, Medicaid may be considered the primary 
payer for such services because there is no third-party coverage that 
pays primary over Medicaid for the particular stay. As we stated in the 
Uninsured Rule, services beyond health insurance coverage limits, 
including annual lifetime limits, will not be considered to be within a 
covered benefit package.\18\ We note that real-life cases can be much 
more complex, and that States and providers should refer to existing 
third party liability rules and policies, such as section 
1902(a)(25)(A) of the Act and Sec. Sec.  433.135 through 433.154, when 
determining third-party liability, and to existing DSH rules and 
policies such as those described in the Uninsured Rule to determine how 
each case should be evaluated for third party coverage for the purpose 
of the hospital-specific DSH limit. Finally, as we stated in the 
Uninsured Rule, the determination of which payer is primary with 
respect to a single, specific hospital service is based on the 
existence of coverage and does not depend on the hospital receiving 
payment from a particular payer.\19\
---------------------------------------------------------------------------

    \17\ 79 FR 71679 at 71683.
    \18\ 79 FR 71679 at 71691.
    \19\ Id.
---------------------------------------------------------------------------

    Comment: Some commenters inquired about the treatment of third-
party payments related to services provided to Medicaid eligible 
individuals. Some commenters wanted to know whether a claim associated 
with a Medicaid eligible individual should have third-party payments 
removed or if the entire claim should not be considered in the 
calculation of the hospital-specific DSH limit. One commenter requested 
that CMS provide an example of a third-party payment associated with 
services furnished to a beneficiary with Medicaid as primary payer.
    Additionally, commenters inquired about cases where an individual 
had no Medicare Part A coverage but had certain charges covered and 
paid by Medicare Part B during an inpatient stay. Similarly, commenters 
also inquired if Medicaid would be considered the primary payer for an 
inpatient stay in cases where the individual has third-party coverage 
for ancillary services but no coverage for routine inpatient hospital 
services, inquiring whether the inpatient routine portion of the stay 
would be includable in the Medicaid shortfall calculation of the 
hospital-specific DSH limit. Commenters questioned whether the 
individuals in these scenarios would be considered to have third party 
coverage, be uninsured, or if Medicaid could be considered the primary 
payer for these inpatient hospital services.
    Response: As discussed previously, based on section 1902(a)(25)(A) 
of the Act and Sec. Sec.  433.135 through 433.154, Medicaid is 
generally the payer of last resort. In general, an individual who has 
third-party coverage for inpatient hospital services provided during a 
hospital stay, with very limited

[[Page 13929]]

exceptions, would be considered to have third-party coverage that is 
primary over Medicaid for the inpatient hospital services. Under the 
single, service-specific determination, we do not separate out 
components of the inpatient hospital services furnished during a 
particular inpatient stay. As such, when it is determined that there is 
third-party coverage for inpatient hospital services that is primary 
over Medicaid for a particular inpatient stay, none of the inpatient 
hospital service costs and payments associated with this inpatient 
stay, including third-party payments, may be included in the Medicaid 
shortfall calculation of the hospital-specific DSH limit.
    Under existing third-party liability rules, there are limited 
exceptions to the general rule that Medicaid is the payer of last 
resort, and these exceptions typically apply to federally administered 
health programs. For a federally administered health program to be an 
exception to the general status of Medicaid as the payer of last 
resort, the statute creating the program must expressly state that it 
pays for a service after Medicaid, such as the Ryan White Fund under 42 
U.S.C. 300ff et seq.\20\ If those other programs that are exceptions to 
the general status of Medicaid as the payer of last resort do cover and 
make payment for the same inpatient hospital services that Medicaid is 
the primary payer for, then such payments from the other programs would 
be treated as cost offsets when the costs and payments of the inpatient 
hospital services are included in the calculation of the Medicaid 
shortfall. This is an example of third-party payments associated with 
services furnished to a beneficiary with Medicaid as the primary payer.
---------------------------------------------------------------------------

    \20\ See, for example, 42 U.S.C. 300ff-15(a)(6), 42 U.S.C. 
300ff-27(b)(7)(F), 42 U.S.C. 300ff-64(f), 42 U.S.C. 300ff-71(i). See 
also discussion at pages 20-22 of the Coordination of Benefits and 
Third-Party Liability In Medicaid Handbook: 2020, available at 
https://www.medicaid.gov/sites/default/files/2020-08/COB-TPL-Handbook.pdf.
---------------------------------------------------------------------------

    However, commenters also specifically inquired about unique 
circumstances where, in addition to Medicaid, a hospital inpatient has 
Medicare Part B only (that is, the patient is not also entitled to or 
enrolled in Medicare Part A, or has already exhausted their Medicare 
Part A benefits), which pays for limited services in certain 
circumstances for a beneficiary who is an inpatient, or has other 
third-party coverage that is only for ancillary services. In general, 
we consider ancillary services to be services provided by a hospital 
that are separate from routine services \21\ such as room and board, 
nursing, and support services; ancillary services may include x-ray, 
drug, laboratory, or other services, associated with an inpatient 
hospital stay.\22\
---------------------------------------------------------------------------

    \21\ The Medicare Provider Reimbursement Manual, Part I, Section 
2202.6 defines ``routine services'' as, ``Inpatient routine services 
in a hospital or skilled nursing facility generally are those 
services included in by the provider in a daily service charge--
sometimes referred to as the ``room and board'' charge. Routine 
services are composed of two board components: (l) general routine 
services, and (2) special care units (SCU's), including coronary 
care units (CCU's) and intensive care Units (ICU's). Included in 
routine services are the regular room, dietary and nursing services, 
minor medical and surgical supplies, medical social services, 
psychiatric social services, and the use of certain equipment and 
facilities for which a separate charge is not customarily made.''
    \22\ The Medicare Provider Reimbursement Manual, Part I, Section 
2202.8 defines ancillary services as, ``Ancillary services in a 
hospital or SNF include laboratory, radiology, drugs, delivery room 
(including maternity labor room), operating room (including 
postanesthesia and postoperative recovery rooms), and therapy 
services (physical, speech, occupational). Ancillary services may 
also include other special items and services for which charges are 
customarily made in addition to a routine service charge.''
---------------------------------------------------------------------------

    Regardless of whether the ancillary services are covered by 
Medicare Part B or another third-party payer, such as a private 
insurance policy, we will defer to States to determine whether that 
third-party coverage is considered coverage for inpatient hospital 
services. The Medicare program generally is structured to pay for 
inpatient hospital services under Part A, see section 1812(a)(1) of the 
Act, whereas Part B generally pays for specified services other than 
inpatient hospital services, see section 1832 of the Act. Given this 
structure, even where a beneficiary with Medicaid and Medicare Part B 
only coverage has payment made on their behalf by Part B for ancillary 
services that fall within the State's Medicaid definition of inpatient 
hospital services during an inpatient hospital stay, we believe that 
the State reasonably could determine that Medicaid--not Medicare Part 
B--will be considered to be the primary payer for the inpatient 
hospital stay. This approach would avoid a potentially anomalous 
outcome where Medicaid would pay for the majority of services, but a 
small Medicare Part B payment for an ancillary service would result in 
the exclusion of all costs and payments for the stay from the hospital-
specific DSH limit.
    Regarding the comment inquiring about other third-party coverage 
that only pays for ancillary services but not routine services, we do 
not have enough information about who this payer would be or what it 
would cover to give guidance on whether that third-party coverage would 
be regarded as coverage for inpatient hospital services and therefore 
would be considered primary to Medicaid. Again, in this case, we will 
defer to the State to make a reasonable determination of whether such 
third-party coverage provides coverage for inpatient hospital services 
that will be considered to be the primary payer for the inpatient 
hospital stay.
    In this scenario, whether the payer in addition to Medicaid is 
Medicare Part B or another third-party payer, we further note that 
since individuals have coverage for inpatient hospital services 
(whether Medicaid, Medicare, or another third party), they would not be 
considered uninsured for purposes of inclusion in the hospital-specific 
DSH limit. As mentioned, we acknowledge that, where a State does 
determine that Medicare Part B or another third-party payer is the 
primary payer for inpatient hospital services where it only makes 
payments for ancillary services furnished during the stay, the 
inpatient hospital service costs and payments for the entire inpatient 
stay would be excluded from the hospital-specific DSH limit, and this 
could result in the exclusion of some Medicaid costs and payments. We 
will monitor for State handling of these scenarios once the rule is in 
effect to ascertain whether the rule is resulting in unexpected 
outcomes, and we may undertake additional rulemaking in the future if 
necessary to address the issue.
    Comment: One commenter inquired about the 2008 DSH audit final rule 
and associated protocol's instructions to use MMIS paid claims data. 
The commenter questioned whether States now will be required to change 
their MMIS systems to provide reports that remove the Medicaid ``no-
pays'' for the DSH audits where there is a third-party payer.
    Response: For any State plan rate year beginning or after October 
1, 2021, States and hospitals must have procedures in place to ensure 
the Medicaid data used in the hospital-specific DSH limit calculation 
complies with the amendments made by section 203 of the CAA 2021 by 
determining when Medicaid is the primary payer for inpatient and 
outpatient hospital services. While the General DSH Audit and Reporting 
Protocol released with the 2008 DSH audit final rule does call for MMIS 
to be the source of Medicaid fee for service utilization and payment 
data, CMS is not specifically requiring any changes to MMIS to 
implement the amendments made by section 203 of the CAA 2021 or the 
provisions of this final rule. We generally would expect States' 
current MMIS would have the ability to support compliance with the

[[Page 13930]]

requirements. However, States with legacy systems may require some 
configuration changes. For States that require MMIS system changes, CMS 
is available to work with them. To the extent that MMIS data on its own 
is not sufficient to identify Medicaid data needed to calculate the 
hospital-specific DSH limit, States are able to supplement MMIS data 
with other auditable data.
    Comment: One commenter inquired about provisions of the February 
28, 2023, proposed rule entitled ``Medicare Program; Medicare 
Disproportionate Share Hospital (DSH) Payments: Counting Certain Days 
Associated With Section 1115 Demonstrations in the Medicaid Fraction'' 
(88 FR 12623). The commenter referenced statements by CMS indicating 
that section 1115 demonstration waivers that provide health insurance 
or premium coverage for inpatient hospital services will be included in 
Medicaid days for Medicare DSH calculations. As such, the commenter 
questioned if CMS considers coverage provided under these section 1115 
demonstrations for inclusion in the Medicaid hospital-specific DSH 
limit calculations.
    Response: We note the Medicare DSH program and the Medicaid DSH 
program are separate programs authorized by different sections of the 
statute and with different purposes and goals. However, as stated in 
the February 2023 proposed rule, which appeared in the February 24, 
2023, Federal Register (88 FR 11865) if an individual receives health 
insurance for inpatient hospital care directly provided by a section 
1115 demonstration, or if a patient buys insurance for inpatient 
hospital care with premium assistance provided by a section 1115 
demonstration for which the demonstration pays 100 percent of the 
premium cost to the individual, and in either case the cost of the 
insurance or premium assistance is paid for with title XIX dollars, the 
individual is regarded as eligible for Medicaid under the Medicare DSH 
statute. Similarly, this individual would be considered a Medicaid 
eligible individual for Medicaid DSH purposes. As such, costs and 
payments associated with covered inpatient and outpatient hospital 
services provided to this individual may be considered in the 
calculation of the hospital-specific DSH limit, depending on the 
determination of primary payer status and the provisions of section 
1923(g) of the Act.
    Comment: Two commenters expressed support of our proposal of the 
October 1, 2021, effective date of the amendments to section 1923(g) of 
the Act made by section 203 of the CAA 2021, to be applicable for SPRYs 
beginning on or after the October 1, 2021, effective date. One 
commenter stated that the plain language of the law indicated that the 
effective date should apply to services furnished on or after October 
1, 2021. One commenter requested that CMS confirm whether the 
application of the amendments to section 1923(g) of the Act made by 
section 203 of the CAA 2021 will apply on the basis of the Federal 
fiscal year or the SPRY. The commenter also urged CMS to allow an 
effective date prior to October 1, 2021, by applying the statutory 
changes to cost reporting periods beginning on or before the October 1, 
2021, date and rebasing DSH using FY 2021 cost reports. This commenter 
stated that this application would allow for a consistent way to gauge 
how hospital systems benefited from the DSH program. The commenter also 
indicated that CMS should be cognizant of the difference in State-to-
State distribution of DSH funds.
    Response: We appreciate the commenters' support of our effective 
date proposal and disagree with the other commenter that our 
interpretation conflicts with the plain language of the statute. To 
align the statutory amendments made by section 203 of the CAA 2021 with 
how the Medicaid DSH program has been historically operationalized 
across States, we proposed to interpret the October 1, 2021, effective 
date to apply the statutory changes to SPRYs beginning on or after 
October 1, 2021. As discussed in the proposed rule and earlier in this 
final rule, this is consistent with past interpretations of statutory 
provisions that have been codified in rulemaking, such as in the 2008 
DSH final rule, and further explained in sub-regulatory guidance. 
Moreover, CMS does not have the statutory authority to apply the 
effective date of the amendments made by section 203 of the CAA 2021 to 
periods before October 1, 2021. These provisions do not ``rebase'' DSH 
payments, per se, but rather change the definition of the hospital-
specific limit for DSH payments.
    We do not agree with the comment that changing the effective date 
to coincide with hospitals' cost reporting periods would provide a 
consistent view of how each hospital system benefits from DSH. We 
acknowledge that hospital cost reports, and internal audits of such 
cost reports, may not align with the State's SPRY. However, the DSH 
independent certified audit requirement at section 1923(j) of the Act, 
as implemented in the 2008 DSH final audit rule, requires States to 
conduct an audit of their DSH programs and identify DSH payments made 
against hospital-specific DSH limits on the basis of each State's 
SPRY.\23\ As we indicated in the proposed rule, this was in 
``recognition of varying fiscal periods between hospitals and States'' 
and that ``[t]he Medicaid [SPRY] is the period which each State has 
elected to use for purposes of DSH payments and other payments made in 
reference to annual limits.'' \24\ We believe that the DSH independent 
certified audit, which within each State looks at all hospitals' 
uncompensated care costs and DSH payments based on that State's SPRY, 
provide for a consistent way to gauge how hospitals that receive DSH 
payments benefit from the DSH program.
---------------------------------------------------------------------------

    \23\ 42 CFR 455.304(d)(2).
    \24\ 88 FR 11865 at 11870.
---------------------------------------------------------------------------

    Further, we believe interpreting this provision to be applicable on 
a FFY basis would impose an excessive burden on States and hospitals, 
in particular with the application of the exception for 97th percentile 
hospitals. We note that the majority of States have SPRYs that do not 
align with the FFY. In these instances, if we were to apply section 203 
of the CAA 2021 to the FFY beginning on October 1, 2021, and 
thereafter, States would need to prorate the uncompensated care costs 
for affected hospitals within a SPRY accordingly, since the methodology 
for calculating the Medicaid shortfall portion of the hospital-specific 
DSH limit may not be consistent for the entire SPRY. If the hospital 
qualified as a 97th percentile hospital for only a portion of the SPRY, 
this proration would be on top of the proration that would already be 
necessary to account for differences between a hospital's cost 
reporting period and the State's SPRY.
    Finally, we believe the commenter who requested that we be 
cognizant of the difference in State-to-State distribution of DSH funds 
was pointing out that each State operates its DSH program differently, 
and that there is variation in how States distribute their DSH payments 
to eligible providers within their State DSH allotments. We acknowledge 
that States have flexibility in the operation of their DSH programs, 
subject to Federal requirements, including section 1923(g) of the Act 
on the hospital-specific DSH limit. This final rule does not affect the 
existing flexibility each State has in how it operates its DSH program 
or distributes its DSH payment in accordance with its State plan, but 
this rule does address the changes to the hospital-specific DSH limit 
as required by section 203 of the CAA. We also acknowledge that while

[[Page 13931]]

the statutory changes to the hospital-specific DSH limit are applicable 
to all States, the actual impact on hospitals can vary by States based 
on how DSH payments are distributed by each State. In developing this 
rule, we considered that each State operates its own DSH program. For 
example, we considered proposing to determine the 97th percentile 
hospital exception qualification on a State-specific level, rather than 
on a national level; however, as we explained in the proposed rule, we 
do not believe this would be consistent with the statutory language 
referring to ``97th percentile of all hospitals.'' Applying section 
1923(g) of the Act, as amended, on a SPRY basis is aligned with how 
States operate their DSH programs and distribute their DSH funds, which 
are on a State-elected SPRY basis. As such, we are finalizing this 
requirement to apply the October 1, 2021, effective date to the 
applicable SPRY beginning on or after October 1, 2021, as proposed.
    Comment: One commenter indicated that CMS should provide guidance 
on a SPRY audit year that includes the October 1, 2021, effective date, 
and direction on how hospital-specific DSH limits and associated 
overpayments should be calculated.
    Response: As indicated previously in this final rule, we are 
finalizing this rule to apply the October 1, 2021, effective date to 
the applicable SPRY beginning on or after the October 1, 2021, 
effective date. To calculate hospital-specific DSH limits, hospitals 
routinely utilize two separate cost reports to cover the entire period 
associated with the applicable SPRY, in cases where the hospital's cost 
reporting period does not correspond exactly to the SPRY. We have 
released guidance to answer specific questions related to addressing 
these misaligned periods.\25\
---------------------------------------------------------------------------

    \25\ https://www.medicaid.gov/sites/default/files/2020-01/part-2-additional-info-on-dsh-reporting-and-auditing.pdf.
---------------------------------------------------------------------------

    In the Additional Information on DSH Reporting and Auditing 
Requirement Part 2--Question 21, we discussed cost report proration in 
calculating a hospital's uncompensated care costs (UCC) for a SPRY 
using more than one cost report, when a hospital's cost reporting 
period does not align with the State's SPRY.\26\ Similar proration was 
discussed when applying the ``DSH Payments--Treatment of Third-Party 
Payers in Calculating Uncompensated Care Costs'' final rule (82 FR 
16114) in the August 18, 2020, CMCS Informational Bulletin entitled 
``Treatment of Third Party Payers (TPP) in Calculating Uncompensated 
Care Costs (UCC).'' \27\
---------------------------------------------------------------------------

    \26\ Id.
    \27\ https://www.medicaid.gov/sites/default/files/2020-08/cib081820.pdf.
---------------------------------------------------------------------------

    We expect that activities required for the implementation of the 
amendments made by section 203 of the CAA 2021 to follow the same 
proration approach to conform hospitals' cost reporting periods to the 
SPRY. For example, if a SPRY is from July 1, 2022 to June 30, 2023, and 
a hospital's cost report year end is December 31, regardless of the 
amendments made by section 203 of the CAA 2021, there is a need to 
prorate the hospital's cost report data from both its December 31, 2022 
and December 31, 2023 cost reports to determine the hospital's 
hospital-specific DSH limit for the SPRY from July 1, 2022 to June 30, 
2023. In using the December 31, 2022, and December 31, 2023, cost 
report data to prorate to this SPRY, which is the State's first SPRY 
that begins on or after October 1, 2021, the hospital and the State 
would need to follow section 1923(g) of the Act, as amended by section 
203 of the CAA 2021, and this final rule in determining the hospital-
specific limit. As is consistent with 2008 DSH audit final rule, an 
overpayment is identified when the DSH payment received by a hospital 
for the SPRY is in excess of its hospital-specific limit for the same 
SPRY.
    Comment: Several commenters expressed support of our proposal to 
determine a hospital's qualification for the 97th percentile exception 
for each SPRY on a prospective basis.
    Response: We appreciate the support and are finalizing the 
determination of a hospital's qualification for the 97th percentile 
exception for each SPRY on a prospective basis. This application allows 
for States and hospitals to know prior to the beginning of the SPRY 
which hospitals qualify for the exception. This allows States and 
hospitals to gauge how payments should be made and measured against 
hospital-specific DSH limits and provides greater payment 
predictability than a retroactive application.
    Comment: One commenter expressed support for the proposal that CMS 
would produce two lists for qualifying hospitals to meet the exception 
for 97th percentile hospitals, based on either the percentage or total 
number of inpatient days for patients who were entitled to both 
Medicare Part A benefits and SSI benefits. One commenter commended CMS 
for determining the number of Medicare Part A SSI days for the most 
recent cost reporting period based on the days associated with 
discharges occurring during the cost reporting period.
    Response: We appreciate the support. We have followed the statutory 
language at section 1923(g)(2)(B)(i) and (ii) of the Act that specifies 
that hospitals may qualify on the basis of total number of inpatient 
days for patients who were entitled to both Medicare Part A benefits 
and SSI benefits or the percentage of such days. Further, we appreciate 
the support for our proposal to determine the number of Medicare Part A 
SSI days for the most recent cost reporting period based on the days 
associated with discharges occurring during the cost reporting period 
and are finalizing the methodology as proposed.
    Comment: Several commenters urged CMS to release the 97th 
percentile exception lists, including those applicable to SPRY 2022, as 
soon as possible. Several hospital associations and hospitals expressed 
that delays in the release may impact their ability to plan for future 
DSH payments with respect to anticipated decreased hospital-specific 
DSH limits. Two commenters recommended that CMS release the 97th 
percentile exception lists at least 60 days prior to the October 1 date 
to which the exception lists will apply. Another commenter indicated 
that releasing the list at least 60 days prior to the October 1 date 
would allow the State and hospitals sufficient time to work within the 
time frames established in the State laws that govern how interim DSH 
payments are calculated and made to providers to make any necessary 
adjustments to DSH payments based on the 97th percentile exception 
lists.
    Response: We understand the commenters' concerns. Unfortunately, we 
cannot commit to publishing the 97th percentile exception lists at 
least 60 days prior to the October 1 date to which the exception lists 
will apply. Given the dates that the necessary data become available, 
and the time needed for CMS to produce and publish the 97th percentile 
hospital exception qualification lists, we cannot be certain of our 
ability to meet this deadline. However, we are committed to releasing 
the exception lists as soon as possible, after March 31 of each year, 
in advance of the October 1 date. Due to the timing of this final rule, 
we will be releasing the exception lists retroactively for the first 
three years (that is, for SPRYs beginning on or after October 1, 2021, 
to September 30, 2024). For SPRYs beginning on or after October 1, 
2024, we will follow the established timeline so that States and 
hospitals will have the exception lists prior to October 1 each year, 
followed by a correction list

[[Page 13932]]

if needed, as discussed earlier in this final rule.
    Comment: Many commenters requested that CMS release the rankings 
and associated data for all hospitals in the universe of providers used 
to determine the qualification for the exemption for 97th percentile 
hospitals, rather than just those hospitals that qualify for the 
exemption. Commenters indicated that this would provide for greater 
transparency and also be informative to hospitals so that they know 
where they stand in the rankings. One commenter inquired whether CMS 
would release the underlying data used in compiling the 97th percentile 
hospital exception lists to allow for validation of CMS's calculations. 
One commenter indicated that the qualifying lists should be readily 
accessible for use by State Medicaid agencies, hospitals, and other 
interested parties.
    Response: We intend to make available the data necessary for CMS to 
calculate the rankings of hospitals in the dataset. This data may 
include hospital names, Medicare provider numbers, cost report record 
numbers, cost reporting period, cost report status, SSI/Part A days, 
and total inpatient days for each hospital and its distinct part 
psychiatric and rehabilitation units, if applicable, in this universe 
of data. We will publish these data on an annual basis, electronically 
or in another format as determined by CMS, prior to the SPRY to which 
the associated 97th percentile hospital exception lists will apply.
    Comment: Several commenters pointed to the ``all hospital'' 
language in section 203 of the CAA 2021 and opposed CMS' proposal to 
exclude hospitals that do not file Medicare cost reports from the 
dataset used to determine which hospitals meet the exception for 97th 
percentile hospitals. Commenters indicated that this omission would 
result in fewer hospitals qualifying to meet the 97th percentile 
exception by merit of shrinking the pool of hospitals in the dataset. 
Commenters requested that CMS include these hospitals in the datasets 
using zero values in the calculations. Commenters indicated that 
requiring the submission of the Medicare cost report to determine 
qualification to meet the exception for 97th percentile hospitals would 
be burdensome, urging CMS to consider less administratively burdensome 
alternatives.
    Response: We understand and appreciate the commenters' concerns. We 
have worked to identify and include as many hospitals as possible in 
the list of hospitals used to determine the 97th percentile hospital 
exception. While we understand that the statute refers to hospitals 
that are ``in at least the 97th percentile of all hospitals'' and that 
not all hospitals submit a Medicare cost report, the statute directs us 
to make the 97th percentile exception qualification determination based 
on each hospital's ``most recent cost reporting period.'' We continue 
to believe it is reasonable to interpret ``all hospitals'' in this 
context to mean all hospitals with cost reports and to look to HCRIS, 
an existing CMS cost report data source, to identify a hospital's 
``most recent cost reporting period'' for which a hospital has a cost 
report. We are not imposing any additional cost reporting requirements 
on hospitals for the purpose of implementing the 97th percentile 
hospital exception. Furthermore, we believe it is reasonable and 
appropriate to use these data to build the hospital dataset and obtain 
each hospital's total inpatient days, and to establish a cutoff for how 
far back we would look within the HCRIS database to reduce the 
inclusion of terminated, inactive hospitals. We again note that we 
proposed to include any hospital that has in HCRIS a cost report with 
an end date dating back to at least September 30, 3 years prior to the 
snapshot date we are using to extract data. For example, for the 97th 
percentile qualification for SPRYs beginning during FFY 2024, the 
snapshot date is March 31, 2023, and we would include any hospital that 
has in HCRIS a cost report with a cost reporting period end date of 
September 30, 2020, or later.
    We selected the 3-year cutoff based on timing of cost report 
submissions but also considering cost report filing delays and HCRIS 
processing lags. As long as a hospital has a cost report in the HCRIS 
database that meets the criteria on March 31, the snapshot date we are 
establishing to allow us to timely generate the 97th percentile 
hospital exception lists each year, the hospital will be included in 
the dataset. We are also including Medicare cost reports that are filed 
as low- or no-Medicare utilization cost reports as long as they exist 
in the HCRIS database and meet the specified timing criteria. Where 
there is no total inpatient day information or the total patient day is 
reported as zero in a cost report included in our dataset, we will use 
a zero value for the percentage of total inpatient days that are 
Medicare Part A SSI days for the purpose of the 97th percentile 
hospital ranking.
    As discussed in the proposed rule, even if we were to consider an 
alternative mechanism outside of the existing Medicare cost report data 
to collect total inpatient days from hospitals without Medicare cost 
reports in HCRIS, there would not be a way to define the most recent 
cost reporting period for those hospitals that would be consistent with 
how we are defining it for hospitals that do have a cost report. As 
such, we are finalizing the rule as proposed to exclude hospitals with 
no Medicare cost report from the dataset we will use to determine the 
lists of hospitals qualifying for the exception for 97th percentile 
hospitals.
    Comment: One commenter expressed support for the March 31 HCRIS 
snapshot date. The commenter indicated this will provide CMS proper 
time to ensure validity and uniformity of the database.
    Response: We agree; we thank the commenter for their support and 
are finalizing as proposed.
    Comment: A commenter indicated that under certain circumstances, 
there could be multiple hospitals that file under a single Medicare 
cost report and provider number. The commenter questioned if a Medicare 
hospital provider number qualified to meet the 97th percentile 
exception, would all hospitals associated with that provider number 
qualify to meet the 97th percentile exception.
    Response: Yes, this would qualify all hospitals under this CMS 
Certification Number (CCN) to meet the exception for 97th percentile 
hospitals. Our 97th percentile hospital exception determination uses 
each Medicare-participating hospital's cost report and the inpatient 
days for the relevant cost reporting period, all associated with the 
hospital's CCN as stated on the cost report and inclusive of the CCN of 
any psychiatric and/or rehabilitation distinct parts that provide 
hospital services. Therefore, the 97th percentile hospital exception 
qualification would apply to the Medicare-participating hospital as a 
whole. If there are circumstances where a State Medicaid agency 
recognizes a Medicare-participating hospital, identified on our 97th 
percentile hospital list as a single hospital, as multiple hospitals, 
then the 97th percentile exception hospital qualification of the single 
Medicare-participating hospital would apply to those multiple hospitals 
recognized under Medicaid.
    Comment: One commenter indicated support for broadening the 97th 
percentile exception to a universe that includes all hospitals, despite 
initially believing that the exception applied only to inpatient 
prospective payment system (IPPS) hospitals.
    Response: We appreciate the support. We recognize that not only 
IPPS hospitals receive Medicaid DSH

[[Page 13933]]

payments, but critical access, rehabilitation, and psychiatric 
hospitals also may qualify to receive DSH payments. Further, section 
1923(g)(2)(B) of the Act, as amended by section 203 of the CAA 2021 
statute specifies that a hospital must be in ``at least the 97th 
percentile of all hospitals'' to qualify to meet the exception. As 
such, we will produce the qualification lists inclusive of all hospital 
types and all hospitals with a Medicare cost report in HCRIS that 
satisfies the timing criteria discussed earlier in this final rule.
    Comment: One commenter was supportive of CMS' proposal to allow 
hospitals to identify data issues resulting from mathematical or other 
similar technical errors. However, the commenter noted that the 1-year 
period may not be sufficient, particularly given the retroactive 
application of the initial datasets. Further, the commenter insisted 
that the identification of issues should not be limited to mathematical 
or other similar technical errors.
    Response: We appreciate the support but disagree with the need to 
extend the 1-year period to identify issues resulting from mathematical 
or other similar technical errors. In addition, we disagree that the 
scope should be broader than issues resulting from mathematical or 
other similar technical errors. Any dispute over the underlying 
Medicare cost report and claims data is outside of this process. We 
will not attempt to resolve disputes on Medicare cost report and claims 
data, nor amend the underlying cost report and claims data as they 
existed in the database, as of the snapshot date.
    The process and procedures that we are establishing for the 97th 
percentile hospital exception relies on existing Medicare data in the 
CMS cost report and claims systems as of a particular snapshot date 
each year. We will ensure that we are extracting the correct values 
from those systems and compiling them accurately in accordance with the 
procedures we are establishing in this final rule and proposed to allow 
for an opportunity to make corrections where mathematical or other 
similar technical errors may occur in these steps. As such, we proposed 
to give States and interested parties 1 year from the release of the 
97th percentile hospital lists and dataset, including those for 
retroactive periods back to the first SPRYs beginning on or after 
October 1, 2021, to bring forward issues resulting from mathematical or 
other similar technical errors made by CMS in the steps of extracting 
and compiling the data and determining the 97th percentile hospital 
exception qualification. We believe that not only is this timeframe 
appropriate for addressing the narrow scope of errors we would expect 
could arise in this process but also extending the timeframe out 
further would extend the period of uncertainty for States and hospitals 
relying on timely, finalized data.
    Comment: One commenter requested that in instances where CMS issues 
a revised qualifying list, any hospital that qualified to meet the 
exception for 97th percentile hospitals on the initial list should 
retain that status regardless of its ranking on the revised list. The 
commenter indicated that this policy would mitigate any financial 
disruption to hospitals.
    Response: We understand the commenter's concern. However, in the 
unlikely case that an initially qualified hospital would fall below the 
97th percentile threshold upon issuance of a corrected list of 
qualifying hospitals, that hospital would not qualify to meet the 
exception for 97th percentile hospitals. The statutory language at 
section 1923(g)(2)(B) of the Act is clear that to qualify to meet the 
exception, the hospital must be in at least the 97th percentile of all 
hospitals for the most recent cost reporting period with respect to the 
total number of inpatient days for the period that were made up of 
patients entitled to Medicare Part A and SSI benefits, or the 
percentage of total inpatient days made up of such days. As such, we 
have no authority to allow an unqualified hospital to receive the 97th 
percentile hospital exception due to a mathematical or other similar 
technical error that resulted in its erroneous inclusion on an initial 
list of qualifying hospitals. We are finalizing all aspects of the 
error correction process as proposed.

D. Limitations on Aggregate Payments for DSHs Beginning October 1, 1992 
(Sec.  447.297)

    We proposed to eliminate the Sec.  447.297(c) requirement to 
publish annual DSH allotments in the Federal Register and to provide 
that the Secretary would post preliminary and final national 
expenditure targets and State DSH allotments in the Medicaid Budget and 
Expenditure System/State Children's Health Insurance Program Budget and 
Expenditure System (MBES/CBES) and at Medicaid.gov (or similar 
successor system or website). Current regulations require us to publish 
the annual DSH allotments in the Federal Register. We have found this 
process to be time consuming and administratively burdensome for us and 
are concerned that it makes providing the information to States and 
other interested parties less timely and accessible. Additionally, 
because we currently notify States directly regarding annual allotment 
amounts and make such information publicly available outside of the 
Federal Register on a routine basis, we find that it is duplicative and 
unnecessary to go through the process of publishing in the Federal 
Register. Therefore, by eliminating the Sec.  447.297(c) requirement to 
publish annual DSH allotments in the Federal Register, we explained 
that we would be removing the administratively burdensome task, which 
would allow us to focus our efforts on providing the information in a 
timely and easily accessible manner through the MBES/CBES and at 
Medicaid.gov (or similar successor system or website).
    Additionally, we proposed in Sec.  447.297(b) and (d)(1) to remove 
the date on which final national targets and allotments are published, 
currently specified as April 1, and revise this timeframe to as soon as 
practicable. In Sec.  447.297(d)(1), we also proposed to remove the 
phrase ``prior to the April 1 publication date,'' and to add in its 
place the phrase, ``prior to the posting date'' for consistency with 
the new timeframe. We proposed to remove the April 1 publication date 
to allow for Medicaid expenditures associated with the FFY DSH 
allotment to be finalized. CMS utilizes these amounts in the 
calculations of the 12 percent limit under section 1923(f)(3)(B)(ii) of 
the Act. Finally, we proposed to remove Sec.  447.297(c), which 
consists of redundant publication requirements already identified in 
Sec.  447.297(b), (c), and (d), in its entirety, to align with our 
proposed changes Sec.  447.297(c).
    We received public comments on these proposals. The following is a 
summary of the public comments we received and our responses.
    Comment: Several commenters commented on this proposal, and with 
one exception, commenters were not supportive of this proposal. The 
commenters cited concerns about transparency, as the MBES/CBES systems 
where we would publish amounts are not accessible to the general 
public. They also cited concerns about accountability, as Medicaid.gov 
is less formal than a Federal Register publication, and the latter 
ensures a static record for historicity.
    Response: While we appreciate the concerns of commenters, we are 
finalizing as proposed. We will ensure ongoing transparency by 
publishing final amounts on a publicly accessible page on Medicaid.gov 
instead of simply distributing to States through MBES/CBES. This step 
ensures that hospitals, researchers, oversight entities, and others 
will have timely access to the

[[Page 13934]]

data as well. We also believe posting to Medicaid.gov can provide 
sufficient accountability regarding the accuracy of the final amounts. 
We already publish many important documents and guidance on our 
website, and we will ensure the postings are clear with respect to the 
date they are published, and with versions for any necessary changes.
    Comment: A couple commenters specifically opposed the removal of 
the ``April 1'' date from the regulatory language and did not want the 
final allotments published any later than that date.
    Response: We are also finalizing as proposed the regulatory 
language removing the ``April 1'' date specification and replacing it 
with ``as soon as practical.'' Our reasoning is twofold. First, we 
already currently send States information prior to when the Federal 
Register publication occurs. This change will not alter our existing 
practice of providing information to States as soon as we have it 
available. Second, this change is important to allow us flexibility 
when some States are late reporting their expenditure data, causing a 
delay in calculating final allotments. By removing the April 1 
language, we can ensure that the publicly available final report is 
more accurate.
    We acknowledge this change in publication location and uncertainty 
of dates could make it difficult for non-State entities to know when 
the final allocation report is available. We intend to communicate 
through multiple channels, such as emails, list servs, and calls with 
interested parties, when the Medicaid.gov publication will be 
available, and once it is posted.

E. Reporting Requirements (Sec.  447.299)

1. Calculating Medicaid Shortfall
    We proposed to revise Sec.  447.299(c)(6), (7), (10), and (16) to 
reflect the statutory changes made by section 203 of the CAA 2021 to 
update the methodology for calculating the Medicaid shortfall portion 
(Medicaid costs less Medicaid payments) of the hospital-specific DSH 
limit to only include costs and payments for hospital services 
furnished to beneficiaries for whom Medicaid is the primary payer, 
effective for the SPRY beginning on or after October 1, 2021, and 
subsequent years, and to include the statutory exception for 97th 
percentile hospitals. Hospitals meeting this exception will calculate 
their hospital-specific DSH limit using the higher value of either the 
hospital-specific DSH limit calculated per the methodology which 
includes only costs and payments associated with beneficiaries for whom 
Medicaid is the primary payer or the hospital-specific DSH limit 
calculated per the methodology in effect on January 1, 2020. We 
reviewed the other data elements in Sec.  447.299(c) to determine if 
additional updates were necessary to account for the changes made by 
section 203 of the CAA 2021. However, we noted our belief that these 
are the only data elements requiring updates because these are the only 
elements that will differ based on whether statutory requirements 
provide for the consideration of all Medicaid eligible individuals or 
only those for whom Medicaid is the primary payer. Therefore, we 
explained that it was only necessary to revise Sec.  447.299(c)(6), 
(7), (10), and (16) to account for the statutory changes made by 
section 203 of the CAA 2021.
    Accordingly, we proposed to revise Sec.  447.299(c)(6), which 
specifies that this data element should include inpatient and 
outpatient Medicaid fee-for-service (FFS) basic rate payments paid to 
hospitals, ``not including DSH payments or supplemental/enhanced 
Medicaid payments, for inpatient and outpatient services furnished to 
Medicaid eligible individuals.'' We proposed this change because, for 
most hospitals, for SPRYs beginning on or after October 1, 2021, only 
those FFS payments for Medicaid eligible individuals for whom Medicaid 
is the primary payer will be counted in the calculation of the 
hospital-specific DSH limit. Therefore, we proposed to revise Sec.  
447.299(c)(6) to remove the reference to Medicaid eligible individuals 
and update the regulatory text to indicate that FFS payments for 
inpatient and outpatient hospital services furnished to Medicaid 
individuals in accordance with Sec.  447.295(d) should be included in 
this data element.
    We also proposed to revise Sec.  447.299(c)(7), which specifies 
that this data element includes payments made to the hospitals ``by 
Medicaid managed care organizations for inpatient hospital and 
outpatient hospital services furnished to Medicaid eligible 
individuals.'' We proposed this change because for most hospitals, for 
SPRYs beginning on or after October 1, 2021, only payments made by 
Medicaid managed care organizations for Medicaid eligible individuals 
for whom Medicaid is the primary payer will be counted in the 
calculation of the hospital-specific DSH limit. Therefore, we proposed 
to revise Sec.  447.299(c)(7) to remove the reference to Medicaid 
eligible individuals and update the regulatory text to indicate that 
Medicaid managed care payments for inpatient and outpatient hospital 
services furnished to Medicaid individuals in accordance with Sec.  
447.295(d) should be included in this data element.
    We also proposed to revise Sec.  447.299(c)(10), which specifies 
that this data element includes ``costs incurred by each hospital for 
furnishing inpatient hospital and outpatient hospital services to 
Medicaid eligible individuals.'' We proposed this change because for 
most hospitals, for SPRYs beginning on or after October 1, 2021, only 
costs incurred on behalf of Medicaid eligible individuals for whom 
Medicaid is the primary payer will be counted in the calculation of the 
hospital-specific DSH limit. Therefore, we proposed to revise Sec.  
447.299(c)(10) to remove the reference to Medicaid eligible individuals 
and update the regulatory text to indicate that costs incurred by each 
hospital for furnishing inpatient hospital and outpatient hospital 
services to Medicaid individuals as determined in accordance with Sec.  
447.295(d) should be included in this data element.
    Finally, we proposed to revise Sec.  447.299(c)(16), which 
currently specifies the calculation of uncompensated care costs to 
include ``the total cost of care for furnishing inpatient hospital and 
outpatient hospital services to Medicaid eligible individuals'' and the 
uninsured, which are to be offset by ``Medicaid FFS rate payments, 
Medicaid managed care organization payments, supplemental/enhanced 
Medicaid payments, uninsured revenues, and section 1011 payments for 
inpatient and outpatient hospital services.'' Therefore, we proposed to 
revise Sec.  447.299(c)(16) to remove the reference to ``Medicaid 
eligible individuals'' and update the regulatory text to indicate that 
total annual uncompensated care cost equals the total cost of care for 
furnishing inpatient hospital and outpatient hospital services to 
``Medicaid individuals as determined in accordance with Sec.  
447.295(d) and to individuals with no source of third-party coverage 
for the hospital services they receive,'' less the sum of payments 
received on their behalf, should be included in this data element.
    We proposed that this and other CAA 2021-related proposals, noted 
in the respective sections, be applicable to fiscal years beginning on 
or after October 1, 2021, to align with the effective date of the 
amendments made by section 203 of the CAA 2021.
    We received public comments on these proposals. The following is a

[[Page 13935]]

summary of the public comments we received and our responses.
    Comment: A few commenters indicated that the DSH audit should 
indicate which hospitals met the exception for 97th percentile 
hospitals and which methodology had a higher hospital-specific DSH 
limit: the limit including only costs and payments for Medicaid 
patients for whom Medicaid is the primary payer in the Medicaid portion 
of the hospital-specific limit calculation, or the methodology in 
effect on January 1, 2020. Commenters indicated that this information 
would be beneficial for informing future policy decisions.
    Response: We agree that this would be useful information and 
suggest that auditors provide this information in the independent 
certified audit. Because we did not propose to include this element as 
a required part of the independent certified audit, future rulemaking 
would be necessary to impose this as a requirement. We are finalizing 
the provisions as proposed.
2. Reporting DSH Overpayments
    To improve the accuracy of identification of provider overpayments 
discovered through the DSH audit process, we proposed to add an 
additional reporting requirement for annual DSH audit reporting 
required by Sec.  447.299. We proposed to redesignate Sec.  
447.299(c)(21) as paragraph (c)(22) of that section, and to add a 
proposed new Sec.  447.299(c)(21) to require an additional data element 
for the required annual DSH audit reporting. The new data element we 
proposed would require auditors to quantify the financial impact of any 
finding, including any impact resulting from incomplete or missing 
data, lack of documentation, non-compliance with Federal statutes or 
regulations, or other deficiencies identified in the independent 
certified audit, which may affect whether each hospital has received 
DSH payments for which it is eligible within its hospital-specific DSH 
limit.
    Currently, audits may include a caveat indicating the auditors are 
unable to quantify the financial impact of an identified audit finding. 
We proposed that, for purposes of Sec.  447.299, audit finding means an 
issue identified in the independent certified audit required under 
Sec.  455.304 concerning the methodology for computing the hospital-
specific DSH limit or the DSH payments made to the hospital, including 
compliance with the hospital-specific DSH limit as defined in Sec.  
447.299(c)(16). For example, an audit may identify that a hospital was 
unable to satisfactorily document the outpatient services it provided 
to Medicaid eligible patients, resulting in the exclusion of associated 
costs and payments from the Medicaid shortfall calculation. Based on 
this lack of documentation, the audit may include a caveat noting the 
auditor's finding that the hospital's total uncompensated care cost may 
be misstated as a result of this exclusion, with unknown impact on the 
hospital-specific DSH limit. Given this lack of quantification of the 
financial impact of this finding, CMS and the State would be unable to 
determine whether an overpayment has resulted related to this audit 
finding, and if so, the amount. We believe that requiring the 
quantification of such findings would limit the burden on States and 
CMS of performing follow-up reviews or audits. Specifically, conducting 
a secondary review or audit after the independent auditors have 
completed theirs would lengthen the review process, and therefore, 
delay the results of the audit. It would also require additional time, 
personnel, and resources by CMS, States, and hospitals to participate 
in a secondary review or audit, which would largely duplicate aspects 
of the audit already conducted by the independent auditor. If 
finalized, the new data element would help ensure appropriate recovery 
and redistribution, as applicable, of all DSH overpayments in excess of 
the hospital-specific limit. Adding this requirement to the submission 
would also ensure auditors provide the additional information at the 
time they are already reviewing the applicable data, reducing the labor 
burden as opposed to a later, secondary audit.
    We explained that auditors would be afforded the professional 
discretion and the flexibility to determine how to best quantify these 
amounts in the audit findings. For example, auditors would be able to 
use alternative source documentation, utilize a methodology to estimate 
the financial impact in terms of the dollar amount at risk, or provide 
an estimated range of financial impact if a determination of an exact 
dollar amount is not possible. However, we also noted our understanding 
that, due to the complexity of issues that may arise, the actual 
financial impact of an audit finding may not always be calculable. 
Therefore, we proposed that, in the expectedly rare event that the 
actual financial impact cannot be calculated, a statement of the 
estimated financial impact for each audit finding identified in the 
independent certified audit that is not reflected in the other data 
elements identified in Sec.  447.299(c) would be required. We proposed 
that actual financial impact would mean the total amount associated 
with audit findings calculated using the documentation sources 
identified in Sec.  455.304(c). Estimated financial impact would mean 
the total amount associated with audit findings calculated on the basis 
of the most reliable available information to quantify the amount of an 
audit finding in circumstances where complete and accurate information 
necessary to determine the actual financial impact is not available 
from the documentation sources identified in Sec.  455.304(c). The 
estimated financial impact would use the most reliable available 
information (for example, related source documentation such as data 
from State systems, hospitals' audited financial statements, and 
Medicare cost reports) to quantify an audit finding as accurately as 
possible. We noted our belief that this additional data reporting 
element is necessary to better enable our oversight of the Medicaid DSH 
program to better ensure compliance with the hospital-specific DSH 
limit in section 1923(g) of the Act.
    Additionally, we proposed to add Sec.  447.299(f), which would 
codify our existing policy for how overpayments identified through the 
annual independent certified DSH audits required under part 455, 
subpart D, must be handled and reported to CMS. Specifically, we 
proposed that DSH payments found in the independent certified audit 
process under part 455, subpart D, to exceed hospital-specific limits 
are provider overpayments for which FFP must be returned to the Federal 
Government in accordance with the requirements in 42 CFR part 433, 
subpart F, or redistributed by the State to other qualifying hospitals, 
if redistribution is provided for under the approved State plan. We 
proposed that overpayment amounts returned to the Federal Government 
must be separately reported on the Form CMS-64 as a decreasing 
adjustment which corresponds to the fiscal year DSH allotment and 
Medicaid SPRY of the original DSH expenditure claimed by the State.
    We further proposed to add Sec.  447.299(g), which would establish 
reporting requirements concerning the redistribution of DSH 
overpayments in accordance with a State's redistribution methodology in 
its Medicaid State plan, as applicable. Specifically, we proposed that, 
as applicable, States would be required to report any overpayment 
redistribution amounts on the Form CMS-64 within 2 years from the date 
of discovery that a hospital-specific limit has been exceeded, as 
determined under Sec.  433.316(f) in accordance with a

[[Page 13936]]

redistribution methodology in the approved Medicaid State plan. The 
State would be required to report redistribution of DSH overpayments on 
the Form CMS-64 as separately identifiable decreasing adjustments 
reflecting the return of the overpayment as specified in Sec.  
447.299(f) and increasing adjustments representing the redistribution 
by the State. Both adjustments must correspond to the fiscal year DSH 
allotment and Medicaid SPRY of the related original DSH expenditure 
claimed by the State. These proposed additions of paragraphs (f) and 
(g) to Sec.  447.299 would memorialize our current policy concerning 
the return of FFP in or redistribution of Medicaid DSH payments in 
excess of the hospital-specific limit in regulation, and thereby 
promote clarity and transparency, avoid misunderstanding, and enhance 
oversight of the Medicaid DSH program.
    We explained that these proposals for the independent certified 
audit and DSH-related claims reporting would enhance Federal oversight 
of the Medicaid DSH program and improve the accuracy of DSH audit 
overpayments identified and collected through annual DSH audits. We 
invited comments on these proposals. The following is a summary of the 
public comments we received and our responses.
    Comment: A few commenters expressed concerns about the language 
regarding auditors' ability to provide an estimate of the financial 
impact. One commenter opposed the provision on the basis that 
overpayment determinations would be based on estimates. Another 
commenter sought clarity on how an auditor would be able to submit an 
estimated range of impact.
    Response: We want to clarify our language around the use of 
estimates and financial impact ranges, and our expectation for how 
States should handle estimated financial impacts. First and foremost, 
we emphasize that we expect auditors to calculate an actual financial 
impact of their audit findings wherever possible. Experience has shown 
that currently, some States' contracts with auditors do not require any 
quantification of overpayments, leaving this critical activity 
incomplete following completion of the audit. By finalizing this new 
data element proposal, we intend to require that State contracts with 
auditors must require the auditor to take the extra step of quantifying 
the financial impact of their findings, based on the audit work already 
being performed. We intend to stop the practice of a State's acceptance 
of auditor ``caveats'' unaccompanied by a statement of actual or 
estimated financial impact, which leaves unnecessary duplicative and 
burdensome work to the State and CMS to determine any associated 
overpayment amount. We believe the additional cost and burden 
associated with the new data element would be minimal given that 
auditors are already engaged in a focused review of available 
documentation to quantify the aggregate amounts that comprise each of 
the existing data elements required under Sec.  447.299(c).
    However, as stated in the proposed rule, we acknowledge that even 
where State contracts with auditors require the auditor to quantify the 
actual or estimated financial impact of any findings, there are rare 
circumstances where the financial impact of an identified issue cannot 
be quantified. As commenters noted, we would allow the auditor to 
submit an estimated impact in these expectedly rare circumstances. We 
want to clarify that the reference to an ``estimated range of financial 
impact'' \28\ in the proposed rule was intended to refer to this 
circumstance. We also want to clarify that we do not require that 
States treat an estimate an auditor produces in this context as a 
determination of an overpayment amount. Consistent with our 
characterization of overpayments in Sec.  433.316(c)(1) through (3), an 
estimate would reflect an inability to calculate a specific amount and 
would not represent a quantified overpayment. It is our expectation 
that more auditors, by employing appropriate methods at their 
professional discretion, have the ability to quantify these amounts, 
than are currently being required to do so under their contracts with 
the relevant State. If an auditor is truly unable to quantify a finding 
or caveat using its best professional efforts, the auditor should 
recommend specific corrective action in its audit report. We expect 
that the States will submit a corrective action plan as part of the 
final audit report for CMS approval. Additionally, we remind States 
that under 42 CFR 431.992, a corrective action plan may be required for 
possible payment error in association with the Payment Error Rate 
Measurement process described at 42 CFR 431.950 et seq. We realize that 
given the independent certified DSH audit and report is not due to us 
until the end of the calendar year 3 years following the end of each 
SPRY, there may be a significant lag between when an auditor identifies 
an issue and when the State and hospitals are able to implement 
corrective action. We intend to take this lag into consideration in 
determining whether the State's annual audit and DSH payments meet 
Federal requirements. We may use the deferral and/or disallowance of 
FFP per Sec.  447.299(e) to ensure timely compliance with Federal DSH 
reporting requirements.
---------------------------------------------------------------------------

    \28\ 88 FR 11865 at 11876.
---------------------------------------------------------------------------

    Comment: One commenter requested that CMS provide standardized 
guidance for how to calculate and quantify any errors and overpayment 
amounts. They were concerned that variations in methodology would 
result in disparate and possibly inequitable impacts from the new data 
element.
    Response: We understand the desire for standardized guidance, and 
we did consider this option. However, we are finalizing as proposed and 
will continue to evaluate the need for additional CMS guidance. We 
expect auditors to utilize their professional discretion to determine 
how to best quantify errors and overpayment amounts. Allowing this 
flexibility acknowledges the potential variability in issues an auditor 
may identify. In addition, auditors are not wholly without guidance on 
this issue. Auditors should utilize the source documents discussed 
throughout the 2008 DSH audit final rule to develop their 
calculations.\29\ Finally, as always, we are available to assist any 
States seeking to develop or enhance their instructions to auditors.
---------------------------------------------------------------------------

    \29\ See for example 73 FR 77904 at 77917 for types of source 
documentation, which can include hospital cost reports, hospital 
financial statements, and other hospital accounting records.
---------------------------------------------------------------------------

    Comment: A few commenters expressed concerns on burden and 
auditors' ability to quantify data caveats. Specifically, one commenter 
opposed the proposed new data element because the requirement to 
quantify data caveats would present a significant burden on States to 
pay for that level of audit. They recommended that instead CMS should 
target States with the highest DSH allotments for this new requirement 
or that CMS should hire a vendor to perform all audits. Another 
commenter stated that CMS lacked data supporting the assertion that 
auditors could easily quantify their findings, or that it would be rare 
for an auditor to need to provide an estimate.
    Response: We disagree that this new requirement will constitute a 
significant burden increase. If an auditor is already completing a full 
review of DSH documentation, then the information needed to calculate 
amounts should be readily available and the calculation of associated 
amounts would not create a significantly burdensome additional step. In 
other words, if an auditor is performing a review of all available 
documentation in order to produce the

[[Page 13937]]

audit, then they have the documentation that will inform how payments 
were made and whether claims for FFP are supported, which should allow 
the auditor to identify and calculate any possible overpayments. If a 
State is finding there is a significant change in effort to meet this 
additional requirement, it could be an indication that previous audit 
contracts were too limited to result in an independent certified audit 
sufficient to identify whether DSH payments to hospitals were 
consistent with each provider's hospital-specific DSH limit. In 
addition, because we are allowing flexibility in methodology, an 
auditor could (and should) utilize an approach that minimizes 
unnecessary burden while still arriving at a mathematically valid final 
calculation. As discussed in a previous response, experience has shown 
that some States have limited contracts with their auditors to meet 
minimum requirements, which results in audit reports that rely heavily 
on data caveats and are limited in their usefulness for identifying 
overpayment amounts.
    The DSH audits are statutorily required under section 1923(j) of 
the Act, which places the requirement on the States to perform the 
audit. All States that make DSH payments must comply with the 
independent certified audit requirements as a condition of receipt of 
FFP in their DSH payments. We do not believe the statute contemplates 
applying more stringent audit standards only to some States. We believe 
this new requirement is important to ensuring that payments are being 
made properly, regardless of the potential amount of overpayment that 
could have occurred in a given State.
    Additionally, section 1923(j) of the Act requires States, not CMS, 
to submit an independent certified audit. We therefore established in 
the 2008 DSH final rule the requirement for States to contract with an 
independent auditor to meet this requirement; CMS does not have 
authority to hire a vendor to perform all independent certified audits, 
and to do so would duplicate a requirement that Congress has placed on 
the States. We note that FFP is available in States' allowable 
administrative expenditures for their audit contracts.
    Lastly, regarding the comment stating CMS lacked data supporting 
the assertion auditors could easily quantify their findings, we have 
heard from various auditors directly that they can provide more data 
but are not presently being requested by States to do so. This 
information about auditors' experiences is why we are confident it 
would be unlikely that an auditor would need to provide an estimated 
financial impact amount in more than rare circumstances. Therefore, we 
are finalizing this required data element with the expectation that 
States will contract with auditors to take the appropriate steps to 
quantify findings for which some States' auditors have been including 
data caveats.
    Comment: A few commenters expressed concern in regard to the 
implementation of the new data element and its interplay with the other 
data elements. One commenter requested that CMS clarify how the new 
data element would be used. They specifically inquired if CMS would 
calculate a new total annual UCC since the commenter perceived that the 
new data element quantifying any overpayments would not necessarily be 
reproducible from the other data elements already included in the 
audit. On the other hand, another commenter questioned whether an 
amount quantified under this new requirement would not be already 
accounted for in other data elements of the audit and expressed concern 
about duplication of effort.
    Response: The intent of the new data element, to the extent an 
auditor has provided actual calculations of impacts, is for States to 
treat it as an identified overpayment amount. It relates to a 
quantification of errors, and errors should not be represented in the 
other data elements of the report, as amounts inclusive of errors would 
presumably be unsupported by documentation, inaccurate, or otherwise 
inappropriate. A State's calculated UCC or hospital-specific DSH limit 
should not include errant or unsupported data, and therefore the 
quantification included in the new data element should not impact the 
UCC/hospital-specific DSH limit or necessitate a change.
    If the State plan methodology allows for redistribution that would 
result in changes to DSH audit data elements, we would expect the State 
to reflect the redistribution-related changes to applicable data 
elements in relevant CMS-64s and in revised data element reports. The 
impacts calculated under the new data element should not duplicate any 
other data elements in content, but should be consistent with and may 
be calculated based on other required data elements, as determined by 
the auditor. Additionally, we are finalizing at Sec.  447.299(c)(21) 
language that specifically states the amount for the new data element 
should include amounts ``not otherwise reflected in data elements 
described in this paragraph (c).''
    Comment: A few commenters express concern on the parameters of the 
new data element. Specifically, one commenter questioned if 
``disclosures'' should be regarded as the types of data caveats and 
errors that an auditor would be required to quantify under this new 
requirement. Another requested an exception to the requirement when a 
State is aware an addendum is forthcoming on an audit.
    Response: We are unsure precisely what the commenter meant by their 
use of ``disclosure.'' If ``disclosure'' is being used synonymously 
with data caveat and is included in lieu of providing a calculated 
impact where it would be possible to state the actual or estimated 
financial impact of an identified issue, then this information would be 
covered by the new requirement we are finalizing in this rule. If the 
``disclosure'' is merely to make CMS aware of a qualitative 
circumstance that, by nature, could not be associated with a quantified 
financial impact, we would not expect an auditor to attempt to produce 
an actual or estimated impact.
    There is no exception to this data requirement, or independent 
certified audit deadlines in general, when a State or auditor knows a 
change or addendum to the audit report is forthcoming. Existing 
regulations at Sec.  433.320(c) contemplate scenarios where an 
overpayment amount is subsequently adjusted and provides the 
requirements and procedures for how to address those changes. In 
addition, frequently asked question (FAQ) #17 of the ``Additional 
Information on the DSH Reporting and Audit Requirements'' guidance \30\ 
explains that States have 3 years beyond the applicable FFY for ongoing 
report and audit submission, in recognition of potential delays in 
obtaining needed information. Based on the audit and reporting 
deadlines, the requirement in Sec.  447.45(d) for provider claims to be 
filed within a year from the date of service and promptly paid by the 
State, and the 2-year timely claim filing requirement in 45 CFR 95.7, 
we explained in FAQ #17 that there should not be a significant 
adjustment to Medicaid payments that would warrant a corrected audit 
and report. However, we acknowledge there is still a possibility that a 
significant adjustment to Medicaid payment may occur for which the 
State claims Federal matching dollars (or returns Federal matching 
dollars) as a prior period adjustment, falling outside the timely 
claims filings we would expect to be

[[Page 13938]]

reflected in original audit submissions. In these instances, the State 
should submit corrected audits and data element reports in the same 
manner as the originals, indicating post-audit adjustments to Medicaid 
and DSH payments that are reflected in the audit or report (or 
uncompensated care costs if Medicaid payment adjustments affect the 
Medicaid shortfall) once those adjustments have been made.
---------------------------------------------------------------------------

    \30\ https://www.medicaid.gov/medicaid/downloads/part-1-additional-info-on-dsh-reporting-and-auditing.pdf.
---------------------------------------------------------------------------

    Comment: One commenter expressed concern about the disparate impact 
this requirement may have for hospitals that disproportionately 
experience certain data issues outside of a State's or hospital's 
control, such as a hospital with a high volume of out-of-State patients 
that cause delays in obtaining necessary documentation.
    Response: We want to emphasize that, although we hope this new 
requirement will compel action by States to contract for, ensure the 
completion of, and submit thorough DSH audits, there is still 
flexibility for those limited scenarios where an auditor simply cannot 
obtain the data or employ appropriate mathematical methods to quantify 
the financial impact of an identified issue. We proposed that auditors 
would be able to provide an estimated financial impact in these 
situations. We also note that under existing policy and as finalized in 
this section of this final rule, States have 3 years beyond the 
applicable FFY to submit audits, and 2 years following the 
identification of an overpayment to perform redistributions, as 
applicable under the State plan. The regulations at Sec.  433.320, as 
mentioned previously, also contemplate subsequent adjustments to 
identified overpayment amounts.
    Comment: A few commenters requested changes or sought clarity 
around the scope of the overpayment policy in Sec.  447.299(f). 
Specifically, one commenter requested an exception to the requirement 
to recoup or redistribute an identified overpayment as described in 
Sec.  447.299(f) if the State knows an audit modification is 
forthcoming in the near future that would require a revised 
redistribution or recoupment. Another comment requested clarification 
about how States should handle an underpayment identified in the new 
DSH data element if the State had not paid out its entire DSH allotment 
initially and its approved DSH payment methodology called for 
additional payments to one or more DSH hospitals with room under the 
hospital-specific DSH limit.
    Response: We are finalizing the Sec.  447.299(f) provision as 
proposed and without an exception to this provision when a State knows 
a change to the independent certified audit report is likely to be 
forthcoming. As mentioned in a previous response, we already allow 
States 3 years beyond the applicable FFY for ongoing report and audit 
submission under Sec.  455.304(b). In addition, if an overpayment is 
discovered later, then that overpayment would be subject to the same 
requirements as any other State Medicaid overpayment, and should be 
handled in accordance with part 433, subpart F. While we appreciate 
that there may be rare circumstances when certain information is not 
available in time to meet these deadlines, we think the time allowed is 
more than adequate for the vast majority of cases and do not believe 
that an extension or indefinite timeframe for the independent certified 
audit and report would be appropriate.
    States retain considerable flexibility to design a payment 
adjustment methodology for DSH hospitals. If States choose to pay up to 
a hospital's UCC (the full extent of its hospital-specific DSH limit, 
subject to available funds within the State's Federal Medicaid DSH 
allotment), in some instances, the DSH audit may identify hospitals 
that were not paid up to their uncompensated care cost as provided in 
the State's approved DSH payment methodology. If the State plan 
outlines an interim payment methodology, the State may be able to make 
additional DSH payments or redistribute amounts from hospitals that 
received excess DSH payments (over their hospital-specific DSH limits) 
to these hospitals with remaining uncompensated care costs through a 
reconciliation process to address the ``underpayment.''
    Comment: One commenter sought clarification regarding how the 
effective date of the rule would impact States with respect to Sec.  
447.299(g); for example, the commenter sought clarification on how this 
new requirement would impact States currently performing 
redistributions on amounts from more than 2 years prior. The commenter 
also inquired from what date related to a discovered overpayment a 
State would have 2 years to redistribute.
    Response: We are finalizing Sec.  447.299(g) as proposed. The 2-
year policy for redistribution will apply for overpayments identified 
from the effective date of this final rule, onward. However, this 
policy has already been communicated directly to States, which have 
been aware of the two-year timeframe for performing redistributions 
provided for under the State's approved DSH payment methodology; this 
final rule merely codifies this existing policy in regulation. If a 
State is currently processing older redistributions, then the State 
should make every effort to come into compliance within the timeframes 
established in this final rule as expeditiously as possible. Regarding 
the date of discovery of an overpayment, we intend the 2-year timeframe 
for redistribution to be determined consistent with the policy we are 
finalizing at Sec.  433.316(f), where we define the date of discovery 
of a DSH audit overpayment.
    Comment: One commenter was in favor of the redistribution 
provisions in proposed Sec.  447.299(f) and (g) for the clarity they 
would provide States on an issue that had multiple reasonable 
interpretations, but suggested CMS collect hospital-specific data 
following any redistributions.
    Response: We thank the commenter for their suggestion. When our 
analysts who perform reviews of State-submitted CMS-64s receive a CMS-
64 that indicates redistributions, and a State has not otherwise 
provided updated hospital-specific data in a revised data elements 
report after the submission of the independent certified audit for the 
relevant year, we perform outreach to confirm the new hospital-specific 
payment amounts and hospital-specific DSH limits and to instruct the 
State to submit a revised data elements report reflecting these new 
amounts.
    We are finalizing the provisions to Sec.  447.299 as proposed, with 
minor phrasing changes to Sec.  447.299(c)(6), (c)(10) introductory 
text, (c)(10)(ii), and (c)(16) replacing ``pursuant to'' with ``in 
accordance with'' to align with current style guidelines.

F. Definitions (Sec.  455.301)

    We proposed to revise the definition of the ``independent certified 
audit'' to include the requirement for auditors to quantify the 
financial impact of each audit finding, or caveat, on an individual 
basis, for each hospital, per the reporting requirement in proposed 
Sec.  447.299(c)(21) and under section 1923(j)(1)(B) of the Act. We 
explained that updating this definition is consistent with the goals of 
the updates to Sec.  447.299(c)(21) to facilitate our determination of 
whether the State made DSH payments that exceeded any hospital's 
specific DSH limit in the Medicaid SPRY under audit. Specifically, as 
discussed in item five of the proposed provisions, we proposed to add 
to annual DSH reporting required under Sec.  447.299(c) a requirement 
for States to report the financial impact of audit findings identified 
by the State's independent auditor. To align with this proposal, we 
proposed to revise the definition of the independent certified

[[Page 13939]]

audit under Sec.  455.301 to include the auditor's certification of ``a 
quantification of the financial impact of each audit finding on a 
hospital-specific basis.'' As previously discussed, based on current 
independent certified DSH audit submissions, we are at times unable to 
determine whether a DSH overpayment to a provider has occurred, the 
underlying cause of any overpayment, and the amount of the 
overpayment(s) associated with each cause. This is the result of an 
auditor including audit findings or caveats indicating that missing 
information or other issues may have an impact on the calculation of 
total uncompensated care costs (that is, the hospital-specific DSH 
limit), while not making a determination of the actual (or estimated) 
financial impact of the identified issue. As such, we noted our belief 
that revising the definition to include a quantification of the 
financial impact of any issues identified in the audit is necessary to 
better ensure proper oversight and integrity of the DSH program.
    We solicited comments related to the proposed change. We did not 
receive public comments on this provision and are finalizing as 
proposed these changes to Sec.  455.301.

G. Condition for Federal Financial Participation (FFP) (Sec.  455.304)

    We proposed to revise Sec.  455.304(d)(1), (3), (4), and (6) to 
reflect the proposed revisions to the independent certified data 
elements at Sec.  447.299(c)(6), (7), (10), and (16). The revisions 
would reflect the statutory changes made by section 203 of the CAA 
2021, updating the independent certified audit verifications as they 
relate to the treatment of Medicaid eligibles and third-party payers. 
We reviewed the other independent certified audit verifications in 
Sec.  455.304(d) to determine if additional updates were necessary to 
account for the changes made by section 203 of the CAA 2021. However, 
we noted our belief that these are the only verifications requiring 
updates because these are the verifications that consider the treatment 
of Medicaid eligibles for purposes of the independent certified audit. 
Therefore, it is only necessary to revise Sec.  455.304(d)(1), (3), 
(4), and (6) to account for the statutory changes made by section 203 
of the CAA 2021.
    Accordingly, we proposed to revise Sec.  455.304(d)(1), which 
specifies that auditors should verify that each qualifying hospital 
that receives DSH payments, associated with the provisions of services 
to ``Medicaid eligible individuals and individuals with no source of 
third-party coverage,'' is allowed to retain that payment. We proposed 
this change because for most hospitals, for SPRYs beginning on or after 
October 1, 2021, the methodology by which these DSH payments are 
calculated and paid will be reflective of Medicaid costs and payments 
associated with Medicaid eligible individuals for whom Medicaid is the 
primary payer. Therefore, we proposed to revise Sec.  455.304(d)(1) to 
remove the reference to Medicaid eligible individuals and update the 
regulatory text to indicate that the DSH payments are associated with 
inpatient hospital and outpatient hospital services provided to 
Medicaid individuals as determined in accordance with Sec.  447.295(d).
    We also proposed to revise Sec.  455.304(d)(3), which specifies 
that ``[o]nly uncompensated care costs of furnishing inpatient and 
outpatient hospital services to Medicaid eligible individuals'' and the 
uninsured should be included in the calculation of the hospital-
specific DSH limit. We proposed this change because for most hospitals, 
for SPRYs beginning on or after October 1, 2021, only costs incurred on 
behalf of Medicaid eligible individuals for whom Medicaid is the 
primary payer will be counted in the calculation of the hospital-
specific DSH limit. Therefore, we proposed to revise Sec.  
455.304(d)(3) to remove the reference to Medicaid eligible individuals 
and update the regulatory text to indicate that uncompensated care 
costs for furnishing inpatient hospital and outpatient hospital 
services to Medicaid individuals is determined in accordance with Sec.  
447.295(d). We also proposed to revise Sec.  455.304(d)(3) to 
streamline this provision by removing a redundant reference to section 
1923(g)(1)(A) of the Act.
    Further, we proposed to revise Sec.  455.304(d)(4), which specifies 
that Medicaid payments, including FFS, supplemental/enhanced, and 
Medicaid managed care payments made to a hospital ``for furnishing 
inpatient hospital and outpatient hospital services to Medicaid 
eligible individuals,'' should be included in the calculation of the 
hospital-specific DSH limit. We proposed this change because for most 
hospitals, for SPRYs beginning on or after October 1, 2021, only costs 
incurred on behalf of Medicaid eligible individuals for whom Medicaid 
is the primary payer will be counted in the calculation of the 
hospital-specific DSH limit. Therefore, we proposed to revise Sec.  
455.304(d)(4) to remove the reference to Medicaid eligible individuals 
and update the regulatory text to indicate that the DSH payments 
associated with inpatient hospital and outpatient hospital services 
provided to Medicaid individuals as determined in accordance with Sec.  
447.295(d) are included in the calculation of hospital-specific DSH 
limit.
    Finally, we proposed to revise Sec.  455.304(d)(6), which requires 
that auditors include a description of the methodology for calculating 
each hospital's hospital-specific DSH limit, including ``how the State 
defines incurred inpatient hospital and outpatient hospital costs for 
furnishing inpatient hospital and outpatient hospital services to 
Medicaid eligible individuals.'' We proposed this change because for 
most hospitals, for SPRYs beginning on or after October 1, 2021, the 
methodology by which these DSH payments were calculated and paid will 
be reflective of Medicaid costs and payments associated with Medicaid 
eligible individuals for whom Medicaid is the primary payer. Therefore, 
we proposed to revise Sec.  455.304(d)(6) to remove the reference to 
Medicaid eligible individuals and update the regulatory text to 
indicate that inpatient hospital and outpatient hospital services 
provided to Medicaid individuals are determined in accordance with 
Sec.  447.295(d).
    We proposed that these and other CAA 2021-related proposals, noted 
in the respective sections, be applicable to fiscal years beginning on 
or after October 1, 2021, to align with the effective date of the CAA 
2021.
    We solicited comments on these proposed changes. We did not receive 
public comments on the proposed changes to Sec.  455.304 and are 
finalizing them as proposed, with minor phrasing changes to Sec.  
455.304(d)(1), (3), (4), and (6) replacing ``pursuant to'' with ``in 
accordance with'' to align with current style guidelines.

H. Process and Calculation of State Allotments for FYs After FY 2008 
(Sec.  457.609)

    We have not published CHIP allotments in the Federal Register since 
the FY 2013 CHIP allotments. Each year following FY 2013, States have 
been notified of their CHIP allotments through email notifications or 
MBES/CBES. We proposed to remove from Sec.  457.609(h), which 
references our discretionary option to publish in the Federal Register 
the national CHIP allotment amounts as determined on an annual basis 
for the FYs specified in statute. Instead, we proposed to post CHIP 
allotments in the MBES/CBES and at Medicaid.gov (or similar successor 
systems or websites) annually. We noted our belief that posting the 
CHIP

[[Page 13940]]

allotment amounts at Medicaid.gov and in the MBES/CBES is an efficient 
way to increase transparency by making the information more easily 
accessible to interested parties and would be less administratively 
burdensome for us.
    We solicited comments related to this proposed change and received 
public comments. The following is a summary of the public comments we 
received and our responses.
    Comment: Several commenters mentioned the CHIP Federal Register 
publication. Most of these comments were combined with the comments on 
the DSH allotment publication proposal, discussed earlier in this final 
rule. The concerns cited in those comments were related to the lack of 
transparency of MBES/CBES publications because those are not available 
to the public, and the accountability of a report being posted on 
Medicaid.gov, because a website can be changed while the Federal 
Register produces static, dated publications. One comment opposed the 
removal of the April 1 target publication date for CHIP allotments.
    Response: We are finalizing this policy as proposed. Although the 
CHIP allotment publication proposal and the DSH allotment publication 
proposal may appear similar, the CHIP proposal is distinct in that the 
prior regulation already afforded CMS discretion whether or not to 
publish the CHIP allotments in the Federal Register, which CMS has not 
done since FFY 2013. Please refer to the response in section II.A.4. of 
this rule, ``Limitations on Aggregate Payments for DSHs Beginning 
October 1, 1992,'' for a response to the DSH allotment publication 
comments. A couple comments received that referenced CHIP but requested 
we continue to publish in the Federal Register are not actually 
relevant to CHIP, since CHIP allotments have not been published in the 
Federal Register in recent years.
    We also note that the new regulation commits us to publishing final 
CHIP allotments on Medicaid.gov, which is not currently done, thereby 
increasing transparency for CHIP allotments. We also note that the 
current CHIP allotment regulation does not include the April 1 date; 
that was only part of the similar DSH allotment publication policy we 
are finalizing in this rule. However, we note the lack of the target 
date would not affect States receiving their necessary information, a 
concern cited by the commenter. As with the DSH allotments, we inform 
States as soon as information is available about their respective 
allotment amounts. Removing the target date for a final, public report 
simply affords CMS room to finalize data in instances where a State is 
late submitting data to CMS.

III. Retroactive Application of the Rule

    The amendments made by section division CC, title II, section 203 
of the CAA 2021, require that the changes to the calculations of 
Medicaid hospital-specific DSH limits take effect on October 1, 2021, 
and apply to payment adjustments made under section 1923 of the Act 
during fiscal years beginning on or after that date. Accordingly, the 
CAA 2021 provisions finalized in this rule at Sec. Sec.  447.295(b) and 
(d), 447.299(c)(6), (7), (10), and (16), and 455.304(d)(1), (3), (4), 
and (6) will apply retroactively as set out in statute.
    Comment: One commenter expressed concern on the retroactive 
application of the rule. The commenter requested that we limit the 
retroactive application to only those provisions that require such an 
application by statute.
    Response: As proposed, we are limiting the retroactive application 
to those provisions related to the CAA 2021 changes.

IV. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3501 et 
seq.), 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. For the purpose of the PRA and this section of 
the preamble, collection of information is defined under 5 CFR 
1320.3(c) of the PRA's implementing regulations.
    To fairly evaluate whether an information collection should be 
approved by OMB, section 3506(c)(2)(A) of the PRA requires that we 
solicit comment on the following issues:
    <bullet> The need for the information collection and its usefulness 
in carrying out the proper functions of our agency.
    <bullet> The accuracy of our estimate of the information collection 
burden.
    <bullet> The quality, utility, and clarity of the information to be 
collected.
    <bullet> Our effort to minimize the information collection burden 
on the affected public, including the use of automated collection 
techniques.
    <bullet> Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    In the February 24, 2023 (88 FR 11865) proposed rule, we solicited 
public comment on each of the aforementioned issues for the sections of 
the rule that contained information collection requirements. We did not 
receive any such comments.

A. Wage Estimates

    To derive average costs, we used data from the U.S. Bureau of Labor 
Statistics' (BLS) May 2022 National Occupational Employment and Wage 
Estimates for all salary estimates (https://www.bls.gov/oes/2022/may/oes_nat.htm). In this regard, Table 1 presents BLS' mean hourly wage, 
our estimated cost of fringe benefits and other indirect costs 
(calculated at 100 percent of salary), and our adjusted hourly wage.
[GRAPHIC] [TIFF OMITTED] TR23FE24.000

    As indicated, we are adjusting our employee hourly wage estimates 
by a factor of 100 percent. This is necessarily a rough adjustment, 
both because fringe benefits and overhead costs vary significantly from 
employer to employer, and because methods of estimating these costs 
vary widely from study to study. Nonetheless, we believe

[[Page 13941]]

that doubling the hourly wage to estimate total cost is a reasonably 
accurate estimation method.

B. Information Collection Requirements (ICR)

    The following ICR section sets out requirements and burden that are 
subject to OMB review and approval under the authority of the PRA.
    The provisions that are not discussed in this section (IV) of the 
preamble are not associated with any information collection 
requirements. In that regard they are not subject to the requirements 
of the PRA. For this rule's full burden implications, please see the 
Regulatory Impact Analysis under section V. of this preamble.
1. ICRs Regarding DSH Reporting Requirements (Sec.  447.299)
    The following changes will be submitted to OMB for approval under 
control number 0938-0746 (CMS-R-266).
    Under Sec.  447.299 as finalized in this rule, States will be 
required to provide an additional data element as part of their annual 
DSH audit reports. This additional element will require a State auditor 
to quantify the financial impact of any audit finding not captured 
within any other data element under Sec.  447.299(c), which may affect 
whether each hospital has received DSH payments for which it is 
eligible within its hospital-specific DSH limit.
    The additional data element requires auditors to indicate the 
financial impact of all findings rather than indicating that the 
financial impact of any finding is unknown.
    The burden consists of the time it would take each State to 
quantify any audit finding identified during the independent certified 
audit required under section 1923(j)(2) of the Act. As we rarely 
receive audits with no identified findings, we assume (for the purposes 
of this estimate) that all applicable States will complete this work. 
The territories have been excluded from this requirement since they do 
not receive a DSH allotment under section 1923(f) of the Act. We have 
also excluded Massachusetts from the total burden estimate, as it 
currently does not complete DSH audits because its entire DSH allotment 
amount is diverted for payments under a section 1115 demonstration 
project.
    We believe the additional burden associated with the new data 
element would be 2 hours given that auditors are already engaged in a 
focused review of available documentation to quantify the aggregate 
amounts that comprise each of the existing data elements required under 
Sec.  447.299(c). We estimate that the 2 hours would consist of 1 hour 
at $80.36/hr for a financial specialist to add the additional data to 
the report and 1 hour at $135.76/hr for management and professional 
staff to review the additional data in the report. In aggregate we 
estimate an annual burden of 100 hours (50 States x 2 hr/response x 1 
response/year) at a cost of $10,806 (50 States x [(1 hr x $135.76/hr) + 
(1 hr x $80.36/hr)]).
    If the auditor is unable to determine the actual financial impact 
amount of an audit finding, the auditor would be required to provide a 
statement of the estimated financial impact for each audit finding 
identified in the independent certified audit. For the purposes of this 
burden estimate, we assume that every State may have some quantifiable 
findings and some unquantifiable findings. As such, we anticipate that 
a State auditor would have to spend an additional 1 hour at $83.40/hr 
quantifying the financial impact of DSH findings that are classified as 
unknown. In aggregate, we estimate an annual burden of 50 hours (50 
States x 1 hr) at a cost of $4,170 (50 hr x $83.40/hr).
    When taking into account the 50 percent Federal administrative 
match, we estimate an annual cost of $7,488 ([$10,806 + $4,170] x 0.5).

C. Summary of Annual Burden Estimates

    Table 2 summarizes the burden for the provisions.
    [GRAPHIC] [TIFF OMITTED] TR23FE24.001
    
    In this rule our proposed burden estimates have been adjusted by 
using BLS' most recent wage estimates (May 2022 vs May 2021) and by 
accounting for 50 respondents, instead of the 51 respondents that was 
accounted for in our proposed rule to remove Massachusetts as it 
currently does not complete DSH audits because its entire DSH allotment 
amount is diverted for payments under a section 1115 demonstration 
project.

V. Regulatory Impact Analysis

A. Statement of Need

    This final rule will codify in Federal regulations the statutory 
requirements of division CC, title II, section 203 of the CAA 2021, 
which relate to Medicaid shortfall and third-party payments. These 
changes are necessary to align with Federal statute and to provide 
States and hospitals an understanding of how qualifying hospitals' DSH 
payments may be impacted by the CAA 2021. These changes are necessary 
in order to reflect the statutory changes to section 1923(g) of the Act 
to update the methodology for calculating the Medicaid shortfall 
portion of the hospital-specific DSH limit to only include costs and 
payments for hospital services furnished to beneficiaries for whom 
Medicaid is the primary payer, and to codify the exception for certain 
hospitals that are in the 97th percentile or above of all hospitals 
with respect to the number of Medicare SSI days or percentage of 
Medicare SSI days to total inpatient days.
    Since we were required to engage in rulemaking to codify the 
statutory

[[Page 13942]]

changes made under the CAA 2021, we also took the opportunity to update 
certain DSH regulations to provide additional clarity and efficiency. 
The changes to the BNF and associated calculations performed under the 
DHRM will provide better clarity for States that divert all or a 
portion of their DSH allotment under an approved section 1115 
demonstration. We are also adding additional specificity to the 
reporting requirements of the annual DSH audit conducted by an 
independent auditor, which will enhance Federal oversight of the 
Medicaid DSH program. Additionally, we will improve the accurate 
identification and collection of overpayments identified through the 
annual DSH independent certified audits by specifying the date of 
discovery and standards for return of FFP or redistribution of DSH 
payments made to providers in excess of the hospital-specific limit. 
Finally, this final rule will alleviate the administrative burden of 
publishing the annual DSH and CHIP allotments in the Federal Register, 
of which we also notify States directly by providing notification 
through other, more practical means.

B. Overall Impact

    We have examined the impacts of this final 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). The 
Executive Order 14094, entitled ``Modernizing Regulatory Review'' 
(hereinafter, the Modernizing E.O.), amends section 3(f)(1) of 
Executive Order 12866 (Regulatory Planning and Review). The amended 
section 3(f) of Executive Order 12866 defines a ``significant 
regulatory action'' as an action that is likely to result in a rule: 
(1) having an annual effect on the economy of $200 million or more in 
any 1 year (adjusted every 3 years by the Administrator of OMB's Office 
of Information and Regulatory Affairs (OIRA) for changes in gross 
domestic product), or adversely affect in a material way the economy, a 
sector of the economy, productivity, competition, jobs, the 
environment, public health or safety, or State, local, territorial, or 
tribal governments or communities; (2) creating a serious inconsistency 
or otherwise interfering with an action taken or planned by another 
agency; (3) materially altering the budgetary impacts of entitlement 
grants, user fees, or loan programs or the rights and obligations of 
recipients thereof; or (4) raise legal or policy issues for which 
centralized review would meaningfully further the President's 
priorities or the principles set forth in this Executive order, as 
specifically authorized in a timely manner by the Administrator of OIRA 
in each case.
    A regulatory impact analysis (RIA) must be prepared for major rules 
with significant regulatory action/s and/or with significant effects as 
per section 3(f)(1) ($200 million or more in any 1 year). Based on our 
estimates using a ``no action'' baseline, OIRA has determined that this 
rulemaking is ``significant'' under section 3(f)(1) and meets the 
criteria set forth in 5 U.S.C. 804(2) under subtitle E of the Small 
Business Regulatory Enforcement Fairness Act of 1996 (also known as the 
Congressional Review Act)''.

C. Detailed Economic Analysis

    Some amendments made by the CAA 2021 required us to propose 
regulatory updates, but there are statutory changes that are effective 
regardless of our actions. Typically, under OMB Circular A-4, our 
analysis for instances such as this would utilize a ``pre-statute'' 
baseline. However, we are unable to assess the impact of the statutory 
changes in a meaningful way due to the potential for variation in the 
Medicare cost reporting and claims data, as well as supplemental 
security income eligibility data, that inform the new standard. 
Additionally, the ranking created by those data whereby an unknown 3 
percent of entities would have the higher of two options, further 
inhibited our ability to estimate the impact in a meaningful way. 
Therefore, for the assessment of incremental economic impact that 
appears below, we compare the effects of this rulemaking against a ``no 
action'' baseline. This baseline incorporates the statutory changes 
made by the CAA 2021 that do not require rulemaking to be in effect, 
such as the change to the definition of Medicaid shortfall. This will 
be the focus of our analysis. Similarly, for the non-CAA 2021-required 
or related DSH provisions in the proposed rule, our analytical baseline 
is a direct comparison between the proposed provisions and not 
finalizing this rule.
    Because the impact of our rule depends on downstream impacts of 
changes created in statute unaffected by this rulemaking, such as the 
change to only include Medicaid costs and payments in the hospital-
specific DSH limit when Medicaid is the primary payer, calculating 
financial cost and transfer impacts specific to this rulemaking 
presents challenges which we will discuss further in those sections.
1. Benefits
    The policies in this final rule will enhance Federal oversight of 
the Medicaid DSH program, improve the accuracy of DSH audit 
overpayments identified through and collected as a result of annual DSH 
audits, and provide clarity on certain existing Medicaid DSH policies. 
This final rule will codify certain existing CMS policies, including 
that the date of discovery of DSH overpayments is determined according 
to the earliest of the date on which the State submits its annual DSH 
independent certified audit to CMS, or any of the dates specified in 
Sec.  433.316(c). Further, this final rule will provide additional 
transparency regarding the DSH allotment reductions calculated under 
the DHRM, specifically regarding the BNF, by updating the applicable 
regulations to specify that amounts diverted under a section 1115 
demonstration approved after July 31, 2009, or approved as of that date 
but for a purpose other than coverage expansion, are subject to 
reduction under the HMF and HUF. Further, these regulatory updates will 
provide transparency regarding how the amounts diverted under a section 
1115 demonstration are to be determined and applied in the DHRM. In 
addition, this final rule includes specific details related to the 
development and application of the data set used to determine the 
qualification for the exception for 97th percentile hospitals. This 
final rule details how hospital-specific DSH limits should be 
calculated under section 1923(g) of the Act and reported in the 
independent certified audit, as specified in Sec.  447.299(c). Further, 
the additional data reporting element in Sec.  447.299(c)(21) will 
strengthen CMS oversight of the Medicaid DSH program and better ensure 
compliance with the hospital-specific DSH limit under section 1923(g) 
of the Act. Finally, this final rule will

[[Page 13943]]

also allow CMS to provide annual DSH and CHIP allotment information in 
a timely and accessible manner while reducing unnecessary 
administrative burden by eliminating the Sec. Sec.  447.297(c) and 
457.609 requirement and option, respectively, to publish these annual 
allotments in a Federal Register notice.
2. Costs
    Under Sec.  447.299, this final rule will require States to 
determine the hospital-specific DSH limit for hospitals meeting the 
exception for 97th percentile hospitals. For these hospitals, the 
hospital-specific DSH limit is calculated using the higher value of 
either the hospital-specific DSH limit amount determined for the 
hospital under section 1923(g)(1)(A) of the Act as amended by section 
203 of the CAA 2021 or the amount determined for the hospital under 
section 1923(g)(1)(A) of the Act as in effect on January 1, 2020. This 
amount will be captured under the reporting element at Sec.  
447.299(c)(10). While we proposed that CMS will produce the source of 
data used to identify hospitals qualifying to meet the exception for 
97th percentile hospitals, this will require a State auditor to 
calculate two separate hospital-specific DSH limits and determine the 
higher value thereof for hospitals meeting this exception. Given this 
exception applies to a limited number of hospitals and that the 
identity of these hospitals and the information required to determine 
their hospital-specific DSH limit amounts under both calculations would 
be based on readily available information, we believe the additional 
burden associated with determining the hospital-specific DSH limit for 
hospitals qualifying under this exception to be minimal.
    To estimate the overall burden of adding this requirement for the 
calculation of the hospital-specific DSH limit for hospitals meeting 
the exception for 97th percentile hospitals, we considered the number 
of annual independent certified audits received by CMS in addition to 
the limited number of hospitals that will qualify under this exception. 
In order for States to assess which hospitals meet the exception, we 
estimate that it would take approximately 2 hours, consisting of: 1 
hour at $80.36/hr for a financial specialist to prepare the 
aforementioned spreadsheet report, and 1 hour at $135.76/hr for 
management and professional staff to review the report. In the 
aggregate, we estimate an ongoing annual burden of 100 hours (50 States 
x 2 hr/response x 1 response/year) at a cost of $10,806 (50 States x 
[(1 hr $135.76/hr) + (1 hr x $80.36/hr)] or $216.12 per State [$10,806/
50 States]). Additionally, we anticipate that a State auditor would 
have to spend an additional hour verifying the hospital-specific DSH 
limits for hospitals meeting the exception for 97th percentile 
hospitals. The estimated annual burden would be 1 hour per State (50 
States x 1 hour) 50 hours x $83.40/hr for auditors to complete the 
audit at a cost of $4,170 per year (50 States x 1 hour x $83.40 per 
hour). The total cost of this provision of the proposed rule would be 
$14,976 ($10,806 + $4,170) and 150 hours, or $299.52 and 3 hours per 
State.
    As described in section IV.C.1. of this final rule, the additional 
DSH audit data reporting element creates a burden of 150 hours at a 
cost of $14,976, with an average of 3 hours ($299.52 hr/50 States) at a 
cost of $299.52 per State Medicaid agency per year ($14,976/50 States).
    We do not estimate there will be a cost impact related to the DHRM 
BNF proposal. This proposal merely provides clarification regarding how 
amounts are determined, and the impact of the policy itself was 
accounted for the in the 2019 final rule that finalized the factor 
amounts. Therefore, the only costs would be associated with review of 
this rule, which are accounted for in part 4 of this section.
    Similarly, there will be no cost impact related to the proposals to 
publish DSH and CHIP allotments through an alternative means. Under 
current CMS practice, States are already informed of their allotment 
amounts prior to the Federal Register publication, so the removal of 
that step will not require a change in entities' practices or systems.
3. Transfers
    Although the policies discussed in this final rule would affect the 
calculation of the hospital-specific DSH limit established at section 
1923(g) of the Act and some providers may see a decrease in their 
historic hospital-specific DSH limits, these effects are a direct 
result of statutory changes rather than the proposals in this rule. In 
addition, some providers may see an increase in their historic 
hospital-specific DSH limits, again as a result of the changes made by 
statute. Further, lower hospital-specific DSH limits for some hospitals 
may result in States choosing to distribute higher DSH payments to 
hospitals that historically had not been paid at higher levels. We note 
that this rule would 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 statutes and regulations. Therefore, we cannot 
predict whether and how States would exercise their flexibility in 
setting DSH payments to account for changes in historic hospital-
specific DSH limits and how this would affect individual providers or 
specific groups of providers. We invited comments from State agencies 
and hospitals providing information or data for the calculation of 
these estimates. We did not receive any data that would aid in 
calculating a more accurate estimate. We made minor adjustments to 
correct the total number of States whose DSH programs would be impacted 
by the provisions of this rule and to reflect the latest BLS wage data, 
but otherwise and generally we are finalizing the estimates as 
proposed.
4. Regulatory Review Cost Estimation
    If regulations impose administrative costs on private entities, 
such as the time needed to read and interpret this final rule, we 
estimate the cost associated with regulatory review. Due to the 
uncertainty involved with accurately quantifying the number of entities 
that will review the rule, we assume that States, Medicaid DSH 
hospitals, and independent auditors will likely be reviewers of this 
final rule. We acknowledge that this assumption may understate or 
overstate the costs of reviewing this rule. It is possible that not all 
Medicaid DSH hospitals will choose to review individually, or that 
State agencies will have multiple people in different roles review. 
Nevertheless, we thought the entities directly or indirectly impacted 
by this rule served as the best basis. As such, we will assume half of 
the approximately 2,700 Medicaid DSH hospitals will review the rule, in 
addition to at least one person from each of the 50 State agencies 
impacted by this rule, and at least one person from the independent DSH 
auditor for each of the 50 States, resulting in 1,450 total entities. 
We welcomed comments on the approach in estimating the number of 
entities which will review this final rule.
    Although this rule has a number of provisions, they more or less 
all relate to DSH, and we assume entities with DSH equities will review 
the entire rule. Using the 2022 wage information from the BLS, https://www.bls.gov/oes/current/oes119111.htm, for medical and health service 
managers (Code 11-9111), we estimate that the cost of reviewing this 
rule is $123.06 per hour, including overhead and other indirect costs. 
We estimate that it would take approximately 2 hours for the staff to 
review this final rule. For each entity

[[Page 13944]]

that reviews the rule, the estimated cost is $246.12 (2 hours x 
$123.06). Therefore, we estimate that the total one-time cost of 
reviewing this regulation is $356,874 ($246.12 x 1,450).

D. Alternatives Considered

    In developing this final rule, the following alternatives were 
considered:
1. Not Finalizing the Rule
    Despite the effort involved in developing a proposed rule, we still 
consider whether the effort of finalizing the proposed rule, in 
general, is worthwhile and necessary additional effort to meet policy 
goals. As with the proposed rule, we concluded that, due to the changes 
to regulatory language necessitated by the legislation, rulemaking was 
necessary. Accordingly, once the decision to issue a final rule was 
reached, the additional DSH-related provisions were discrete decisions 
and not part of the calculus of whether to issue a final rule.
2. The Most Recent Cost Reporting Period Reports
    As discussed in section II.A.3. of this final rule, we performed 
additional work to consider where data anomalies that exist in the 
status of available cost reports should impact our proposal to use the 
total inpatient days from the cost report with the most updated cost 
report status, for the most recent cost reporting period, available on 
the day that the data are pulled, in determining the hospitals that 
meet the 97th percentile threshold. However, through our additional 
review we determined our proposal was most in line with the statutory 
requirement to use the most recent cost reporting period and that 
anomalies in the status of the most recent reports did not create 
issues that would affect our decision.
3. Lookback Period for Cost Reporting
    CMS considered various alternatives for making the determination 
regarding how far back the time period of a hospital's cost report 
could relate in order to be included in the data set for the 
calculation of hospitals that meet the 97th percentile threshold 
exception. We proposed not including any cost report ending earlier 
than September 30, 3 years prior to the March 31 snapshot date for 
compiling the data set. For the proposed rule, we considered a shorter 
cutoff, such as excluding any cost report ending earlier than September 
30, 2 years prior to the March 31 snapshot date. However, we were 
concerned that establishing too short of a cutoff could exclude a 
material number of hospitals due to either delays in hospitals filing 
cost reports or delays in the transmitting and processing of cost 
report files into HCRIS. At that time, we also considered a longer 
cutoff than 3 years, but we were concerned this could create too much 
variability in the cost reporting periods and would also capture in the 
data set hospitals that are currently inactive or terminated. While the 
proposed rule was out for comment, we continued assessing whether 
expanding to 4 years would be a net positive for DSH hospitals. 
However, our additional testing did not demonstrate a benefit in 
expanding to 4 years and therefore we did not amend the proposal in 
this final rule. We believe the 3-year cutoff is equitable in ensuring 
there is general consistency in the cost reporting periods used, 
conforms with the use of ``most recent cost reporting period,'' and is 
practical for implementation purposes.

E. Accounting Statement and Table

    As required by OMB Circular A-4 (available at https://www.whitehouse.gov/wp-content/uploads/legacy_drupal_files/omb/circulars/A4/a-4.pdf), we have prepared an accounting statement in 
Table 3 showing the classification of the costs associated with the 
provisions of this final rule.
[GRAPHIC] [TIFF OMITTED] TR23FE24.002

F. Regulatory Flexibility Act (RFA)

    The RFA requires agencies to analyze options for regulatory relief 
of small entities, if a rule has a significant impact on a substantial 
number of small entities. The great majority of hospitals and most 
other health care providers and suppliers are small entities, either by 
being nonprofit organizations or by meeting the Small Business 
Administration definition of a small business (having revenues of less 
than $9.0 million to $47 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. We do not 
believe that this threshold will be reached by the provisions in this 
final rule.
    This rule establishes requirements that are solely the 
responsibility of State Medicaid agencies, which are not small 
entities. Therefore, the Secretary certifies this final rule would not, 
if issued, have a significant economic impact on a substantial number 
of small entities.
    In addition, section 1102(b) of the Act requires us to prepare a 
regulatory impact analysis if a rule may have a significant impact on 
the operations of a substantial number of small rural hospitals. This 
analysis must conform to the provisions of section 604 of the RFA. For 
purposes of section 1102(b) of the Act, we define a small rural 
hospital as a hospital that is located outside of a metropolitan 
statistical area and has fewer than 100 beds. This rule will not have a 
significant impact on the operations of a substantial number of small 
rural hospitals.

G. Unfunded Mandates Reform Act (UMRA)

    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA)

[[Page 13945]]

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 
2024, that threshold is approximately $183 million. This rule does not 
contain mandates that will impose spending costs on State, local, or 
tribal governments in the aggregate, or by the private sector, in 
excess of the threshold.

H. Federalism

    Executive Order 13132 establishes certain requirements that an 
agency must meet when it issues a proposed rule that imposes 
substantial direct requirement costs on State and local governments, 
preempts State law, or otherwise has federalism implications. This rule 
does not impose substantial direct costs on State or local governments, 
preempt State law, or otherwise have federalism implications.

I. Conclusion

    The policies in this final rule will enable CMS to implement 
statutory changes, strengthen financial oversight, clarify existing 
financial management policies, and reduce unnecessary administrative 
burden.
    The analysis in this section V., together with the rest of this 
preamble, provides a regulatory impact analysis. In accordance with the 
provisions of Executive Order 12866, this final rule was reviewed by 
the Office of Management and Budget.
    Chiquita Brooks-LaSure, Administrator of the Centers for Medicare & 
Medicaid Services, approved this document on February 15, 2024.

List of Subjects

42 CFR Part 433

    Administrative practice and procedure, Child support, Claims, Grant 
programs--health, Medicaid, Reporting and recordkeeping requirements.

42 CFR Part 447

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

42 CFR Part 455

    Fraud, Grant programs--health, Health facilities, Health 
professions, Investigations, Medicaid, Reporting and recordkeeping 
requirements.

42 CFR Part 457

    Administrative practice and procedure, Grant programs--health, 
Health insurance, Reporting and recordkeeping requirements.

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

PART 433--STATE FISCAL ADMINISTRATION

0
1. The authority citation for part 433 continues to read as follows:

    Authority:  42 U.S.C. 1302.


0
2. Amend Sec.  433.316 by--
0
a. Redesignating paragraphs (f) through (h) as paragraphs (g) through 
(i), respectively; and
0
b. Adding a new paragraph (f).
    The addition reads as follows:


Sec.  433.316  When discovery of overpayment occurs and its 
significance.

* * * * *
    (f) Overpayments identified through the disproportionate share 
hospital (DSH) independent certified audit. In the case of an 
overpayment identified through the independent certified audit required 
under part 455, subpart D, of this chapter, CMS will consider the 
overpayment as discovered on the earliest of the following:
    (1) The date that the State submits the independent certified audit 
report required under Sec.  455.304(b) of this chapter to CMS.
    (2) Any of the dates specified in paragraph (c)(1), (2), or (3) of 
this section.
* * * * *

PART 447--PAYMENTS FOR SERVICES

0
3. The authority citation for part 447 continues to read as follows:

    Authority:  42 U.S.C. 1302 and 1396r-8.


0
4. Amend Sec.  447.294 by revising paragraphs (e)(12) introductory text 
and (e)(12)(i) and (ii) to read as follows:


Sec.  447.294  Medicaid disproportionate share hospital (DSH) allotment 
reductions.

* * * * *
    (e) * * *
    (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 in accordance with an approval on or 
before July 31, 2009. CMS will calculate the BNF for qualifying States 
by the following:
    (i) For States in which the 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, determining the amount 
of the State's DSH allotment included in the budget neutrality 
calculation for coverage expansion. This amount is not subject to 
reductions under the HMF and HUF calculations. DSH allotment amounts 
included in the budget neutrality calculation for purposes other than 
coverage expansion for a demonstration project under section 1115 that 
was approved as of July 31, 2009, are subject to reduction as specified 
in paragraphs (e)(12)(ii) through (iv) of this section. For States 
whose DSH allotment was included in the budget neutrality calculation 
for a demonstration project that was approved under section 1115 after 
July 31, 2009, whether for coverage expansion or otherwise, the entire 
DSH allotment amount that was included in the budget neutrality 
calculation is subject to reduction as specified in paragraphs 
(e)(12)(ii) through (iv) of this section.
    (ii) Determining the amount of the State's DSH allotment included 
in the budget neutrality calculation subject to reduction. The amount 
to be assigned reductions under paragraphs (e)(12)(iii) and (iv) of 
this section is the total of each State's DSH allotment diverted under 
an approved 1115 demonstration during the period that aligns with the 
associated State plan rate year DSH audit utilized in the DSH allotment 
reductions.
* * * * *

0
5. Amend Sec.  447.295 by adding a definition for ``97th percentile 
hospital'' in alphanumerical order in paragraph (b) and revising 
paragraph (d) to read as follows:


Sec.  447.295  Hospital-specific disproportionate share hospital 
payment limit: Determination of individuals without health insurance or 
other third-party coverage.

* * * * *
    (b) * * *
    97th percentile hospital means a hospital that is in at least the 
97th percentile of all hospitals nationwide with respect to the 
hospital's number of inpatient days or the hospital's percentage of 
total inpatient days, for the hospital's most recent cost reporting 
period, made up of patients who were entitled to benefits under part A 
of title XVIII and supplemental security income benefits under title 
XVI (excluding any State supplementary benefits paid).
    (i) CMS will identify the 97th percentile hospitals, for each 
Medicaid

[[Page 13946]]

State plan rate year beginning on or after October 1, 2021, using 
Medicare cost reporting and claims data sources, as well as 
supplemental security income eligibility data provided by the Social 
Security Administration.
    (ii) CMS will publish lists identifying each 97th percentile 
hospital annually in advance of October 1 of each year. CMS will revise 
a published list only to correct a mathematical or other similar 
technical error that is identified to CMS during the one-year period 
beginning on the date the list is published.
* * * * *
    (d) Hospital-specific DSH limit calculation. (1) For each State's 
Medicaid State plan rate years beginning prior to October 1, 2021 and 
subject to paragraph (d)(3) of this section, only costs incurred in 
providing inpatient hospital and outpatient hospital services to 
Medicaid individuals, and revenues received with respect to those 
services, and costs incurred in providing inpatient hospital and 
outpatient hospital services, and revenues received with respect to 
those services, for which a determination has been made in accordance 
with paragraph (c) of this section that the services were furnished to 
individuals who have no source of third-party coverage for the specific 
inpatient hospital or outpatient hospital service are included when 
calculating the costs and revenues for Medicaid individuals and 
individuals who have no health insurance or other source of third-party 
coverage for purposes of section 1923(g)(1) of the Act.
    (2) For each State's first Medicaid State plan rate year beginning 
on or after October 1, 2021, and thereafter, subject to paragraph 
(d)(3) of this section, only costs incurred in providing inpatient 
hospital and outpatient hospital services to Medicaid individuals when 
Medicaid is the primary payer for such services, and revenues received 
with respect to those services, and costs incurred in providing 
inpatient hospital and outpatient hospital services, and revenues 
received with respect to those services, for which a determination has 
been made in accordance with paragraph (c) of this section that the 
services were furnished to individuals who have no source of third-
party coverage for the specific inpatient hospital or outpatient 
hospital service are included when calculating the costs and revenues 
for Medicaid individuals and individuals who have no health insurance 
or other source of third-party coverage for purposes of section 
1923(g)(1) of the Act.
    (3) Effective for each State's first Medicaid State plan rate year 
beginning on or after October 1, 2021, and thereafter, the hospital-
specific DSH limit for a 97th percentile hospital defined in paragraph 
(b) of this section is the higher of the values from the calculations 
described in paragraphs (d)(1) and (2) of this section.


Sec.  447.297  [Amended]

0
6. Amend Sec.  447.297 by:
0
a. In paragraph (b), removing the phrase ``published by April 1 of each 
Federal fiscal year,'' and adding in its place the phrase ``posted as 
soon as practicable,'';
0
b. In paragraph (c)--
0
i. Removing the phrase ``publish in the Federal Register'' and adding 
in its place the phrase ``post in the Medicaid Budget and Expenditure 
System/State Children's Health Insurance Program Budget and Expenditure 
System and at Medicaid.gov (or similar successor system or website)''; 
and
0
ii. Removing the phrase ``publish final State DSH allotments by April 1 
of each Federal fiscal year,'' and adding in its place the phrase 
``post final State DSH allotments as soon as practicable for each 
Federal fiscal year,''; and
0
c. In paragraph (d)(1)--
0
i. Removing the phrase ``by April 1 of each Federal fiscal year'' and 
adding in its place the phrase ``as soon as practicable for each 
Federal fiscal year''; and
0
ii. Removing the phrase ``prior to the April 1 publication date'' and 
adding in its place the phrase ``prior to the posting date''; and
0
d. Removing paragraph (e).

0
7. Amend Sec.  447.299 by--
0
a. Revising paragraphs (c)(6) and (7), (c)(10) introductory text, 
(c)(10)(ii), and (c)(16);
0
b. Redesignating paragraph (c)(21) as paragraph (c)(22); and
0
c. Adding new paragraph (c)(21) and paragraphs (f) and (g).
    The revisions and additions read as follows:


Sec.  447.299  Reporting requirements.

* * * * *
    (c) * * *
    (6) IP/OP Medicaid fee-for-service (FFS) basic rate payments. The 
total annual amount paid to the hospital under the State plan, 
including Medicaid FFS rate adjustments, but not including DSH payments 
or supplemental/enhanced Medicaid payments, for inpatient and 
outpatient hospital services furnished to Medicaid individuals, as 
determined in accordance with Sec.  447.295(d).
    (7) IP/OP Medicaid managed care organization payments. The total 
annual amount paid to the hospital by Medicaid managed care 
organizations for inpatient hospital and outpatient hospital services 
furnished to Medicaid individuals, as determined in accordance with 
Sec.  447.295(d).
* * * * *
    (10) Total cost of care for Medicaid IP/OP services. The total 
annual costs incurred by each hospital for furnishing inpatient 
hospital and outpatient hospital services to Medicaid individuals as 
determined in accordance with Sec.  447.295(d). The total annual costs 
are determined on a hospital-specific basis, not a service-specific 
basis. For purposes of this section, costs--
* * * * *
    (ii) Must capture the total burden on the hospital of treating 
Medicaid patients as determined in accordance with Sec.  447.295(d), 
not including payment by Medicaid. Thus, costs must be determined in 
the aggregate and not by estimating the cost of individual patients. 
For example, if a hospital treats two Medicaid patients at a cost of 
$2,000 and receives a $500 payment from a third party for each 
individual, the total cost to the hospital for purposes of this section 
is $1,000, regardless of whether the third-party payment received for 
one patient exceeds the cost of providing the service to that 
individual.
* * * * *
    (16) Total annual uncompensated care costs. The total annual 
uncompensated care cost equals the total cost of care for furnishing 
inpatient hospital and outpatient hospital services to Medicaid 
individuals as determined in accordance with Sec.  447.295(d), and to 
individuals with no source of third-party coverage for the hospital 
services they receive, less the sum of regular Medicaid FFS rate 
payments, Medicaid managed care organization payments, supplemental/
enhanced Medicaid payments, uninsured revenues, and section 1011 
payments for inpatient and outpatient hospital services. This should 
equal the sum of paragraphs (c)(9), (12), and (13) of this section 
subtracted from the sum of paragraphs (c)(10) and (14) of this section.
* * * * *
    (21) Financial impact of audit findings. The total annual amount 
associated with each audit finding. If it is not practicable to 
determine the actual financial impact amount, state the estimated 
financial impact for each audit finding identified in the independent 
certified audit that is not otherwise reflected in data elements 
described in this paragraph (c). For

[[Page 13947]]

purposes of this paragraph (c), audit finding means an issue identified 
in the independent certified audit required under Sec.  455.304 of this 
chapter concerning the methodology for computing the hospital-specific 
DSH limit or the DSH payments made to the hospital, including, but not 
limited to, compliance with the hospital-specific DSH limit as defined 
in paragraph (c)(16) of this section. Audit findings may be related to 
missing or improper data, lack of documentation, non-compliance with 
Federal statutes or regulations, or other deficiencies identified in 
the independent certified audit. Actual financial impact means the 
total amount associated with audit findings calculated using the 
documentation sources identified in Sec.  455.304(c) of this chapter. 
Estimated financial impact means the total amount associated with audit 
findings calculated on the basis of the most reliable available 
information to quantify the amount of an audit finding in circumstances 
where complete and accurate information necessary to determine the 
actual financial impact is not available from the documentation sources 
identified in Sec.  455.304(c) of this chapter.
* * * * *
    (f) DSH payments found in the independent certified audit process 
under part 455, subpart D, of this chapter to exceed hospital-specific 
cost limits are provider overpayments which must be returned to the 
Federal Government in accordance with the requirements in part 433, 
subpart F, or redistributed by the State to other qualifying hospitals, 
if redistribution is provided for under the approved State plan. 
Overpayment amounts returned to the Federal Government must be 
separately reported on the Form CMS-64 as a decreasing adjustment which 
corresponds to the fiscal year DSH allotment and Medicaid State plan 
rate year of the original DSH expenditure claimed by the State.
    (g) As applicable, States must report any overpayment 
redistribution amounts on the Form CMS-64 within 2 years from the date 
of discovery that a hospital-specific limit has been exceeded, as 
determined under Sec.  433.316(f) of this chapter in accordance with a 
redistribution methodology in the approved Medicaid State plan. The 
State must report redistribution of DSH overpayments on the Form CMS-64 
as separately identifiable decreasing adjustments reflecting the return 
of the overpayment as specified in paragraph (f) of this section and 
increasing adjustments representing the redistribution by the State. 
Both adjustments must correspond to the fiscal year DSH allotment and 
Medicaid State plan rate year of the related original DSH expenditure 
claimed by the State.

PART 455--PROGRAM INTEGRITY: MEDICAID

0
8. The authority citation for part 455 continues to read as follows:

    Authority:  42 U.S.C. 1302.


0
9. Amend Sec.  455.301 by revising the definition of ``Independent 
certified audit'' to read as follows:


Sec.  455.301  Definitions.

* * * * *
    Independent certified audit means an audit that is conducted by an 
auditor that operates independently from the Medicaid agency or subject 
hospitals and is eligible to perform the DSH audit. Certification means 
that the independent auditor engaged by the State reviews the criteria 
of the Federal audit regulation and completes the verification, 
calculations and report under the professional rules and generally 
accepted standards of audit practice. This certification includes a 
review of the State's audit protocol to ensure that the Federal 
regulation is satisfied, an opinion for each verification detailed in 
the regulation, a determination of whether or not the State made DSH 
payments that exceeded any hospital's hospital-specific DSH limit in 
the Medicaid State plan rate year under audit, and a quantification of 
the financial impact of each audit finding on a hospital-specific 
basis. The certification also identifies any data issues or other 
caveats or deficiencies that the auditor identified as impacting the 
results of the audit.
* * * * *

0
10. Amend Sec.  455.304 by revising paragraphs (d)(1), (3), (4), and 
(6) to read as follows:


Sec.  455.304  Condition for Federal financial participation (FFP).

* * * * *
    (d) * * *
    (1) Verification 1. Each hospital that qualifies for a DSH payment 
in the State is allowed to retain that payment so that the payment is 
available to offset its uncompensated care costs for furnishing 
inpatient hospital and outpatient hospital services during the Medicaid 
State plan rate year to Medicaid individuals as determined in 
accordance with Sec.  447.295(d) of this chapter, and individuals with 
no source of third-party coverage for the services, in order to reflect 
the total amount of claimed DSH expenditures.
* * * * *
    (3) Verification 3. Only uncompensated care costs of furnishing 
inpatient and outpatient hospital services to Medicaid individuals as 
determined in accordance with Sec.  447.295(d) of this chapter, and 
individuals with no third-party coverage for the inpatient and 
outpatient hospital services they received are eligible for inclusion 
in the calculation of the hospital-specific disproportionate share 
limit payment limit, as described in section 1923(g)(1)(A) of the Act.
    (4) Verification 4. For purposes of this hospital-specific limit 
calculation, any Medicaid payments (including regular Medicaid fee-for-
service rate payments, supplemental/enhanced Medicaid payments, and 
Medicaid managed care organization payments) made to a disproportionate 
share hospital for furnishing inpatient hospital and outpatient 
hospital services to Medicaid individuals as determined in accordance 
with Sec.  447.295(d) of this chapter, which are in excess of the 
Medicaid incurred costs of such services, are applied against the 
uncompensated care costs of furnishing inpatient hospital and 
outpatient hospital services to individuals with no source of third-
party coverage for such services.
* * * * *
    (6) Verification 6. The information specified in paragraph (d)(5) 
of this section includes a description of the methodology for 
calculating each hospital's payment limit under section 1923(g)(1) of 
the Act. Included in the description of the methodology, the audit 
report must specify how the State defines incurred inpatient hospital 
and outpatient hospital costs for furnishing inpatient hospital and 
outpatient hospital services to Medicaid individuals as determined in 
accordance with Sec.  447.295(d) of this chapter, and individuals with 
no source of third-party coverage for the inpatient hospital and 
outpatient hospital services they received.
* * * * *

PART 457--ALLOTMENTS AND GRANTS TO STATES

0
11. The authority for part 457 continues to read as follows:

    Authority:  42 U.S.C. 1302.


0
12. Amend Sec.  457.609 by revising paragraph (h) to read as follows:

[[Page 13948]]

Sec.  457.609  Process and calculation of State allotments for a fiscal 
year after FY 2008.

* * * * *
    (h) CHIP fiscal year allotment process. The national CHIP allotment 
and State CHIP allotments will be posted in the Medicaid Budget and 
Expenditure System/State Children's Health Insurance Program Budget and 
Expenditure System and at Medicaid.gov (or similar successor system or 
website) as soon as practicable after the allotments have been 
determined for each Federal fiscal year.

Xavier Becerra,
Secretary, Department of Health and Human Services.
[FR Doc. 2024-03542 Filed 2-20-24; 4:15 pm]
BILLING CODE 4120-01-P