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[Federal Register Volume 77, Number 11 (Wednesday, January 18, 2012)]
[Proposed Rules]
[Pages 2500-2507]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-734]

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 447

[CMS-2315-P]
RIN 0938-AQ37

Medicaid Program; Disproportionate Share Hospital Payments--
Uninsured Definition

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

ACTION: Proposed rule.

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

DATES: To be assured consideration, comments must be received at one of 
the addresses provided below, no later than 5 p.m. on February 17, 
2012.

ADDRESSES: In commenting, please refer to file code CMS-2315-P. Because 
of staff and resource limitations, we cannot accept comments by 
facsimile (Fax) transmission.
    You may submit comments in one of four ways (please choose only one 
of the ways listed):
    1. Electronically. You may submit electronic comments on this 
regulation to http://www.regulations.gov. Follow the ``Submit a 
comment'' instructions.
    2. By regular mail. You may mail written comments to the following 
address ONLY: Centers for Medicare & Medicaid Services, Department of 
Health and Human Services, Attention: CMS-2315-P, P.O. Box 8016, 
Baltimore, MD 21244-8016.
    Please allow sufficient time for mailed comments to be received 
before the close of the comment period.
    3. By express or overnight mail. You may send written comments to 
the following address ONLY: Centers for Medicare & Medicaid Services, 
Department of Health and Human Services, Attention: CMS-2315-P, Mail 
Stop C4-26-05, 7500 Security Boulevard, Baltimore, MD 21244-1850.
    4. By hand or courier. Alternatively, you may deliver (by hand or 
courier) your written comments ONLY to the following addresses prior to 
the close of the comment period:
    a. For delivery in Washington, DC-- Centers for Medicare & Medicaid 
Services, Department of Health and Human Services, Room 445-G, Hubert 
H. Humphrey Building, 200 Independence Avenue SW., Washington, DC 
20201.

[[Page 2501]]

    (Because access to the interior of the Hubert H. Humphrey Building 
is not readily available to persons without Federal government 
identification, commenters are encouraged to leave their comments in 
the CMS drop slots located in the main lobby of the building. A stamp-
in clock is available for persons wishing to retain a proof of filing 
by stamping in and retaining an extra copy of the comments being 
filed.)
    b. For delivery in Baltimore, MD-- Centers for Medicare & Medicaid 
Services, Department of Health and Human Services, 7500 Security 
Boulevard, Baltimore, MD 21244-1850.
    If you intend to deliver your comments to the Baltimore address, 
call telephone number (410) 786-9994 in advance to schedule your 
arrival with one of our staff members.
    Comments erroneously mailed to the addresses indicated as 
appropriate for hand or courier delivery may be delayed and received 
after the comment period.
    For information on viewing public comments, see the beginning of 
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT: Rory Howe (410) 786-4878.

SUPPLEMENTARY INFORMATION:
    Inspection of Public Comments: All comments received before the 
close of the comment period are available for viewing by the public, 
including any personally identifiable or confidential business 
information that is included in a comment. We post all comments 
received before the close of the comment period on the following Web 
site as soon as possible after they have been received: http://www.regulations.gov. Follow the search instructions on that Web site to 
view public comments.
    Comments received timely will also be available for public 
inspection as they are received, generally beginning approximately 3 
weeks after publication of a document, at the headquarters of the 
Centers for Medicare & Medicaid Services, 7500 Security Boulevard, 
Baltimore, Maryland 21244, Monday through Friday of each week from 8:30 
a.m. to 4 p.m. To schedule an appointment to view public comments, 
phone 1-(800) 743-3951.

I. Background

A. Introduction

    On December 19, 2008, we published a final rule in the Federal 
Register (73 FR 77904) entitled ``Medicaid Disproportionate Share 
Hospital Payments'' (herein referred to as the 2008 DSH final rule) 
that implemented section 1001 of the Medicare Prescription Drug, 
Improvement and Modernization Act of 2003 (MMA), requiring State 
reports and audits to ensure the appropriate use of Medicaid 
Disproportionate Share Hospital (DSH) payments and compliance with the 
DSH limit imposed at section 1923(g) of the Social Security Act (the 
Act). The limit at section 1923(g) of the Act is commonly referred to 
as the hospital-specific DSH limit and specifies that only the 
uncompensated costs of providing inpatient hospital and outpatient 
hospital services to Medicaid eligible individuals and uninsured 
individuals as described in section 1923(g)(1)(A) of the Act are 
included in the calculation of the hospital-specific DSH limit. The 
statute describes uninsured individuals as those ``who have no health 
insurance (or other source of third party coverage) for the services 
furnished during the year.''
    Citing an effort to adhere to an accurate representation of the 
broad statutory references to insurance or other coverage and to 
delineate more definitively the meaning of the term uninsured, we 
defined the phrase ``who have health insurance (or other third party 
coverage)'' to refer broadly to individuals who have creditable 
coverage consistent with the definitions under 45 CFR Part 144 and 45 
CFR Part 146, as well as individuals who have coverage based upon a 
legally liable third party payer. This regulatory definition was not 
the same as the preliminary guidance previously issued to States and 
providers in 1994.
    In an August 17, 1994 letter to State Medicaid Directors (SMD), CMS 
included a summary of the DSH provisions in the Omnibus Budget 
Reconciliation Act of 1993 (OBRA 93) (Pub. L. 103-66), as a preliminary 
interpretation. In that letter, we endorsed a service-specific approach 
in which individuals were considered ``uninsured'' for purposes of DSH 
to the extent that they did not have third party coverage for the 
specific hospital service that they received. A January 10, 1995, 
letter to the Chair of the State Medicaid Director's Association 
affirmed the service-specific interpretation of the definition of 
uninsured by clarifying that: ``It would be permissible for States to 
include in their determination of uninsured patients those individuals 
who do not possess health insurance which would apply to the service 
which the individual sought''.
    The regulatory definition published in the 2008 DSH final rule was 
more restrictive than the service-specific definition and is applied on 
an individual-specific basis rather than a service-specific basis. This 
interpretation of the definition of ``uninsured'' superseded all prior 
interpretive issuances.
    After publication of the 2008 DSH final rule, numerous States, 
members of Congress, and related stakeholders expressed their concern 
that the 2008 DSH final rule definition of the uninsured deviated from 
prior guidance and would have a significant financial impact on States 
and hospitals. This proposed rule is designed to mitigate some of the 
unintended consequences of the uninsured definition put forth in the 
2008 DSH final rule and to provide additional clarity on which costs 
can be considered uninsured costs for purposes of determining the 
hospital-specific limit.

B. Legislative History

    Title XIX of the Act authorizes Federal grants to States for 
Medicaid programs that provide medical assistance to low-income 
families, the elderly, and persons with disabilities. Section 
1902(a)(13)(A)(iv) of the Act requires that States make Medicaid 
payment adjustments for hospitals that serve a disproportionate share 
of low-income patients with special needs. Section 1923 of the Act 
contains more specific requirements related to the DSH payments.
    The OBRA 93 was signed into law on August 10, 1993. Section 13621 
of OBRA 93 added section 1923(g) of the Act, limiting Medicaid DSH 
payments to a qualifying hospital to the amount of eligible 
uncompensated costs incurred. This hospital-specific limit requires 
that Medicaid DSH payments to a qualifying hospital not exceed the 
costs incurred by that hospital for providing inpatient and outpatient 
hospital services furnished during the year to Medicaid patients and 
individuals who have no health insurance or other source of third party 
coverage for the services provided during the year, less applicable 
revenues for those services.

C. Hospital-Specific DSH Limit

    Section 1923(g)(1) of the Act defines a hospital-specific limit on 
Federal financial participation (FFP) for DSH payments. Each State must 
develop a methodology to compute this hospital-specific limit for each 
DSH hospital in the State. As defined in section 1923(g)(1) of the Act, 
the State's methodology must calculate for each hospital, for each 
fiscal year, the difference between the costs incurred by that hospital 
for furnishing inpatient hospital and outpatient hospital services 
during the applicable State fiscal year to Medicaid individuals and 
individuals who have no health insurance or other source of third party 
coverage for the

[[Page 2502]]

inpatient hospital and outpatient hospital services they receive, less 
all applicable revenues for these hospital services. This difference, 
if any, between incurred inpatient hospital and outpatient hospital 
costs and associated revenues is considered a hospital's uncompensated 
care cost (UCC) limit, or hospital-specific DSH limit. FFP is not 
available for DSH payments that exceed a hospital's UCC for furnishing 
inpatient hospital and outpatient hospital services to Medicaid 
eligible individuals and individuals who have no health insurance or 
other source of third party coverage for the services they receive in 
any given State plan rate year.
    To be considered as an inpatient or outpatient hospital service for 
purposes of Medicaid DSH, a service must meet the Federal and State 
definitions of an inpatient hospital service or outpatient hospital 
service and must be included in the State's definition of an inpatient 
hospital service or outpatient hospital service under the approved 
State plan. While States may have some flexibility to define the scope 
of inpatient or outpatient hospital services, States must use 
consistent definitions. Hospitals may engage in any number of 
activities, or may furnish practitioner, nursing facility, or other 
services to patients that are not within the scope of inpatient 
hospital services or outpatient hospital services. These services are 
not considered inpatient or outpatient hospital services.
    Section 1923(a) and section 1923(c) of the Act provide States some 
latitude in determining the level of DSH payment under the Medicaid 
State plan. Section 1923(g) of the Act simply creates hospital-specific 
limitations on FFP for DSH payments to individual hospitals. These 
limits are comprised of specific net costs. The first component of the 
net costs is described in statute as attributable to hospital costs 
incurred by individuals eligible for medical assistance under the State 
plan and net of payments made under title XIX of the Act. We currently 
implement this provision by allowing all medically necessary inpatient 
and outpatient costs associated with Medicaid eligible individuals 
authorized under section 1905 of the Act and covered under the approved 
Medicaid State plan regardless of whether those beneficiaries or 
hospitals were entitled to payment as part of the Medicaid benefit 
package under the State plan. To arrive at uncompensated Medicaid 
costs, all Medicaid payments received from the State for Medicaid 
hospital services, including supplemental payments, must be netted 
against those costs.
    The second type of costs allowable as part of the Medicaid DSH 
limit are described in statute as attributable to hospital costs 
incurred by individuals who have no health insurance or other source of 
third party coverage for services provided during the year. The 
statutory language uses the term ``services provided'' when discussing 
allowable uninsured costs. The use of this term provides a clear link 
to third party coverage of specific services provided by the hospital.

D. CMS Guidance Regarding the Definition of Uninsured

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

E. MMA and the 2008 DSH Final Rule

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

F. Concerns Raised

    Numerous States, members of the Congress, hospitals and related 
stakeholders expressed concerns following the publication of the 2008 
DSH final rule that the rule's definition of uninsured individuals 
would have a significant negative financial impact on States and 
hospitals. As States and hospitals began to complete the initial audits 
as defined in the final rule, they identified specific issues relating 
to the regulatory definition of uninsured adopted under the rule. 
Specific

[[Page 2503]]

consequences regarding the practical application of the creditable 
coverage definition were identified and some stakeholders questioned 
the impact of the new definition of uninsured as it relates to 
individuals who had IHS and tribal health coverage for services and 
individuals who had exhausted their insurance benefits or who had 
reached their lifetime insurance limits. Uncompensated costs to 
hospitals for these services were no longer eligible DSH costs under 
the creditable coverage definition.
    The issue involving IHS and tribal programs arises because IHS 
coverage is within the scope of ``creditable coverage'' under the 
regulations at 45 CFR Part 144 and 45 CFR Part 146, and thus 
individuals with such coverage could not be considered ``uninsured'' 
even if the IHS or tribal health program did not provide the service or 
authorize coverage through the contract health service program (through 
a purchase order or equivalent document). In that circumstance, the 
hospital is not able to count, as costs eligible for Medicaid DSH 
payments, costs of uncompensated care associated with the provision of 
inpatient or outpatient hospital services to American Indians/Alaska 
Natives with access to IHS and tribal coverage (but no other source of 
third party payment).
    The IHS and Tribal health programs provide two primary types of 
services, direct health care services and contract health services. 
Direct health care services are oftentimes limited to primary care 
services and are limited to eligible beneficiaries identified at 42 CFR 
136.12. Many of the beneficiaries that receive direct care services 
have no other source of third party coverage. Contract health services 
(CHS) are services provided outside of an IHS or Tribal facility to an 
eligible beneficiary (Sec.  136.23). CHS appropriations are 
discretionary; therefore, coverage is determined based on a priority 
system. Coverage for CHS services is specifically authorized on a case-
by-case basis through a CHS purchase order or equivalent document. IHS 
and tribal health programs can also issue referrals that do not 
authorize CHS coverage of a service.
    For Medicaid DSH purposes, we propose that American Indians/Alaska 
Natives are considered to have third party coverage for inpatient and 
outpatient hospital services received directly from IHS or tribal 
health programs (direct health care services) and for such services 
specifically authorized under CHS. The service-specific determination 
of third party coverage status of American Indian/Alaska Natives for 
services not authorized to be within the scope of coverage by CHS 
should be performed in the same manner as for services that are outside 
the scope of coverage from any other insurer or third party payer.
    The second issue concerns the interaction between the creditable 
coverage definition in current regulation and hospital services 
provided to individuals with creditable coverage but without coverage 
for specific hospital services received. By utilizing the existing 
regulatory creditable coverage definition an individual is considered 
either to have coverage, as broadly described in regulation, or not to 
have coverage during the period a hospital service was provided. If a 
service was provided to an individual with creditable coverage at the 
time of the provision of such service, that service cannot be 
considered provided to an uninsured individual. In practical 
application, this definition appeared to exclude from uncompensated 
care for DSH purposes the costs of many services that were provided to 
individuals with creditable coverage but were outside the scope of such 
coverage. Costs affected include those associated with individuals who 
have exhausted their insurance benefits or who have reached lifetime 
insurance limits for certain services, as well as services not included 
in a benefit package as covered, but which are identified in section 
1905 of the Act and covered under the approved Medicaid State plan.
    For purposes of defining uncompensated care costs for the Medicaid 
hospital-specific DSH limit, we believe that uncompensated costs of 
providing inpatient and outpatient hospital services to individuals who 
do not have coverage for those specific services should be considered 
costs for which there is no liable third party payer and thus eligible 
costs for Medicaid DSH payments. An example of such a situation would 
involve an individual with basic hospitalization coverage that has an 
exclusion for transplant services. Should the individual need the 
excluded service, the cost of that service could be included in the 
Medicaid hospital-specific DSH limit. An additional example involves an 
individual with excluded benefits or services, or exhaustion of 
coverage or benefits for a limited covered service, due to a pre-
existing condition (for example, cancer or diabetes). Though both 
examples involve medically necessary services for which an individual 
is uninsured, associated costs would have been prohibited from 
inclusion in calculating the hospital-specific DSH limit based on the 
2008 DSH final rule and related guidance.
    If an individual is Medicaid eligible, all costs incurred in 
providing inpatient and outpatient hospital services identified in 
section 1905 of the Act and covered under the approved Medicaid State 
plan should be included in calculating Medicaid hospital costs, not 
uninsured hospital costs, for purposes of calculating the hospital-
specific DSH limit, regardless of whether the individual's benefits 
have been exhausted or whether coverage limits have been reached.

II. Provisions of the Proposed Rule

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

    We are proposing to add a new Sec.  447.295 Hospital-Specific 
Disproportionate Share Hospital Payment Limit--Definition of 
Individuals Who Have no Health Insurance (or Other Source of Third 
Party Coverage) for the Services Furnished During the Year and the 
Determination of an Individual's Third Party Coverage Status. 
Specifically, Sec.  447.295(a) would describe the scope of the new 
regulatory section and its focus on defining the term ``individuals who 
have no health insurance (or other source of third party coverage) for 
the services furnished during the year.''
    We are proposing at Sec.  447.295(b) to define through regulation 
``individuals who have no health insurance (or other source of third 
party coverage) for the services furnished during the year'' for 
purposes of calculating the hospital-specific DSH limit as described in 
section 1923(g) of the Act effective for 2011. Proposed Sec.  
447.295(b) would also provide specific definitions for the terms 
``service-specific coverage determination'' and ``lifetime or annual 
health insurance coverage limit.''
    In this proposed rule, we are proposing to define ``individuals who 
have no health insurance (or other source of third party coverage) for 
the services furnished during the year'' for purposes of calculating 
the hospital-specific DSH limit on a service-specific basis rather than 
on an individual basis, and thus would not make reference to the 
regulatory definition of creditable coverage. The proposed definition 
would instead require a determination of whether, for each specific 
service furnished during the year, the individual has third party 
coverage. We are also proposing a definition of ``no source of third 
party coverage for a specific inpatient or outpatient service'' to mean 
that the service is not within a

[[Page 2504]]

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

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

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

C. Bad Debt and Unpaid Coinsurance and Deductibles

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

D. Prisoners

    This proposed rule would clarify that the proposed definition of 
``individuals who have no health insurance (or other source of third 
party coverage) for the services furnished during the year'' maintains 
the current position that individuals who are inmates in a public 
institution or are otherwise involuntarily held in secure custody as a 
result of criminal charges are considered to have a source of third 
party coverage. These individuals are in secure custody pursuant to the 
authority held by Federal, State or local law enforcement agencies, and 
those agencies are legally liable for the cost of their care (even if 
that agency has contracted with private parties for that secure 
custody). Moreover, the exclusion of such costs is consistent with the 
exclusion of such costs from the definition of ``Medical assistance'' 
in the statutory text at paragraph (A) following section 1905(a)(28) of 
the Act. Accordingly, the costs associated with providing hospital 
services to these individuals cannot be included in calculating the 
hospital-specific DSH limit.
    The proposed definition of ``individuals who have no health 
insurance (or other source of third party coverage) for the services 
furnished during the year'' as it relates to prisoner inmate care would 
be consistent with the statute, regulations, and longstanding CMS 
policy regarding the treatment of inmates of public institutions for 
purposes of Medicaid eligibility and Medicaid DSH. A policy 
clarification regarding prisoner inmate care and DSH was provided in a 
SMD letter dated August 16, 2002. This proposed rule would serve to 
define more definitively who is considered a prisoner inmate for 
purposes of DSH.
    The policy that inmates have third party coverage, based on the 
assumption that their care is the responsibility of the

[[Page 2505]]

responsible law enforcement or corrections agency, is consistent with 
the statutory framework that focuses on the distinction between an 
``inmate'' and a ``patient.'' While the statutory provision at section 
1905(a)(28)(A) of the Act generally excludes FFP for all care furnished 
to inmates of public institutions, there is a statutory exception for 
patients in a medical institution. We interpret this exception to be 
limited to when the individual is no longer in secure custody by law 
enforcement or a corrections agency and thus can be admitted as a 
``patient'' rather than as an ``inmate'' to a hospital, nursing 
facility, juvenile psychiatric facility, or intermediate care facility. 
This is consistent with the fact that hospitals, or other institutional 
facilities cannot, within the scope of their conditions of 
participation, subject patients to restraints or seclusion. Thus 
individuals held in secure custody would be outside the function of the 
institution as a Medicaid-participating hospital and could not be 
treated as ``patients.'' Accordingly, FFP is available for Medicaid 
covered hospital services (or other covered institutional care) for 
Medicaid-eligible individuals referred from or by law enforcement or 
corrections authorities, or their contractors only to the extent that 
they have been released from secure custody, and all other requirements 
under the State plan are met. Applying this interpretation of the 
statutory exclusion and exception to the hospital-specific limits for 
DSH, costs and revenues associated with hospital services for 
individuals (whether Medicaid eligible or uninsured) referred from or 
by law enforcement or corrections authorities, or their contractors 
would be included in calculating the limit only to the extent that the 
individual has been released from secure custody by law enforcement or 
a corrections agency.

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

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

IV. Collection of Information Requirements

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

IV. Response to Comments

    Because of the large number of public comments we normally receive 
on Federal Register documents, we are not able to acknowledge or 
respond to them individually. We will consider all comments we receive 
by the date and time specified in the ``DATES'' section of this 
preamble, and, when we proceed with a subsequent document, we will 
respond to the comments in the preamble to that document.

V. Regulatory Impact Statement

A. Overall Impact

    We have examined the impact of this rule as required by Executive 
Order 12866 on Regulatory Planning and Review (September 30, 1993), 
Executive Order 13563 on Improving Regulation and Regulatory Review 
(January 18, 2011), the Regulatory Flexibility Act (RFA) (September 19, 
1980, Pub. L. 96-354), section 1102(b) of the Social Security Act, 
section 202 of the Unfunded Mandates Reform Act of 1995 (March 22, 
1995; Pub. L. 104-4), Executive Order 13132 on Federalism (August 4, 
1999) and the Congressional Review Act (5 U.S.C. 804(2).
    Executive Orders 12866 and 13563 direct agencies to assess all 
costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). A 
regulatory impact analysis (RIA) must be prepared for major rules with 
economically significant effects ($100 million or more in any 1 year). 
This rule does not reach the economic threshold and thus is not 
considered a major rule.
    The RFA requires agencies to analyze options for regulatory relief 
of small entities. For purposes of the RFA, small entities include 
small businesses, nonprofit organizations, and small governmental 
jurisdictions. Most hospitals and most other providers and suppliers 
are small entities, either by nonprofit status or by having revenues of 
$7.0 million to $34.5 million in any 1 year. Individuals and States are 
not included in the definition of a small entity. We are not preparing 
an analysis for the RFA because we have determined, and the Secretary 
certifies, that this proposed rule would not have a significant 
economic impact on a substantial number of small entities.
    In addition, section 1102(b) of the Social Security Act requires us 
to prepare a regulatory impact analysis if a rule may have a 
significant impact on the operations of a substantial number of small 
rural hospitals. This analysis must conform to the provisions of 
section 603 of the RFA. For purposes of section 1102(b) of the Act, we 
define a small rural hospital as a hospital that is located outside of 
a Metropolitan Statistical Area for Medicare payment regulations and 
has fewer than 100 beds. We are not preparing an analysis for section 
1102(b) of the Act because we have determined, and the Secretary 
certifies, that this proposed rule would not have a significant impact 
on the operations of a substantial number of small rural hospitals.
    Section 202 of the Unfunded Mandates Reform Act of 1995 also 
requires that agencies assess anticipated costs and benefits before 
issuing any rule whose mandates require spending in any 1 year of $100 
million in 1995 dollars, updated annually for inflation. In 2011, that 
threshold is approximately $136 million. This rule would have no 
consequential effect on State, local, or tribal governments or on the 
private sector.
    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a proposed rule (and subsequent 
final rule) that imposes substantial direct requirement costs on State 
and local governments, preempts State law, or otherwise has Federalism 
implications. Since this regulation does not impose any costs on State 
or local governments, the requirements of Executive Order 13132 are not 
applicable.
    To the extent that this proposed rule will have tribal 
implications, and in accordance with E.O. 13175 and the HHS Tribal 
Consultation Policy (December 2010), CMS will consult with Tribal 
officials prior to the formal promulgation of this regulation.

B. Anticipated Effects

1. Effects on State Medicaid Programs
    CMS does not anticipate that the final rule will have significant 
financial effects on State Medicaid Programs.

[[Page 2506]]

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

C. Alternatives Considered

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

D. Conclusion

    For the reasons discussed above, we are not preparing analysis for 
either the RFA or section 1102(b) of the Act because we have determined 
that this regulation would not have a direct significant economic 
impact on a substantial number of small entities or a direct 
significant impact on the operations of a substantial number of small 
rural hospitals.
    In accordance with the provisions of Executive Order 12866, this 
regulation was reviewed by the Office of Management and Budget.

List of Subjects in 42 CFR Part 447

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

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

Title 42--Public Health

PART 447--PAYMENTS FOR SERVICES

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

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

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

    2. Add Sec.  447.295 to read as follows:

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

    (a) Basis and purpose. This section sets forth the methodology for 
determining the costs for individuals who have no health insurance or 
other source of third party coverage for services furnished during the 
year for purposes of calculating the hospital-

[[Page 2507]]

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

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

    Dated: March 30, 2011.
Donald M. Berwick,
Administrator, Centers for Medicare & Medicaid Services.
    Approved: October 31, 2011.
Kathleen Sebelius,
Secretary, Department of Health and Human Services.
[FR Doc. 2012-734 Filed 1-13-12; 11:15 am]
BILLING CODE 4120-01-P
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