CMS Proposes Major Changes to DSH Payments

Greg Knight, Healthcare Consulting Senior
May 2016

On April 18 the Centers for Medicare and Medicaid Services (CMS) released the fiscal year 2017 Inpatient Prospective Payment System (IPPS) proposed rule. CMS releases the proposed rule annually in April, which gives time for public comment to be heard before the final rule is released in August. The rule will apply to discharges on or after October 1, 2016. In the 2017 proposed rule CMS has reduced the uncompensated care portion of disproportionate share hospital (DSH) payments from $6.4 billion in FY 2016 to $6.0 billion in 2017. This reduction of $400 million would be the lowest reduction since CMS has started to reduce the DSH payments due to the ACA mandate to reduce DSH payments by $50 billion by 2019. The fiscal year 2016 reduction was $1.2 billion and the fiscal year 2015 reduction was $1.4 billion.

CMS has also proposed changes to the 2017 factor 3 percentage, which is what determines each hospital’s allocation of the uncompensated care pool proposed to be $6 billion in fiscal year 2017. CMS has proposed to continue using Medicaid/SSI days for fiscal year 2017 as the factor 3 basis like previous years. However, beginning in the 2017 factor 3 calculation, CMS will use a three year average. In the final rule CMS will use SSI days from fiscal years 2012, 2013, and 2014 for each hospital’s 2017 factor 3.

Instead of hinting that they desire to use worksheet S-10 data in future years, CMS stated they intend to use S-10 data in fiscal year 2018. Specifically, CMS is proposing a 3-year transition beginning in fiscal year 2018 where they use a combination of worksheet S-10 and proxy data until fiscal year 2020 when all data used in computing the uncompensated care payment amounts to be distributed would come from worksheet S-10. The proxy data used in addition to S-10 data for fiscal year 2018 will be Medicaid days from fiscal year 2012 and 2013 cost reports and fiscal year 2014 and 2015 SSI ratios.

CMS has also hinted in previous IPPS rules that they desire to use data from worksheet S-10 to determine each hospital Factor 3 percentage but found too many inconsistencies with the filed data. CMS hired a consulting group to gather all the worksheet S-10 data from filed cost reports. They used several comparisons including IRS form 990 schedule H data to determine that S-10 data is a statistically valid source. They also published the S-10 calculation for Factor 3 and results for each hospital based on fiscal year 2014. The basis for the S-10 factor 3 calculation is the cost of uncompensated care plus the cost of bad debts divided by the total for all DSH eligible hospitals which was calculated to be just under 24 billion. Interestingly CMS decided to exclude the Medicaid shortfall section of worksheet S-10 in the new factor 3 calculation.

The consultants gathering the data tried to minimize the inconsistencies with an adjustment to providers with high cost to charge ratio’s reported on line 1. However inconsistencies are clearly still evident within the data that was published, some due to the providers filing the cost report and some due to the process of gathering the data. For example, providers that didn’t report bad debt expense on line 26 or uncompensated care charges on line 20 will see a large decline in their Factor 3. Another example is for providers that filed cost reports that were for less than 12 months the data used is not annualized. Another example is some DSH eligible provider’s data being excluded (mostly due to non-traditional fiscal year ends).  The result of these inconsistencies is overstating all providers that filed a full year cost report and correctly filled out worksheet S-10.  It will be interesting to see what adjustments are made to the final rule coming out in August.

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