Medicaid Program; Disproportionate Share Hospital Payments, 77904-77952 [E8-30000]

Agencies

• Centers for Medicare & Medicaid Services
• DEPARTMENT OF HEALTH AND HUMAN SERVICES

[Federal Register Volume 73, Number 245 (Friday, December 19, 2008)]
[Rules and Regulations]
[Pages 77904-77952]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-30000]



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Part III





Department of Health and Human Services





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Centers for Medicare & Medicaid Services



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42 CFR Parts 447 and 455



Medicaid Program; Disproportionate Share Hospital Payments; Final Rule

Federal Register / Vol. 73, No. 245 / Friday, December 19, 2008 / 
Rules and Regulations

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 447 and 455

[CMS-2198-F]
RIN 0938-AN09


Medicaid Program; Disproportionate Share Hospital Payments

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

ACTION: Final rule.

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SUMMARY: This final rule sets forth the data elements necessary to 
comply with the requirements of Section 1923(j) of the Social Security 
Act (Act) related to auditing and reporting of disproportionate share 
hospital payments under State Medicaid programs. These requirements 
were added by Section 1001(d) of the Medicare Prescription Drug, 
Improvement, and Modernization Act of 2003 (MMA).

DATES: Effective Date: This rule is effective on January 19, 2009.

FOR FURTHER INFORMATION CONTACT: Venesa Day, (410) 786-8281; Rory Howe, 
(410) 786-4878; and Rob Weaver, (410) 786-5914.

SUPPLEMENTARY INFORMATION:

I. Background

    Title XIX of the Social Security Act (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 
such disproportionate share hospital (DSH) payments, including 
aggregate annual state-specific limits on Federal financial 
participation under Section 1923(f), and hospital-specific limits on 
DSH payments under Section 1923(g). Under those hospital specific 
limits, a hospital's DSH payments may not exceed the costs incurred by 
that hospital in furnishing services during the year to Medicaid 
patients and the uninsured, less other Medicaid payments made to the 
hospital, and payments made by uninsured patients (``uncompensated care 
costs''). In addition, Section 1923(a)(2)(D) requires States to provide 
an annual report to the Secretary describing the payment adjustments 
made to each disproportionate share hospital.
    Section 1001(d) of the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003 (MMA) (Pub. L. 108-173, enacted on December 
8, 2003) added Section 1923(j) to 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 that includes the 
following:
     Identification of each DSH facility that received a DSH 
payment under the State's Medicaid program in the preceding fiscal year 
and the amount of DSH payments paid to that hospital in the same year.
     Such other information as the Secretary of Health and 
Human Services determines necessary to ensure the appropriateness of 
DSH payments.
    Section 1923(j)(2) of the Act also requires States to have their 
DSH payment programs independently audited and to submit the 
independent certified audit annually to the Secretary. The certified 
independent audit must verify:
     The extent to which hospitals in the State have reduced 
uncompensated care costs to reflect the total amount of claimed 
expenditures made under Section 1923 of the Act.
     DSH payments to each hospital comply with the applicable 
hospital-specific DSH payment limit.
     Only the uncompensated care 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 limits.
     The State included all Medicaid payments, including 
supplemental payments, in the calculation of such hospital-specific 
limits.
     The State has separately documented and retained a record 
of all its costs under the Medicaid program, claimed expenditures under 
the Medicaid program, uninsured costs in determining payment 
adjustments under Section 1923 of the Act, and any payments made on 
behalf of the uninsured from payment adjustments under Section 1923 of 
the Act.
    In addition to these reporting requirements, under Section 1923(j) 
of the Act, Federal matching payments are contingent upon a State's 
submission of the annual DSH report and independent certified audit.

II. Summary of the Proposed Regulations

    On August 26, 2005, we published in the Federal Register (70 FR 
50262-50268) a notice of proposed rulemaking implementing the reporting 
and auditing requirements for State Disproportionate Share Hospital 
payments. In this notice of proposed rulemaking, we proposed modifying 
the DSH reporting requirements in Federal regulations at 42 CFR 447 by 
providing the following changes to our regulations:
1. Reporting Requirements
    To implement the reporting requirements in Section 1923(j)(1) of 
the Act, we proposed to modify the DSH reporting requirements in 
Federal regulations at 42 CFR 447.
     We proposed to add a new paragraph (c) to the reporting 
requirements in Sec.  447.299.
     We proposed to redesignate the documentation requirements 
in paragraph (c) as paragraph (d) and redesignate the deferrals and 
disallowances information in paragraph (d) as paragraph (e), 
respectively.
     We proposed a list of information to reflect the data 
elements necessary to ensure that DSH payments are appropriate such 
that each qualifying hospital receives no more in DSH payments than the 
amount permitted under Section 1923(g) of the act.
     We proposed that paragraph (c) would require each State 
receiving an allotment under Section 1923(f) of the Act, beginning with 
the first full State fiscal year (SFY) immediately after the enactment 
of Section 1001(d) of the Medicare Prescription Drug, Improvement, and 
Modernization Act (MMA) and each year thereafter, to report to us the 
list of information detailed in an Reporting form, which was published 
in the September 23, 2005 correction notice entitled ``Medicaid 
Programs; Disproportionate Share Hospital Payments''.
     We proposed that States will need to consider a Section 
1011 payment when determining the hospital's DSH limit, because the 
total DSH payments should not exceed the total amount of uncompensated 
care at the hospital.
     The information supplied on this spreadsheet would satisfy 
the requirements under Sections 1923(a)(2)(D) and 1923(j)(1) of the 
Act.
2. Audit Requirements
    We explained the statute's requirement for States to verify their 
methodology for computing the hospital specific DSH limit and the DSH

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payments made to hospitals. As required by Section 1923(j)(2) of the 
Act, these five items identified in statute would provide independent 
verification that State Medicaid DSH payments comply with the hospital-
specific DSH limit in Section 1923(g) of the Act, and that such limits 
are accurately computed.
     In Sec.  455.201, we proposed that ``SFY'' stands for 
State fiscal year.
     We proposed to define that an ``independent audit'' means 
an audit conducted according to the standards specified in the 
generally accepted government auditing standards issued by the 
Comptroller General of the United States.
     We proposed adding a new Sec.  455.204(a) to reflect 
Section 1923(j) of the Act's requirement that each State must submit 
annually the independent certified audit of its DSH program as a 
condition for receiving Federal payments under Section 1903(a)(1) and 
1923 of the Act.
     We proposed to add a new Sec.  455.204(b) to reflect the 
requirement that States must obtain an independent certified audit, 
beginning with an audit of its State fiscal year 2005 DSH program.
     We proposed a submission requirement within 1 year of the 
independent certified audit.
     We proposed that in the audit report, the auditor must 
verify whether the State's method of computing the hospital-specific 
DSH limit and the DSH payments made to the hospital comply with the 
five items required by Section 1923(j)(2) of the Act.

III. Discussion of Public Comments

    On August 26, 2005, we set forth a proposed rule implementing the 
reporting and auditing requirements for State disproportionate share 
hospital payments (DSH). In this notice of proposed rulemaking, we 
proposed several modifications to the DSH reporting requirements and 
detailed the statutory auditing requirements for States to verify their 
methodology for computing the hospital-specific DSH limit to ensure 
that DSH payments made to eligible hospitals do not exceed such limits.
    We received 119 timely public comments, in response to the August 
26, 2005, proposed rule. The comments came from a variety of 
correspondents, including professional associations, national and State 
organizations, physicians, hospitals, advocacy groups, State Medicaid 
programs, State Legislators, and members of the Congress. The following 
is a summary of the comments received and our response to those 
comments.

A. General Comments on Auditing and Reporting Provisions

    We received the following general comments regarding the proposed 
regulation:
    Comment: Many commenters believe the proposed regulation exceeds 
the Congressional intent of the statutory authority of the MMA, makes 
substantive interpretations and changes to longstanding DSH policy not 
required by MMA and attempts to establish new policy.
    Response: The statutory authority under MMA instructed States to 
report and audit specific payments and specific costs. Section 
1923(j)(1)(B) of the Act specifically delegated to the Secretary 
authority to require reporting of information ``necessary to ensure the 
appropriateness of payment adjustments made under this Section.'' These 
regulations require reporting of data elements that are specifically 
related to the appropriateness of DSH payments, and thus are consistent 
with that statutory provision. The regulations provide States with 
uniform instructions that contain detailed identification of the 
necessary data elements. The audit requirements also specified in 
Section 1923(j)(2) of the Act, and these regulations specifically track 
the statutory requirements.
    Comment: Many commenters are concerned that CMS has used the MMA 
provisions, which only relate to reporting and auditing, to 
dramatically change the financing of the Medicaid DSH program; this 
change would have serious implications for hospitals that care for the 
low-income and uninsured.
    Response: Neither the statute nor the implementing regulation 
addresses the financing of DSH payments. The statutory authority under 
MMA instructed States to report and audit specific payments and the 
underlying calculations. While it could be that this information 
discloses impermissible payments (or ``financing''), this does not 
reflect a change in the standards for such payments. Instead the 
information will ensure that payments conform with existing applicable 
law.
    Comment: Several commenters noted that the proposed rule purports 
to implement statutory reporting and audit requirements that do not 
alter any of the substantive standards regarding the calculation of 
costs under the hospital-specific DSH cap. They asserted that it would 
be completely improper for CMS to employ preamble language, or include 
in the rule provisions that would alter substantive standards under the 
auspices of new statutory reporting requirements.
    Response: The provisions of this rule do not alter the fundamental 
statutory requirements to calculate DSH hospital-specific uncompensated 
care costs, and audit such calculations, in order to demonstrate that 
payments are proper. This rulemaking sets forth reporting requirements 
to ensure uniformity in the understanding and implementation of these 
requirements. By doing so, the rule will ensure that the basis for DSH 
payments is clear, including the required hospital-specific 
uncompensated care cost calculations, and set forth the necessary 
elements for an independent audit of those cost calculations and 
payments following the statute as amended by the MMA.
    Comment: A few commenters expressed disagreement with the manner in 
which the proposed regulation would employ audits to determine whether 
States are making Medicaid DSH payments in appropriate amounts. These 
commenters argued that audits should not limit State discretion in the 
manner in which DSH payments are calculated. These commenters objected 
to the proposed requirements that auditors determine whether DSH is 
being calculated ``correctly'' when there has never been a single, 
true, definitive definition of exactly what ``correct'' means. In other 
words, the commenters argued that the regulation proposes counting on 
auditors to help impose a standard that does not currently exist.
    Response: We disagree that the calculations involved in applying 
the hospital-specific DSH limits are discretionary. There have been 
clear and longstanding standards for calculating the costs of hospital 
services that apply to the calculation of hospital-specific DSH limits. 
The statutory authority under MMA instructed States to report and audit 
specific payments and specific costs to ensure compliance with those 
standards.
    The applicable standards are based on existing statutes, 
regulations, and interpretive guidance. In 1993, Congress imposed 
hospital-specific limitations on the level of DSH payments to which 
qualifying hospitals were entitled. Section 1923(g)(1)(A) specifies 
that DSH payments cannot exceed, ``the costs incurred during the year 
of furnishing hospital services (as determined by the Secretary and net 
of payments under this title, other than under this Section, and by 
uninsured patients * * *)''. In 1994, CMS issued guidance that 
clarified that the 1993 hospital-specific ``cost'' limit includes both 
inpatient and outpatient hospital services for Medicaid individuals and 
individuals

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with no source of third party coverage. Moreover, the calculation of 
hospital costs is subject to longstanding cost principles contained in 
Office of Management and Budget Circulars, including Circular A-110, 
and, to the extent not addressed in those Circulars, in Generally 
Accepted Accounting Principles (GAAP). In addition, over the years CMS 
has addressed hospital cost accounting in considerable detail in the 
Medicare program, and has developed cost reporting forms and procedures 
that offer further guidance on these issues.
    Comment: A few commenters stated that, to the extent that CMS 
retains substantive changes to DSH policy in this regulation, CMS 
should acknowledge that this regulation does more than merely implement 
reporting and auditing requirements against existing standards.
    Response: This regulation does not alter any of the substantive 
standards regarding the calculation of hospital costs, but requires 
that auditors apply those standards in determining the hospital-
specific DSH limit. The preamble and the regulation set forth reporting 
requirements to ensure that the basis for DSH payments is clear, 
including the required hospital-specific uncompensated care cost 
calculations, and set forth the necessary elements for an independent 
audit of those cost calculations and payments.
    Comment: Several commenters noted that States have implemented and 
carried out their DSH programs pursuant to methodologies set forth in 
CMS-approved Medicaid State plan amendments which were developed 
consistent with the DSH statute that provides States the flexibility to 
adopt procedures and methodologies tailored to each State's health care 
delivery system. The commenters asserted that the proposed rule would 
impose new substantive requirements that would be implemented through 
third-party auditors applying standards that are at odds with existing 
State plan provisions. They asserted that the approved Medicaid plan in 
each Medicaid State plan should provide the substantive basis for the 
independent audits and reports required under Section 1923(j). Because 
CMS approved the Medicaid State plan provisions and has not implemented 
the statutory process that would be required to render them invalid, 
the commenters stated that the Medicaid State plans should be deemed to 
reflect current Federal policy on the implementation of the Medicaid 
DSH program and be the standard by which FFP is available for State 
Medicaid expenditures.
    Response: In reviewing State DSH payments, auditors must first 
determine whether the DSH payments were initially calculated using the 
methodology authorized by the approved Medicaid State plan. These 
Medicaid State plans, in part, articulate the methods and standards by 
which States set payment rates. Section 4.19-A of the Medicaid State 
plan includes the methodologies States utilize to make Medicaid DSH 
payments. The statutory hospital-specific limit, however, overlays that 
methodology because it is determined by actual uncompensated costs of 
inpatient and outpatient hospital services. States typically include a 
provision within the Medicaid State plan that DSH payments will not 
exceed each qualifying hospital's DSH limit.
    The DSH payment methodologies contained in Section 4.19-A of the 
Medicaid State plan do not specifically identify the cost components 
included in the hospital-specific DSH limits but are governed by 
longstanding principles set forth in statutes, regulations, and agency 
guidance.
    While CMS recognizes that States must use prospective estimates to 
determine DSH payments in a given Medicaid State plan rate year, the 
audits required by the MMA are statutorily required to verify the 
extent to which such estimates are reflective of the actual costs and 
that resultant payments do not exceed such cost limitations imposed by 
Congress.
    Comment: Several commenters noted that the proposed rule would 
establish DSH policy that reaches beyond the reporting and audit 
requirements outlined in Section 1001(d). They cited the example that, 
if a State fails to comply with the reporting and auditing 
requirements, CMS proposes to impose a penalty that would result in the 
loss of Federal matching Medicaid dollars.
    Response: Section 1923(j) of the Act very clearly stipulates that 
Medicaid DSH payments are conditioned upon the submission of the annual 
report and independent certified audit is required. However, with 
respect to requiring recovery of any overpayments, the regulation does 
not impose an immediate penalty that would result in the loss of 
Federal matching dollars. As described in subsequent responses to 
comments specific to the auditing component of the regulation, because 
a trial period will be required for auditors to refine audit 
methodologies, findings from Medicaid State plan rate year 2005 through 
2010 will be used only for the purpose of determining prospective 
hospital-specific cost limits and the actual DSH payments associated 
with a particular year.
    Beginning in Medicaid State plan rate year 2011, to the extent that 
audit findings demonstrate that DSH payments exceed the documented 
hospital-specific cost limits, CMS will regard them as representing 
discovery of overpayments to providers that, pursuant to 42 CFR Part 
433, Subpart F, triggers the return of the Federal share to the Federal 
government (unless the DSH payments are redistributed by the State to 
other qualifying hospitals as an integral part of the audit process). 
This is not a ``penalty'' but instead reflects adjustment of an 
overpayment that was not consistent with Federal statutory limits. We 
note that, to the extent that States wish to redistribute DSH payments 
that exceed hospital-specific limits, the Federally approved Medicaid 
State plan must reflect that payment policy.
    Comment: A few commenters said there are existing administrative 
procedures for determining a Medicaid State plan's compliance with 
Federal Medicaid law, which include a notice and hearing process. 
Nothing in Section 1923 or its legislative history suggests that 
Congress intended to circumvent these longstanding procedures through 
the audit and reporting requirements. Therefore, any attempt to do so 
in the guise of these implementing regulations would be invalid.
    Response: The MMA independent audit procedures establish a process 
for discovery of DSH overpayments that trigger existing 
responsibilities for States to refund the Federal share of Medicaid 
overpayments to providers. The audits provide information that will 
identify DSH payments that exceed the amounts permitted under Section 
1923(g)(1) of the Act and incorporated by reference into approved State 
plans. This information, in the form of an independent certified audit 
obtained by the State, will result in discovery of DSH overpayments and 
will trigger requirements to refund the Federal share of those 
overpayments, pursuant to existing requirements at 42 CFR Part 433, 
Subpart F. States that do not refund the Federal share of overpayments 
will be subject to disallowance of claims for Federal funds, and will 
have notice and an opportunity for a hearing through the Medicaid 
disallowance process. We believe this is consistent with the apparent 
purpose of the audit requirement to ensure the financial integrity of 
State DSH payments, and to ensure that DSH payments are targeted at 
addressing the burdens faced by hospitals which serve a

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disproportionate share of low income patients.
    Comment: Many commenters said that the Medicaid DSH program was 
designed to recognize the financial burden borne by those hospitals 
that take care of a disproportionate number of low income and uninsured 
individuals, and to provide financial assistance essential for these 
safety net providers to continue to take care of patients. Medicaid DSH 
funds are critical to the future viability of their hospitals. They 
were concerned that any new policy interpretation that results in 
substantially lower DSH payments or affects prior year DSH payments 
will have a significant financial impact on (safety net) hospitals, and 
will threaten their ability to continue to serve the community. Because 
of the negative impact on hospitals and on the patients they serve, the 
commenters strongly urge CMS to rethink its approach in this proposed 
rule. A few commenters stated that changing the Federal position on 
this matter could cause significant financial problems for State 
Medicaid programs.
    Response: This rule does not impose any new restrictions on DSH 
payments. The statute calls for reporting and auditing of DSH payments, 
to ensure that such payments comply with existing statutory 
requirements limitations. This rule does not restrict the aggregate DSH 
funding that is available, nor does it effect DSH payments that comply 
with all statutory requirements. Consequently, there should be no 
effect on DSH payments that have been properly made to hospitals to 
account for the burden of treating a disproportionate share of low 
income patients.
    Comment: Several commenters referenced the 1994 guidance to State 
Medicaid Directors in which CMS granted flexibility in allowing a State 
to use the definition of allowable costs in its State Medicaid plan or 
any other definition as long as the costs determined under such a 
definition do not exceed the amounts that would be allowable under the 
Medicare principles of cost reimbursement. They argued that this 
pronouncement was consistent with the principle that Medicaid is a 
Federal-State partnership and should be continued. Since this is a 
Medicaid DSH program, they assert that the State should be permitted to 
determine the definition of allowable costs as either not exceeding 
amounts allowable under Medicare principles of cost reimbursement or 
amounts that would be consistent with the State's existing Medicaid 
program. They asked that the rule reaffirm State flexibility in 
defining allowable costs.
    Response: States have considerable discretion to determine 
allowable inpatient and outpatient costs when determining payment rates 
under their Medicaid State plan, but Section 1923(g)(1) of the Act 
provides for a Federal limitation based on costs that must be 
calculated in accordance with Federal accounting standards. In 
accordance with this principle, the 1994 guidance provided State 
flexibility to define Medicaid costs for purposes of setting Medicaid 
payment rates. But this flexibility does not apply to calculation of 
hospital-specific DSH limits to the extent that State-defined costs 
exceed those permitted under Medicare cost principles.
    Moreover, the hospital-specific limit is based on the costs 
incurred for furnishing ``hospital services'' and does not include 
costs incurred for services that are outside either the State or 
Federal definition of inpatient or outpatient hospital services. While 
States have some flexibility to define the scope of ``hospital 
services,'' States must use consistent definitions of ``hospital 
services.'' Hospitals may engage in any number of activities, or may 
furnish practitioner or other services to patients, that are not within 
the scope of ``hospital services.'' A State cannot include in 
calculating the hospital-specific DSH limit cost of services that are 
not defined under its Medicaid State plan as a Medicaid inpatient or 
outpatient hospital service.
    Comment: Numerous commenters said the proposed rule violates 
Administrative Procedure's Act rulemaking requirements because there 
was inadequate notice and opportunity for public comment on the 
proposed policy to limit hospital costs includable in the Medicaid DSH 
calculation. The commenters stated this is a proposed regulation for a 
reporting requirement only and that the cited statutory authority for 
the proposed rule has no bearing on allowability of costs in DSH 
calculation. These commenters stated the rule would substantively 
change longstanding DSH policy without appropriately calling for direct 
public comment.
    Response: CMS published the Notice of Public Rule Making on August 
26, 2005. As part of this publication, a 60 day comment period was 
provided. CMS received and considered numerous comments, as discussed 
in this preamble. Through this process, rulemaking requirements under 
the Administrative Procedure Act have been met. Moreover, the rule does 
not substantively change the standards for DSH payments, or for the 
review of hospital-specific limits on such payments. Even if the rule 
did make changes to those standards, however, CMS has followed the 
appropriate rulemaking procedures for such changes. Fundamentally, this 
rule implements statutory requirements to review and audit the 
calculation of DSH hospital-specific limits, including only the costs 
of those hospital services that are specified in the statute, and 
accounting for such costs consistently with existing applicable cost 
accounting principles.
    Comment: One commenter further indicated that this is not just an 
issue of notice and comment rulemaking as required under the 
Administrative Procedure Act, it is an issue of Federal-State comity. 
The commenter asserted that the requirements contained in the proposed 
rule are not consistent with Supreme Court decisions providing that, if 
Congress intends to impose a condition on the grant of Federal moneys, 
it must do so unambiguously.
    Response: The statute expressly requires that States report and 
audit DSH payments consistent with existing statutory limitations on 
such payments; this rule simply defines the nature and scope of these 
reporting and audit requirements. These requirements are related to 
ensuring Medicaid program integrity and transparency by providing 
information to identify improper payments, and the cost of meeting 
those requirements may be claimed as an administrative cost of the 
Medicaid program, eligible for Federal matching funding. As such, the 
statutory requirements are not new substantive responsibilities, but 
are part of existing State responsibilities to administer State 
Medicaid programs. Moreover, the Medicaid statute expressly requires 
the Secretary to identify necessary reporting requirements and the 
Secretary has oversight authority to ensure compliance with the 
statutory audit requirements. This rule provides detailed 
identification of the data elements necessary to comply with such 
reporting and auditing requirements expressly contained in statute. As 
an interpretation and implementation of clear statutory 
responsibilities, this rule is consistent with the cited Supreme Court 
decisions.

B. Reporting

1. Retroactivity
    Comment: One commenter stated that their State would need to make 
several regulation changes that would need to be retroactive to July 1, 
2005. The State

[[Page 77908]]

currently does not have a procedure to change regulations 
retroactively.
    Response: CMS does not agree that States would need to 
retroactively change their programs to comply with the audit and 
reporting requirements associated with Medicaid State plan rate year 
2005. The audit and reporting requirements discussed in this regulation 
can be met through prospective actions by States, and thus do not have 
retroactive effect. While the information disclosed by the audit and 
reporting requirements may reveal the need for retroactive adjustments 
to account for payments that are improper, this is no different from 
any other audit situation. Moreover, in order to ensure a period for 
developing and refining audit practices, we are providing for a 
transition period through Medicaid State plan rate year 2010, before 
audit results will be given weight other than in making prospective 
estimates of hospital costs for the purposes of ongoing DSH payments.
    Comment: Many commenters stated that applying the proposed rule's 
requirements to dates of service prior to State fiscal year (SFY) 2005 
would represent an undue administrative burden and a hardship for 
States and hospitals. Several commenters stated that it is unreasonable 
to expect that States are going to have readily available to them for 
SFY 2005, the data elements that CMS is just now requiring to be 
reported under this proposal. Applying the changes to the reporting 
requirements to SFY 2005 is a retroactive application and puts the 
States in the position of struggling to retrieve data that was not 
collected during SFY 2005. This would ultimately be to the detriment of 
the providers if the States are unable to capture all of the 
uncompensated care costs when they submit their reports. Many other 
commenters suggested all reporting and auditing requirements be 
prospective. In addition, they suggested linking the new reporting and 
auditing requirements to the first State fiscal year beginning after 
the finalization of the rule, no earlier than SFY 2006, with an audit 
being no earlier than 2 years later.
    A few commenters stated that the effective date of State Fiscal 
Year (SFY) 2005 would not give hospitals time needed to modify their 
procedures to comply with State instructions for reporting made 
pursuant to the final regulations.
    Response: We have modified the regulation to address concerns 
regarding the inability to complete the audit one year from the end of 
SFY 2005. The final regulation provides at 447.204(b) that:
    1. The Medicaid State plan rate year 2005, rather than State fiscal 
year 2005, is the first time period subject to the audit. The basis for 
this modification is recognition of varying fiscal periods between 
hospitals and States. The Medicaid State plan rate year is the one 
uniform time period under which all States estimate uncompensated costs 
in order to make DSH payments under the approved Medicaid State plan.
    2. In recognition of timing issues related to initiating the audit 
process, States may concurrently complete the Medicaid State plan rate 
year 2005 and 2006 audits by no later than September 30, 2009.
    3. Each subsequent audit beginning with Medicaid State plan rate 
year 2007 must be completed by the last day of the Federal fiscal year 
(FFY), September 30, ending three years from the Medicaid State plan 
rate year under audit. This means that the 2007 Medicaid State plan 
rate year must be audited by September 30, 2010.
    4. Each audit report must be submitted to CMS within 90 days of the 
completion of the audit. The report associated with Medicaid State plan 
rate years 2005 and 2006 are due no later than December 31, 2009. The 
2007 Medicaid State plan rate year audit report must be submitted to 
CMS by December 31, 2010.
    In addition, we have added a transition period at 447.204(d) to 
reflect concerns that auditing techniques may need to be reviewed and 
refined. Findings of the Medicaid State plan rate year audits through 
2010 will not be given weight other than for purposes of prospective 
Medicaid State plan rate year uncompensated care cost estimates and 
associated DSH payments. This means that, starting in Medicaid State 
plan rate year 2011, such findings should be used in the calculation of 
prospective estimates related to DSH payments.
    We are also making clear that DSH payments that, after the 
regulatory transition period, are found in the audit process to exceed 
the hospital-specific cost limits are provider overpayments that must 
be promptly returned to the Federal Government or redistributed by 
States to other qualifying hospitals. (Such redistribution authorities 
must be articulated in the Federally approved Medicaid State plan.) 
After the transition period to ensure the accuracy and reliability of 
audit techniques, such audit findings represent discovery of an 
overpayment under existing regulations at 42 CFR Part 433, Subpart F. 
We note that the regulatory transition provision is not intended to 
preclude review of DSH payments and discovery of overpayments prior to 
Medicaid State plan rate year 2011, to the extent that such review is 
independent of the State audit process.
    Comment: One commenter noted that the proposed reporting 
requirements do not provide for any option to request an extension for 
the submission of the information or audit.
    Response: As indicated in the response above, we have extended the 
audit and report submission date in the regulation. These extended time 
frames are detailed in a prior response and the regulation has been 
revised accordingly. Based on the revisions, the time frames are 
sufficiently long that there should be no need for extensions beyond 
the revised time frames. In the event of a natural disaster, or other 
incident beyond a State's control, we would consider providing relief 
in the context of a demonstration project that addresses the overall 
circumstances of the State.
    Comment: Many commenters noted that the NPRM applies these new 
changes to retroactively FY 2005 when most DSH plans are already in 
place. Medicaid State Plans, regulations, and/or statutes will need to 
be amended to reflect the new reporting and audit requirements, which 
are retroactive to 7/1/05.
    Response: CMS does not agree that States would need to 
retroactively change regulations to comply with the audit and reporting 
requirements associated with Medicaid State plan rate year 2005. In the 
audit process, Medicaid State plan DSH payments in the State plan rate 
year 2005 will be reviewed against uncompensated care costs during that 
same period (for example, OBRA 93 hospital-specific limits), which is 
consistent with the existing statutory provisions of Section 
1923(g)(1). States will not need to retroactively modify their Medicaid 
State plans to comply with this regulation. The DSH reimbursement 
methodologies contained in Medicaid State plans articulate the methods 
by which States make DSH payments and already contain assurances that 
such DSH reimbursement methodologies will not exceed the OBRA 93 
hospital-specific DSH limits. Typically, States currently rely on 
unaudited surveys to estimate uncompensated care in eligible hospitals, 
and this regulation would simply require reconciliation based on 
statutory cost limits using a more accurate audit methodology.
    Under this regulation, the State DSH audit and report will use 
actual cost and payment data beginning with the Medicaid State plan 
rate year 2005 to ensure that DSH payments in the

[[Page 77909]]

approved Medicaid State plan did not exceed DSH eligible costs in 
hospitals receiving DSH payments. As noted above, to allow a period to 
develop and refine audit techniques, we also have included a transition 
period before audit results will be directly used to identify provider 
overpayments.
    Comment: One commenter stated that the proposed reporting 
requirements refer to submission timing on two different pages, which 
are inconsistent with each other. On Page 50264 of the Federal Register 
under the Audit Requirements Section, it states, ``We are proposing a 
submission requirement within 1 year of the independent certified 
audit.'' On Page 50268 of the Federal Register under the List of 
Subjects Section, where the proposed revisions to Section 455.204(b) 
are indicated, it states, ``Timing. Beginning with State fiscal year 
(SFY) 2005, a State must submit to CMS an independent certified audit 
report no later than 1 year after the completion of each State's fiscal 
year.''
    Response: The regulation has been modified to achieve consistent 
audit and reporting time frames. Generally, audits will examine prior 
period DSH payments and such audit must be completed by the last day of 
the FFY ending three years from the Medicaid State plan rate year under 
audit. Reports of the audit will be due within 90 days of completion of 
the audit. A special transition period is provided for Medicaid State 
plan rate year 2005 and 2006 audits. Further detail of audit and 
reporting are described in other responses to comments.
2. Effect of Lag in Medicaid Claims
    Comment: Several commenters noted that there is already a 
requirement for States to indicate the regular Medicaid rate payments 
paid to the hospital for the SFY as part of the Medicaid claims 
information provided to CMS through the Medicaid Statistical 
Information System (MSIS). Claims may be submitted to the State for 
payment up to one year after the date of service. Therefore, payments 
made by the State for claims with dates of service in the SFY may be 
submitted up to a year after the service date by the hospital. The 
payment information would not be available before 12 months after the 
SFY at a minimum. Obtaining the amount paid by the State for the SFY 
being reported is not possible by the end of the SFY.
    Response: Based on the modifications to the audit and reporting 
deadlines, the existing requirement at 42 CFR 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 existing two-year timely claim filing 
requirement at 45 CFR 95.7, there should not be a significant 
adjustment to Medicaid payments that would warrant a corrected report. 
To the extent that such an adjustment to Medicaid payments occurs and 
States claim Federal matching dollars (or return Federal matching 
dollars) as a prior period adjustment, States should correct the audit 
and report by indicating post-audit adjustments to Medicaid and DSH 
payments (or uncompensated care costs if Medicaid payment adjustments 
affect the Medicaid shortfall).
    States must consider post-audit adjustments, as information about 
them becomes available, to the extent that the State's DSH methodology 
involves prospective estimates of uncompensated care, at least 
beginning in Medicaid State plan rate year 2011. Similarly, such 
adjustments must be reported in the quarter the underlying claims were 
paid, and must be considered to determine if there were overpayments, 
beginning with Medicaid State plan rate year 2011 (although in some 
cases, the State plan may authorize the State to redistribute the 
overpaid funds to another eligible hospital). The regulation has been 
modified to include this provision.
    Comment: A few commenters noted that the proposed rules do not 
indicate the submission dates for the Annual DSH Reports. Based on 1) 
the data reporting that is required, 2) the fact that some of these 
data will need to be audited under the proposed provisions of Sec.  
455.204, and 3) the fact that the audit is proposed to be required by 
one year after the close of the State fiscal year to which the 
reporting and the audit apply, we assume the reporting is contemplated 
to be submitted less than a year after the close of the State fiscal 
year. To the extent that CMS is requesting actual (and potentially 
audited) cost data for the fiscal year, that information must be 
gathered from hospitals and reviewed by the States prior to completion 
of the Annual DSH Report. The commenters pointed out that much of the 
required data are found only on Medicare cost reports, which are 
submitted no sooner than five months after year-end and are desk 
reviewed no sooner than 11 months after year end. Given this, the 
reporting timeframes that appear to be contemplated are not realistic. 
The commenters urged that CMS allow sufficient time for the States to 
complete this process.
    Response: We have modified the regulation to clarify that the 
annual DSH reports are due at the same time as the completed 
independent audits. We believe that this time frame is sufficient for 
the State, hospitals and auditors to meet their respective 
responsibilities to review the accuracy of the State's DSH payments.
3. Eligible Uncompensated Care
    Comment: Many commenters asserted that the language in the proposed 
regulation that excluded bad debts from being considered part of 
uncompensated care exceeded the statutory authorization since the 
statute does not specifically address that issue. These commenters 
argued that bad debts are part of the burden of providing care to 
uninsured, and underinsured patients for whom the hospital receives no 
payment. The commenters believe that the proposed rule is inconsistent 
with Congressional intent, and actually works to weaken the statute's 
purpose. These commenters cited the conference report language for the 
Omnibus Budget Reconciliation Act of 1993 provision establishing the 
hospital-specific DSH limit, stating that the cost of providing 
services to uninsured patients would be net of any out of pocket 
payments received from uninsured individuals. They argued that this 
language clearly implies an intent that only amounts received, and not 
bad debt should be considered when implementing the hospital-specific 
DSH limit.
    Response: Implicit in these comments is a misunderstanding of the 
term ``bad debt.'' Bad debt arises when there is non-payment on behalf 
of an individual who has third party coverage. Section 1923(g)(1) is 
clear that the hospital-specific uncompensated care limit is calculated 
based only on costs arising from individuals who are Medicaid eligible 
or uninsured, not costs arising from individuals who have third party 
coverage. Thus, while the Medicaid statute does not specifically 
exclude bad debt from the definition of uncompensated care costs, there 
is nothing in the statute that would suggest that any costs related to 
services provided to individuals with third party coverage, including 
bad debt, are within that definition.
    Comment: One commenter noted that if an uninsured patient does not 
pay the amount he or she was expected to pay, that may be recorded by 
the hospital as bad debt. The OBRA 1993 limit as prescribed by Section 
1923(g) provides that the costs of furnished services are net of non-
DSH payments under Medicaid and payments by uninsured patients. The 
statute does not authorize reductions to uncompensated care costs for 
amounts that patients were expected

[[Page 77910]]

to pay, only for payments that are actually made.
    Response: We agree. The statutory definition of uncompensated care 
includes the costs of furnishing hospital services to uninsured 
patients, minus the payments actually received from those patients.
    To the extent that hospitals do not currently separately identify 
uncompensated care related to services provided to individuals with no 
source of third party coverage from uncompensated care costs of 
patients with insurance, hospitals will need to modify their accounting 
systems to separate the two categories in order to properly document 
that DSH payments are within the hospital-specific limit.
    Uncompensated inpatient and outpatient hospital care costs for 
individuals without third party coverage is then offset by payments 
actually made by or on behalf of those patients in the Medicaid State 
plan rate year under audit, except for payments made by State-only or 
local-only government programs for services provided to indigent 
patients.
    Comment: Numerous commenters asserted that the proposed rule was 
contrary to the interpretation that bad debt should be considered when 
implementing the hospital-specific DSH limit that was found in CMS 
guidance in 1994 and again in 2002, and asked for a continuation of the 
prior interpretation.
    Response: In 1994, CMS clarified the 1993 hospital-specific 
``cost'' limit to include outpatient hospital services, in addition to 
inpatient hospital services, for Medicaid individuals and individuals 
with no source of third party coverage. This clarification of cost 
under the hospital-specific DSH limit was established in recognition of 
historical Congressional references to hospital services under its 
ongoing instruction regarding DSH. The 1994 letter to State Medicaid 
Directors did not specifically refer to bad debt, nor did it contain 
any language that should have suggested that the hospital specific 
limit calculation should include costs (whether compensated or 
uncompensated) related to individuals who had third party coverage. 
Similarly, the State Medicaid Director letter dated August, 2002 
specifically addressed the treatment of Medicaid supplemental UPL 
payments for purposes of calculating uncompensated care; the treatment 
of costs associated with inmates of correctional facilities; and, the 
inclusion of Medicaid managed care days in the Medicaid inpatient 
utilization rate formula. Nothing in that letter addressed the issue of 
bad debt and the calculation of DSH eligible costs. The provisions in 
this rule that expressly exclude bad debt from the calculation of the 
hospital specific limit are based on the statutory language and do not 
represent any change in CMS policy.
    Comment: Several commenters stated that the proposed rule fails to 
clarify how bad debt would be calculated.
    Response: Bad debt arises when there is non-payment on behalf of an 
individual who has third party coverage. Section 1923(g)(1) is clear 
that the hospital-specific uncompensated care limit is calculated based 
only on costs arising from individuals who are Medicaid eligible or 
uninsured, not costs arising from individuals who have third party 
coverage. To the extent that hospitals do not currently separately 
identify uncompensated care related to services provided to individuals 
with no source of third party coverage from bad debts from patients 
with insurance, hospitals will need to modify their accounting systems 
to separate the two categories in order to properly document that DSH 
payments are within the hospital specific limit. We are not prescribing 
the details of how hospitals can accurately measure uncompensated care; 
the precise methodology may vary depending on individual circumstances 
(but will have to provide an auditable basis for the measurement). As 
described in later comments, the source of this information will be 
derived from hospital cost reports, hospital financial statements, and 
other hospital accounting records.
    Comment: One commenter said that bad debts represent an enormous 
uncompensated cost to providers and pointed out that the Medicare 
program recognizes this reality and reimburses providers 70 percent of 
their Medicare bad debt write-offs. The commenter suggested that 
Medicaid should operate similarly to Medicare in this respect.
    Response: 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. The Medicaid statute does not 
specifically authorize payment based on bad debts, nor does it 
authorize including bad debts in the calculation of the hospital 
specific limit under Section 1923(g)(1). We note, however, that the 
hospital specific limit is not a payment methodology, and States could 
recognize bad debts in constructing DSH payment methodologies that 
provide for payments less than or equal to the hospital specific limit 
for each hospital.
    Comment: One commenter noted that the provider will report the 
``Provision for Medicaid Bad Debt'' as a component of its uncompensated 
total. As such, the Provision for Bad Debt is an estimate, a Balance 
Sheet account, not an expense account, and deductibles and coinsurance, 
along with other charges, are estimated in that account. The actual bad 
debt expense is booked against the provision and/or allowance and most 
facilities would need to drill down on the Provision for Bad Debt 
account to get actual bad debt expense related to uninsured cost.
    Response: Setting up an accounting category to aggregate charges 
and revenues associated with uninsured individuals receiving inpatient 
and/or outpatient services from a hospital should be an accounting 
system adjustment not far removed from the process of setting up an 
account for any other payer category. To the extent that hospitals do 
not currently separately identify uncompensated care related to 
services provided to individuals with no source of third party coverage 
from other uncompensated care costs, hospitals will need to modify 
their accounting systems to do so. For purposes of the initial audits 
under the transitional provision of the regulation, States and auditors 
may need to develop methodologies to analyze current audited financial 
statements and other accounting records to properly segregate 
uncompensated costs.
    Only the inpatient and outpatient hospital charges associated with 
individuals with no source of third party coverage for such services 
can be applied to the Medicare cost report for purposes of calculating 
the uninsured uncompensated care cost component of the hospital-
specific DSH limit. Hospitals must also ensure that no duplication of 
such charges exist in their accounting records. This information must 
be made available to the auditor for certification.
    Comment: One commenter questioned whether claims denied by insurers 
for lack of prior authorization or claims submitted too late would be 
considered uninsured since the service is not reimbursed by the insurer 
and the amount is not a contractual allowance. The commenter asserted 
that, in that instance, the cost of that portion of the stay is 
uninsured.
    Response: Section 1923(g)(1) refers to the costs of hospital 
services furnished by the hospital ``in individuals who * * * have no 
health insurance (or other source of third party coverage).'' We have 
always read this language to distinguish between care furnished to 
individuals who have health insurance

[[Page 77911]]

or other coverage, and care furnished to those who do not. We have 
never read this language to be service-specific and we believe that 
such an interpretation would be inconsistent with the broad statutory 
references to insurance or other coverage. Furthermore, such a reading 
would result in cost shifting from private sector coverage to the 
Medicaid program. We interpret the phrase ``who have health insurance 
(or other third party coverage)'' to broadly refer to individuals who 
have creditable coverage consistent with the definitions under 45 CFR 
Parts 144 and 146, as well as individuals who have coverage based upon 
a legally liable third party payer. The phrase would not include 
individuals with insurance that provides only excepted benefits, such 
as those described in 45 CFR 146.145, unless that insurance actually 
provides coverage for the hospital services at issue (such as when an 
automobile liability insurance policy pays for a hospital stay).
    Improper billing by a provider does not change the status of the 
individual as insured or otherwise covered. In no instance should costs 
associated with claims denied by a health insurance carrier for such a 
reason be included in the calculation of hospital-specific 
uncompensated care costs.
    Comment: One commenter argued that small hospitals budget for and 
count on receiving funding related to uncompensated bad debt, and 
argued that it would be unfair to remove bad debt from the DSH payment 
equation for all of 2005.
    Response: Bad debt arises when there is non-payment on behalf of an 
individual who has third party coverage. Section 1923(g)(1) is clear 
that the hospital-specific uncompensated care limit is calculated based 
only on costs arising from individuals who are Medicaid eligible or 
uninsured, not costs arising from individuals who have third party 
coverage. As we discuss below, the regulation provides a transition 
period for reliance on audit findings. Findings for Medicaid State Plan 
years 2005-2010 will not be given weight except to the extent that the 
findings draw into question the reasonableness of State uncompensated 
care costs estimates used for calculations of prospective DSH payments 
for Medicaid State plan year 2011 and thereafter. This regulation 
requires an independent certified audit of Medicaid State plan DSH 
payments beginning with the Medicaid State plan rate year 2005, 
including comparison to the hospital-specific limits. As discussed 
above, this regulation does not change the costs that are included in 
calculating the hospital-specific limit. As discussed in a prior 
response, however, because the auditing process is new and will need to 
be refined, the 2005 audit findings will be used solely to review 
prospective DSH payments beginning with Medicaid State plan rate year 
2011.
    Comment: Several commenters stated that the recent growth of health 
plans and health savings accounts with high deductibles and/or have 
exclusion limits, is putting new burdens on hospitals in terms of 
unreimbursed costs. The proposed rule fails to clarify whether non-
payment of beneficiaries' deductibles and co-payments would be 
considered bad debt and/or should be applied as a reduction in 
determining uncompensated care costs.
    Response: Costs associated with services furnished to individuals 
who have limited health insurance or other third party coverage are not 
included in the calculation of the hospital-specific DSH limit. 
Specifically, the DSH limit does not include amounts associated with 
unpaid co-pays or deductibles for such individuals (bad-debt associated 
with third party coverage). Health savings accounts associated with 
high deductible third-party coverage typically provide a source for co-
pays and deductibles as well as premium contributions or co-insurance. 
When health savings accounts are not sufficient to cover such charges, 
however, the individual remains insured and therefore hospital services 
costs are not considered not within the statutory calculation of the 
hospital specific limit.
    Comment: A number of commenters stated that hospitals should not be 
denied DSH payments for uncollectible co-pays and deductibles for 
patients eligible for charity care based on a hospital's policy or for 
bad debts that in fact are true charity care but cannot be accounted 
for as such because the patient would not or could not fill out a 
hospital's charity care application or did not qualify for charity care 
but was uninsured.
    Response: States have considerable flexibility in developing DSH 
payment methodologies, and such uncollectible amounts could be a factor 
in a State DSH payment methodology but can only be considered in 
calculating the hospital-specific limit on DSH payments if they meet 
the statutory criteria. Costs that can be included in the hospital-
specific limit set forth at Section 1923(g) of the Act are hospital 
costs associated with uncompensated Medicaid costs and uncompensated 
costs of hospital services provided to individuals without health 
insurance (for example, the uninsured).
    Charity care is a term used by hospitals to describe an individual 
hospital's program of providing free or reduced charge care to those 
that qualify for the particular hospital's charity care program. The 
term also may be defined by a State in determining qualification for 
DSH payments under the low-income utilization rate methodology set 
forth in Section 1923(b)(3) of the Act. Depending on the definition 
used, hospital costs associated with the uninsured may be a subset of 
charity care in the hospital or may entirely encompass a hospital's 
charity care program. Regardless of a hospital's definition/parameter 
on what constitutes charity care, States and hospitals must comply with 
Federal Medicaid DSH law and policy guidance in determining what 
portion of their specific charity care program costs qualify under the 
hospital-specific DSH cost limits.
    To the extent that hospitals do not separately identify 
uncompensated care related to services provided to individuals with no 
source of third party coverage, hospitals will need to modify their 
accounting systems to do so. And hospitals must ensure that no 
duplication of such charges exist in their accounting records. For 
purposes of the initial audits, States and auditors may need to develop 
methods to analyze current audited financial statements and other 
accounting records to properly segregate uncompensated costs.
    Comment: A few commenters noted that if a patient does not have 
health insurance, the costs of services provided to that patient may be 
included in calculating the hospital-specific limit, even if revenues 
related to that patient are uncollectible and eventually written off as 
bad debt. They argued that the touchstone for purposes of the DSH limit 
is whether the individual has third party coverage, not whether the 
hospital has or has not treated the patient's account as bad debt.
    Response: We agree. As long as the costs are for services furnished 
to uninsured patients, they may be included in the calculation of the 
hospital-specific limit, regardless of whether the hospital treats the 
costs as bad debt on its own books.
    Comment: A few commenters said that hospitals are currently 
required to report both charity and bad debt costs to the State 
Medicaid program to assure that the hospital will not receive excess 
Medicaid DSH payment. The commenters indicated that this requirement is 
part of an approved

[[Page 77912]]

Medicaid State plan that has been in place for numerous years, and 
asserted that the proposed requirements would be an unwarranted 
departure from this practice.
    Response: We recognize that this rule may necessitate some changes 
in current practices, but we believe these changes are warranted in 
order to ensure compliance with the statutory hospital-specific limit. 
As discussed above, the statutory calculation does not refer to charity 
care or bad debts, but expressly refers to uncompensated costs of 
furnishing hospital services to individuals eligible for Medicaid or 
individuals who have no health insurance or other third party coverage.
    Comment: A few commenters were concerned that the regulation lacks 
a clear and appropriate definition of ``third-party coverage.'' In 
particular, the commenters believe that third-party coverage should 
explicitly be defined in a manner that makes clear that third-party 
coverage does not include State and local programs to pay for care for 
indigent and uninsured individuals and that ``lack of third-party 
coverage'' also encompasses patients who lack coverage for the service 
provided, not necessarily any coverage at all.
    Response: We disagree. As discussed above, Section 1923(g)(1) of 
the Act refers to costs of hospital services furnished to ``individuals 
without health insurance (or other source of third party coverage).'' 
We have always read this language to distinguish between care furnished 
to individuals who have health insurance or other coverage, and care 
furnished to those who do not. We have never read this language to be 
service-specific and we believe that such an interpretation would be 
inconsistent with the broad statutory references to insurance or other 
coverage. Furthermore, such a reading would result in cost shifting 
from private sector coverage to the Medicaid program. We interpret the 
phrase ``who have health insurance (or other third party coverage)'' to 
refer to individuals who have creditable coverage consistent with the 
definitions under 45 CFR Parts 144 and 146, as well as individuals who 
have coverage based upon a legally liable third party payer.
4. Dual Eligibles
    Comment: A few commenters indicated that days attributable to dual 
eligibles should be included in the calculation described in Section 
1923(a) relating to determining DSH eligibility.
    Response: The Medicaid Inpatient Utilization Rate (MIUR) is a 
calculation that includes all Medicaid eligible days. To the extent 
that an inpatient hospital day for a dually-eligible Medicare/Medicaid 
patient qualifies as a Medicaid day, that day would be included in the 
MIUR calculation.
    Comment: One commenter questioned whether the costs attributable to 
dual eligibles be included in the calculation described in SSA Sec.  
1923(g) relating to uncompensated care costs. The commenter asserted 
that these costs should be excluded because the purpose of the DSH 
upper payment limit is to limit DSH payments to hospitals to no more 
than the difference between the cost and payments of Medicaid and the 
uninsured. The commenter indicated that, since Medicare is the primary 
payer for the duals, it seems appropriate to exclude the costs of those 
patients from this calculation, since the payments are also excluded.
    Response: We disagree; since Section 1923(g)(1) does not contain an 
exclusion for dually eligible individuals, we believe the costs 
attributable to dual eligibles should be included in the calculation of 
the uncompensated costs of serving Medicaid eligible individuals. But 
in calculating those uncompensated care costs, it is necessary to take 
into account both the Medicare and Medicaid payments made, since those 
payments are contemplated under Title XIX. In calculating the Medicare 
payment for service, the hospital would have to include the Medicare 
DSH adjustment and any other Medicare payment adjustment (Medicare IME 
and GME) with respect to that service.
5. Charity and Indigent Care
    Comment: One commenter questioned how a hospital would classify 
individuals who had Medicaid coverage for some discharges and no 
insurance for others.
    Response: The hospital-specific DSH limit comprises uncompensated 
care costs of furnishing inpatient and outpatient hospital services to 
Medicaid eligible individuals and individuals with no source of third 
party coverage for the inpatient and outpatient hospital services they 
receive. If an individual is Medicaid eligible on the day they received 
inpatient or outpatient hospital services, then those services would be 
included in calculating the hospital-specific limit. To the extent the 
Medicaid payment does not fully cover the cost of the inpatient or 
outpatient hospital services provided, the unreimbursed costs of those 
services would be counted in calculating that limit. Servi