Medicaid Program; State Disproportionate Share Hospital Allotment Reductions, 50308-50332 [2019-20731]

Agencies

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

[Federal Register Volume 84, Number 186 (Wednesday, September 25, 2019)]
[Rules and Regulations]
[Pages 50308-50332]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-20731]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 447

[CMS-2394-F]
RIN 0938-AS63


Medicaid Program; State Disproportionate Share Hospital Allotment 
Reductions

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

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The statute requires aggregate reductions to state Medicaid 
Disproportionate Share Hospital (DSH) allotments annually beginning 
with fiscal year (FY) 2020. This final rule delineates the methodology 
to implement the annual allotment reductions.

DATES: These regulations are effective on November 25, 2019.

FOR FURTHER INFORMATION CONTACT: Stuart Goldstein, (410) 786-0694 and 
Richard Cuno, (410) 786-1111.

SUPPLEMENTARY INFORMATION:

I. Executive Summary

A. Purpose

    Section 2551 of the Patient Protection and Affordable Care Act of 
2010 (Pub. L. 111-148, enacted March 23, 2010), as amended by the 
Health Care and Education Reconciliation Act of 2010 (Pub. L. 111-152, 
enacted March 30,

[[Page 50309]]

2010)) (the ACA) amended section 1923(f) of the Act by setting forth 
aggregate reductions to state DSH allotments annually from FY 2014 
through FY 2020. In the September 18, 2013 Federal Register (78 FR 
57293), we published the ``Medicaid Program; State Disproportionate 
Share Hospital Allotment Reductions'' final rule (herein referred to as 
the ``2013 DSH allotment reduction final rule''). In the 2013 DSH 
allotment reduction final rule, we finalized a DSH Health Reform 
Methodology (DHRM), as required by statute, to implement annual 
allotment reductions that would have been in place only for FY 2014 and 
FY 2015. Prior to the implementation of allotment reductions, 
legislation was signed into law delaying the start of the 
reductions.\1\ Subsequent legislation delayed the start of these 
reductions, modified the reduction amounts, and extended the fiscal 
years subject to reductions.\2\ Under current law, annual allotment 
reductions start in FY 2020 and run through FY 2025. In July 28, 2017 
Federal Register (82 FR 35155), we published the ``Medicaid Program; 
State Disproportionate Share Hospital Allotment Reductions'' proposed 
rule (herein referred to as the ``the July 2017 proposed rule''), in 
which we proposed to establish a DHRM applicable for all fiscal years 
subject to allotment reduction that would account for relevant data 
that was unavailable to CMS during prior rulemaking for DSH allotment 
reductions originally set to take place for FY 2014 and FY 2015. In 
this final rule, we are finalizing the DHRM as proposed, with limited 
exceptions identified below.
---------------------------------------------------------------------------

    \1\ Bipartisan Budget Act of 2013 (Pub. L. 113-67), enacted on 
December 26, 2013.
    \2\ Protecting Access to Medicare Act of 2014 (Pub. L. 113-93), 
enacted April 1, 2014; Medicare Access and CHIP Reauthorization Act 
of 2015 (Pub. L. 114-10), enacted April 16, 2015; and the Bipartisan 
Budget Act of 2018 (Pub. L. 115-123), enacted February 9, 2018.
---------------------------------------------------------------------------

B. Summary of the Major Provisions

    The statute as amended by the ACA, directs the Secretary of Health 
and Human Services (the Secretary) to implement the annual DSH 
allotment reductions using a DHRM. This final rule amends 42 CFR 
447.294 by establishing the DHRM for FY 2020 and subsequent fiscal 
years, which incorporates factors identified in the statute. We are 
finalizing Sec.  447.294(a) and (e) to remove language referring to 
specific federal fiscal years (FY 2014 and FY 2015) when calculating 
annual state DSH allotment reductions. We are finalizing Sec.  
447.294(b) to add the definition of ``Total hospital cost.'' We are 
modifying this definition from the proposed in order to give the term 
the same meaning as it is defined in Sec.  447.299(c)(20). We believe 
that cross-referencing the existing provision is clearer, less likely 
to result in any confusion or ambiguity, and is not intended to be a 
substantive difference in meaning from that of the proposed definition. 
This rule finalizes Sec.  447.294(d) to clarify state data submission 
requirements by simplifying the language and removing language related 
to the submission of data for previous state plan rate years (SPRY) 
already provided to CMS. We are finalizing Sec.  447.294(e)(3)(i) to 
utilize total estimated Medicaid service expenditures in the 
calculation of the Low DSH adjustment factor (LDF) for the applicable 
year. In this rule, we are finalizing revisions to Sec.  
447.294(e)(5)(i) through (iii) to adjust the weighting of statutorily 
defined factors required to be included in the DHRM. Additionally, this 
rule finalizes revisions to Sec.  447.294 to revise paragraph (f) by 
removing references to specific fiscal years in regulation.

C. Impacts

    The DHRM will generate a state-specific DSH allotment reduction 
amount for each fiscal year in accordance with the requirements 
specified in section 1923(f)(7) of the Act. The total of all DSH 
allotment reduction amounts in a specific fiscal year will equal the 
aggregate annual reduction amount identified in the statute for that 
year. To determine the effective annual DSH allotment for each state, 
the state-specific annual DSH allotment reduction amount will be 
applied to the unreduced DSH allotment amount for the state.

II. Background

A. Introduction

    In anticipation of lower uninsured rates and lower levels of 
hospital uncompensated care, the ACA modified the amounts of funding 
available to states under the Medicaid program to address the situation 
of hospitals that serve a disproportionate share of low-income 
patients, and therefore, may have uncompensated care costs. Under 
sections 1902(a)(13)(A)(iv) and 1923 of the Act, states are required to 
make payments to qualifying DSHs (DSH payments). Section 2551 of the 
ACA amended section 1923(f) of the Act, by adding paragraph (7), to 
provide for aggregate reductions in federal funding under the Medicaid 
program for such DSH payments for the 50 states and the District of 
Columbia. DSH allotments are not provided for the five US territories.
    Section 1923(f)(7)(A)(i) of the Act requires that the Secretary 
implement the aggregate reductions in federal funding for DSH payments 
through reductions in annual state allotments of federal funding for 
DSH payments (state DSH allotments), and accompanying reductions in 
payments to each state. Since 1998, the amount of federal funding for 
DSH payments for each state has been limited to an annual state DSH 
allotment in accordance with section 1923(f) of the Act. The addition 
of section 1923(f)(7) of the Act requires the use of a DHRM to 
determine the percentage reduction in annual state DSH allotments to 
achieve the required aggregate annual reduction in federal DSH funding. 
The statutory reductions apply to all states and the District of 
Columbia, except the State of Tennessee. Under section 
1923(f)(6)(A)(vi) of the Act, notwithstanding any other provision of 
section 1923(f) of the Act, or any other provision of law, the DSH 
allotment for Tennessee is established at $53.1 million per year for FY 
2015 through FY 2025. Therefore, Tennessee's DSH allotment is not 
subject to reduction under section 1923(f)(7) of the Act. For purposes 
of this rule, references to the reduction for ``each state'' means 
``each state subject to a DSH allotment reduction'' (that is, the 50 
states and the District of Columbia, except, for periods before FY 
2026, Tennessee).
    Section 1923(f)(7)(B) of the Act establishes the following factors 
that must be considered in the development of the DHRM. The methodology 
must:
     Impose a smaller percentage reduction on low DSH States;
     Impose the largest percentage reductions on:
    ++ States that have the lowest percentages of uninsured individuals 
during the most recent year for which such data are available;
    ++ States that do not target their DSH payments on hospitals with 
high volumes of Medicaid inpatients;
    ++ States that do not target their DSH payments on hospitals with 
high levels of uncompensated care; and
     Take into account the extent to which the DSH allotment 
for a state was included in the budget neutrality calculation for a 
coverage expansion approved under section 1115 of the Act as of July 
31, 2009.
    In section II.B. of the July 2017 proposed rule, we described the 
principles we intended to apply when calculating the annual DSH 
allotment reduction amounts for each state through the DHRM.

[[Page 50310]]

B. Legislative History and Overview

    The Omnibus Budget Reconciliation Act of 1981 (OBRA'81) (Pub. L. 
97-35, enacted on August 13, 1981) amended section 1902(a)(13) of the 
Act to require that Medicaid payment rates for hospitals take into 
account the situation of hospitals that serve a disproportionate share 
of low-income patients with special needs. Over the more than 35 years 
since this requirement was first enacted, the Congress has set forth in 
section 1923 of the Act payment targets and limits to implement the 
requirement and to ensure greater oversight, transparency, and 
targeting of funding to hospitals.
    To qualify as a DSH under section 1923(b) of the Act, a hospital 
must meet two minimum qualifying criteria in section 1923(d) of the 
Act. The first criterion is that the hospital has at least two 
obstetricians who have staff privileges at the hospital and who have 
agreed to provide obstetric services to Medicaid beneficiaries. This 
criterion does not apply to hospitals in which the inpatients are 
predominantly individuals under 18 years of age or hospitals that do 
not offer nonemergency obstetric services to the general public as of 
December 22, 1987. The second criterion is that the hospital has a 
Medicaid inpatient utilization rate (MIUR) of at least 1 percent.
    Under section 1923(b) of the Act, a hospital meeting the minimum 
qualifying criteria in section 1923(d) of the Act is deemed as a DSH if 
the hospital's MIUR is at least one standard deviation above the mean 
MIUR in the state for hospitals receiving Medicaid payments, or if the 
hospital's low-income utilization rate (LIUR) exceeds 25 percent. 
States have the option to define DSHs under the state plan using 
alternative qualifying criteria as long as the qualifying methodology 
comports with the deeming requirements of section 1923(b) of the Act. 
Subject to certain federal payment limits, states are afforded 
flexibility in setting DSH state plan payment methodologies to the 
extent that these methodologies are consistent with section 1923(c) of 
the Act.
    Section 1923(f) of the Act limits federal financial participation 
(FFP) for total statewide DSH payments made to eligible hospitals in 
each federal FY to the amount specified in an annual DSH allotment for 
each state. Although there have been some special rules for calculating 
DSH allotments for particular years or sets of years, section 
1923(f)(3) of the Act establishes a general rule that state DSH 
allotments are calculated on an annual basis in an amount equal to the 
DSH allotment for the preceding FY increased by the percentage change 
in the consumer price index for all urban consumers for the previous 
FY. The annual allotment, after the consumer price index increase, is 
limited to the greater of the DSH allotment for the previous year or 12 
percent of the total amount of Medicaid expenditures under the state 
plan during the FY. Allotment amounts were originally established in 
the Medicaid Voluntary Contribution and Provider Specific Tax 
Amendments of 1991 based on each state's historical DSH spending.
    Section 1923(g) of the Act also limits DSH payments by imposing a 
hospital-specific limit on DSH payments. Specifically, a DSH payment 
must not exceed a hospital's uncompensated care costs for that year 
(that is, it must not exceed the costs of providing inpatient hospital 
and outpatient hospital services to Medicaid patients and the 
uninsured, minus payments received by the hospital by or on the behalf 
of those patients). FFP is not available for DSH payments that exceed 
the hospital-specific limit.
    The statute, as amended by the ACA, required annual aggregate 
reductions in federal DSH funding from FY 2014 through FY 2020. 
However, subsequent legislation extended the reductions, modified the 
amount of the reductions, and delayed the start of the reductions, 
which now begin in FY 2020. The most recent related amendments to the 
statute were through the Bipartisan Budget Act of 2018 (Pub. L. 115-
123, enacted February 9, 2018) (BBA 18). Currently, the aggregate 
annual reductions are set to begin in FY 2020, and the annual reduction 
amounts are specified in section 1923(f)(7)(A)(ii) of the Act:
     $4,000,000,000 for FY 2020.
     $8,000,000,000 for FY 2021.
     $8,000,000,000 for FY 2022.
     $8,000,000,000 for FY 2023.
     $8,000,000,000 for FY 2024.
     $8,000,000,000 for FY 2025.
    To implement these annual reductions, the statute requires that the 
Secretary reduce annual state DSH allotments, and payments to states, 
based on a DHRM specified in section 1923(f)(7)(B) of the Act. The 
proposed DHRM relied on five statutorily-identified factors 
collectively to determine a state-specific DSH allotment reduction 
amount to be applied to the allotment that is calculated under section 
1923(f) of the Act prior to the reductions under section 1923(f)(7) of 
the Act.
    In the May 15, 2013 Federal Register (78 FR 28551), we published 
the ``Medicaid Program; State Disproportionate Share Hospital Allotment 
Reductions'' proposed rule. The rule proposed a DHRM that relied on the 
statutory factors and solicited comments regarding whether state 
decisions to extend Medicaid coverage to low-income adults under 
section 1902(a)(10)(A)(i)(VIII) of the Act (the Medicaid expansion 
population) should be accounted for in the reduction methodology. We 
received several comments in support of accounting for Medicaid 
coverage expansion and numerous comments in opposition.
    In the September 18, 2013 Federal Register (78 FR 57293), we 
published the ``Medicaid Program; State Disproportionate Share Hospital 
Allotment Reductions'' final rule (herein referred to as the ``2013 DSH 
allotment reduction final rule''). In the 2013 DSH allotment reduction 
final rule, we decided to finalize a DHRM that would be in place only 
for FY 2014 and FY 2015 to allow time for revaluation of the 
methodology with improved and more recent data and information about 
the impact of the ACA on levels of coverage and uncompensated care. As 
a result of our reevaluation, we subsequently proposed to modify the 
DHRM factor weights and to use improved data sources where possible.

III. Summary of the Provisions of the July 2017 Proposed Rule and 
Responses to Public Comments

    In the July 2017 proposed rule, we proposed to amend Sec.  447.294 
by establishing the DHRM for FY 2018 and subsequent fiscal years, 
incorporating factors identified in the statute. We received 
approximately 140 public comments on the proposed rule from 
organizations, individuals, health care providers, advocacy groups, and 
states. In the sections that follow, we describe each proposed 
provision, summarize any public comments received on each provision, 
and provide our responses to the comments.

A. General Comments

    In addition to the comments we received on the July 2017 proposed 
rule's discussion of specific aspects of the State DSH Allotment 
Reductions (which we address later in this final rule), commenters also 
submitted the following more general observations on the reductions. 
The following is a discussion of these comments.
    Comment: Many commenters urged delaying the implementation of the 
annual aggregate reductions to State DSH allotments. The commenters 
provided various reasons for the requested delay.

[[Page 50311]]

    Response: The statute directs the Secretary to develop a DHRM to 
implement annual Medicaid DSH allotment reductions. Various 
legislation, including most recently the BBA 18, delayed the start of 
the reductions until FY 2020. We have no flexibility administratively 
to delay the start of the statutory reductions.
    Comment: Multiple commenters expressed concern that unreduced DSH 
allotments under section 1923(f) of the Act are inequitable. Some of 
these commenters recommended modifications to the method for 
determining the unreduced allotments and some commenters indicated a 
belief that the proposed DHRM would exacerbate the alleged inequities 
of the unreduced allotments.
    Response: Section 1923(f)(7) of the Act specifies the five factors 
for the DHRM, but does not authorize modifications to the statutory 
formula for calculating unreduced state DSH allotments under section 
1923(f) of the Act. While the statute does not direct the Secretary to 
modify the formula for unreduced DSH allotments through the DHRM, the 
DHRM does take into account the size of the existing state DSH 
allotments in determining annual allotment reduction amounts. Most 
notably, the Low DSH Adjustment Factor (LDF) requires the imposition of 
smaller percentage reductions on low DSH states that historically have 
received lower DSH allotments relative to their total Medicaid 
expenditures than non-low DSH states.
    Comment: One commenter inquired as to when the reduced 2018 DSH 
allotments will be available as cuts were to begin October 1, 2017.
    Response: The BBA 18 delayed the start of annual DSH allotment 
reductions until FY 2020, which begins on October 1, 2019. We intend to 
make final FY 2020 reduction amounts available to states once finalized 
data necessary to calculate these reductions are available, which CMS 
anticipates will be on or before October 1, 2019.
    Comment: A number of commenters expressed concern that the DSH 
allotment reductions will cause financial distress to hospitals.
    Response: We understand the commenters' concerns. However, the 
statute requires annual aggregate reductions in DSH allotments starting 
in FY 2020 and the use of a DHRM to determine the percentage reduction 
in annual state DSH allotments to achieve the required aggregate annual 
reduction amounts. We are finalizing a DHRM that is consistent with 
statutory direction and does not affect the considerable flexibility 
afforded states in setting DSH state plan payment methodologies to the 
extent that these methodologies are consistent with section 1923(c) of 
the Act and all other applicable statutes and regulations.
    Comment: One commenter stated that those affected by drug addiction 
and mental health issues will be hurt by the DSH reductions.
    Response: We recognize the importance of health care services for 
substance use disorders and behavioral health issues. However, section 
1923(f)(7)(A)(i) of the Act requires the Secretary implement aggregate 
reductions in federal funding for DSH payments through reductions in 
annual state DSH allotments. Moreover, these statutorily-required 
annual state DSH allotment reductions do not directly affect payment 
rates for services, including services related to substance use 
disorders or behavioral health, or otherwise directly affect 
reimbursement to providers that do not receive DSH payments.
    Comment: A few commenters suggested that CMS finalize the rule for 
a limited period of time to allow for reevaluation and refinement to 
strengthen the DHRM in future years.
    Response: We recognize the importance of the DHRM to states, 
hospitals, and other stakeholders. Therefore, we will monitor and 
reevaluate the DHRM and its application throughout implementation. If 
necessary, we will undertake future rulemaking to make modifications to 
the DHRM.
    Comment: Multiple commenters suggested that the DHRM does not take 
into consideration that Medicaid reimbursement rates are considerably 
lower than private insurance.
    Response: Section 1923(f)(7) of the Act specifies the five factors 
for the DHRM, but does not direct the Secretary to consider 
specifically the levels of Medicaid reimbursement rates as compared to 
private insurers. However, the DHRM does consider Medicaid coverage and 
payment levels by imposing the largest percentage DSH allotment 
reductions on states that do not target their DSH payments on hospitals 
with high volumes of Medicaid inpatients and states that do not target 
their DSH payments on hospitals with high levels of uncompensated care, 
which includes Medicaid shortfall.
    Comment: Some commenters expressed concern that the Congress passed 
Medicaid DSH allotments reductions expecting that hospitals would care 
for fewer uninsured patients as a result of health care coverage 
expansion related to the ACA. Commenters also stated that projected 
increases in coverage have not been fully realized for a variety of 
reasons and some noted that some providers in Medicaid expansion states 
are still experiencing significant losses for serving Medicaid 
beneficiaries. Some commenters also expressed concern that increases in 
the number of insured individuals has not decreased the need for DSH 
payments.
    Response: We appreciate the comments, but the statute directs the 
Secretary to develop a DHRM to implement annual Medicaid allotment 
reductions. We have no administrative flexibility to delay the start of 
the statutory reductions or to reduce the aggregate reduction amounts 
specified in statute. We believe that the final DHRM distributes DSH 
allotment reduction amounts among the states in an equitable manner, 
consistent with statutory requirements.
    Comment: Several commenters stated that the hospital industry 
greatly opposes CMS' policy for the treatment of third party payments 
when calculating the hospital-specific DSH limit, stating it is a 
misinterpretation of the Medicaid statute.
    Response: CMS' policy regarding the treatment of third party 
payments when calculating the hospital-specific DSH limit is outside 
the scope of this rule.
    Comment: A few commenters indicated there are unresolved legal 
questions related to the DSH audit process that are the subject of 
pending litigation; therefore, CMS should delay finalizing the DSH 
reduction methodology. One commenter expressed concern that the DSH 
audit and reporting data may not be consistent with federal Medicaid 
law.
    Some commenters recommended that CMS delay the final rule until 
stakeholders have had ample opportunity to replicate and evaluate the 
proposed DHRM and that CMS should provide requisite data sets and 
sufficient technical information before issuing a final rule. The 
commenters requested that if that is not possible, then CMS should 
finalize the DHRM for FY 2018 only and provide an adequate comment 
period, requisite data sets, and refined technical information with a 
proposed rule for FY 2019. The commenters noted that, given the 
complexity of the DHRM and the destabilizing effect that statutorily-
required annual state DSH allotment reductions may have on safety net 
hospitals, a longer comment period and more transparency would be 
warranted.
    Response: We do not believe that there is any need to delay 
finalizing the July 2017 proposed rule. The statute

[[Page 50312]]

directs the Secretary to develop a DHRM to implement annual Medicaid 
DSH allotment reductions, and the intent of this rule is to provide the 
methodology used to calculate the statutorily-required Medicaid DSH 
allotment reductions. While a number of issues related to Medicaid DSH 
payment calculations currently are the subject of litigation, the 
statutorily-required allotment reductions and the DHRM are not among 
them, and we are bound by statute to adopt a rule to implement the DSH 
reductions. With this final rule, we are doing so according to our view 
of the best interpretation of the DSH statute and will utilize the most 
recent data available to us that is consistent with applicable laws and 
regulations.
    The BBA 18 delayed the start of the reductions until FY 2020. 
Accordingly, concerns with respect to how a DHRM might have applied 
with respect to prior fiscal years, including FY 2018 and FY 2019, are 
moot. We have no flexibility to delay the start of the statutory 
reductions. Finally, we intend to publish a separate DHRM technical 
guide that provides information regarding the DHRM calculation and 
associated data sources in order to be fully transparent with states 
and other stakeholders.
    Comment: Several commenters expressed concern with the 30-day 
comment period and the availability of data used in the illustrative 
model during the comment period and noted that a 60-day comment period 
would have been more appropriate. Another commenter suggested a second 
comment period prior to when the DSH allotment reductions for FY 2018 
are published to allow states to accurately estimate the impact of the 
proposed methodology on the state.
    Response: We believe the 30-day comment period was appropriate and 
are not providing an additional comment period. Section 1923(f)(7)(B) 
of the Act, establishing the five factors that must be considered in 
the development of the DHRM, was enacted in statute in 2010. 
Additionally, we signaled our intent to pursue a similar methodology in 
future rulemaking when publishing the final 2013 DSH allotment 
reduction rule.
    Comment: One commenter indicated that research has shown that 
residents of Medicaid expansion states are less likely to experience 
financial barriers to healthcare access than residents of states that 
have not expanded Medicaid coverage.
    Response: This comment is outside the scope of this rule.
    Comment: One commenter encouraged CMS to consider that Medicaid is 
the single largest payer to children's hospitals and suggested that the 
regulation will impose a greater burden to these hospitals, which 
already face significant financial challenges due to inadequate 
Medicaid reimbursement rates. Another commenter expressed concern that 
the reductions will have a negative impact on hospitals in the 
commenter's state, given that there is not a sufficient number of 
privately insured patients to offset losses from Medicare and Medicaid, 
which pay significantly less than private insurers.
    Response: We appreciate the important role that children's 
hospitals play in serving Medicaid beneficiaries. This rule provides 
the methodology used to calculate the statutorily-required Medicaid DSH 
allotment reductions and does not affect the flexibility afforded to 
states when 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 laws and regulations. States retain 
flexibility to direct Medicaid DSH payments to qualifying hospitals in 
the state, including children's hospitals, in the manner the state 
determines most appropriate under the conditions in the state. In 
addition, we are finalizing a DHRM that would equitably allocate the 
statutorily-required annual reductions based on the factors specified 
in section 1923(f)(7) of the Act. Changes to Medicare and non-DSH 
Medicaid payment rates are outside the scope of this rule.
    Comment: One commenter stated that the statute requiring DSH 
allotment reductions is unethical, particularly in that it would reduce 
payments to hospitals.
    Response: We appreciate the concerns that the rule may have an 
impact on hospitals. However, the statute as amended by the ACA and 
subsequent legislation directs the Secretary to implement annual DSH 
allotment reductions using a DHRM, which is specified in this final 
rule.
    Comment: One commenter noted their work for an institution that 
served mostly Medicaid patients and that the institution may not be 
able to continue to provide services to all individuals if DSH payments 
are reduced. Additionally, the commenter expressed concern that future 
Congressional action in health care might result in additional 
uninsured or underinsured patients.
    Response: We appreciate the important role that DSHs play in 
providing health care to low-income individuals and vulnerable 
populations. The statute specifies the annual amount of aggregate DSH 
allotment reductions and directs the Secretary to develop a methodology 
which takes into consideration the required statutory factors for 
allocating a reduction amount to each state. This final rule does not 
affect state flexibility to develop methodologies as described in 
section 1923(c) of the Act for payments to qualifying hospitals, 
provided the methodology complies with all applicable statutory and 
regulatory requirements.
    Comment: One commenter recommended that CMS carve out most non-DSH 
supplemental payments made to inpatient hospitals and add the funding 
into the state's DSH allotment, to better support essential hospitals 
by ensuring payments flow through one central distribution program.
    Response: Non-DSH Medicaid supplemental payments and the method for 
calculating unreduced DSH allotments in section 1923(f) of the Act are 
outside the scope of this rule.
    Comment: One commenter suggested CMS consider that Medicaid is 
about to embark on a new phase of payment and delivery reform, and the 
DSH reductions could disrupt those efforts.
    Response: This rule does not address potential future payment and 
delivery reform, and does not affect state's flexibility under section 
1923 of the Act to establish DSH payment methodologies.
    Comment: Many commenters recommended that CMS mitigate the impact 
of reductions on specific hospital types, including rural hospitals, 
safety net hospitals, critical access hospitals, and academic medical 
centers. One commenter recommended that CMS mitigate reductions based 
on community needs to ensure individuals have access to care and that 
DSH funding is available for medically necessary services. Another 
commenter expressed concern for low and moderate income families having 
access to care and suggested that hospitals be required to meet basis 
standards related to charity care, billing, and collections to receive 
DSH payments.
    Response: This rule only addresses the aggregate DSH allotment 
reductions under section 1923(f)(7) of the Act. The statutory 
requirements for DSH payment methodologies are specified in section 
1923(c) of the Act and are outside of the scope of this rule. However, 
we believe that the DHRM reduces DSH allotments, at the state level, in 
an equitable manner that is consistent with the statute. Accordingly, 
we designed the DHRM to preserve the considerable flexibility afforded 
states in setting DSH state plan payment methodologies, to the extent 
that these methodologies are consistent with section 1923(c) of the Act 
and all

[[Page 50313]]

other applicable statutes and regulations.
    Comment: One commenter recommended that CMS consider Medicaid 
shortfalls, charity care, and bad debt in the distribution of funds 
from uncompensated care pools approved under section 1115 
demonstrations. In addition, the commenter recommended that CMS 
consider all lines of a hospital's business in the DHRM for hospitals 
experiencing negative margins to better account for the overall 
financial situation of hospitals.
    Response: This regulation does not address the distribution of 
payments under section 1115 demonstrations; it only addresses the 
statutorily-required Medicaid DSH allotment reductions. Changes 
affecting the distribution of payments under section 1115 
demonstrations are outside the scope of this rule. Additionally, the 
hospital-specific limit under section 1923(g) of the Act only considers 
costs incurred for furnishing hospital services to individuals who are 
either Medicaid beneficiaries or uninsured. Consistent with the DSH 
statute's overall focus on these populations, the statutory DHRM 
targeting factors also require smaller reductions be imposed on states 
that target their DSH payments to hospitals with high volumes of 
Medicaid inpatients and high levels of uncompensated care (excluding 
bad debt). As such, we did not propose and are not finalizing 
consideration of other lines of a hospital's business for purposes of 
the statutorily-required Medicaid DSH allotment reductions.
    Comment: Many commenters expressed concerns regarding the 
possibility of revisions to or repeal of the ACA and recommended that 
the DHRM include a provision for reversal of reductions if future 
legislation affecting section 1923(f)(7) of the Act is enacted.
    Response: We appreciate the commenters' concerns but are 
statutorily-bound to implement the DSH allotment reductions beginning 
with FY 2020. This final rule does not prevent CMS from following 
future statutory provisions, including any revisions to the applicable 
statute pertaining to Medicaid DSH allotment reductions. We will 
undertake future rulemaking as may be necessary to ensure that the 
regulations continue to implement statutory requirements appropriately.
    Comment: We received several comments related to the Medicare 
Inpatient Prospective Payment System (IPPS) rules.
    Response: Comments on the Medicare IPPS rules are outside the scope 
of this rule.
    Comment: One commenter expressed concern that the proposed 
methodology will exacerbate current inequalities in Medicare IPPS and 
jeopardize the existence of hospitals already experiencing negative 
margins.
    Response: The Medicaid and the Medicare programs are distinct 
programs authorized under different titles of the statute and the 
Medicare and Medicaid DSH rules have somewhat different purposes and 
statutory directives. Section 1923(f)(7)(B) of the Act establishes five 
factors that must be considered in the development of the DHRM. While 
we appreciate the commenter's concern, considerations related to the 
Medicare IPPS are not included in the factors Congress has specified to 
be considered in the DHRM. However, states will continue to have 
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 statutes and 
regulations.
    Comment: One commenter expressed concern that California's 
estimated DSH reductions are more than double those estimated in the 
proposed rule released in 2013.
    Response: The aggregate DSH allotment reductions shown for FY 2018, 
as included in the illustrative model included in the July 2017 
proposed rule, were greater for all states (except Tennessee) than the 
aggregate DSH allotment reduction amounts in the illustrative example 
for the 2013 DSH allotment reduction proposed rule. This was the result 
of the magnitude of the reductions shown in the illustrative example in 
the July 2017 proposed rule, which were $2 billion, while the 
reductions shown in the 2013 proposed rule were $500 million. 
Additionally, the state-specific DSH allotment reductions included in 
both proposed rules were part of illustrative examples to show how the 
DHRM would work, and were not estimated reduction amounts. Under 
current law FY 2018 would not be subject to annual allotment reductions 
which will now begin in FY 2020 and run through FY 2025.
    Comment: One commenter questioned whether state-specific DSH 
allotment reductions for each fiscal year will increase proportionately 
as the annual aggregate DSH allotment reductions increase.
    Response: Each state's annual DSH allotment reduction will be 
determined annually based on the DHRM.
    Comment: One commenter stated that 50 percent of all hospitals are 
DSH and expresses concern that the reductions may be unevenly 
allocated.
    Response: We believe that the DHRM will determine state DSH 
allotment reductions in an equitable manner consistent with statutory 
requirements. States will continue to have 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 statutes and regulations.

B. DHRM Data Sources

    The statute establishes parameters regarding data and data sources 
for specific factors in the development of the DHRM. In the July 2017 
proposed rule, we proposed that the DHRM would rely, wherever possible, 
on data sources and metrics that are consistent with the statute, 
transparent, and readily available to CMS, states, and the public, such 
as: DSH MIUR data; Medicaid DSH data reported as required by section 
1923(j) of the Act; United States Census Bureau (Census Bureau) data; 
existing state DSH allotments; and Form CMS-64 Medicaid Budget and 
Expenditure System (MBES) data. We proposed to utilize the most recent 
year available for all data sources and proposed to align the state 
plan rate year (SPRY) of data sources whenever possible. Selected data 
sources are discussed in greater detail below, including our responses 
to comments regarding particular data sources.
1. MIUR Data
    To ensure that all hospitals are properly deemed disproportionate 
share in accordance with section 1923(b) of the Act, states must 
determine the mean MIUR for hospitals receiving Medicaid payments in 
the state and the value of one standard deviation above the mean. 
States are currently required to provide this data to CMS annually 
under Sec.  447.294(d) (CMS-R-266, Office of Management and Budget 
(OMB) 0938-0746). We proposed to utilize MIUR data from the year that 
corresponds to the DSH audit SPRY used in the calculation of each 
state's DSH allotment reduction.
2. Medicaid DSH Audit and Reporting Data
    We also proposed to rely on data derived from Medicaid DSH audit 
(CMS-R-266, OMB 0938-0746) and reporting data (CMS-R-266, OMB 0938-
0746). The data is reported by states as required by section 1923(j) of 
the Act and the ``Medicaid

[[Page 50314]]

Disproportionate Share Hospital Payments'' final rule published on 
December 19, 2008 (73 FR 77904) (and herein referred to as the 2008 DSH 
audit final rule) requiring state reports and audits to ensure the 
appropriate use of Medicaid DSH payments and compliance with the 
hospital-specific DSH limit imposed at section 1923(g) of the Act. This 
is the only comprehensive data source for DSH hospitals that identifies 
hospital-specific DSH payments and uncompensated care costs in a manner 
consistent with Medicaid DSH program requirements.\3\
---------------------------------------------------------------------------

    \3\ CMS published a final rule in the April 3, 2017 Federal 
Register (82 FR 16114) revising the text of Sec.  447.299(c)(1). 
Effective June 2, 2017, the rule amended paragraph (c)(1) to clarify 
that uncompensated care costs are calculated using total cost of 
care for Medicaid inpatient and outpatient services, net of third-
party payments.
---------------------------------------------------------------------------

    To date, we have received rich, comprehensive audit and reporting 
data from each state that makes Medicaid DSH payments. To facilitate 
the provision of high quality data, we provided explicit parameters in 
the 2008 DSH audit final rule and associated policy guidance for 
calculating and reporting data elements. As the data elements are based 
on hospital costs reports and are subject to audit, the data elements 
are not due to CMS until the end of the calendar year 3 years following 
the end of each SPRY. Additionally, state submitted audit and reporting 
data is subject to detailed CMS review to ensure quality and accuracy 
and requires significant resources to compile and prepare for use in 
the DHRM. This means that the data used for the methodology may not be 
the most recently submitted data, but instead the most recent data 
available to us in usable form. For the reductions scheduled for FY 
2020, we anticipate utilizing SPRY 2015 DSH audit and reporting data, 
which was due to CMS from states on December 31, 2018. We considered 
utilizing alternative uncompensated care cost data and Medicaid 
utilization data from sources such as the Medicare Form CMS-2552 (OMB 
0938-0050), which we explained in more detail in the 2013 DSH allotment 
reduction final rule. The DSH audit and reporting data, however, 
remains the only comprehensive reported data available that is 
consistent with Medicaid program requirements.
3. United States Census Bureau Data
    As required by the statute, the DHRM must impose the largest 
percentage DSH allotment reductions on the states that have the lowest 
percentages of uninsured individuals. Although other sources of this 
information could be considered for this purpose, the statute 
explicitly refers to the use of data from the Census Bureau for 
determining the percentage of uninsured for each state. As with the 
2013 DSH allotment reduction final rule, we identified and considered 
two Census Bureau data sources for this purpose: The American Community 
Survey (ACS); and the Annual Social and Economic Supplement to the 
Current Population Survey (CPS). In consultation with the Census 
Bureau, we proposed to use the data from the ACS for the following 
reasons. First, the ACS is the largest household survey in the United 
States; in that regard, the annual sample size for the ACS is over 30 
times larger than that for the CPS--about 3 million for the ACS versus 
100,000 for the CPS. The ACS is conducted continuously each month 
throughout the year, with the sample for each month being roughly 1/
12th of the annual total, while the CPS is conducted in the first 4 
months following the end of the survey year.
    Finally, although the definition of uninsured and insured status is 
the same for the ACS and the CPS, the CPS considers the respondents as 
uninsured if they are uninsured at any time during the year whereas the 
ACS makes this determination based on whether the respondent has 
coverage at the time of the interview, which are conducted at various 
times throughout the year. For these reasons, and with the 
recommendation of the Census Bureau, we determined that the ACS is the 
appropriate source for establishing the percentage of uninsured for 
each state for purpose of the DHRM.
    We received a number of public comments on our proposals regarding 
DHRM data sources in the July 2017 proposed rule. A discussion of these 
comments, with our responses, appears below.
    Comment: One commenter expressed support for the DSH audit and 
reporting data being the source for uncompensated care cost data for 
the DHRM.
    Response: We thank the commenter for the support for the proposal 
and are finalizing the use of the DSH audit and reporting data as the 
source of uncompensated care cost data for the DHRM.
    Comment: Several commenters expressed concern regarding the use of 
DSH audit and reporting data for the DHRM. The commenters cited various 
concerns regarding the DSH audit data, including the use of out-of-date 
data which causes a lag between DSH policy and programmatic changes 
that is not reflected in audit and reporting data. One commenter 
indicated that use of the DSH audit data penalized states because it is 
not reflective of DSH payment policy changes that have been made in 
later time periods following the audit year. Many commenters requested 
that CMS provide states with at least 4 years advance notice of its 
intent to utilize DSH audit data for reductions based on payment 
targeting to give states proper time to consider adjustments to their 
programs. One commenter expressed concern that the timeliness of the 
DSH audit data undermines the incentive for states to target DSH 
payments because states have to wait 5 years, which the approximate lag 
time between a particular SPRY subject to audit and when related data 
for that year becomes available for use in the DHRM, to see the 
benefits of targeting hospitals with high Medicaid utilization and high 
uncompensated care costs. Some commenters recommended that CMS use 
uniform data in the DHRM wherever possible among all hospitals. Other 
commenters recommended that we consider initiating a separate survey to 
determine uncompensated care costs for a more recent year than the DSH 
audit data we propose to use in the DHRM. Several commenters 
recommended that CMS revise the DHRM if a source of timelier data 
become available.
    Response: The Medicaid DSH audit and reporting data is the most 
comprehensive reported data available that is consistent with Medicaid 
program requirements. To date, we have received audit and reporting 
data from each state that makes Medicaid DSH payments. To facilitate 
the provision of high quality data, we provided explicit parameters in 
the 2008 DSH final rule and associated policy guidance for calculating 
and reporting data elements. The 2008 DSH final rule included a 
transition period in which states and auditors could develop and refine 
audit and reporting techniques. Moreover, states have had ample time to 
implement DSH payment methodologies that could mitigate DSH allotment 
reductions related to the DSH payment targeting factors, which have 
been codified in statute since March 23, 2010, and prior rulemaking as 
finalized in the 2013 DSH allotment reduction rule and as discussed in 
the July 2017 proposed rule. This final rule will not affect the 
considerable flexibility afforded to states with regard to establishing 
DSH state plan payment methodologies to the extent that these 
methodologies are consistent with section 1923(c) of the Act and all 
other applicable statutes and regulations.
    We currently have no plans to develop a separate survey to serve as 
a

[[Page 50315]]

timelier source of uncompensated care costs. However, we do not believe 
a timelier source of high quality data could be developed given that 
cost reports used to calculate uncompensated care costs may not be 
settled for 2 or more years following the end of a fiscal year. 
Moreover, an additional time period would be needed to allow for review 
and/or audit of this data to ensure its quality and accuracy. This 
would impose administrative burden on states, hospitals and us by 
essentially doubling effort relating to DSH auditing and reporting. As 
such, we are finalizing reliance on existing DSH audit and reporting 
data in the DHRM because it represents the best available data that is 
consistent with existing program requirements without imposing 
duplicative and otherwise unnecessary burden. Notwithstanding, we will 
continue to monitor the reduction methodology after implementation and 
will consider whether the development of a timelier data source is 
warranted, which we would undertake through future rulemaking, as 
necessary.
    Comment: Several commenters recommended that CMS modify DSH audit 
requirements to rely on estimated costs in calculating hospital-
specific limits instead of relying on actual costs to allow for more 
recent data to be included in the DHRM. Two commenters suggested that 
this approach would also minimize the financial burden that conducting 
independent certified DSH audits places upon states.
    Response: While we recognize that states must use estimates to 
determine DSH payments in a given Medicaid SPRY, the independent 
certified DSH audits are statutorily-required under section 1923(j) of 
the Act to verify the extent to which such estimates are reflective of 
the actual costs and that resultant payments do not exceed the 
limitations on DSH payments imposed by Congress.
    Comment: One commenter expressed concern that the DSH audit and 
reporting data included negative values for uncompensated care.
    Response: Negative values for uncompensated care costs occur where 
hospitals receive payments by or on the behalf of Medicaid patients and 
the uninsured for inpatient and outpatient hospital services that 
exceed the costs of providing inpatient hospital and outpatient 
hospital services to such individuals.
    Comment: One commenter recommended that CMS modify the DSH 
reporting requirements to collect total hospital costs from the 
Medicare cost report for all hospitals that receive DSH payments.
    Response: We confirm that as part of the DSH audit submission, 
states are currently required to report total hospital costs, meaning 
the total annual costs incurred by the hospital for furnishing 
inpatient hospital and outpatient hospital services, for each in-state 
hospital that receives a DSH payment, per Sec.  447.299(c).
    Comment: One commenter requested a detailed explanation of how CMS 
derived Massachusetts' HMF and HUF reduction or the HMF and HUF 
reduction for any state missing hospital-specific DSH payments.
    Response: As of the publication of this final rule, we have not 
calculated FY 2020 DSH allotment reductions. We will calculate FY 2020 
reductions for Massachusetts and all other states by utilizing the 
final DHRM. States that do not make DSH payments may still receive a 
DSH allotment reduction.

C. DHRM Overview

    The statute requires aggregate annual reduction amounts to be 
implemented through a DHRM designed by the Secretary consistent with 
statutorily-established factors. Taking these factors into account for 
each state, we proposed that the DHRM would generate a state-specific 
DSH allotment reduction amount for each applicable fiscal year for all 
states and the District of Columbia, with the exception of Tennessee, 
whose DSH allotment is defined in section 1923(f)(6)(A)(vi) of the Act 
to be $53.1 million, notwithstanding DSH allotment reductions in 
section 1923(f)(7) of the Act, for each FY from 2015 through 2025. The 
total of all DSH allotment reduction amounts would equal the aggregate 
annual reduction amount identified in statute for each applicable 
fiscal year. To determine the effective annual DSH allotment for each 
state, we proposed that the state-specific annual DSH allotment 
reduction amount would be applied to the unreduced DSH allotment amount 
for its respective state.
    We proposed to calculate an unreduced DSH allotment for each state 
prior to the beginning of each FY, as we do currently. This unreduced 
allotment is determined by calculating the allotment in section 1923(f) 
of the Act prior to the application of the DHRM under section 
1923(f)(7) of the Act. We proposed that the unreduced allotment would 
serve as the base amount for each state to which the state-specific DSH 
allotment reduction amount would apply annually. In the July 2017 
proposed rule, we utilized estimated unreduced DSH allotments for FY 
2017 for illustrative purposes. Moreover, we indicated that the 
illustrative estimate may rely on different data than what we proposed 
to use when calculating annual DSH allotment reductions for FY 2018, 
which is when reductions were scheduled to begin when we published the 
July 2017 proposed rule, and anticipated that more recent data would be 
available when calculating the final allotment reductions.
    We proposed to apply the DHRM to the unreduced DSH allotment amount 
on an annual basis for the fiscal years specified in statute as subject 
to DSH allotment reduction. In developing the proposed DHRM, we 
considered the factors identified in the statute to determine each 
state's annual state-specific DSH allotment reduction amount.
    We proposed a DHRM that utilizes the best available data at the 
time of the annual DSH allotment reduction calculations, and proposed 
that we would not recalculate the reduction amounts based on revised or 
late DSH audit reports, MIUR data, or other relevant data. The DHRM 
would also rely on a series of interacting calculations that result in 
the identification of state-specific reduction amounts that, when 
summed, equal the aggregate DSH allotment reduction amount identified 
by the statute for each applicable year. The proposed DHRM accomplishes 
this through the following summarized steps:
    1. Separate states into two overall groups, non-low DSH states and 
low DSH states, to give effect to the statutory low DSH criterion. 
(States falling into each category were listed in Table 1 of the July 
2017 proposed rule).
    2. Proportionately allocate aggregate DSH funding reductions to 
each of these two state groups based on each state group's proportion 
of the total national unreduced DSH allotment amount.
    3. Apply a low DSH adjustment percentage to adjust the non-low DSH 
and low DSH state groups' DSH funding reduction amount. This step 
maintains the combined aggregate DSH funding reduction for the low DSH 
and non-low DSH state groups by distributing a portion of the 
unadjusted low DSH state DSH funding reduction amount across the non-
low DSH state group, as described in greater detail below.
    4. Divide each state group's DSH allotment reduction amount among 
three statutorily-identified factors, the uninsured percentage factor 
(UPF), the high level of uncompensated care factor (HUF), and the high 
volume of Medicaid inpatients factor (HMF). We proposed to assign a 50 
percent weight to the UPF

[[Page 50316]]

and a 50 percent combined weight for the two DSH payment targeting 
factors (a 25 percent weight for the HUF, and a 25 percent weight for 
the HMF). This approach would assign equal weights based on the 
statutory structure under which the UPF is presented separately, in 
section 1923(f)(7)(B)(i)(I) of the Act, while the HMF and HUF are 
grouped together in section 1923(f)(7)(B)(i)(II) of the Act, at items 
(aa) and (bb). Additionally, compared to the approach taken in the 2013 
DSH allotment reduction final rule, this weight assignment would place 
greater emphasis on the UPF to:
     Reduce the impact of the DSH allotment reduction for 
states with greater DSH need due to high uninsurance rates.
     Give greater weight to more recent data, since the UPF 
data relies on more recent data than the HUF and HMF.
    We considered various alternative weight assignments prior to 
proposing equal weights for the UPF as specified in section 
1923(f)(7)(B)(i)(I) of the Act and for the combined HMF and HUF as 
specified in section 1923(f)(7)(B)(i)(II) of the Act. We decided to 
propose the 50 percent weight for the UPF and a 50 percent combined 
weight for the two DSH payment targeting factors to reduce the impact 
of the DSH allotment reductions for states with high uninsurance rates, 
place a greater weight on more recent data, and reflect how these 
factors are specified in statute.
    5. Limit the reduction to be applied to each state's total 
unreduced DSH allotment to 90 percent of its original unreduced 
allotment. Any excess reduction amounts called for under the DHRM which 
are limited by this reduction cap will be factored back into the 
reduction model and be redistributed among the remaining states that do 
not exceed the reduction cap based on the proportion of each remaining 
state's allotment reduction amount to the aggregate allotment reduction 
amount for its respective state group. This operation would be 
performed separately for each state group such that, for example, an 
excess reduction amount attributable to a low DSH state would be 
reapportioned only among other low DSH states and would not be 
reapportioned among any states in the non-low DSH state group. By 
limiting the overall amount by which each state's allotment may be 
decreased, we proposed to preserve at least 10 percent of each state's 
unreduced DSH allotment, thereby allowing all states to continue to 
make DSH payments. Placing limits on the reductions applied to each 
state's original unreduced allotments was a new proposal that was not 
considered in the 2013 DSH allotment reduction final rule. In view of 
the then-required aggregate DSH allotment reduction amounts and the 
DHRM under the 2013 DSH allotment reduction final rule, no state was in 
jeopardy of having its entire DSH allotment eliminated for FY 2014 or 
FY 2015 at the time that rule was promulgated. However, with the larger 
reduction amounts that were scheduled for FYs 2018 through 2025 under 
the statute as it was in effect at the time of the July 2017 proposed 
rule, and the reduction amounts currently scheduled for FYs 2020 
through 2025, which are as high as $8 billion annually, states could 
experience the elimination of their entire DSH allotment without the 
inclusion of a reduction cap methodology in the DHRM. Although we did 
consider different reduction cap percentages, we believe the proposed 
90 percent reduction cap strikes a balance between ensuring reduction 
amounts are determined based on the statutory DHRM factors and ensuring 
states maintain the ability to make an appreciable amount of DSH 
payments. Lower reduction caps would cause the reductions to approach 
even distribution among all states, instead of being based on the 
statutory DHRM factors. No cap might result in the complete elimination 
of some states' DSH allotments.
    6. For each state group, determine state-specific DSH allotment 
reduction amounts relating to the UPF. To accomplish this, we will 
compare each state's uninsurance rate to the uninsurance rates of all 
states in relation to each state's unreduced allotment in proportion to 
its respective state group's total unreduced allotment to calculate 
each state's reduction. As required by statute, states with lowest 
uninsurance rates will receive largest percentage DSH reductions.
    7. For each state group, determine state-specific DSH allotment 
reduction amounts relating to the HUF. By utilizing the most recently 
available Medicaid DSH audit and reporting data, we will determine the 
mean uncompensated care level for each state to determine the total 
payments each state makes to non-high uncompensated care level 
hospitals. We will then determine the HUF by dividing the total of each 
state's total payments made to non-high uncompensated care level 
hospitals by the total payments made non-high uncompensated care level 
hospitals for its respective state group.
    8. For each state group, determine state-specific DSH allotment 
reduction amounts relating to the HMF. Again, by utilizing the most 
recently available Medicaid DSH audit and reporting data, we will 
determine the mean MIUR for each state to determine the amount of DSH 
payments each state makes to non-high Medicaid volume hospitals. We 
will then determine the HMF by dividing each state's total payments 
made to non-high volume Medicaid hospitals by the total payments made 
non-high volume Medicaid hospitals for its respective state group.
    9. Apply a section 1115 budget neutrality factor (BNF) for each 
qualifying state. To apply this factor, we will not reduce any portion 
of a state's DSH allotment which was included in the budget neutrality 
calculation for a coverage expansion that was approved under section 
1115 of the Act as of July 31, 2009. We will assign any qualifying 
states an average percentage reduction amount within its respective 
state group for diverted DSH allotment amounts that are not related to 
a coverage expansion in effect as of July 31, 2009 and for which the 
state does not have complete and/or relevant DSH payment data.
    10. Identify the state-specific DSH allotment reduction amount.
    11. Subtract each state's state-specific DSH allotment reduction 
amount from each state's unreduced DSH allotment to determine the 
state's available DSH allotment for the applicable year.
    The manner in which we proposed that each of the five factors would 
be considered and calculated in the proposed DHRM is described in 
greater detail below.
    The DHRM recognizes the variations in DSH allotments among states 
and the application of the methodology generates a lesser impact on low 
DSH states. The DHRM is designed to determine DSH allotment reductions 
in an equitable manner by grouping similar states together for purposes 
of applying the statutory reduction factors. Reductions assigned 
through the HMF and HUF would lessen the impact on states that have 
targeted DSH payments to hospitals that have high volumes of Medicaid 
inpatients and to hospitals that have high levels of uncompensated 
care, respectively, while incentivizing payment targeting for future 
DSH payments. As specified in statute, the DHRM would also take into 
account the extent to which the DSH allotment for a state was included 
in part or in whole in the budget neutrality calculation for a coverage 
expansion approved under section 1115 of the Act as of July 31, 2009 by 
excluding from DSH allotment reduction the amount of DSH that 
qualifying states continue to divert specifically for coverage 
expansion in

[[Page 50317]]

the budget neutrality calculation. Any amount of DSH diverted for other 
purposes under the demonstration would still be subject to reduction by 
automatically assigning qualifying states an average percentage 
reduction amount within its respective state group for factors for 
which the state does not have complete and/or relevant DSH payment 
data.
    We received the following comments regarding the overall approach 
to the DHRM and have responded to the comments below.
    Comment: One commenter expressed concern that the proposed DHRM 
would result in a significant reduction for its state and recommended 
revising the proposed methodology to reduce the impact of the DHRM on 
the commenter's state.
    Response: We are finalizing a DHRM that will reduce DSH allotments 
annually by an aggregate amount set in statute, using a methodology 
that is consistent with statutory factors that direct the allocation of 
the annual reduction amount among the states.
    Comment: One commenter requested information regarding which data 
will be used to calculate the preliminary DSH allotments. Other 
commenters recommended that CMS be transparent about the data sources, 
including by identifying which states will have the BNF applied to 
their allotment reduction calculation. Many commenters recommended that 
CMS post all the data sets used to implement the FY 2018 DHRM on its 
website and post a more comprehensive explanation of the calculation 
for each component of each state's total reduction.
    Response: Currently, we calculate preliminary unreduced DSH 
allotments based on data available around the August preceding the 
start of each fiscal year and publish an annual notice in the Federal 
Register with detailed information regarding the data sources used for 
each fiscal year. These data sources include the previous year's 
preliminary unreduced DSH allotment, the change in the previous year's 
consumer price index, and state budget estimates from MBES. In addition 
to publishing an annual notice in the Federal Register and updating 
MBES at the beginning of each FY to reflect each state's preliminary 
DSH allotment amount, we also inform states prior to the beginning of 
each FY of their preliminary DSH allotment via direct electronic 
communication. In this communication, we provide states with all 
relevant data utilized to calculate both the annual preliminary DSH 
allotment and IMD limits, which is analogous to the information that is 
provided and published in the Federal Register.
    In the July 2017 proposed rule, we included a detailed description 
of the proposed DHRM methodology. We thoroughly reviewed and carefully 
considered public comments, and issued this final rule in a timely 
manner incorporating input from public comments. This final rule also 
provides a detailed methodological description of the DHRM. To ensure 
the use of most recent available data, we do not intend to calculate 
the FY 2020 DSH allotment reductions until after the publication of 
this final rule. Also, we intend to publish a separate DHRM technical 
guide that provides information regarding the DHRM calculation and 
associated data sources.
    Comment: Several commenters noted concern with CMS' use of the FY 
2017 DSH allotments, FY 2013 DSH audit data, and state-reported MIUR 
data to generate FY 2018 DSH allotment reduction amounts. Commenters 
stated that the data were not consistent with Medicaid statute, 
transparent, and readily available to the public during the notice and 
comment period and that the lack of transparency significantly hampered 
state governments' and stakeholders' ability to assess how the DHRM 
would affect their state DSH allotment, particularly for FY 2018, the 
first year that annual state DSH allotment reductions were scheduled to 
be implemented at the time of the July 2017 proposed rule. 
Additionally, the commenters requested that we identify a more 
comprehensive and reliable source for calculating the uninsured rate 
for each state and not rely upon survey sampling results.
    Response: We believe that the data used in the DHRM as described in 
the July 2017 proposed rule is consistent with the statute, transparent 
and readily available to CMS and the public. The statute requires that 
the percentage of uninsured individuals is determined on the basis of 
data from the Census Bureau, audited hospital cost reports, and other 
information likely to yield accurate data, during the most recent year 
for which such data are available. For hospitals that receive DSH 
payments and are included in the DSH audit and reporting data (which 
CMS makes readily available to the public on an annual basis), we 
proposed and are finalizing the use of the most recent complete DSH 
audit and reporting data for purposes of the DHRM. For purposes of this 
rule, we intend to use the most recent DSH audit and reporting data 
available at the time of allotment reduction calculation based on the 
existing DSH audit and reporting process. Additionally, we intend to 
publish a separate DHRM technical guide that provides information 
regarding the DHRM calculation and associated data sources.
    Comment: A few commenters suggested that due to the lack of timely 
and transparent data it would be difficult to fully assess CMS' 
proposal and noted that it would be irresponsible for CMS to move 
forward with DSH allotment reductions without resolving commenters' 
data transparency concerns and technical questions. One commenter 
stated that a delay is warranted so that CMS can address important 
deficiencies with transparency and outstanding legal questions 
impacting the data that, if not addressed prior to implementation, 
would have a material impact on the distribution of the reductions 
across states.
    Response: More recent data will be available at the time CMS 
calculates annual reductions for FY 2020 (and thereafter) than was 
available at the publication of the July 2017 proposed rule. Therefore, 
we used an illustrative example to assist in transparency and provided 
the detailed DHRM, which we are statutorily-required to develop, to 
specify the methodology for determining the annual DSH allotment 
reduction amounts. As finalized, we believe the DHRM will use the 
timeliest, most transparent, and comprehensive reported data available 
that is consistent with Medicaid program requirements. As stated above, 
while a number of issues related to Medicaid DSH payment calculations 
currently are the subject of litigation, the statutorily-required 
allotment reductions and the DHRM are not among them, and we are bound 
by statute to adopt a rule to implement the DSH reductions. With this 
final rule, we are doing so according to our view of the best 
interpretation of the DSH statute and will utilize the most recent data 
available to us that is consistent with applicable laws and 
regulations. In an effort to be transparent in the application of the 
DSH allotment reductions, we intend to publish a separate DHRM 
technical guide that provides information regarding the DHRM 
calculation and associated data sources.
    Comment: One commenter requested that CMS provide an opportunity 
for qualified stakeholders and consultants to confer directly with the 
CMS contractor that has performed work relating to the DHRM.
    Response: We will not provide stakeholders with a formal process to 
confer directly with CMS contractors involved with calculations or 
other

[[Page 50318]]

work relating to the DHRM. We are available to provide technical 
assistance to states regarding the DHRM following the publication of 
this final rule.
    Comment: Several commenters suggested that the timeline of 
publication of preliminary DSH allotments does not support 
transparency, citing examples that the preliminary DSH allotments for 
FY 2016 were not public until late 2016 and the FY 2017 allotments were 
not expected to be made public until after 2018.
    Response: We disagree and believe the rulemaking regarding proposed 
DSH allotment reductions has been timely. In addition, we notify states 
electronically and through MBES of their preliminary DSH allotments at 
the start of each federal fiscal year. We also finalize DSH allotment 
amounts as soon as all necessary information is available. The 
preliminary and final DSH allotment amounts are also published in the 
Federal Register. Moreover, we do not believe that knowledge of future 
preliminary unreduced DSH allotment amounts in necessary for evaluating 
the DHRM. In general, the DSH allotments for each state is increased by 
the consumer price index each year, so each state's unreduced DSH 
allotment remains constant in proportion to the total national DSH 
allotment.
    Comment: One commenter stated that the methodology for calculating 
the state-specific cap on the annual DSH allotment reduction ignores 
what the commenter stated is an existing inequality across states in 
unreduced DSH allotments as established by the Balanced Budget Act of 
1997 (Pub. L. 105-33, enacted August 5, 1997) which were based on each 
state's 1995 DSH spending levels. Several commenters supported a state-
specific cap on annual reductions that will allow states to keep at 
least a portion of their DSH allotment. Commenters also recommended 
various modifications to the cap, and that CMS re-evaluate the cap 
based on experience. Some commenters recommended that states be 
permitted to retain more than 10 percent of their unreduced allotments, 
but did not recommend a percentage. One commenter suggested that CMS 
implement a reduction cap based on each state's cost coverage 
percentage determined by dividing each state's total uncompensated care 
by its respective unreduced DSH allotment. States with a cost coverage 
percentage below the national average would be subject to a cap on DSH 
allotment reductions with low-DSH states' reductions being capped at 5 
percent reduction of their unreduced allotment, while non low-DSH 
states' reductions would be capped at 7 percent reduction of their 
unreduced allotment.
    In addition, a few commenters did not support a state-specific cap 
on annual DSH allotment reductions that will allow states to keep at 
least a portion of their DSH allotment. One commenter indicated that a 
cap on DSH allotment reductions did not appear in the final 2013 DSH 
allotment reduction rule and should not be permitted to compete with 
the statutory obligations to implement the DSH allotment reductions. 
One commenter believes states can make their own determination 
regarding what level of funding is sufficient and that a cap on 
reductions shifts reductions away from states with lesser need to 
states with greater need for DSH funding.
    Response: We believe that the DHRM, including the state-specific 
reduction cap methodology, calculates DSH allotment reductions in an 
equitable manner consistent with statutory requirements. We are 
finalizing our proposed state-specific cap that limits the reduction to 
be applied to each state's total unreduced DSH allotment to 90 percent 
of its original unreduced allotment because it strikes a balance 
between ensuring reduction amounts are determined based on the 
statutory DHRM factors and ensuring states maintain the ability to make 
an appreciable amount of DSH payments. Lower reduction caps might cause 
the reductions to approach even distribution among all states instead 
of being based on the statutory DHRM factors. No cap might result in 
the complete elimination of some states' DSH allotments and higher caps 
might result in states with an insignificant amount of DSH allotment 
with which to make DSH payments. We did not consider a state-specific 
reduction cap in the 2013 DSH allotment reduction rule since no state 
was in jeopardy of having its entire DSH allotment eliminated under the 
amounts designated under statute during that time. We will evaluate the 
reduction methodology after implementation and will consider whether 
modifications are warranted, which we would undertake through future 
rulemaking, as necessary.
    Comment: Several commenters recommended that the DHRM reduce 
allotments by first applying it to unused state DSH allotments, then 
applying the factors set forth in the DHRM.
    Response: Section 1923(f)(7) of the Act specifies the five factors 
for the DHRM, but does not distinguish between spent and unspent state 
DSH allotment amounts in directing that the allotments be reduced. 
Therefore, we did not propose and are not finalizing a policy to apply 
reductions first to unspent DSH allotment amounts before application of 
the DHRM. We believe that commenters' suggested method could serve to 
penalize unfairly states that do not currently expend their entire DSH 
allotment. Therefore, we are finalizing the structure of proposed DHRM 
that considers five factors identified by section 1923(f)(7)(B) of the 
Act when determining state-specific allotment reduction amounts.
    Comment: One commenter noted concerned that CMS would use FY 2017 
state DSH allotments to calculate allotment reduction amounts for FY 
2018.
    Response: As proposed, we will use the preliminary unreduced DSH 
allotment for each fiscal year to calculate DSH allotment reductions 
for the corresponding fiscal year. Specifically, we will utilize the 
preliminary unreduced FY 2020 DSH allotment amounts to calculate FY 
2020 DSH allotment reductions.
    Comment: One commenter expressed concern that the DHRM, by 
considering the five factors separately and summing the results, could 
create disproportionately large reductions for states with high levels 
of uninsured that are targeting hospitals with both a high volume of 
Medicaid inpatients and a high level of uncompensated care. The 
commenter stated this is in violation of the statutory intent.
    Response: We disagree and believe the proposed methodology, which 
we are adopting in this final rule, supports the intent of the statute 
and the proposed rule, as it imposes smaller percentage reductions on 
low DSH states compared to non-low DSH states and, within each state 
group, imposes larger percentage reductions on states that have the 
lowest percentages of uninsured individuals and on states that do not 
target their DSH payments to hospitals with high volumes of Medicaid 
inpatients and high levels of uncompensated care. Further, the proposed 
DHRM takes into account the extent to which a state's DSH allotment was 
included in the budget neutrality calculation for a coverage expansion 
that was approved under section 1115 demonstration authority as of July 
31, 2009.
    We interpret the statute to require CMS to utilize both the UPF and 
the two targeting factors. We proposed to assign a 50 percent weight to 
the UPF and a 50 percent combined weight for the two DSH payment 
targeting factors (a 25 percent weight for the HUF, and a 25 percent 
weight for the HMF). We believe that this is an equitable approach for 
assigning factor weights, and

[[Page 50319]]

appropriately implements the statutorily-required factors. This weight 
distribution does preserve more DSH allotment (that is, it imposes 
smaller allotment reductions) for states that may have greater DSH need 
due to high uninsurance rates while still incentivizing states to 
continue to target DSH payments to hospitals with both a high volume of 
Medicaid inpatients and high level of uncompensated care. Additionally, 
we proposed, and are finalizing, a weight of 50 percent for the UPF to 
rely more heavily on more recent Census Bureau data and to align the 
factor weights with how these factors are set forth in statute. We 
believe the proposed DHRM is an equitable method for calculating 
reduction amounts based on each state's rate of uninsurance and how 
well each state is targeting its DSH payments to hospitals with high 
volumes of Medicaid inpatients and high levels of uncompensated care.
    Comment: Two commenters requested that CMS require states to 
allocate the reduction amount between Institutions for Mental Diseases 
(IMD) and all other hospitals proportionately so IMDs do not have to 
absorb a higher proportion of the DSH reductions.
    Response: We will calculate the IMD DSH limit under section 1923(h) 
of the Act based on the state's DSH allotment after the reduction is 
applied, to ensure that the IMD DSH limit is subject to a reduction 
consistent with the overall reduction of the state's annual DSH 
allotment.
    Comment: Another commenter suggested that CMS apply the DSH 
allotment reductions to the unreduced allotment and treat any DSH 
payments states make over the reduced allotment as an overpayment.
    Response: We are finalizing a DHRM that will calculate annual 
reductions that will apply to unreduced DSH allotments. Additionally, 
section 1923(f) of the Act limits FFP for total statewide DSH payments 
made to eligible hospitals in each federal fiscal year to the annual 
DSH allotment for each state, which will be reduced annually through 
the DHRM for FYs 2020 through 2025. Any state claims for FFP in excess 
of the state's reduced annual DSH allotment are subject to potential 
disallowance as specified in 42 CFR 430.42.
    Comment: Several commenters recommended that CMS allow for a 
process to revise the calculation of DSH allotment reductions. Some 
commenters suggested that CMS publish the underlying data and 
calculations for each factor included in the DHRM for each year so that 
states can validate the accuracy of the data and the calculations and 
work with CMS to make any corrections that might be necessary based on 
more up to date or corrected data related to DSH audit reports, MIUR, 
or other data.
    Response: We will conduct a thorough review to ensure the quality 
and accuracy of all data and calculations. To promote transparency, we 
intend to publish a separate DHRM technical guide that will include all 
data source information and the underlying DHRM calculations. During 
the development and publication of this final rule, we have continued 
to work with states to ensure that we are utilizing accurate, complete 
data that is the most recent available, prior to calculating the FY 
2020 DSH allotment reductions. Due to the timeframes associated with 
the publication of this final rule and the statutorily-required DSH 
allotment reductions scheduled to be applied to state FY 2020 DSH 
allotments, we will calculate the FY 2020 DSH allotment reductions 
using the most currently available data at the time we apply the DHRM 
to determine the allotment reductions, prior to October 1, 2019. In 
subsequent years, beginning with FY 2021, we anticipate that we will 
assemble necessary data and perform calculations to determine the DSH 
allotment reductions for the FY during the months of July, August, and 
September before the start of the FY, to enable us to publish the DSH 
allotment reductions prior to the start of the FY to which they will 
apply. Accordingly, for the annual DSH allotment reductions beginning 
with FY 2021, states must have submitted all revised and corrected data 
to CMS by July 1st of the FY prior to the FY for which reductions will 
be calculated and applied to each state's unreduced preliminary DSH 
allotment, so that the most recent data available to us at the time we 
apply the DHRM reflects all revisions and corrections determined by the 
state. For example, to be used in applying the DHRM for FY 2021, all 
corrected and revised data would be required to be submitted to us by 
July 1, 2020 (and meet applicable federal requirements) to be reflected 
in the DHRM calculations for the DSH allotment reductions scheduled to 
be applied to the FY 2021 unreduced preliminary DSH allotments. We 
anticipate that this schedule would be in effect for any years 
following FY 2020 for which DSH allotment reductions are to be applied 
under the statute.
    Comment: Several commenters noted support for CMS' emphasis on 
targeting of DSH payments to hospitals with high volumes of Medicaid 
inpatients and hospitals with high levels of uncompensated care in the 
DHRM. One commenter urged CMS to incentivize states to target DSH 
payments to hospitals providing the highest share of care to low-income 
patients within each state.
    Response: We believe that the proposed DHRM, incorporating the 
statutory factors identified in section 1923(f)(7)(B) of the Act, does 
incentivize states to target their DSH payments, both through the HMF 
and HUF, to hospitals providing care to low-income individuals, and 
have incorporated this method in the final rule.
    Comment: Many commenters expressed concern with CMS' proposed 
increase of the UPF from a 33 percent weight, as finalized in the 2013 
DSH reduction rule, to a 50 percent weight. Commenters stated that the 
50 percent UPF weight would disadvantage states that have expanded 
Medicaid coverage under the ACA and create disincentives for states to 
continue to cover the Medicaid expansion population. One commenter 
noted support for the 50 percent UPF weight due to the opinion that 
this would minimize annual DSH allotment reductions for non-expansion 
states. Many commenters recommended that CMS revert back to the 33 
percent weight for each of the core factors, the UPF, the HMF and the 
HUF. One commenter suggested that an equal weighting of the three core 
factors is appropriate in this period of market uncertainty. Commenters 
also variously recommended: That the UPF be weighted at 25 percent or 
less; that an 80 percent weight be placed on the UPF and a 10 percent 
weight on each of the targeting factors, the HMF and the HUF, to 
mitigate annual DSH allotment reductions for states that did not expand 
Medicaid; that a 60 percent weight be applied to the UPF and 20 percent 
to each of targeting factors, the HMF and the HUF; and that the weight 
assigned to the UPF be increased if other consideration were not given 
to mitigate the impact of the reductions on non-expansion states.
    Response: We are finalizing our proposal to apply a weight of 50 
percent to the UPF to rely more heavily on the more recent Census 
Bureau data (as it is more recent than DSH audit data and, therefore, 
likely more reflective of current circumstances than DSH audit data) 
and to align the factor weights with how these factors are set forth in 
statute. Section 1923(f)(7)(B)(i)(I) of the Act requires that the UPF 
be incorporated into the DHRM, while section 1923(f)(7)(B)(i)(II)(aa) 
of the Act requires that the HMF be incorporated into the DHRM and 
section 1923(f)(7)(B)(i)(II)(bb) of the Act requires that the HUF be 
incorporated into the DHRM. This structure of subclauses and

[[Page 50320]]

items is consistent with a 50 percent weight being applied to the 
factor identified in section 1923(f)(7)(B)(i)(I) of the Act and an 
equal 50 percent weight being applied to the factors identified in 
section 1923(f)(7)(B)(i)(II) of the Act. The 50 percent UPF weight and 
combined 50 percent targeting factor weight will yield different 
results for both expansion and non-expansion states depending on each 
state's rate of uninsured and how well each state targets its DSH 
payments to hospitals with high volumes of Medicaid inpatients and 
uncompensated care. We believe that the weighting in the July 2017 
proposed rule is a reasonable approach and have incorporated this 
methodology into the final rule.
    Comment: One commenter recommended that the weight of the HMF be 
increased to provide consideration for states with high Medicaid 
enrollment.
    Response: We disagree with the recommendation because we believe 
that the proposed DHRM reduces DSH allotments in an equitable manner 
that is consistent with the statute. The DHRM gives consideration to 
states with high Medicaid enrollment that target DSH payments to 
hospitals with high volumes of Medicaid inpatients. We believe that the 
proposed weighting is a reasonable approach to implementing the 
statutory requirements for the DHRM and are finalizing this methodology 
in Sec.  447.294(e)(5) in this final rule.

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

    The first factor considered in the proposed DHRM is the Low DSH 
Adjustment Factor identified at section 1923(f)(7)(B)(ii) of the Act, 
which requires the DHRM to impose a smaller percentage reduction on 
``low DSH states'' that meet the criterion described in section 
1923(f)(5)(B) of the Act. To qualify as a low DSH state, total 
expenditures under the state plan for DSH payments for FY 2000, as 
reported to us as of August 31, 2003, had to have been greater than 
zero but less than 3 percent of the state's total Medicaid state plan 
expenditures during the FY. Historically, low DSH states have received 
lower DSH allotments relative to their total Medicaid expenditures than 
non-low DSH states.
    We proposed to apply the LDF by imposing a greater proportion of 
the annual DSH funding reduction on non-low DSH states. To meet the 
statutory requirement to impose a smaller percentage reduction on low 
DSH states, the DHRM would create two state groups (low DSH states and 
non-low DSH states), then would apply the LDF when allocating reduction 
amounts to each state group. The LDF is calculated and applied as 
follows:
    1. Separate states into two groups, non-low DSH states and low DSH 
states.
    2. Divide each state's unreduced preliminary DSH allotment for the 
year for which the reduction is calculated by estimated Medicaid 
service expenditures for that same year. Currently, we create a 
preliminary DSH allotment based on the estimates available in August of 
the prior year and we issue a final DSH allotment once the federal FY 
ends.
    3. For each state group, calculate the non-weighted mean of the 
value calculated in step 2 for states in the group.
    4. Divide the average calculated in step 3 for the low DSH state 
group by the average calculated in step 3 for the non-low DSH state 
group.
    5. Convert this number to a percentage. This percentage is the LDF.
    6. Multiply the proportionately allocated DSH funding reductions 
for the low DSH state group by the LDF percentage to determine the 
aggregate DSH reduction amount that would be distributed across the low 
DSH state group.
    7. Subtract the aggregate DSH reduction amount determined in step 6 
from the proportionately allocated DSH funding reduction for the low 
DSH state group, and add the remainder to the aggregate DSH reduction 
amount that would be distributed across the non-low DSH state group.
    We considered using various alternative proportional relationships 
to establish the LDF, including the proportion of each state group's 
annual Medicaid DSH expenditures to total Medicaid expenditures. 
However, we believe that this may benefit non-low DSH states that are 
unable to or otherwise do not spend their existing DSH allotment 
amount, which we believe is not the intent of the statute. Therefore, 
we proposed to calculate the LDF based on the proportion of each state 
group's DSH allotments to total Medicaid expenditures.
    We received a number of public comments on the proposed Factor 1--
LDF. A discussion of these comments, with our responses, appears below.
    Comment: Several commenters suggested modifying the statutory 
definition of low DSH states in section 1923(f)(5)(B) of the Act.
    Response: The statute directs the Secretary to impose a smaller 
percentage DSH allotment reduction on ``low DSH states'' that meet the 
criterion described in section 1923(f)(5)(B) of the Act, and we do not 
have the authority to modify this provision. We are implementing this 
statutory directive through the LDF.
    Comment: In calculating the LDF, one commenter recommended that CMS 
use the median instead of mean to normalize non-low DSH state outlier 
values.
    Response: We believe use of the mean, instead of the median, 
ensures arithmetically that the value representing each state's DSH 
allotment as a percentage of Medicaid service expenditures has an equal 
impact in determining the average used in step 2 of the LDF, regardless 
of whether the value is an outlier value (either very high or very 
low). We believe this is important as the values have a large variance 
and each value, including outliers, represents the situation of a 
state. Using the median, instead of the mean, would not adequately 
capture the variance among all the states.
    Comment: One commenter stated that the proposed DHRM conflicts with 
section 1923(f)(7)(B)(iii) of the Act in that it could result in 
percentage reductions for certain low DSH states that are greater than 
the percentage reductions for certain non-low DSH states.
    Response: We disagree that the reduction methodology conflicts with 
the statutory direction to impose ``a smaller percentage reduction on 
low DSH States.'' While the final DHRM includes the LDF to impose 
smaller percentage reductions on low DSH states, it is possible that 
the annual DSH allotment reduction percentage could be higher for one 
or more low DSH states than for one or more non-low DSH states based on 
the application of other factors identified by the statute. In this 
case, the annual DSH allotment reduction percentage for the low DSH 
state would be smaller than if the state were instead a non-low DSH 
state, due to the application of the LDF, consistent with section 
1923(f)(7)(B)(iii) of the Act.
    Comment: One commenter suggested that low DSH states be exempt from 
the reduction.
    Response: The statute directs the DHRM to impose ``a smaller 
percentage reduction on low DSH States,'' but does not permit that low 
DSH states be categorically exempted from reduction. Consistent with 
the statute, the final DHRM imposes smaller percentage reductions on 
low DSH states, but does not exempt low DSH states from reduction. We 
believe that this methodology is consistent with the statute and is an 
equitable approach to allocating annual DSH allotment reductions.

[[Page 50321]]

    Comment: One commenter expressed concerns that the LDF calculation 
is overly beneficial to low DSH states. The commenter stated that the 
formula exceeds the statutory requirements and recommended an 
alternative approach that would rely on calculating each group's 
proportion of annual Medicaid expenditures to total Medicaid 
expenditures.
    Response: The proposed DHRM imposes smaller percentage reductions 
on low DSH states, which historically have received lower DSH 
allotments relative to their total Medicaid expenditures than non-low 
DSH states. This historical difference, between low DSH and non-low DSH 
state groups, serves as the basis for calculating the LDF value and 
addresses the statutory requirement to impose ``a smaller percentage 
reduction on low DSH States.'' Although we considered alternate methods 
for calculating the LDF, we believe that the proposed methodology for 
determining the LDF best addresses this historical difference while 
adhering to statutory direction. Furthermore, our proposed methodology 
is consistent with the statutory designation of low DSH or non-low DSH 
states. Therefore, we are finalizing the LDF as proposed.
    Comment: One commenter stated that step 6 in the calculation should 
read ``multiply the proportion of total unreduced allocations for the 
low DSH states group to total unreduced allocations for all states by 
the LDF percentage.''
    Response: We believe that we have described the process accurately 
in calculating the total reduction amount for low DSH states once the 
LDF is applied. While the commenter's suggested language is accurate in 
describing the steps to calculate the revised percent of total 
weighting for the low DSH state group, our proposed language provides 
the steps to calculate the total reduction amount for the low DSH state 
group. We proposed to separate states into two overall groups, non-low 
DSH states and low DSH states, to give effect to the statutory low DSH 
criterion. Then, we proposed to proportionately allocate aggregate DSH 
funding reductions to each of these two state groups based on each 
state group's proportion of the total national unreduced DSH allotment 
amount. Next, we proposed to apply a low DSH adjustment percentage to 
adjust the non-low DSH and low DSH state groups' DSH funding reduction 
amounts. This step maintains the combined aggregate DSH funding 
reduction for the low DSH and non-low DSH state groups together, as 
specified by statute for the applicable FY, by distributing a portion 
of the unadjusted low DSH state DSH funding reduction amount to the 
non-low DSH state group.
    Comment: Several commenters urged CMS to minimize annual DSH 
allotment reductions for states that have relatively low ratios of the 
unreduced annual DSH allotment to the number of uninsured individuals 
in the state. One commenter recommended that states that receive less 
than $125 in unreduced annual DSH allotments per uninsured individual 
should receive no more than a 5 percent annual DSH allotment reduction.
    Response: The statute directs the DHRM to impose ``a smaller 
percentage reduction on low DSH States,'' which is described in 
paragraph 1923(f)(5)(B) of the Act where it defines low DSH states as 
states with total Medicaid DSH payments for FY 2000 between 0 and 3 
percent of total (state and federal) Medicaid medical assistance 
expenditures. We do not have the authority to modify the statutory 
definition of a low DSH state in order to impose smaller percentage 
reductions on states that have low annual DSH allotments relative to 
the number of uninsured individuals in the state. Consistent with the 
statute, the final DHRM imposes smaller percentage reductions on low 
DSH states described in section 1923(f)(5)(B) of the Act. While we are 
statutorily-required to impose ``a smaller percentage reduction on low 
DSH States,'' the final DHRM does allocate reductions taking into 
account the size of the existing state DSH allotments prior to 
reduction in the UPF, which does give consideration to states that 
historically have smaller unreduced DSH allotments relative to 
similarly situated states with higher allotments.
    Comment: One commenter stated that CMS did not provide total 
computable medical assistance expenditures used to calculate the LDF in 
the illustrative DHRM example in the July 2017 proposed rule. Further, 
the commenter stated that the proposed rule did not specify whether the 
denominator of the LDF includes or excludes DSH and whether it is total 
computable or Federal share.
    Response: The July 2017 proposed rule included an illustrative 
example, not an actual DHRM calculation. For purposes of the final 
DHRM, we will exclude DSH expenditures from total computable Medical 
assistance expenditures described in Sec.  447.294(e)(3)(i). The 
denominator for the value calculated in Sec.  447.294(e)(3)(i) is the 
estimated Medicaid service expenditures. The denominator for the value 
calculated in Sec.  447.294(e)(3)(iii) is the mean value of the ratio 
of each non-low DSH state's proportion of preliminary DSH allotment to 
estimated Medicaid service expenditures, calculated in Sec.  
447.294(e)(3)(ii). Additionally, we intend to publish a separate DHRM 
technical guide that provides information regarding the final DHRM 
calculation, including the additional information regarding data 
sources.
    Comment: One commenter requested that CMS consider an alternative 
methodology for calculating the low DSH adjustment and stated CMS 
should consider a flat percentage rather than basing it on a factor 
ratio.
    Response: We considered using various alternative proportional 
relationships to establish the LDF. However, we are finalizing the LDF 
as proposed without change to our proposal to use the LDF as currently 
codified in Sec.  447.594(e)(3). The low DSH adjustment percentage is 
consistent with the statutory method used for classifying low DSH 
states at section 1923(f)(5)(B) of the Act by utilizing the proportion 
of each state group's DSH allotments to total Medicaid expenditures. 
Further, the proposed LDF percentage can evolve over time, respond to 
changes in state situations, and use better data as it becomes 
available while a flat percentage would remain static and not be 
responsive to state or data changes. Given that low-DSH states 
collectively receive lower DSH allotments relative to their total 
Medicaid expenditures than non-low DSH states, the LDF results in the 
application of a smaller percentage reduction to low DSH states.

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

    The second factor considered in the DHRM is the UPF identified in 
section 1923(f)(7)(B)(i)(I) of the Act, which requires that the DHRM 
impose the largest percentage DSH allotment reductions on states that 
have the lowest percentages of uninsured individuals. The statute also 
requires that the percentage of uninsured individuals be determined on 
the basis of data from the Census Bureau, audited hospital cost 
reports, and other information likely to yield accurate data, during 
the most recent year for which such data are available.
    To determine the percentage of uninsured individuals in each state, 
the DHRM relies on the total population and uninsured population as 
identified in the most recent ``1-year estimates'' data available from 
the ACS conducted by the Census Bureau. The Census

[[Page 50322]]

Bureau generates ACS ``1-year estimates'' data annually based on a 
point-in-time survey of approximately 3 million individuals. For 
purposes of the DHRM, we would utilize the most recent ACS data 
available at the time of the calculation of the annual DSH allotment 
reduction amounts.
    The UPF, as applied through the DHRM, has the effect of imposing 
the lowest relative DSH allotment reductions on states that have the 
highest percentage of uninsured individuals, and thereby mitigates the 
annual DSH allotment reductions for states with the highest percentage 
of uninsured individuals.
    The UPF is determined separately for each state group as follows:
    1. Uninsured Value--Using United States Census Bureau data, 
calculate each state's uninsured value by dividing the total state 
population by the number of uninsured in the state. (This is different 
than the percentage rate of uninsurance; the rate of uninsurance can be 
obtained by dividing 100 by this number.)
    2. Uninsured Allocation Component--Determine the relative Uninsured 
Value for each state compared to other states in the state group by 
dividing the value in step one by the state group (low DSH state and 
non-low DSH state) total of step one values. The result will be a 
percentage, and the total of the percentages for all states in the 
state group will total 100 percent.
    3. Allocation Weighting Factor--To ensure that larger and smaller 
states are given fair weight in the final UPF, divide each state's 
preliminary unreduced DSH allotment by the sum of all unreduced 
preliminary DSH allotments in the respective state group to obtain the 
allocation weighting factor, expressed as a percentage. The sum of all 
weighting factors will equal 100 percent. Then, take this percentage 
for each state and multiply it by the state's uninsured allocation 
component determined in step 2. The result is the allocation weighting 
factor.
    4. UPF--For each state group, divide each state's allocation 
weighting factor by the sum of all allocation weighting factors. The 
resulting percentage is the UPF.
    We would determine the UPF portion of the aggregate DSH allotment 
reduction allocation for each state by multiplying the state's UPF by 
the aggregate DSH allotment reduction allocated to the UPF factor for 
the respective state group. As with the prior factor, we proposed to 
utilize preliminary DSH allotment estimates to develop the DSH 
reduction factors, including the UPF. We received the following 
comments concerning this topic.
    We received a number of public comments on the proposed Factor 2--
UPF. A discussion of these comments, with our responses, appears below.
    Comment: Many commenters supported the DHRM's identification of 
uninsured individuals based on 1-year estimates of the number of 
uninsured from the Census Bureau's ACS.
    Response: We appreciate the support and are finalizing the use of 
1-year estimates of the number of uninsured from the ACS in the DHRM, 
as discussed in the proposed rule and as described in the definition of 
``Uninsured population'' in Sec.  447.294(b).
    Comment: Many commenters expressed concerns that the uninsured 
individual data used for the UPF may undercount the number of 
undocumented individuals as reported and estimated through the ACS. One 
commenter noted that this is particularly concerning, given the 50 
percent UPF weight. Additionally, many commenters recommended that CMS 
work with Pew Research Institute, Census Bureau, and other researchers 
to develop a methodology that accounts for all uninsured individuals 
regardless of citizenship status.
    Response: Section 1923(f)(7)(B)(i)(I) of the Act specifically 
requires that the percentage of uninsured individuals be determined on 
the basis of data from the Census Bureau, audited hospital cost 
reports, and other information likely to yield accurate data. According 
to the Census Bureau, the foreign-born population includes anyone who 
is not a U.S. citizen at birth. This includes two groups: (1) 
Naturalized U.S. citizens; and (2) noncitizens. Noncitizens include 
lawful permanent residents (immigrants), temporary migrants (such as 
foreign students), humanitarian migrants (such as refugees and 
asylees), and persons not lawfully present in the United States.
    The Census Bureau collects data from all foreign-born individuals 
who participate in its censuses and surveys, regardless of legal 
status. Thus, unauthorized migrants are included in ACS estimates of 
the total foreign-born population. However, the Census Bureau only asks 
foreign-born respondents if they are naturalized U.S. citizens or 
noncitizens, so it is not possible to tabulate separate estimates of 
unauthorized migrants using the ACS. Accordingly, we believe the ACS 
data does account for uninsured individuals regardless of citizenship 
status and are finalizing our proposed use of ACS data without an 
adjustment in the uninsured data.
    Comment: Several commenters noted support for CMS' goal of relying 
on the most recently available data for calculating the UPF, but 
expressed concern that CMS would use 2014 ACS data to calculate the FY 
2018 DSH allotment reductions. Commenters recommended that CMS utilize 
more recent data when calculating final DSH allotments. One commenter 
recommended that CMS utilize ACS 5-year estimates for the uninsured to 
better align the years of the Census Bureau ACS data with the DSH audit 
and MIUR data.
    Response: We are finalizing, as proposed, the application of a DHRM 
that utilizes the most recent year available for all data sources and 
aligns data sources whenever possible. That is, section 
1923(f)(7)(B)(i)(I) of the Act requires the use of Census Bureau data, 
audited hospital cost reports, and other information likely to yield 
accurate data, for the most recent year for which such data are 
available. Therefore, with respect to annual DSH allotment reductions 
for FY 2020, we intend to use 2018 ACS data, which we anticipate will 
be the most recent year available at the time the DHRM is applied for 
FY 2020.
    We will use the ACS 1-year estimates because it depicts the most 
current data on the uninsured population. The ACS 5-year estimates use 
60 months of data. For example, 2013-2017 estimate is data collected 
from January 1, 2013 through December 31, 2017. This is the least 
current of the ACS estimates. The Census Bureau recommends using ACS 1-
year when currency is more important.
    Comment: One commenter expressed concern that the ACS data 
considers an individual's uninsured status based only on whether 
respondent has coverage at time of interview, and that ACS data may 
undercount the population of individuals experiencing homelessness. 
Another commenter recommended that CMS work with the Census Bureau to 
attain the point in time estimate as well as a determination of whether 
an individual was uninsured at any point in time during the past year.
    Response: Section 1923(f)(7)(B)(i)(I) of the Act requires that CMS 
utilize data from the Census Bureau, from the most recent year for 
which data are available to calculate the UPF. Moreover, while the ACS 
data determine whether the respondent has coverage at the time of the 
interview, these interviews are conducted at various times throughout 
the year. The Census Bureau randomly

[[Page 50323]]

selects addresses, through scientific sampling, to represent the total 
population. As such, we believe that the ACS 1-year estimates represent 
the best available data for use in determining the number of uninsured 
individuals in the states. Further, we understand that the Census 
Bureau works with organizations such as the National Coalition for the 
Homeless to help ensure a more accurate and comprehensive census, 
including with respect to individuals experiencing homelessness.
    Comment: One commenter expressed concern that the DHRM assigns too 
much weight to the UPF and suggested that the UPF calculation 
methodology rely on state levels of insured individuals instead of 
percentages of uninsured individuals. Additionally, the commenter 
indicated the UPF and factor weighting would result in the DHRM 
penalizing Medicaid expansion states.
    Response: The UPF, as applied through the DHRM, has the effect of 
imposing lower relative DSH allotment reductions on states that have 
higher percentage of uninsured individuals. Section 1923(f)(7)(B)(i)(I) 
of the Act specifies the ``percentage of uninsured individuals,'' not 
the level of insured individuals. To determine the percentage of 
uninsured individuals in each state, the DHRM relies on the total 
population and uninsured population as identified in the most recent 
``1-year estimates'' data available from the ACS conducted by the 
Census Bureau. This approach is consistent with statutory requirements 
and mitigates the DSH allotment reductions for states with the highest 
percentage of uninsured individuals. Further, we believe that the final 
DHRM, including the factor weighting discussed above, distributes DSH 
allotment reduction amounts among the states in an equitable manner, 
consistent with statutory requirements and does not penalize Medicaid 
expansion states.
    Comment: One commenter recommended that we rely on the Medicaid DSH 
definition of uninsured used for calculating hospital-specific DSH 
limits, adjusted also to include certain insured individuals who might 
be more likely to be associated with unpaid copayments and deductibles 
(such as individuals with high deductible plans), for purposes of 
defining uninsured individuals for the UPF.
    Response: Section 1923(f)(7)(B)(i)(I) of the Act requires the use 
of Census Bureau data to determine the percentages of uninsured 
individuals. We are finalizing the use of 1-year estimates of the 
number of uninsured from the ACS conducted by the Census Bureau in the 
DHRM, as discussed in the proposed rule and as described in the 
definition of ``Uninsured population'' in Sec.  447.294(b).
    Comment: One commenter recommended that CMS distribute the entire 
available DSH allotment for all states based on its uninsured rate. 
Several commenters stated that statute does not require CMS to use both 
the UPF and the two targeting factors in the DHRM and suggested that 
CMS apply only the UPF in the determination of DSH allotment 
reductions. These commenters recommended this approach to mitigate 
reductions for both states that have not expanded Medicaid under the 
ACA and for states that have strict criteria for eligibility to receive 
DSH payments. One commenter suggested that, given the statutory 
language, CMS could and should use only the targeting factors (both the 
HUF and the HMF) in the DRHM, or that the UPF weight be lowered if both 
the UPF and the targeting factors are to be considered.
    Response: Section 1923(f) of the Act specifies the manner in which 
each state's DSH allotment is determined. Moreover, section 
1923(f)(7)(B) of the Act establishes the five factors that must be 
considered in the establishment of a DHRM to calculate the annual DSH 
allotment reductions. We interpret the statute to require CMS to 
utilize both the UPF and the two targeting factors. We proposed to 
assign a 50 percent weight to the UPF and a 50 percent combined weight 
for the two DSH payment targeting factors (a 25 percent weight for the 
HUF, and a 25 percent weight for the HMF). As described in detail in 
section III.C. of this final rule, we believe that this is an equitable 
approach for assigning factor weights, and appropriately implements the 
statutorily-required factors. This weight distribution does preserve 
more DSH allotment (that is, it imposes smaller allotment reductions) 
for states that may have greater DSH need due to high uninsurance rates 
while still incentivizing states to continue to target DSH payments to 
hospitals with both a high volume of Medicaid inpatients and high level 
of uncompensated care. Additionally, we proposed, and are finalizing, a 
weight of 50 percent for the UPF to rely more heavily on more recent 
Census Bureau data and to align the factor weights with how these 
factors are set forth in statute.

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

    The third factor considered in the DHRM is the HMF identified in 
section 1923(f)(7)(B)(i)(II)(aa) of the Act, which requires that the 
DHRM impose the largest percentage DSH allotment reductions on states 
that do not target DSH payments to hospitals with high volumes of 
Medicaid inpatients. For purposes of the DHRM, the statute defines 
hospitals with high volumes of Medicaid inpatients as those defined in 
section 1923(b)(1)(A) of the Act. These hospitals must meet minimum 
qualifying requirements at section 1923(d) of the Act and have an MIUR 
that is at least one standard deviation above the mean MIUR for 
hospitals receiving Medicaid payments in the state. Every hospital that 
meets that definition is deemed a disproportionate share hospital and 
is statutorily-required to receive a DSH payment.
    States that have been, and continue to, target a large percentage 
of their DSH payments to hospitals that are federally deemed as a DSH 
based on their MIUR would receive the lowest reduction amounts relative 
to their total DSH spending. States that target the largest amounts of 
DSH payments to hospitals that are not federally deemed based on MIUR 
would receive the largest reduction amounts under this factor. The 
current DSH allotment amounts are unrelated to the number of MIUR-
deemed hospitals within each state and their DSH-eligible uncompensated 
care costs. By basing the HMF reduction on the amounts that states do 
not target to hospitals with high volumes of Medicaid inpatients as 
described below, this methodology incentivizes states to target DSH 
payments to such hospitals.
    To ensure that all deemed disproportionate share hospitals receive 
a required DSH payment, states are already required to determine the 
mean MIUR for hospitals receiving Medicaid payments in the state and 
the value of one standard deviation above the mean. We proposed to rely 
on MIUR information for use in the DHRM that CMS collects from states 
on an annual basis under Sec.  447.294(d). When a state or states do 
not submit this required MIUR information timely, for purposes of this 
factor, we would assume that the state(s) have the highest value of one 
standard deviation above the mean reported among all other states that 
did submit this information timely.
    The calculation of the HMF will rely on extant data that should be 
readily available to states. The following data elements are used in 
the HMF calculation: The preliminary unreduced

[[Page 50324]]

DSH allotment for each state; the DSH hospital payment amount reported 
for each DSH in accordance with Sec.  447.299(c)(17); the MIUR for each 
DSH reported in accordance with Sec.  447.299(c)(3); and the value of 
one standard deviation above the mean MIUR for hospitals receiving 
Medicaid payments in the state, reported separately.
    The HMF is a state-specific percentage that is calculated 
separately for each state group (low DSH and non-low DSH) as follows:
    1. For each state, classify each DSH that has an MIUR at least one 
standard deviation above the mean MIUR for hospitals receiving Medicaid 
payments in the state as a High Medicaid Volume hospital.
    2. For each state, determine the amount of DSH payments to non-High 
Medicaid Volume DSH hospitals using data from the most recently 
submitted and accepted DSH audit template.
    3. For each state, determine a percentage by dividing the state's 
total DSH payments made to non-High Medicaid Volume hospitals by the 
aggregate amount of DSH payments made to non-High Medicaid Volume 
hospitals for the entire state group. The result of step 3 is the HMF.
    4. Determine each state's HMF reduction amount by applying the HMF 
percentage to the aggregate reduction amount allocated to this factor 
for each state group.
    As a result of this methodology, there are a number of interactions 
that may occur for states among DSH payment methodologies, DSH 
allotments, and DSH allotment reductions. Most of these scenarios work 
in concert with this factor's established reduction relationship. For 
example, if a state paid out its entire DSH allotment to hospitals with 
high volumes of Medicaid inpatients, it would receive no reduction 
associated with this factor because all DSH payments were made only to 
hospitals that qualify as high volume. The results of this scenario 
would be consistent with the methodology because the state is 
incentivized to target DSH payments to high Medicaid volume hospitals.
    Another example is a state that makes DSH payments up to the 
hospital-specific DSH limit to all hospitals with high Medicaid volume 
but also uses its remaining allotment to make DSH payments to hospitals 
that do not qualify as high Medicaid volume. In this example, the state 
would receive a reduction under this factor based on the amount of DSH 
payments it made to non-high Medicaid volume hospitals. Although the 
state targeted DSH payments to hospitals with high Medicaid volume, the 
existing size of its DSH allotment permitted it to make DSH payments to 
hospitals that did not meet the statutory definition of a hospital with 
a high volume of Medicaid inpatients. In that situation, we stated in 
the proposed rule that this allotment reduction would effectively 
reduce a state's existing DSH allotment if the allotment exceeded the 
maximum amount that the state could pay to hospitals that are high 
Medicaid volume. The resulting HMF reduction would be greater for 
states with DSH allotments large enough to pay significant amounts to 
non-high Medicaid volume hospitals. This helps ensure that states 
target DSH payments to high Medicaid volume hospitals and distributes 
the reductions in such a way as to promote the ability of all states to 
provide DSH funds to high Medicaid volume hospitals.
    We described the HMF in greater detail in the July 2017 proposed 
rule (82 FR 35155). We received a number of public comments on the 
proposed Factor 3--HMF. A discussion of these comments, with our 
responses, appears below.
    Comment: One commenter expressed concern that CMS will use DSH 
audit data and MIUR data from different years to calculate reductions 
based on the HMF. In addition, the commenter recommended that the DHRM 
rely on MIUR data from the audited Medicaid DSH audits and reports to 
improve accuracy of the DHRM.
    Response: In the July 2017 proposed rule, we proposed, as a general 
principle, to utilize the most recent year available for all data 
sources and to align the Medicaid SPRY of data sources. The proposed 
DHRM relies on the most recent data for all data sources with one 
exception. For this exception, we believe the benefits of aligning the 
SPRYs of two data sources outweighs the benefits of using the most 
recent data. Specifically, the MIUR data required by Sec.  447.294(d) 
used for the HMF may not be the most recent year available. We proposed 
to align and utilize MIUR data from the year that corresponds to the 
DSH audit SPRY used in the calculation of each state's DSH allotment 
reduction. Although more recent MIUR data might be available, we are 
aligning the MIUR data SPRY with the DSH audit SPRY for the HMF to 
ensure the universe of hospitals is the same and to ensure the DSH 
payment for a particular SPRY corresponds with the receiving hospital's 
MIUR for that same SPRY.
    The Medicaid DSH audits and reports do not include the MIUR for all 
hospitals that receive a Medicaid payment. Therefore, we believe the 
DHRM is more accurate relying on MIUR information that we will collect 
from states on an annual basis as required under Sec.  447.294(d).
    Comment: Two commenters expressed concern that expansion states 
could receive relatively greater reduction through the HMF when many of 
their hospitals meeting MIUR-related deeming requirements defined in 
section 1923(b)(1)(A) of the Act have little or no uncompensated care 
costs, particularly due to the state targeting Medicaid supplemental 
payments to such deemed hospitals. One commenter suggested that CMS 
develop an alternative methodology for judging how well states target 
DSH payments to MIUR-deemed hospitals that recognizes that states may 
not pay in excess of the hospital-specific DSH limit.
    Response: The proposed HMF would apply to states without regard to 
their Medicaid expansion status. Additionally, we understand that the 
proposed HMF reduction would be greater for states with DSH allotments 
large enough to pay significant amounts to non-high Medicaid volume 
hospitals, including in cases where states cannot target DSH payment to 
high volume Medicaid hospitals because they do not have significant 
uncompensated care costs. This helps ensure that states target DSH 
payments to high Medicaid volume hospitals and distributes the 
reductions in such a way as to promote the ability of all states to 
provide DSH funds to high Medicaid volume hospitals.
    Comment: One commenter expressed concern that the DHRM could 
penalize some states that target deemed hospitals based on the LIUR. 
The commenter noted that about half of all deemed-DSH hospitals 
nationally qualify on the basis of their LIUR. The commenter suggested 
that the DHRM should either consider all payments made to deemed 
hospitals as being paid to high Medicaid volume hospitals, or DSH 
payments to LIUR-deemed hospitals should be excluded from the 
calculation of the HMF.
    Response: We believe the DHRM as proposed will promote state 
targeting of payments to hospitals that qualify for DSH payments based 
on MIUR deeming requirements defined in section 1923(b)(1)(A) of the 
Act, consistent with section 1923(f)(7)(B)(i)(II)(aa) of the Act. The 
HMF targeting factor in the DHRM is consistent with the statutory 
direction to impose larger percentage reductions on states that do not 
target their DSH payments on hospitals with high volumes of Medicaid 
inpatients and do not target their DSH payments on

[[Page 50325]]

hospitals with high levels of uncompensated care.\4\ The HMF provides 
mitigation of the state-specific DSH reduction amount for states that 
have targeted and do target DSH payments to these hospitals federally-
deemed on the basis of their MIUR. We recognize the importance of 
hospitals with high LIURs and such hospitals may also experience high 
levels of uncompensated care costs. If those LIUR-deemed hospitals have 
high levels of uncompensated care, the HUF will provide mitigation of 
the state-specific DSH reduction amount for states that have targeted 
and do target DSH payments to those hospitals.
---------------------------------------------------------------------------

    \4\ See section 1923(f)(7)(B)(i)(II)(bb) of the Act.
---------------------------------------------------------------------------

    Comment: One commenter recommended that the demographics of the 
Medicaid population be taken into account when determining DSH 
allotment reductions. The commenter recommended that if a large 
percentage of the Medicaid expansion population represents individuals 
who shifted from other insurance coverage, that state should not have 
as large of a DSH allotment reduction as a state in which a larger 
share of the Medicaid expansion population was previously uninsured.
    Response: The statute requires that larger percentage reductions be 
imposed on states that do not target their DSH payments on hospitals 
with high volumes of Medicaid inpatients and on hospitals with high 
levels of uncompensated care (excluding bad debt). The statutory 
requirements do not address the prior coverage status of Medicaid 
enrollees.
    Comment: Several commenters expressed concern that many states had 
not submitted MIUR data to CMS, and therefore, CMS utilized proxy MIUR 
data for calculation of illustrative DSH allotment reductions. These 
commenters expressed concern that the use of proxy data may affect the 
distribution of DSH allotment reductions. One commenter recommended 
that CMS accept late MIUR submissions for FY 2018 and should consider 
accepting late MIUR submissions for subsequent years.
    Response: Section 447.294(d) specifies the timeline according to 
which states are required to submit MIUR data to CMS. The example 
included in the July 2017 proposed rule was for illustrative purposes 
only. As specified in the final 2013 DSH allotment reduction rule (78 
FR 57305), when a state does not timely submit this separately required 
MIUR information, for purposes of this factor, we will assume that the 
state has the highest value of one standard deviation above the mean 
reported among all other states.
    Comment: One commenter suggested that CMS propose a standard 
definition of which hospitals should be included in each state's annual 
MIUR data submission. Another commenter suggested that the requested 
MIUR data is duplicative of data collected as part of the DSH audits.
    Response: We believe the laws and regulations already provide a 
standard definition of hospitals with high volumes of Medicaid 
inpatients and which hospitals must be included in the annual MIUR 
submission required in Sec.  447.294(d). Section 
1923(f)(7)(B)(i)(II)(aa) of the Act defines hospitals with high volumes 
of Medicaid inpatients as those defined in section 1923(b)(1)(A) of the 
Act. Section 447.294(d) specifies that states must submit the MIUR for 
all hospitals receiving Medicaid payments in the State.
    Although the DSH audits do contain MIUR data for each hospital that 
receives a DSH payment, the MIUR submission required under Sec.  
447.294(d) contains the Medicaid utilization for all hospitals that 
receive a Medicaid payment (including those that do not receive a DSH 
payment), which information is necessary to the calculation of the HMF.

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

    The fourth factor considered in the DHRM is the HUF identified at 
section 1923(f)(7)(B)(i)(II)(bb) of the Act, which requires that the 
DHRM impose the largest percentage DSH allotment reductions on states 
that do not target DSH payments to hospitals with high levels of 
uncompensated care (excluding bad debt). We proposed to rely on the 
existing statutory definition of uncompensated care cost used in 
determining the hospital-specific limit on FFP for Medicaid DSH 
payments.
    As defined in section 1923(g)(1) of the Act, the state must 
calculate for each hospital, for each FY, the difference between the 
costs incurred by that hospital for furnishing inpatient hospital and 
outpatient hospital services during the applicable state FY to Medicaid 
individuals and individuals who have no health insurance or other 
source of third party coverage for the inpatient hospital and 
outpatient hospital services they receive, less all applicable revenues 
received 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 
costs, or hospital-specific DSH limit.
    We proposed to rely on this definition of uncompensated care costs 
for the calculation of the HUF, as reported by states on the most 
recent available Medicaid DSH audit and reporting data. For the 
proposed DHRM, hospitals with high levels of uncompensated care costs 
are defined based on a comparison with other Medicaid DSH hospitals in 
the state. Any hospital that exceeds the mean ratio of uncompensated 
care costs to total Medicaid and uninsured inpatient hospital and 
outpatient hospital service costs within the state is considered a 
hospital with a high level of uncompensated care. This data is 
consistent with the existing Medicaid DSH program definition of 
uncompensated care and is readily available to states and CMS.
    The following data elements would be used in the HUF calculation:
     The preliminary unreduced DSH allotment for each state;
     DSH hospital payment amounts reported for each DSH in 
accordance with Sec.  447.299(c)(17);
     Uncompensated care cost amounts reported for each DSH in 
accordance with Sec.  447.299(c)(16);
     Total Medicaid cost amounts reported for each DSH in 
accordance with Sec.  447.299(c)(10);
     Total uninsured cost amounts reported for each DSH in 
accordance with Sec.  447.299(c)(14); and
     Total hospital cost amounts reported for each DSH in 
accordance with Sec.  447.299(c)(20).
    The statute also requires that uncompensated care costs used in 
this factor of the DHRM exclude bad debt. The DHRM relies on the 
uncompensated care cost data derived from Medicaid DSH audit and 
reporting required by section 1923(f) of the Act and implementing 
regulations. This uncompensated care data excludes bad debt, including 
unpaid copayments and deductibles, associated with individuals with a 
source of third party coverage for the service.
    The HUF is a state-specific percentage that is calculated 
separately for each state group (low DSH and non-low DSH) as follows:
    1. Determine each disproportionate share hospital's uncompensated 
care level by dividing its uncompensated care cost by total hospital 
cost. This data element would come from the most recently submitted and 
accepted Medicaid DSH audit and associated reporting.
    2. For each state, calculate the mean uncompensated care level.

[[Page 50326]]

    3. Identify all hospitals that meet or exceed the mean 
uncompensated care level as high uncompensated care level hospitals, 
and all hospitals with uncompensated care costs below this mean as non-
high uncompensated care level hospitals.
    4. For each state, determine the total amount of DSH payments to 
non-high uncompensated care level hospitals.
    5. For each state, determine a percentage by dividing the state's 
total DSH payments made to non-high uncompensated care level hospitals 
by the aggregate amount of DSH payments made to non-high uncompensated 
care level hospitals for the entire state group. The result would be 
the HUF.
    6. Determine each state's HUF reduction amount by applying the HUF 
percentage to the aggregate reduction amount allocated to this factor 
for each state group.
    In previous rulemaking, we identified some potential scenarios, due 
to data limitations, where the DHRM finalized in 2013 could have 
produced some paradoxical outcomes when comparing hospital levels of 
uncompensated care for purposes of evaluating DSH payment targeting 
through the HUF. Specifically, in Sec.  447.294(e), the 2013 DSH 
allotment reduction final rule, it was possible for a hospital not to 
have been considered to have a higher level of uncompensated care even 
though it provided a higher percentage of services to Medicaid and 
uninsured individuals and had greater total qualifying uncompensated 
care costs than another hospital that did qualify as having a high 
level of uncompensated care. This was due to the previous formula 
determining the level of uncompensated care by dividing uncompensated 
care costs by the sum of total Medicaid costs and total uninsured 
costs. We propose to resolve this problem at Sec.  447.294(e) by 
determining the level of uncompensated care by dividing uncompensated 
care costs by the total hospital costs.
    We sought comments on the proposed DHRM with respect to whether the 
proposed implementation of this factor is expected to be effective in 
tying the level of DSH reductions to the targeting of DSH payments to 
hospitals with high levels of uncompensated care. We believe that the 
proposed DHRM methodology, in using the mean uncompensated care cost 
level as the measure to identify hospitals with high levels of 
uncompensated care, captures a better balance in tying the level of DSH 
reductions to the targeting of DSH payments to such high level 
uncompensated care hospitals, imposing smaller annual state DSH 
allotment reductions on states that more effectively target DSH 
payments to hospitals with high levels of uncompensated care.
    We described the HUF in greater detail in the July 2017 proposed 
rule (82 FR 35155). We received a number of public comments on the 
proposed Factor 4--HUF. A discussion of these comments, with our 
responses, is below.
    Comment: One commenter suggested that the formula in the July 2017 
proposed rule would disadvantage hospitals for their size and services 
provided to the insured by using the total hospital cost in the HUF 
denominator. The commenter requested that CMS not adopt the formula or 
adopt both the 2013 HUF calculation and the new formula and letting 
hospitals use the option that results in the higher UCC amount.
    Response: We disagree that the policy reflected in the July 2017 
proposed rule disproportionately harms hospitals with high 
uncompensated care costs related to the insured population and believe 
that the proposed formula, which we are adopting in this final rule, 
accurately and equitably calculates levels of uncompensated care costs. 
This rule specifies the methodology to be used to calculate the 
statutorily-required Medicaid DSH reductions. In the 2013 DSH allotment 
reduction final rule, we finalized a DHRM, which gave the HUF a 33\1/3\ 
percent weight and that would be in place only for FY 2014 and FY 2015 
to allow time for reevaluation of the methodology with improved and 
more recent data and information about the impact of the ACA on levels 
of coverage and uncompensated care. As a result of our reevaluation, in 
the July 2017 proposed rule, we proposed to modify the DHRM factor 
weights and to use improved data sources where possible, as discussed 
in this final rule. We believe this rule ensures the appropriate 
allocation of the DSH allotment reductions to those states that target 
their DSH payments to hospitals with high volumes of Medicaid 
inpatients and high levels of uncompensated care (excluding bad debt), 
as required under the statute. Therefore, we will only be using the 
policy reflected in the July 2017 proposed rule and this final rule, 
and we will not adopt the 2013 HUF calculation as an alternative 
option.
    Comment: One commenter recommended that CMS include costs other 
than inpatient and outpatient hospital services, including physician 
services, transportation costs, and non-hospital services, in the 
calculation of the hospital-specific DSH limit. One other commenter 
recommended that CMS update the definition of uncompensated care to 
align with the definition under the Internal Revenue Code to determine 
community benefit, and that CMS require hospitals receiving DSH 
payments to report Medicaid shortfall, charity care, and bad debt to 
better understand the impact of DSH payments on hospitals.
    Response: Consistent with statutory direction, the DHRM will use 
uncompensated care data that excludes bad debt, including unpaid 
copayments and deductibles associated with individuals with a source of 
third party coverage for the service. Changes to calculating the 
hospital-specific DSH limit are outside the scope of the July 2017 
proposed rule. We are not addressing the calculation of hospital-
specific DSH payment limits under section 1923(g) of the Act, or the 
DSH audit reporting requirements under section 1923(j) of the Act, 
through this rulemaking.
    Comment: One commenter noted that the MIUR data do not 
appropriately account for state-created programs for low-income 
individuals that are funded by DSH payments, or were so funded prior to 
Medicaid expansion.
    Response: We disagree. The DHRM relies on MIUR data as the data 
source specified in statute. Modifying the MIUR used in the DHRM to 
account for state-created programs would be inconsistent with statutory 
requirements.
    Comment: Several commenters expressed concerns that the HUF does 
not properly address the statutory direction to impose larger 
percentage reductions on states that do not target their DSH payments 
to hospitals with high levels of uncompensated care because Medicaid 
DSH audit and reporting data does not include all hospitals in a state. 
These commenters noted that using only the hospitals identified on the 
DSH audit report creates a higher mean uncompensated care value than 
that of states with less strict criteria for eligibility for receiving 
DSH payments. One commenter suggested that the DHRM should account for 
states that have strict criteria for qualifying to receive DSH payments 
and recommended that CMS collect and utilize high LIUR values to 
consider hospitals targeted under the HUF. Another commenter suggested 
that for purposes of calculation reductions under the HUF, CMS cap each 
state's average uncompensated care level at the national mean plus one 
standard deviation. Yet another commenter suggested that CMS obtain 
average uncompensated care levels from all hospitals with Medicaid 
days, not just from those hospitals identified through DSH audit and 
reporting data.

[[Page 50327]]

    Response: We recognize that the DSH audit and reporting data does 
not include uncompensated care information for all hospitals; however, 
the Medicaid DSH audit and reporting data represent the only existing 
uncompensated care cost data consistent with the existing statutory 
definition of uncompensated care cost used in determining the hospital-
specific limit on FFP for DSH payments. We disagree that the HUF does 
not address the statutory direction to impose larger percentage 
reductions on states that do not target their DSH payments to hospitals 
with high levels of uncompensated care. The proposed and final HUF is 
designed to promote state targeting of DSH payments to hospitals with 
high levels of uncompensated care by imposing reductions based on the 
payments to non-high uncompensated care-level hospitals. We believe 
that the proposed calculation of the HUF represents an equitable method 
for comparing how states target payments to high uncompensated care 
hospitals, and therefore, we are not adopting the commenters' 
recommendations.
    Comment: Many commenters noted support for total hospital cost in 
the denominator of the HUF. One commenter stated that using total 
hospital cost in the denominator of the HUF mitigates reductions for 
states that target deemed DSH hospitals.
    Response: We believe this is an accurate and equitable method for 
calculating reductions under the HUF, and as such, we are finalizing 
the rule with the use of the total hospital cost as the denominator for 
purposes of calculating reductions under the HUF.
    Comment: One commenter requested that CMS clarify the description 
of total hospital cost in the July 2017 proposed rule.
    Response: The description of total hospital costs as it relates to 
the July 2017 proposed rule and this final rule is codified in Sec.  
447.299(c)(20). Total hospital cost is the total annual costs incurred 
by each hospital for furnishing inpatient hospital and outpatient 
hospital services.
    Comment: One commenter suggested CMS use a standardized calculation 
for uncompensated care costs to promote more consistent results across 
all states, so that the states currently including third party payments 
for Medicaid eligible individuals in calculating uncompensated care 
cost for purposes of the hospital-specific DSH limit would not be 
disadvantaged.
    Response: While a number of issues related to Medicaid DSH payment 
calculations currently are the subject of litigation, the statutorily-
required allotment reductions and the DHRM are not among them, and we 
are bound by statute to adopt a rule to implement the DSH reductions. 
With this final rule, we are doing so according to our view of the best 
interpretation of the DSH statute and will utilize the most recent data 
available to us that is consistent with applicable laws and 
regulations. We believe the proposed DHRM relies on a standard 
definition of uncompensated costs for the HUF, which relies on data 
derived from Medicaid DSH audit and reporting data. Further, the DHRM, 
in using this data, imposes larger percentage reductions on states that 
do not target their DSH payments to hospitals with high levels of 
uncompensated care.
    Comment: Several commenters noted support of CMS utilizing total 
hospital cost in the denominator of the HUF. Commenters expressed 
concern that the HUF should include an adjustment to account for the 
relative size of hospitals, and that utilizing total hospital costs in 
the denominator of the HUF disadvantages academic medical centers. The 
commenters noted that the need for academic medical centers to provide 
training, to maintain emergency standby capacity for rarely used 
hospital services, and to provide additional highly specialized 
services increases their total hospital cost compared to peer hospitals 
and, therefore, understates their HUF uncompensated care level compared 
to peer hospitals. One commenter expressed concern that CMS did not 
provide any data indicating which states would be impacted by this 
proposal.
    Response: We disagree with this commenter that utilizing total 
hospital costs in the denominator of the HUF disadvantages academic 
medical centers and note that we received multiple comments in support 
of utilizing total hospital costs in the denominator of the HUF as 
opposed to our previous 2013 final rule approach of using only Medicaid 
and uninsured costs in the denominator. By using total hospital costs, 
we are accounting for the size of hospitals, therefore making an 
additional hospital size adjustment unnecessary. While we believe using 
total hospital costs in the denominator of the HUF represents a 
reasonable method for determining hospitals with high levels of 
uncompensated care costs, consistent with statutory requirements, we 
will monitor the application of this factor and the DHRM generally and 
may propose modifications if a better option avails itself in the 
future, nothing prevents CMS from readdressing the calculation of the 
HUF through future rulemaking, if appropriate.

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

    The statute requires that we take into account the extent to which 
a state's DSH allotment was included in the budget neutrality 
calculation for a coverage expansion that was approved under section 
1115 demonstration authority as of July 31, 2009. These states possess 
full annual DSH allotments as calculated under section 1923(f) of the 
Act. Under an approved section 1115 demonstration, however, some states 
have limited authority to make DSH payments under section 1923 of the 
Act because all or a portion of their DSH allotment was included in the 
budget neutrality calculation for a coverage expansion under an 
approved section 1115 demonstration or to fund uncompensated care pools 
and/or safety net care pools. For applicable states, DSH payments under 
section 1923 of the Act are limited to the DSH allotment calculated 
under section 1923(f) of the Act less the allotment amount included in 
such a budget neutrality calculation. If a state's entire DSH allotment 
is included in such a budget neutrality calculation, it would have no 
available DSH funds with which to make DSH payments under section 1923 
of the Act for the period of the demonstration.
    Consistent with the statute, for states that include DSH allotment 
in budget neutrality calculations for coverage expansion under an 
approved section 1115 demonstration as of July 31, 2009, we proposed to 
exclude from the DSH allotment reduction, for the HMF and the HUF 
factors, the amount of DSH allotment that each state currently 
continues to divert specifically for coverage expansion in the budget 
neutrality calculation. DSH allotment amounts included in budget 
neutrality calculations for non-coverage expansion purposes under 
approved demonstrations would still be subject to reduction. 
Uncompensated care pools and safety net care pools are considered non-
coverage expansion purposes for the BNF. For section 1115 
demonstrations not approved as of July 31, 2009, any DSH allotment 
amounts included in budget neutrality calculations, whether for 
coverage expansion or otherwise, under a later approval would also be 
subject to reduction.
    We proposed to determine for each reduction year if any portion of 
a state's DSH allotment qualifies for consideration under this factor. 
To qualify annually, CMS and the state would have to have included the 
state's

[[Page 50328]]

DSH allotment (or a portion thereof) in the budget neutrality 
calculation for a coverage expansion that was approved under section 
1115 of the Act as of July 31, 2009, and the coverage expansion would 
have to still exist in the approved section 1115 demonstration at the 
time that reduction amounts are calculated for each FY. If a state had 
a DSH allotment amount for coverage expansion approved under a 
demonstration under a section 1115 of the Act as of July 31, 2009 but 
subsequently reduced this amount, the approved amount remaining under 
the section 1115 demonstration would not be subject to reduction.
    The proposed DHRM took into account the extent to which the DSH 
allotment for a state was included in the budget neutrality calculation 
for a demonstration approved under section 1115 of the Act as of July 
31, 2009 by excluding from reduction under the HMF and HUF amounts 
diverted specifically for a coverage expansion and automatically 
assigning qualifying states an average percentage reduction amount 
(that is, the average HUF and HMF of the state's respective state 
group) for any DSH allotment diverted for non-coverage expansion 
purposes and any amounts diverted for coverage expansion if the section 
1115 demonstration was not approved as of July 31, 2009. DSH allotment 
reductions relating to two DHRM factors (the HUF and the HMF) are 
determined based on how states target DSH payments to certain 
hospitals. Since states that diverted all or a portion of their DSH 
allotments would have limited or no relevant data for these two 
factors, we would be unable to evaluate how they spent the diverted 
portion of their DSH allotment for these targeting criteria. 
Accordingly, for diversion amounts subject to reduction, we proposed to 
maintain the HUF and HMF formula for DSH payments for which qualifying 
states would have available data. Because we would not have DSH payment 
data for DSH allotment amounts diverted for non-coverage expansion (or 
for coverage expansions not approved as of July 31, 2009), we proposed 
to assign average HUF and HMF reduction percentages for the portion of 
the DSH allotment that a state diverted for non-coverage expansion (or 
for coverage expansions not approved as of July 31, 2009) that it was 
consequently unable to use to target payments to disproportionate share 
hospitals. Instead of assigning the average percentage reduction to 
non-qualifying amounts, we considered using alternative percentages 
higher or lower than the average. However, these alternative 
percentages might provide an unintended benefit or penalty to these 
states for DSH diversions approved under a demonstration under section 
1115 of the Act. We sought comment on the use of different percentages 
for the reductions to diversion amounts that do not qualify under the 
BNF and regarding alternative BNF methodologies that may be preferable.
    We described the BNF in greater detail in the July 2017 proposed 
rule (82 FR 35155). We received a number of public comments on the 
proposed Factor 5--BNF. A discussion of these comments, with our 
responses, are below.
    Comment: One commenter noted support for the BNF excluding diverted 
DSH allotment amounts, but stated that limiting this to waivers 
approved before July 31, 2009, unfairly limits the ability of some 
states to expand coverage using a model that has proven successful in 
the commenter's state. The commenter noted that if the rule is 
finalized as proposed, it could jeopardize their state's section 1115 
demonstration program, which has currently been extended, but due to 
the statutory requirement that coverage expansion DSH diversion funding 
have been approved by July 31, 2009, its demonstration coverage 
expansion DSH diversion funding would not be excluded. The commenter 
stated this is contrary to the purpose of excluding DSH funds for 
coverage expansions from the DHRM, which the commenter noted is to 
ensure that DSH funds diverted to expand health coverage are insulated 
from reductions.
    Response: The statute requires that we take into account the extent 
to which a state's DSH allotment was included in the budget neutrality 
calculation for a coverage expansion that was approved under section 
1115 of the Act as of July 31, 2009, specifically. The ACA made non-DSH 
funds available to support Medicaid expansion and the purchase of 
private insurance for eligible individuals through Health Insurance 
Exchanges, which may have reduced the need for states to divert DSH 
funds through demonstration projects. In recognition of the reduced 
need for DSH diversion, the July 31, 2009 date, which predates the 
enactment of the ACA, serves to ensure that states could not newly 
divert DSH under demonstration projects to avoid allotment reductions. 
If a state's initial section 1115 demonstration was approved as of July 
31, 2009 and later extended, the amount approved under the associated 
the waiver would still be excluded for purposes of the HMF and HUF 
factors from DSH allotment reductions in the DHRM. However, for section 
1115 demonstrations not approved as of July 31, 2009, any DSH allotment 
amounts included in budget neutrality calculations, whether for 
coverage expansion or otherwise, under a later approval would be 
subject to reduction. We note that, in some cases, modifications made 
by amendment (including in connection with a renewal or extension) to a 
coverage expansion DSH diversion initially approved as of July 31, 2009 
may be so significant that the DSH diversion is no longer appropriately 
considered the same coverage expansion DSH diversion program as was 
approved as of July 31, 2009. In such a case, we would cease excluding 
the diverted DSH amounts from reduction under the DHRM. We are 
finalizing the rule as proposed.
    Comment: Several commenters urged CMS to take into account that 
there is no policy reason to differentiate DSH funding for a coverage 
expansion demonstration in relation to the July 2009 date, and noted 
that the only policy reason given by CMS was that subsequent to July 
31, 2009, the ACA provided states with other, non-DSH funds for such 
coverage expansion, thus limiting the need for diverted DSH under 
demos. The commenters suggested that CMS did this because it did not 
want to provide financial relief to states that chose not to effectuate 
coverage through a mechanism other than Medicaid expansion through the 
ACA and that CMS has the legal authority to exclude funding approved 
after July 31, 2009. The commenters stated their belief that their 
state has the only section 1115 waiver approved after July 31, 2009 
that diverted DSH allotment for coverage expansion, and states that 
choose to expand coverage through a section waiver 1115, rather than 
expanding Medicaid to the adult expansion population as permitted under 
the ACA, will save the federal government money. The commenters urged 
CMS to exclude from the DHRM any DSH funding diverted to support any 
section 1115 demonstration coverage expansion approved at any time 
between July 31, 2009, and the effective date of the new regulation, or 
at a minimum, to include such projects approved on or before July 31, 
2012.
    Response: Consistent with the statute, for states that include DSH 
allotment amounts in budget neutrality calculations for coverage 
expansion under an approved section 1115 demonstration as of July 31, 
2009, we are excluding from the DSH allotment reduction, for the HMF 
and the HUF

[[Page 50329]]

factors, the amount of DSH allotment that each state currently 
continues to divert specifically for coverage expansion in the budget 
neutrality calculation. To promote equitable DSH allotment reductions 
across states, other than this specified statutory exception 
implemented through this rule, the final DHRM does not provide 
additional relief to states that include all or a portion of their DSH 
allotment in their section 1115 demonstration budget neutrality 
calculation.
    Comment: One commenter noted that CMS proposed to estimate the 
targeting of section 1115 payments not excluded from reductions under 
the BNF for states by using DSH data from other states as a proxy, but 
did not provide a timeline for replacing the proxy data with actual 
hospital-specific data. The commenter recommended that a better long 
term approach would be to collect hospital-specific data on these 
payments to calculate the DSH targeting factors for these states 
directly.
    Response: DSH allotment reductions relating to two DHRM targeting 
factors (the HUF and the HMF) are determined based on how states target 
DSH payments to certain hospitals. States that diverted all or a 
portion of their DSH allotments either make limited or no DSH payments 
using this diverted DSH allotment amount; therefore, actual hospital-
specific DSH payment data suggested by the commenter for use often does 
not exist. We are finalizing use of a proxy as proposed for calculating 
DSH allotment reductions for purposes of the HUF and HMF. We will 
assign any qualifying states an average percentage reduction amount 
within its respective state group for diverted DSH allotment amounts 
that are not related to a coverage expansion in effect as of July 31, 
2009, and for which the state does not have complete and/or relevant 
DSH payment data. We believe this is a reasonable approach for 
determining reductions for the HUF and HMF factors given the absence of 
relevant hospital-specific DSH payment data for these payments.
    Comment: Some commenters suggested that CMS should re-examine the 
definition of ``coverage for expansion purposes'' and as it applies to 
the BNF to include safety net care pools and Uncompensated Care pools 
to the extent that they are established or used as part of broader 
efforts to expand coverage. Additionally, the commenters stated that 
there is no rational basis and that it is in fact contrary to the 
statutory intent to automatically designate all safety net care pools 
and uncompensated care pools as not contributing to coverage expansion 
purposes, and the July 2017 proposed rule provided no discussion of or 
justification for CMS' decision. The commenters requested that the full 
amount of a state's diverted DSH allotment in effect on July 31, 2009, 
be excluded from reduction.
    Response: Uncompensated care pools and safety net care pools are 
designed to pay providers directly for uncompensated care costs, do not 
provide or pay for health care coverage for individuals, and do not 
result in the expansion of Medicaid coverage. Accordingly, they are 
excluded from consideration as coverage expansion for purposes of this 
factor.
    Comment: Multiple commenters noted that CMS' proposed methodology 
would exclude from the DSH allotment reduction, for the HMF and HUF, 
the amount of DSH allotment that each state uses for coverage expansion 
in the budget neutrality calculation and recommended that CMS change 
the way in which the BNF is applied to also exclude the amount of DSH 
allotment that each state uses for coverage expansion from the UPF to 
account for the level of uninsured in the state.
    Response: The statute requires that we take into account the extent 
to which a state's DSH allotment was included in the budget neutrality 
calculation for a coverage expansion that was approved under a 
demonstration project under section 1115 of the Act as of July 31, 
2009. The proposed DHRM takes into account the extent to which the DSH 
allotment for a state was included in the budget neutrality calculation 
approved under section 1115 demonstration as of July 31, 2009, by 
excluding amounts diverted specifically for a coverage expansion and 
automatically assigning qualifying states an average percentage 
reduction amount (based on the state group) for any DSH allotment 
diverted for non-coverage expansion purposes and any amounts diverted 
for coverage expansion if the section 1115 demonstration was or is 
approved after July 31, 2009. DSH allotment reductions relating to two 
DHRM factors (the HUF and the HMF) are determined based on how states 
target DSH payments to certain hospitals. Since states diverting their 
DSH allotments under section 1115 demonstration projects would have 
limited or no relevant data for these two factors, we would be unable 
to evaluate how they spent the portion of their DSH allotment that was 
diverted for non-coverage expansion, which is why we proposed and are 
adopting the proxy methodology of assigning an average percentage 
reduction amount. However, the data necessary to calculate the UPF is 
unaffected by whether a state has diverted its DSH allotment under a 
section 1115 demonstration. Therefore, we do not exclude the amount of 
DSH allotment that each state has diverted through a section 1115 
demonstration for coverage expansion from the UPF. We believe that the 
proposed methodology is an accurate and equitable approach, and we are 
finalizing this method in this final rule.
    Comment: Two commenters noted that CMS did not propose to change 
the regulatory language at paragraph (e)(12)(i), stating that the 
phrase ``(without regard to approved amendments since that date)'' 
within the regulatory language may be confusing and possibly lead to 
misinterpretation or uncertainty and requested that CMS clarify its 
proposal regarding the amount excluded under the BNF calculation.
    Response: We agree that the regulatory language could be 
misinterpreted and we are clarifying our intent in this final rule. For 
section 1115 demonstrations not approved as of July 31, 2009, any DSH 
allotment amounts included in budget neutrality calculations, whether 
for coverage expansion or otherwise, would also be subject to 
reduction.
    Comment: One commenter questioned whether certain hospitals 
involved with Medicaid demonstration programs are subject to DSH audit 
and reporting requirements. Additionally, the commenter requested 
information on the impact of the reductions on state demonstration 
programs in states that use both DSH payments and section 1115 
demonstration payments to fund hospitals.
    Response: The final rule relies on DSH audit and reporting data as 
submitted by states in accordance with section 1923(j) of the Act and 
implementing regulations. The implementing regulations and associated 
policy guidance specify all audit and reporting requirements, including 
which hospitals must be included in the audit and associated reporting. 
The DSH audit and reporting requirements apply to all hospitals 
receiving DSH payments under section 1923 of the Act. Moreover, the DSH 
audit and reporting requirements continue to apply to states with 
section 1115 demonstrations, unless requirements of that section are 
specifically identified as waived or inapplicable to expenditures under 
the demonstration. As the reductions are not in effect at the time of 
publication of this final rule, we cannot know the specific impact the 
reductions will have on state demonstration programs, which is also 
likely to be affected by states'

[[Page 50330]]

policy decisions regarding their Medicaid programs. Other than states 
that have a qualifying coverage expansion under the BNF of the DHRM, we 
generally anticipate a similar impact of the reductions on states that 
utilize DSH payments and section 1115 demonstration payments to fund 
hospitals, as on states that do not make section 1115 demonstration 
payments to hospitals.
    Comment: One commenter noted that states would like to know the 
impact of the July 2017 proposed rule on Medicaid demonstration 
programs, including those related to Medicaid DSH.
    Response: The statute requires that we take into account the extent 
to which a state's DSH allotment was included in the budget neutrality 
calculation for a coverage expansion that was approved under section 
1115 of the Act as of July 31, 2009. This final rule implements this 
requirement by excluding from DSH allotment reduction the amount of DSH 
that qualifying states continue to divert specifically for coverage 
expansion in the budget neutrality calculation. Any amount of DSH 
diverted for other purposes under the demonstration (or diverted for a 
coverage expansion approved after July 1, 2009) would still be subject 
to reduction by automatically assigning qualifying states an average 
percentage reduction amount within its respective state group for 
factors for which the state does not have complete and/or relevant DSH 
payment data. DSH allotment amounts included in budget neutrality 
calculations for non-coverage expansion purposes under approved 
demonstrations (or for a coverage expansion approved after July 1, 
2009) would still be subject to reduction.

IV. Provisions of the Final Rule

    As discussed in section III. of this final rule, this final rule 
generally finalizes the provisions as proposed in the July 2017 
proposed rule. However, we are adding paragraph Sec.  
447.294(e)(14)(iv) to finalize a proposed state-specific cap that 
limits the annual DSH allotment reduction for each fiscal year to be 
applied to each state's total unreduced DSH allotment to 90 percent of 
its original unreduced DSH allotment for that fiscal year. This 
addition is a technical change to correct an unintentional omission of 
proposed regulatory text to implement this proposed policy, which was 
discussed in the July 2017 proposed rule.

V. Collection of Information Requirements

    Beginning with each state's Medicaid state plan for rate year 2005, 
each state must submit to CMS (at the same time as it submits the 
completed DSH audit as required under Sec.  455.304) the data specified 
under Sec.  447.299 for each DSH hospital to which the state made a DSH 
payment. The reporting requirements which allows CMS to verify the 
appropriateness of such payments are currently approved by OMB under 
control number 0938-0746 (CMS-R-266). This rule does not impose any 
new/revised information collection requirements or burden pertaining to 
Sec.  447.299.
    Although mentioned in sections III.B and III.B.2. of this preamble, 
this rule does not impose any new/revised SPA or auditing requirements 
or burden nor any new/revised information collection requirements or 
burden associated with CMS-64 (control number 0938-1265) or CMS-2552 
(control number 0938-0050).
    Since this rule does not impose any new or revised ``collection of 
information'' requirements or burden, it need not be reviewed by OMB 
under the authority of the Paperwork Reduction Act of 1995 (PRA) (44 
U.S.C. 3501 et seq.). For the purpose of this section of the preamble, 
collection of information is defined under 5 CFR 1320.3(c) of the PRA's 
implementing regulations.

VI. Regulatory Impact Analysis

A. Statement of Need

    The ACA amended the statute by requiring aggregate reductions to 
state Medicaid DSH allotments annually from FY 2014 through FY 2020. 
Subsequent legislation extended the reductions, modified the amount of 
the reductions, and delayed the start of the reductions until FY 2020. 
The most recent related amendments to the statute were through the BBA 
18. This final rule delineates the DHRM to implement the annual 
reductions for FY 2020 through FY 2025.

B. Overall Impact

    We have examined the impact of this rule as required by Executive 
Order 12866 on Regulatory Planning and Review (September 30, 1993), 
Executive Order 13563 on Improving Regulation and Regulatory Review 
(January 18, 2011), the Regulatory Flexibility Act (RFA) (September 19, 
1980, Pub. L. 96-354), section 1102(b) of the Act, section 202 of the 
Unfunded Mandates Reform Act of 1995 (March 22, 1995; Pub. L. 104-4), 
Executive Order 13132 on Federalism (August 4, 1999), the Congressional 
Review Act (5 U.S.C. 804(2)), and Executive Order 13771 on Reducing 
Regulation and Controlling Regulatory Costs (January 30, 2017).
    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). Section 
3(f) of Executive Order 12866 defines a ``significant regulatory 
action'' as an action that is likely to result in a rule: (1) Having an 
annual effect on the economy of $100 million or more in any 1 year, or 
adversely and materially affecting a sector of the economy, 
productivity, competition, jobs, the environment, public health or 
safety, or state, local or tribal governments or communities (also 
referred to as ``economically significant''); (2) creating a serious 
inconsistency or otherwise interfering with an action taken or planned 
by another agency; (3) materially altering the budgetary impacts of 
entitlement grants, user fees, or loan programs or the rights and 
obligations of recipients thereof; or (4) raising novel legal or policy 
issues arising out of legal mandates, the President's priorities, or 
the principles set forth in the Executive Order.
    A regulatory impact analysis (RIA) must be prepared for major rules 
with economically significant effects ($100 million or more in any 1 
year). We estimate that this rulemaking is ``economically significant'' 
as measured by the $100 million threshold, and hence also a major rule 
under the Congressional Review Act. Accordingly, we have prepared a 
Regulatory Impact Analysis that to the best of our ability presents the 
costs and benefits of the rulemaking. Under the Congressional Review 
Act (5 U.S.C. 801 et seq.), the Office of Information and Regulatory 
Affairs designated this rule as a major rule, as defined by 5 U.S.C. 
804(2).

C. Anticipated Effects

    The RFA requires agencies to analyze options for regulatory relief 
of small entities, if a rule has a significant impact on a substantial 
number of small entities. For purposes of the RFA, small entities 
include small businesses, nonprofit organizations, and small 
governmental jurisdictions. The great majority of hospitals and most 
other health care providers and suppliers are small entities, either by 
being nonprofit organizations or by meeting the SBA definition of a 
small business (having revenues of less than $7.5 million to $38.5 
million in any 1 year). Individuals and states are not included in the 
definition of a small entity. We are not

[[Page 50331]]

preparing an RFA analysis because we have determined, and the Secretary 
certifies, that this final rule would not have a significant economic 
impact on a substantial number of small entities (including hospitals 
and providers) because states still have considerable flexibility to 
determine DSH state plan payment methodologies.
    In addition, section 1102(b) of the Act requires us to prepare a 
regulatory impact analysis if a rule may have a significant impact on 
the operations of a substantial number of small rural hospitals. This 
analysis must conform to the provisions of section 604 of the RFA. For 
purposes of section 1102(b) of the Act, we define a small rural 
hospital as a hospital that is located outside of a Metropolitan 
Statistical Area for Medicare payment regulations and has fewer than 
100 beds. We are not preparing an analysis for section 1102(b) of the 
Act because we have determined, and the Secretary certifies, that this 
final 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 (UMRA) also 
requires that agencies assess anticipated costs and benefits before 
issuing any rule whose mandates require spending in any 1 year of $100 
million in 1995 dollars, updated annually for inflation. In 2019, that 
threshold is approximately $154 million. This final rule would not 
mandate any requirements for state, local, or tribal governments, nor 
would it affect private sector costs.
    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 rule does not impose substantial direct costs 
on state or local governments, the requirements of Executive Order 
13132 are not applicable.

C. Anticipated Effects

1. Effects on State Medicaid Programs
    We anticipate, effective for FY 2020, that the DSH allotment 
reductions would have a direct effect on the ability for some or all 
states to maintain state-wide Medicaid DSH payments at FY 2017 levels. 
Federal share DSH allotments, which are published by CMS in an annual 
Federal Register notice and otherwise communicated to states and made 
publicly available on the Medicaid.gov website, limit the amount of FFP 
in the aggregate that states can pay annually in DSH payments to 
hospitals. This final rule would reduce state DSH allotment amounts, 
and therefore, would limit the states' ability to make DSH payments and 
claim FFP for DSH payments at FY 2017 levels. By statute, the rule 
would reduce state DSH allotments by $44,000,000,000 for FY 2020 
through FY 2025. We anticipate that the rule would reduce total FFP 
claimed by states by similar amounts, although it may not equal the 
exact amount of the allotment reductions. Due to the complexity of the 
interaction among the DHRM methodology, state DSH allotments, DHRM 
data, future state DSH payment levels and methodologies for these 
years, we cannot provide a specific estimate of the total federal 
financial impact for each year.
    The final rule utilizes a DHRM that would mitigate the negative 
impact on states that continue to have high percentages of uninsured 
and are targeting DSH payments to hospitals that have a high volume of 
Medicaid patients and to hospitals with high levels of uncompensated 
care, consistent with statutorily-required factors.
2. Effects on Providers
    We anticipate that the final rule would affect certain providers 
through the reduction of state DSH payments that states would need to 
implement in order to comply with their reduced annual state DSH 
allotments. However, we cannot estimate the impact on individual 
providers or groups of providers. This final rule would not affect the 
considerable flexibility afforded states in setting DSH state plan 
payment methodologies to the extent that these methodologies are 
consistent with section 1923(c) of the Act and all other applicable 
statutes and regulations. States would retain the ability to preserve 
existing DSH payment methodologies, to the extent consistent with the 
state's reduced annual DSH allotment, or to propose modified 
methodologies by submitting state plan amendments to us. Some states 
may determine that implementing a proportional reduction in DSH 
payments for all qualifying hospitals is the preferred method to 
account for the reduced allotment. Alternatively, states could 
determine that the best action is to propose a methodology that would 
direct DSH payments reductions to hospitals that do not have high 
Medicaid volume and do not have high levels of uncompensated care. Some 
states could opt to take a different approach. Regardless, the rule 
would incentivize states to target DSH payments to hospitals that are 
most in need of Medicaid DSH funding based on their serving a high 
volume of Medicaid inpatients and having a high level of uncompensated 
care.
    This final rule also does not affect the calculation of the 
hospital-specific DSH limit established at section 1923(g) of the Act. 
This hospital-specific limit requires that Medicaid DSH payments to a 
qualifying hospital not exceed the costs incurred by that hospital for 
providing inpatient and outpatient hospital services furnished during 
the year to Medicaid patients and individuals who have no health 
insurance or other source of third party coverage for the services 
provided during the year, less applicable revenues for those services.
    Although this rule would reduce state DSH allotments, the 
management of the reduced allotments still largely remains with the 
states. Given that states would retain the same flexibility to design 
DSH payment methodologies under the state plan and that individual 
hospital-specific DSH payment limits would not be affected, we cannot 
predict whether and how states would exercise their flexibility in 
setting DSH payments to account for their reduced DSH allotment and how 
this would affect individual providers or specific groups of providers.

D. Alternatives Considered

    The statute specifies the annual DSH allotment reduction amounts. 
Therefore, we were unable to consider alternative reduction amounts. 
However, we did consider various methodological alternatives to the 
DHRM discussed in individual sections above. Some of the various 
alternatives included using alternative weight assignments, utilizing 
various alternative data sources for uncompensated cost and uninsured 
data, and considering alternate methods for capping individual state 
allotment reductions. However, we decided to move forward with the 
approach specified in the proposed rule in an effort to pursue an 
equitable and reasonable approach in calculating the DSH allotment 
reductions while ensuring that the DHRM complies with federal statutory 
requirements.

E. Accounting Statement and Table

    As required by OMB Circular A-4 (available at www.whitehouse.gov/sites/whitehouse.gov/files/omb/circulars/A4/a-4.pdf), we have prepared 
an accounting statement table showing the classification of the impacts 
associated with implementation of this final rule. Table 1 provides our 
best estimate of the

[[Page 50332]]

reductions to state Medicaid Disproportionate Share Hospital (DSH) 
allotments annually beginning with fiscal year (FY) 2020 based on the 
data.

                                          Table 1--Accounting Statement
----------------------------------------------------------------------------------------------------------------
                                                                                           Units
                                                               Estimates  --------------------------------------
                          Category                               ($ in                    Discount
                                                               millions)   Year dollar      rate        Period
                                                                                         (percent)     covered
----------------------------------------------------------------------------------------------------------------
Transfers:
    Annualized Reductions in Disproportionate Share Hospital     -7,215.7         2017            7    2020-2025
     Allotment (in millions)................................
                                                             ---------------------------------------------------
                                                                 -7,283.1         2017            3    2020-2025
----------------------------------------------------------------------------------------------------------------
    From Whom to Whom.......................................    Federal Government to the States due to assumed
                                                                 reduced number of uninsured and uncompensated
                                                                                     care.
----------------------------------------------------------------------------------------------------------------

F. Reducing Regulation and Controlling Regulatory Costs

    Executive Order 13771, titled Reducing Regulation and Controlling 
Regulatory Costs, was issued on January 30, 2017, and requires that the 
costs associated with significant new regulations ``shall, to the 
extent permitted by law, be offset by the elimination of existing costs 
associated with at least two prior regulations.'' It has been 
determined that this final rule is a transfer rule that does not impose 
more than de minimis costs and thus is not a regulatory action for the 
purposes of Executive Order 13771.
    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 amends 42 CFR chapter IV as set forth below:

PART 447--PAYMENTS FOR SERVICES

0
1. The authority citation for part 447 is revised to read as follows:

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


0
2. Section 447.294 is amended--
0
a. By revising the section heading;
0
b. By revising paragraph (a);
0
c. In paragraph (b), by adding the definition of ``Total hospital 
cost'' in alphabetical order;
0
d. By revising paragraphs (d), (e) introductory text, (e)(3)(i), and 
(e)(5)(i) through (iii);
0
e. By adding paragraph (e)(14)(iv); and
0
f. By revising paragraph (f).
    The revisions and additions reads as follows:


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

    (a) Basis and purpose. This section sets forth the DSH health 
reform methodology (DHRM) for calculating State-specific annual DSH 
allotment reductions as required under section 1923(f) of the Act.
    (b) * * *
    Total hospital cost has the meaning given the term in Sec.  
447.299(c)(20).
* * * * *
    (d) State data submission requirements. States are required to 
submit the mean MIUR, determined in accordance with section 
1923(b)(1)(A) of the Act, for all hospitals receiving Medicaid payments 
in the State and the value of one standard deviation above such mean. 
The State must provide this data to CMS by June 30 of each year. To 
determine which state plan rate year's data the state must submit, 
subtract 3 years from the calendar year in which the data is due.
    (e) DHRM methodology. Section 1923(f)(7) of the Act requires 
aggregate annual reduction amounts as specified in paragraph (f) of 
this section to be reduced through the DHRM. The DHRM is calculated on 
an annual basis based on the most recent data available to CMS at the 
time of the calculation. The DHRM is determined as follows:
* * * * *
    (3) * * *
    (i) Dividing each State's preliminary unreduced DSH allotment by 
their respective total estimated Medicaid service expenditures for the 
applicable fiscal year.
* * * * *
    (5) * * *
    (i) UPF--50 percent.
    (ii) HMF--25 percent.
    (iii) HUF--25 percent.
* * * * *
    (14) * * *
    (iv) No state will receive a reduction as calculated in paragraph 
(e)(14) of this section in excess of 90 percent of its preliminary 
unreduced DSH allotment for the respective fiscal year. For any state 
assigned a reduction amount determined under paragraph (e)(14) of this 
section in excess of 90 percent of its unreduced DSH allotment, the 
reduction amount that exceeds 90 percent of that state's unreduced DSH 
allotment will be distributed among the remaining states in the state 
group that do not exceed the 90 percent reduction cap, based on the 
proportion of each of these remaining states' allotment reduction 
amount before any distribution is performed pursuant to this paragraph 
(e)(14)(iv) to the aggregate allotment reduction amount for the state 
group. This operation will be performed until all reduction amounts in 
excess of the 90 percent reduction cap for all states are allocated 
within each respective state group.
    (f) Annual DSH allotment reduction application. For each fiscal 
year identified in section 1923(f)(7)(A)(ii) of the Act, CMS will 
subtract the State-specific DSH allotment amount determined in 
paragraph (e)(14) of this section from that State's final unreduced DSH 
allotment. This amount is the State's final DSH allotment for the 
fiscal year.

    Dated: September 12, 2019.
Seema Verma,
Administrator, Centers for Medicare & Medicaid Services.
    Dated: September 17, 2019.
Alex M. Azar II,
Secretary, Department of Health and Human Services.
[FR Doc. 2019-20731 Filed 9-23-19; 11:15 am]
BILLING CODE 4120-01-P