Industry Insights

Uncertainty on Commercial Payments in Medicaid DSH Calculations

May 2015

With the state fiscal year 2011 Medicaid disproportionate share hospitals (DSH) audits completed, state Medicaid agencies are in the process of recouping and redistributing funds in accordance with their state plan. But a recent court ruling means a new challenge has emerged regarding DSH calculations. 

The December 19, 2008, Federal Register includes regulations outlining how to compute the uncompensated care cost (UCC) used in the DSH calculation. The regulation states:

“The total annual uncompensated care cost equals the total cost of care for furnishing inpatient hospital and outpatient hospital services to Medicaid eligible individuals and to individuals with no source of third party coverage for the hospital services they receive less the sum of regular Medicaid [fee-for-service] rate payments, Medicaid managed care organization payments, supplemental/enhanced Medicaid payments, uninsured revenues, and Section 1011 payments …” 

The rule did not specifically indicate commercial insurance payments could be used to reduce the cost; however, the Centers for Medicare & Medicaid Services (CMS) clarified this situation in FAQ No. 33, published in “Additional Information on the DSH Reporting and Audit Requirements.” CMS states “days, costs and revenues associated with patients that are eligible for Medicaid and also have private insurance should be included in the calculation of the hospital-specific DSH limit.”

On December 29, 2014, in Texas Children’s Hospital v. Burwell, the U.S. District Court for the District of Columbia granted an injunction preventing state Medicaid agencies in Texas and Washington and CMS from recouping Medicaid DSH funds from hospitals if overpayments can be attributed to the inclusion of commercial insurance payments in the UCC calculation. The hospitals are challenging the legality of the FAQ being applied in the calculation; because the issue was addressed as an FAQ clarification, it did not go through the traditional regulation process, which includes a comment period.

If the decision is upheld, it could significantly affect hospitals with liabilities and potentially those expecting to receive additional distributions depending on the state plan. For example, a hospital paid just over its limit could potentially swing from a longfall to a shortfall depending on the amount of commercial payments included in its calculation, as shown below:

Based on current regulations, Medicaid DSH audit contractors continue to request these payments be reported in the calculation. There is tremendous uncertainty about the eventual outcome, and we do not anticipate any changes in regard to liabilities a hospital currently faces related to state FY 2011. Once this issue is resolved in the courts, examinations may have to be re-evaluated to exclude only the third-party liability payments. This likely would reduce many liabilities currently faced by hospitals, but also would reduce the pool available to redistribute funds to hospitals that were “underpaid” depending on the Medicaid state plan.

If you have additional questions or would like more information on this matter, please contact your BKD advisor.

BKD LinkedIn BKD Twitter BKD Youtube BKD Google Plus