NAVEOS® Analysis Highlights Impact of CMS 2014 IPPS Proposed Rule on State Medicaid Expansion Decision

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Research by NAVEOS®, a leading health care reimbursement and analytics company, indicates that the CMS 2014 IPPS Proposed Rule will create a marked disadvantage in the calculation of Medicare Disproportionate Share (DSH) reimbursement for hospitals in States which do not expand their Medicaid populations under the Affordable Care Act (ACA).

On April 26, 2013, CMS released the FFY 2014 IPPS Proposed Rule (“Proposed Rule”). Although the fundamental shift in the way Medicare DSH funds are distributed in FY 2014 and forward coincides in some ways with prior CMS guidance, there are major changes. An important consequence will be an expected lowering of Medicare DSH reimbursement to hospitals in States that choose not to expand this population. This will likely bring renewed pressure on States to expand the Medicaid population. A substantive change in the determination of the Uncompensated Care component of the DSH calculation has caused this issue to surface.

The Medicare DSH program is a large and complex program that will distribute roughly $12B to hospitals that serve a disproportionate share of indigent patients. The funds known as DSH reimbursement, are crucial to hospitals serving a large number of indigent patients, particularly safety net hospitals. Significant reductions in DSH payments may have a large effect on the ability of some hospitals to meet their mission.


Measure of Uncompensated Care:

The change in the Proposed Rule that will cause the situation above was driven by the decision to defer use of CMS’ newly revamped Worksheet S-10 (WS10) (developed specifically for measuring uncompensated care) to allocate the $8.2B DSH Uncompensated Care Pool (UCP). This pool will be 40-70% of a hospital’s total 2014 DSH reimbursement. Instead, CMS is going to use the numerator values from the classic DSH fractions to determine Uncompensated Care;

  •     SSI w/Medicare A (and C) days, and
  •     Allowable Title XIX days.

Each hospital will have a value, called the hospital’s “Insured Low Income Days” representing the sum of these two values. That hospital specific value will be divided by the sum of all DSH Hospital’s Insured Low Income Days to obtain a percentage value of national Uncompensated Care for this subset of hospitals; this is defined as Factor 3 in the UCP payment formula.

By continuing to use allowable Medicaid days in the determination of the UCP, States that do not expand Medicaid will put their DSH hospitals at a severe competitive disadvantage compared to hospitals in States that do expand. This will be manifested in three distinct components:

1.    Having a relatively lower number of allowable Medicaid days than Medicaid expansion States will generate a reduced “Insured Low Income Days” value for specific DSH hospitals, a diminished value for Factor 3 and a smaller piece of the UCP zero-sum funding pool.

     Medicaid days comprise 85% (30.5M of 35.8M) of the sum of national Insured Low Income Days for all DSH hospitals.

2.    The decision to disregard a relative increase in a State’s true uncompensated care (as defined by CMS as Charity Care and Non-Medicare Bad Debt) compared to expansion States removes the countervailing variable that was intended to offset the negative DSH impact of States choosing not to expand.

3.    Having relatively lower allowable Medicaid days than Medicaid expansion States will generate a lower Empirically Justified Amount (EJA) as compared to DSH hospitals in States that have or will decide to expand.

Regardless of the major changes proposed in the distribution of the UCP; one primary principle remains; it will still be distributed under a zero sum model. That means hospitals are going to be vigorously competing for this funding that will decline over time as the number of uninsured is reduced.

Uninsured Population:

The projection of the reduction in the percentage of uninsured people under 65 is much more conservative than previously stated. When the Congressional Budget Office (CBO) first estimated these values, they projected a 34% reduction of uninsured by 2015.

The most recent CBO estimate for 2014 projects a 2% nominal reduction in the national uninsured from the 2013 base year (set at 18%) to 16% or an 11.1% reduction in uninsured projected for 2014.     This one change increased the UCP from prior models by $2B from $6.2B to $8.2B.

Timing of Payment:

One somewhat disturbing note in the proposed rule has to do with the timing of when these supplemental payments would be made. The document noted that these payments would be made periodically, not on a per discharge basis, as is the case with DSH current payments. Depending on when and how often these payments will be distributed, it could cause unexpected cash flow difficulties for hospitals that now get a DSH subsidy in every DRG payment throughout the year.

Commitment to use WS10 in the Future:

CMS made it very clear in the proposed rule that they intend to use WS10 to make this distribution of the UCP. Their (very legitimate) concern that is preventing them from doing this now relates to poor data quality. When they reach an acceptable level of comfort, CMS intends to use actual uncompensated care costs as reported on WS10 to make this distribution.

However, CMS has indicated that they will not be using all of the sections on WS10. Instead they have indicated that are going to use only the Charity Care costs and Non-Medicare Bad Debts (lines 23 and 29) of the form. What they are leaving out of the calculation is the uncompensated costs for Medicaid, S-CHIP, and Other State/Local Indigent Care programs. This proposal will likely generate a firestorm of comments as it disadvantages several States with below average Medicaid reimbursement (e.g. California). Their hospitals will not be compensated in any way for the large Medicaid losses as reported on Line 8 of WS10.

The Factor 3 worksheet for every hospital in the country can be found on the URL noted at the bottom of this document. CMS has already calculated Insured Low Income Days values for each hospital, whether or not a hospital is considered a DSH hospital (for the empirically justified amount) and the hospital specific percent of the national Insured Low Income Days measurement that will drive the UCP dollar amount per provider.

Questions on the proposed rule can be directed to Robert Gricius of NAVEOS® at or (888) 550-2708.

In the download section choose the last file titled: FY 2014 IPPS Proposed Rule: Medicare DSH Supplemental Data File. This is a zip Excel file.

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Robert Gricius
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