77904 - Federal Register/Vol. 73, No. 245/Friday, December 19

77904

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

DEPARTMENT OF HEALTH AND

HUMAN SERVICES

Centers for Medicare & Medicaid

Services

42 CFR Parts 447 and 455

[CMS–2198–F]

RIN 0938–AN09

Medicaid Program; Disproportionate

Share Hospital Payments

AGENCY

: Centers for Medicare &

Medicaid Services (CMS), HHS.

ACTION

: Final rule.

SUMMARY

: This final rule sets forth the

data elements necessary to comply with

the requirements of Section 1923(j) of

the Social Security Act (Act) related to

auditing and reporting of

disproportionate share hospital

payments under State Medicaid

programs. These requirements were

added by Section 1001(d) of the

Medicare Prescription Drug,

Improvement, and Modernization Act of

2003 (MMA).

DATES

: Effective Date: This rule is

effective on January 19, 2009.

FOR FURTHER INFORMATION CONTACT

Venesa Day, (410) 786–8281; Rory

Howe, (410) 786–4878; and Rob Weaver,

(410) 786–5914.

SUPPLEMENTARY INFORMATION

I. Background

Title XIX of the Social Security Act

(Act) authorizes Federal grants to States

for Medicaid programs that provide

medical assistance to low-income

families, the elderly and persons with

disabilities. Section 1902(a)(13)(A)(iv) of

the Act requires that States make

Medicaid payment adjustments for

hospitals that serve a disproportionate

share of low-income patients with

special needs. Section 1923 of the Act

contains more specific requirements

related to such disproportionate share

hospital (DSH) payments, including

aggregate annual state-specific limits on

Federal financial participation under

Section 1923(f), and hospital-specific

limits on DSH payments under Section

1923(g). Under those hospital specific

limits, a hospital’s DSH payments may

not exceed the costs incurred by that

hospital in furnishing services during

the year to Medicaid patients and the

uninsured, less other Medicaid

payments made to the hospital, and

payments made by uninsured patients

(‘‘uncompensated care costs’’). In

addition, Section 1923(a)(2)(D) requires

States to provide an annual report to the

Secretary describing the payment

adjustments made to each

disproportionate share hospital.

Section 1001(d) of the Medicare

Prescription Drug, Improvement, and

Modernization Act of 2003 (MMA) (Pub.

L. 108–173, enacted on December 8,

2003) added Section 1923(j) to the Act

to require States to report additional

information about their DSH programs.

Section 1923(j)(1) of the Act requires

States to submit an annual report that

includes the following:

• Identification of each DSH facility

that received a DSH payment under the

State’s Medicaid program in the

preceding fiscal year and the amount of

DSH payments paid to that hospital in

the same year.

• Such other information as the

Secretary of Health and Human Services

determines necessary to ensure the

appropriateness of DSH payments.

Section 1923(j)(2) of the Act also

requires States to have their DSH

payment programs independently

audited and to submit the independent

certified audit annually to the Secretary.

The certified independent audit must

verify:

• The extent to which hospitals in the

State have reduced uncompensated care

costs to reflect the total amount of

claimed expenditures made under

Section 1923 of the Act.

• DSH payments to each hospital

comply with the applicable hospital-

specific DSH payment limit.

• Only the uncompensated care costs

of providing inpatient hospital and

outpatient hospital services to Medicaid

eligible individuals and uninsured

individuals as described in Section

1923(g)(1)(A) of the Act are included in

the calculation of the hospital-specific

limits.

• The State included all Medicaid

payments, including supplemental

payments, in the calculation of such

hospital-specific limits.

• The State has separately

documented and retained a record of all

its costs under the Medicaid program,

claimed expenditures under the

Medicaid program, uninsured costs in

determining payment adjustments

under Section 1923 of the Act, and any

payments made on behalf of the

uninsured from payment adjustments

under Section 1923 of the Act.

In addition to these reporting

requirements, under Section 1923(j) of

the Act, Federal matching payments are

contingent upon a State’s submission of

the annual DSH report and independent

certified audit.

II. Summary of the Proposed

Regulations

On August 26, 2005, we published in

the Federal Register (70 FR 50262–

50268) a notice of proposed rulemaking

implementing the reporting and

auditing requirements for State

Disproportionate Share Hospital

payments. In this notice of proposed

rulemaking, we proposed modifying the

DSH reporting requirements in Federal

regulations at 42 CFR 447 by providing

the following changes to our

regulations:

1. Reporting Requirements

To implement the reporting

requirements in Section 1923(j)(1) of the

Act, we proposed to modify the DSH

reporting requirements in Federal

regulations at 42 CFR 447.

• We proposed to add a new

paragraph (c) to the reporting

requirements in § 447.299.

• We proposed to redesignate the

documentation requirements in

paragraph (c) as paragraph (d) and

redesignate the deferrals and

disallowances information in paragraph

(d) as paragraph (e), respectively.

• We proposed a list of information to

reflect the data elements necessary to

ensure that DSH payments are

appropriate such that each qualifying

hospital receives no more in DSH

payments than the amount permitted

under Section 1923(g) of the act.

• We proposed that paragraph (c)

would require each State receiving an

allotment under Section 1923(f) of the

Act, beginning with the first full State

fiscal year (SFY) immediately after the

enactment of Section 1001(d) of the

Medicare Prescription Drug,

Improvement, and Modernization Act

(MMA) and each year thereafter, to

report to us the list of information

detailed in an Reporting form, which

was published in the September 23,

2005 correction notice entitled

‘‘Medicaid Programs; Disproportionate

Share Hospital Payments’’.

• We proposed that States will need

to consider a Section 1011 payment

when determining the hospital’s DSH

limit, because the total DSH payments

should not exceed the total amount of

uncompensated care at the hospital.

• The information supplied on this

spreadsheet would satisfy the

requirements under Sections

1923(a)(2)(D) and 1923(j)(1) of the Act.

2. Audit Requirements

We explained the statute’s

requirement for States to verify their

methodology for computing the hospital

specific DSH limit and the DSH

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payments made to hospitals. As

required by Section 1923(j)(2) of the

Act, these five items identified in statute

would provide independent verification

that State Medicaid DSH payments

comply with the hospital-specific DSH

limit in Section 1923(g) of the Act, and

that such limits are accurately

computed.

• In § 455.201, we proposed that

‘‘SFY’’ stands for State fiscal year.

• We proposed to define that an

‘‘independent audit’’ means an audit

conducted according to the standards

specified in the generally accepted

government auditing standards issued

by the Comptroller General of the

United States.

• We proposed adding a new

§ 455.204(a) to reflect Section 1923(j) of

the Act’s requirement that each State

must submit annually the independent

certified audit of its DSH program as a

condition for receiving Federal

payments under Section 1903(a)(1) and

1923 of the Act.

• We proposed to add a new

§ 455.204(b) to reflect the requirement

that States must obtain an independent

certified audit, beginning with an audit

of its State fiscal year 2005 DSH

program.

• We proposed a submission

requirement within 1 year of the

independent certified audit.

• We proposed that in the audit

report, the auditor must verify whether

the State’s method of computing the

hospital-specific DSH limit and the DSH

payments made to the hospital comply

with the five items required by Section

1923(j)(2) of the Act.

III. Discussion of Public Comments

On August 26, 2005, we set forth a

proposed rule implementing the

reporting and auditing requirements for

State disproportionate share hospital

payments (DSH). In this notice of

proposed rulemaking, we proposed

several modifications to the DSH

reporting requirements and detailed the

statutory auditing requirements for

States to verify their methodology for

computing the hospital-specific DSH

limit to ensure that DSH payments made

to eligible hospitals do not exceed such

limits.

We received 119 timely public

comments, in response to the August 26,

2005, proposed rule. The comments

came from a variety of correspondents,

including professional associations,

national and State organizations,

physicians, hospitals, advocacy groups,

State Medicaid programs, State

Legislators, and members of the

Congress. The following is a summary of

the comments received and our

response to those comments.

A. General Comments on Auditing and

Reporting Provisions

We received the following general

comments regarding the proposed

regulation:

Comment: Many commenters believe

the proposed regulation exceeds the

Congressional intent of the statutory

authority of the MMA, makes

substantive interpretations and changes

to longstanding DSH policy not required

by MMA and attempts to establish new

policy.

Response: The statutory authority

under MMA instructed States to report

and audit specific payments and

specific costs. Section 1923(j)(1)(B) of

the Act specifically delegated to the

Secretary authority to require reporting

of information ‘‘necessary to ensure the

appropriateness of payment adjustments

made under this Section.’’ These

regulations require reporting of data

elements that are specifically related to

the appropriateness of DSH payments,

and thus are consistent with that

statutory provision. The regulations

provide States with uniform

instructions that contain detailed

identification of the necessary data

elements. The audit requirements also

specified in Section 1923(j)(2) of the

Act, and these regulations specifically

track the statutory requirements.

Comment: Many commenters are

concerned that CMS has used the MMA

provisions, which only relate to

reporting and auditing, to dramatically

change the financing of the Medicaid

DSH program; this change would have

serious implications for hospitals that

care for the low-income and uninsured.

Response: Neither the statute nor the

implementing regulation addresses the

financing of DSH payments. The

statutory authority under MMA

instructed States to report and audit

specific payments and the underlying

calculations. While it could be that this

information discloses impermissible

payments (or ‘‘financing’’), this does not

reflect a change in the standards for

such payments. Instead the information

will ensure that payments conform with

existing applicable law.

Comment: Several commenters noted

that the proposed rule purports to

implement statutory reporting and audit

requirements that do not alter any of the

substantive standards regarding the

calculation of costs under the hospital-

specific DSH cap. They asserted that it

would be completely improper for CMS

to employ preamble language, or

include in the rule provisions that

would alter substantive standards under

the auspices of new statutory reporting

requirements.

Response: The provisions of this rule

do not alter the fundamental statutory

requirements to calculate DSH hospital-

specific uncompensated care costs, and

audit such calculations, in order to

demonstrate that payments are proper.

This rulemaking sets forth reporting

requirements to ensure uniformity in

the understanding and implementation

of these requirements. By doing so, the

rule will ensure that the basis for DSH

payments is clear, including the

required hospital-specific

uncompensated care cost calculations,

and set forth the necessary elements for

an independent audit of those cost

calculations and payments following the

statute as amended by the MMA.

Comment: A few commenters

expressed disagreement with the

manner in which the proposed

regulation would employ audits to

determine whether States are making

Medicaid DSH payments in appropriate

amounts. These commenters argued that

audits should not limit State discretion

in the manner in which DSH payments

are calculated. These commenters

objected to the proposed requirements

that auditors determine whether DSH is

being calculated ‘‘correctly’’ when there

has never been a single, true, definitive

definition of exactly what ‘‘correct’’

means. In other words, the commenters

argued that the regulation proposes

counting on auditors to help impose a

standard that does not currently exist.

Response: We disagree that the

calculations involved in applying the

hospital-specific DSH limits are

discretionary. There have been clear and

longstanding standards for calculating

the costs of hospital services that apply

to the calculation of hospital-specific

DSH limits. The statutory authority

under MMA instructed States to report

and audit specific payments and

specific costs to ensure compliance with

those standards.

The applicable standards are based on

existing statutes, regulations, and

interpretive guidance. In 1993, Congress

imposed hospital-specific limitations on

the level of DSH payments to which

qualifying hospitals were entitled.

Section 1923(g)(1)(A) specifies that DSH

payments cannot exceed, ‘‘the costs

incurred during the year of furnishing

hospital services (as determined by the

Secretary and net of payments under

this title, other than under this Section,

and by uninsured patients * * *)’’. In

1994, CMS issued guidance that

clarified that the 1993 hospital-specific

‘‘cost’’ limit includes both inpatient and

outpatient hospital services for

Medicaid individuals and individuals

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with no source of third party coverage.

Moreover, the calculation of hospital

costs is subject to longstanding cost

principles contained in Office of

Management and Budget Circulars,

including Circular A–110, and, to the

extent not addressed in those Circulars,

in Generally Accepted Accounting

Principles (GAAP). In addition, over the

years CMS has addressed hospital cost

accounting in considerable detail in the

Medicare program, and has developed

cost reporting forms and procedures that

offer further guidance on these issues.

Comment: A few commenters stated

that, to the extent that CMS retains

substantive changes to DSH policy in

this regulation, CMS should

acknowledge that this regulation does

more than merely implement reporting

and auditing requirements against

existing standards.

Response: This regulation does not

alter any of the substantive standards

regarding the calculation of hospital

costs, but requires that auditors apply

those standards in determining the

hospital-specific DSH limit. The

preamble and the regulation set forth

reporting requirements to ensure that

the basis for DSH payments is clear,

including the required hospital-specific

uncompensated care cost calculations,

and set forth the necessary elements for

an independent audit of those cost

calculations and payments.

Comment: Several commenters noted

that States have implemented and

carried out their DSH programs

pursuant to methodologies set forth in

CMS-approved Medicaid State plan

amendments which were developed

consistent with the DSH statute that

provides States the flexibility to adopt

procedures and methodologies tailored

to each State’s health care delivery

system. The commenters asserted that

the proposed rule would impose new

substantive requirements that would be

implemented through third-party

auditors applying standards that are at

odds with existing State plan

provisions. They asserted that the

approved Medicaid plan in each

Medicaid State plan should provide the

substantive basis for the independent

audits and reports required under

Section 1923(j). Because CMS approved

the Medicaid State plan provisions and

has not implemented the statutory

process that would be required to render

them invalid, the commenters stated

that the Medicaid State plans should be

deemed to reflect current Federal policy

on the implementation of the Medicaid

DSH program and be the standard by

which FFP is available for State

Medicaid expenditures.

Response: In reviewing State DSH

payments, auditors must first determine

whether the DSH payments were

initially calculated using the

methodology authorized by the

approved Medicaid State plan. These

Medicaid State plans, in part, articulate

the methods and standards by which

States set payment rates. Section 4.19–

A of the Medicaid State plan includes

the methodologies States utilize to make

Medicaid DSH payments. The statutory

hospital-specific limit, however,

overlays that methodology because it is

determined by actual uncompensated

costs of inpatient and outpatient

hospital services. States typically

include a provision within the Medicaid

State plan that DSH payments will not

exceed each qualifying hospital’s DSH

limit.

The DSH payment methodologies

contained in Section 4.19–A of the

Medicaid State plan do not specifically

identify the cost components included

in the hospital-specific DSH limits but

are governed by longstanding principles

set forth in statutes, regulations, and

agency guidance.

While CMS recognizes that States

must use prospective estimates to

determine DSH payments in a given

Medicaid State plan rate year, the audits

required by the MMA are statutorily

required to verify the extent to which

such estimates are reflective of the

actual costs and that resultant payments

do not exceed such cost limitations

imposed by Congress.

Comment: Several commenters noted

that the proposed rule would establish

DSH policy that reaches beyond the

reporting and audit requirements

outlined in Section 1001(d). They cited

the example that, if a State fails to

comply with the reporting and auditing

requirements, CMS proposes to impose

a penalty that would result in the loss

of Federal matching Medicaid dollars.

Response: Section 1923(j) of the Act

very clearly stipulates that Medicaid

DSH payments are conditioned upon

the submission of the annual report and

independent certified audit is required.

However, with respect to requiring

recovery of any overpayments, the

regulation does not impose an

immediate penalty that would result in

the loss of Federal matching dollars. As

described in subsequent responses to

comments specific to the auditing

component of the regulation, because a

trial period will be required for auditors

to refine audit methodologies, findings

from Medicaid State plan rate year 2005

through 2010 will be used only for the

purpose of determining prospective

hospital-specific cost limits and the

actual DSH payments associated with a

particular year.

Beginning in Medicaid State plan rate

year 2011, to the extent that audit

findings demonstrate that DSH

payments exceed the documented

hospital-specific cost limits, CMS will

regard them as representing discovery of

overpayments to providers that,

pursuant to 42 CFR Part 433, Subpart F,

triggers the return of the Federal share

to the Federal government (unless the

DSH payments are redistributed by the

State to other qualifying hospitals as an

integral part of the audit process). This

is not a ‘‘penalty’’ but instead reflects

adjustment of an overpayment that was

not consistent with Federal statutory

limits. We note that, to the extent that

States wish to redistribute DSH

payments that exceed hospital-specific

limits, the Federally approved Medicaid

State plan must reflect that payment

policy.

Comment: A few commenters said

there are existing administrative

procedures for determining a Medicaid

State plan’s compliance with Federal

Medicaid law, which include a notice

and hearing process. Nothing in Section

1923 or its legislative history suggests

that Congress intended to circumvent

these longstanding procedures through

the audit and reporting requirements.

Therefore, any attempt to do so in the

guise of these implementing regulations

would be invalid.

Response: The MMA independent

audit procedures establish a process for

discovery of DSH overpayments that

trigger existing responsibilities for

States to refund the Federal share of

Medicaid overpayments to providers.

The audits provide information that will

identify DSH payments that exceed the

amounts permitted under Section

1923(g)(1) of the Act and incorporated

by reference into approved State plans.

This information, in the form of an

independent certified audit obtained by

the State, will result in discovery of

DSH overpayments and will trigger

requirements to refund the Federal

share of those overpayments, pursuant

to existing requirements at 42 CFR Part

433, Subpart F. States that do not refund

the Federal share of overpayments will

be subject to disallowance of claims for

Federal funds, and will have notice and

an opportunity for a hearing through the

Medicaid disallowance process. We

believe this is consistent with the

apparent purpose of the audit

requirement to ensure the financial

integrity of State DSH payments, and to

ensure that DSH payments are targeted

at addressing the burdens faced by

hospitals which serve a

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disproportionate share of low income

patients.

Comment: Many commenters said

that the Medicaid DSH program was

designed to recognize the financial

burden borne by those hospitals that

take care of a disproportionate number

of low income and uninsured

individuals, and to provide financial

assistance essential for these safety net

providers to continue to take care of

patients. Medicaid DSH funds are

critical to the future viability of their

hospitals. They were concerned that any

new policy interpretation that results in

substantially lower DSH payments or

affects prior year DSH payments will

have a significant financial impact on

(safety net) hospitals, and will threaten

their ability to continue to serve the

community. Because of the negative

impact on hospitals and on the patients

they serve, the commenters strongly

urge CMS to rethink its approach in this

proposed rule. A few commenters stated

that changing the Federal position on

this matter could cause significant

financial problems for State Medicaid

programs.

Response: This rule does not impose

any new restrictions on DSH payments.

The statute calls for reporting and

auditing of DSH payments, to ensure

that such payments comply with

existing statutory requirements

limitations. This rule does not restrict

the aggregate DSH funding that is

available, nor does it effect DSH

payments that comply with all statutory

requirements. Consequently, there

should be no effect on DSH payments

that have been properly made to

hospitals to account for the burden of

treating a disproportionate share of low

income patients.

Comment: Several commenters

referenced the 1994 guidance to State

Medicaid Directors in which CMS

granted flexibility in allowing a State to

use the definition of allowable costs in

its State Medicaid plan or any other

definition as long as the costs

determined under such a definition do

not exceed the amounts that would be

allowable under the Medicare principles

of cost reimbursement. They argued that

this pronouncement was consistent with

the principle that Medicaid is a Federal-

State partnership and should be

continued. Since this is a Medicaid DSH

program, they assert that the State

should be permitted to determine the

definition of allowable costs as either

not exceeding amounts allowable under

Medicare principles of cost

reimbursement or amounts that would

be consistent with the State’s existing

Medicaid program. They asked that the

rule reaffirm State flexibility in defining

allowable costs.

Response: States have considerable

discretion to determine allowable

inpatient and outpatient costs when

determining payment rates under their

Medicaid State plan, but Section

1923(g)(1) of the Act provides for a

Federal limitation based on costs that

must be calculated in accordance with

Federal accounting standards. In

accordance with this principle, the 1994

guidance provided State flexibility to

define Medicaid costs for purposes of

setting Medicaid payment rates. But this

flexibility does not apply to calculation

of hospital-specific DSH limits to the

extent that State-defined costs exceed

those permitted under Medicare cost

principles.

Moreover, the hospital-specific limit

is based on the costs incurred for

furnishing ‘‘hospital services’’ and does

not include costs incurred for services

that are outside either the State or

Federal definition of inpatient or

outpatient hospital services. While

States have some flexibility to define the

scope of ‘‘hospital services,’’ States must

use consistent definitions of ‘‘hospital

services.’’ Hospitals may engage in any

number of activities, or may furnish

practitioner or other services to patients,

that are not within the scope of

‘‘hospital services.’’ A State cannot

include in calculating the hospital-

specific DSH limit cost of services that

are not defined under its Medicaid State

plan as a Medicaid inpatient or

outpatient hospital service.

Comment: Numerous commenters

said the proposed rule violates

Administrative Procedure’s Act

rulemaking requirements because there

was inadequate notice and opportunity

for public comment on the proposed

policy to limit hospital costs includable

in the Medicaid DSH calculation. The

commenters stated this is a proposed

regulation for a reporting requirement

only and that the cited statutory

authority for the proposed rule has no

bearing on allowability of costs in DSH

calculation. These commenters stated

the rule would substantively change

longstanding DSH policy without

appropriately calling for direct public

comment.

Response: CMS published the Notice

of Public Rule Making on August 26,

2005. As part of this publication, a 60

day comment period was provided.

CMS received and considered numerous

comments, as discussed in this

preamble. Through this process,

rulemaking requirements under the

Administrative Procedure Act have been

met. Moreover, the rule does not

substantively change the standards for

DSH payments, or for the review of

hospital-specific limits on such

payments. Even if the rule did make

changes to those standards, however,

CMS has followed the appropriate

rulemaking procedures for such

changes. Fundamentally, this rule

implements statutory requirements to

review and audit the calculation of DSH

hospital-specific limits, including only

the costs of those hospital services that

are specified in the statute, and

accounting for such costs consistently

with existing applicable cost accounting

principles.

Comment: One commenter further

indicated that this is not just an issue of

notice and comment rulemaking as

required under the Administrative

Procedure Act, it is an issue of Federal-

State comity. The commenter asserted

that the requirements contained in the

proposed rule are not consistent with

Supreme Court decisions providing that,

if Congress intends to impose a

condition on the grant of Federal

moneys, it must do so unambiguously.

Response: The statute expressly

requires that States report and audit

DSH payments consistent with existing

statutory limitations on such payments;

this rule simply defines the nature and

scope of these reporting and audit

requirements. These requirements are

related to ensuring Medicaid program

integrity and transparency by providing

information to identify improper

payments, and the cost of meeting those

requirements may be claimed as an

administrative cost of the Medicaid

program, eligible for Federal matching

funding. As such, the statutory

requirements are not new substantive

responsibilities, but are part of existing

State responsibilities to administer State

Medicaid programs. Moreover, the

Medicaid statute expressly requires the

Secretary to identify necessary reporting

requirements and the Secretary has

oversight authority to ensure

compliance with the statutory audit

requirements. This rule provides

detailed identification of the data

elements necessary to comply with such

reporting and auditing requirements

expressly contained in statute. As an

interpretation and implementation of

clear statutory responsibilities, this rule

is consistent with the cited Supreme

Court decisions.

B. Reporting

1. Retroactivity

Comment: One commenter stated that

their State would need to make several

regulation changes that would need to

be retroactive to July 1, 2005. The State

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currently does not have a procedure to

change regulations retroactively.

Response: CMS does not agree that

States would need to retroactively

change their programs to comply with

the audit and reporting requirements

associated with Medicaid State plan rate

year 2005. The audit and reporting

requirements discussed in this

regulation can be met through

prospective actions by States, and thus

do not have retroactive effect. While the

information disclosed by the audit and

reporting requirements may reveal the

need for retroactive adjustments to

account for payments that are improper,

this is no different from any other audit

situation. Moreover, in order to ensure

a period for developing and refining

audit practices, we are providing for a

transition period through Medicaid

State plan rate year 2010, before audit

results will be given weight other than

in making prospective estimates of

hospital costs for the purposes of

ongoing DSH payments.

Comment: Many commenters stated

that applying the proposed rule’s

requirements to dates of service prior to

State fiscal year (SFY) 2005 would

represent an undue administrative

burden and a hardship for States and

hospitals. Several commenters stated

that it is unreasonable to expect that

States are going to have readily available

to them for SFY 2005, the data elements

that CMS is just now requiring to be

reported under this proposal. Applying

the changes to the reporting

requirements to SFY 2005 is a

retroactive application and puts the

States in the position of struggling to

retrieve data that was not collected

during SFY 2005. This would ultimately

be to the detriment of the providers if

the States are unable to capture all of

the uncompensated care costs when

they submit their reports. Many other

commenters suggested all reporting and

auditing requirements be prospective. In

addition, they suggested linking the new

reporting and auditing requirements to

the first State fiscal year beginning after

the finalization of the rule, no earlier

than SFY 2006, with an audit being no

earlier than 2 years later.

A few commenters stated that the

effective date of State Fiscal Year (SFY)

2005 would not give hospitals time

needed to modify their procedures to

comply with State instructions for

reporting made pursuant to the final

regulations.

Response: We have modified the

regulation to address concerns regarding

the inability to complete the audit one

year from the end of SFY 2005. The

final regulation provides at 447.204(b)

that:

1. The Medicaid State plan rate year

2005, rather than State fiscal year 2005,

is the first time period subject to the

audit. The basis for this modification is

recognition of varying fiscal periods

between hospitals and States. The

Medicaid State plan rate year is the one

uniform time period under which all

States estimate uncompensated costs in

order to make DSH payments under the

approved Medicaid State plan.

2. In recognition of timing issues

related to initiating the audit process,

States may concurrently complete the

Medicaid State plan rate year 2005 and

2006 audits by no later than September

30, 2009.

3. Each subsequent audit beginning

with Medicaid State plan rate year 2007

must be completed by the last day of the

Federal fiscal year (FFY), September 30,

ending three years from the Medicaid

State plan rate year under audit. This

means that the 2007 Medicaid State

plan rate year must be audited by

September 30, 2010.

4. Each audit report must be

submitted to CMS within 90 days of the

completion of the audit. The report

associated with Medicaid State plan rate

years 2005 and 2006 are due no later

than December 31, 2009. The 2007

Medicaid State plan rate year audit

report must be submitted to CMS by

December 31, 2010.

In addition, we have added a

transition period at 447.204(d) to reflect

concerns that auditing techniques may

need to be reviewed and refined.

Findings of the Medicaid State plan rate

year audits through 2010 will not be

given weight other than for purposes of

prospective Medicaid State plan rate

year uncompensated care cost estimates

and associated DSH payments. This

means that, starting in Medicaid State

plan rate year 2011, such findings

should be used in the calculation of

prospective estimates related to DSH

payments.

We are also making clear that DSH

payments that, after the regulatory

transition period, are found in the audit

process to exceed the hospital-specific

cost limits are provider overpayments

that must be promptly returned to the

Federal Government or redistributed by

States to other qualifying hospitals.

(Such redistribution authorities must be

articulated in the Federally approved

Medicaid State plan.) After the

transition period to ensure the accuracy

and reliability of audit techniques, such

audit findings represent discovery of an

overpayment under existing regulations

at 42 CFR Part 433, Subpart F. We note

that the regulatory transition provision

is not intended to preclude review of

DSH payments and discovery of

overpayments prior to Medicaid State

plan rate year 2011, to the extent that

such review is independent of the State

audit process.

Comment: One commenter noted that

the proposed reporting requirements do

not provide for any option to request an

extension for the submission of the

information or audit.

Response: As indicated in the

response above, we have extended the

audit and report submission date in the

regulation. These extended time frames

are detailed in a prior response and the

regulation has been revised accordingly.

Based on the revisions, the time frames

are sufficiently long that there should be

no need for extensions beyond the

revised time frames. In the event of a

natural disaster, or other incident

beyond a State’s control, we would

consider providing relief in the context

of a demonstration project that

addresses the overall circumstances of

the State.

Comment: Many commenters noted

that the NPRM applies these new

changes to retroactively FY 2005 when

most DSH plans are already in place.

Medicaid State Plans, regulations, and/

or statutes will need to be amended to

reflect the new reporting and audit

requirements, which are retroactive to

7/1/05.

Response: CMS does not agree that

States would need to retroactively

change regulations to comply with the

audit and reporting requirements

associated with Medicaid State plan rate

year 2005. In the audit process,

Medicaid State plan DSH payments in

the State plan rate year 2005 will be

reviewed against uncompensated care

costs during that same period (for

example, OBRA 93 hospital-specific

limits), which is consistent with the

existing statutory provisions of Section

1923(g)(1). States will not need to

retroactively modify their Medicaid

State plans to comply with this

regulation. The DSH reimbursement

methodologies contained in Medicaid

State plans articulate the methods by

which States make DSH payments and

already contain assurances that such

DSH reimbursement methodologies will

not exceed the OBRA 93 hospital-

specific DSH limits. Typically, States

currently rely on unaudited surveys to

estimate uncompensated care in eligible

hospitals, and this regulation would

simply require reconciliation based on

statutory cost limits using a more

accurate audit methodology.

Under this regulation, the State DSH

audit and report will use actual cost and

payment data beginning with the

Medicaid State plan rate year 2005 to

ensure that DSH payments in the

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approved Medicaid State plan did not

exceed DSH eligible costs in hospitals

receiving DSH payments. As noted

above, to allow a period to develop and

refine audit techniques, we also have

included a transition period before audit

results will be directly used to identify

provider overpayments.

Comment: One commenter stated that

the proposed reporting requirements

refer to submission timing on two

different pages, which are inconsistent

with each other. On Page 50264 of the

Federal Register under the Audit

Requirements Section, it states, ‘‘We are

proposing a submission requirement

within 1 year of the independent

certified audit.’’ On Page 50268 of the

Federal Register under the List of

Subjects Section, where the proposed

revisions to Section 455.204(b) are

indicated, it states, ‘‘Timing. Beginning

with State fiscal year (SFY) 2005, a State

must submit to CMS an independent

certified audit report no later than 1

year after the completion of each State’s

fiscal year.’’

Response: The regulation has been

modified to achieve consistent audit

and reporting time frames. Generally,

audits will examine prior period DSH

payments and such audit must be

completed by the last day of the FFY

ending three years from the Medicaid

State plan rate year under audit. Reports

of the audit will be due within 90 days

of completion of the audit. A special

transition period is provided for

Medicaid State plan rate year 2005 and

2006 audits. Further detail of audit and

reporting are described in other

responses to comments.

2. Effect of Lag in Medicaid Claims

Comment: Several commenters noted

that there is already a requirement for

States to indicate the regular Medicaid

rate payments paid to the hospital for

the SFY as part of the Medicaid claims

information provided to CMS through

the Medicaid Statistical Information

System (MSIS). Claims may be

submitted to the State for payment up

to one year after the date of service.

Therefore, payments made by the State

for claims with dates of service in the

SFY may be submitted up to a year after

the service date by the hospital. The

payment information would not be

available before 12 months after the SFY

at a minimum. Obtaining the amount

paid by the State for the SFY being

reported is not possible by the end of

the SFY.

Response: Based on the modifications

to the audit and reporting deadlines, the

existing requirement at 42 CFR

447.45(d) for provider claims to be filed

within a year from the date of service

and promptly paid by the State, and the

existing two-year timely claim filing

requirement at 45 CFR 95.7, there

should not be a significant adjustment

to Medicaid payments that would

warrant a corrected report. To the extent

that such an adjustment to Medicaid

payments occurs and States claim

Federal matching dollars (or return

Federal matching dollars) as a prior

period adjustment, States should correct

the audit and report by indicating post-

audit adjustments to Medicaid and DSH

payments (or uncompensated care costs

if Medicaid payment adjustments affect

the Medicaid shortfall).

States must consider post-audit

adjustments, as information about them

becomes available, to the extent that the

State’s DSH methodology involves

prospective estimates of uncompensated

care, at least beginning in Medicaid

State plan rate year 2011. Similarly,

such adjustments must be reported in

the quarter the underlying claims were

paid, and must be considered to

determine if there were overpayments,

beginning with Medicaid State plan rate

year 2011 (although in some cases, the

State plan may authorize the State to

redistribute the overpaid funds to

another eligible hospital). The

regulation has been modified to include

this provision.

Comment: A few commenters noted

that the proposed rules do not indicate

the submission dates for the Annual

DSH Reports. Based on 1) the data

reporting that is required, 2) the fact that

some of these data will need to be

audited under the proposed provisions

of § 455.204, and 3) the fact that the

audit is proposed to be required by one

year after the close of the State fiscal

year to which the reporting and the

audit apply, we assume the reporting is

contemplated to be submitted less than

a year after the close of the State fiscal

year. To the extent that CMS is

requesting actual (and potentially

audited) cost data for the fiscal year,

that information must be gathered from

hospitals and reviewed by the States

prior to completion of the Annual DSH

Report. The commenters pointed out

that much of the required data are found

only on Medicare cost reports, which

are submitted no sooner than five

months after year-end and are desk

reviewed no sooner than 11 months

after year end. Given this, the reporting

timeframes that appear to be

contemplated are not realistic. The

commenters urged that CMS allow

sufficient time for the States to complete

this process.

Response: We have modified the

regulation to clarify that the annual DSH

reports are due at the same time as the

completed independent audits. We

believe that this time frame is sufficient

for the State, hospitals and auditors to

meet their respective responsibilities to

review the accuracy of the State’s DSH

payments.

3. Eligible Uncompensated Care

Comment: Many commenters asserted

that the language in the proposed

regulation that excluded bad debts from

being considered part of uncompensated

care exceeded the statutory

authorization since the statute does not

specifically address that issue. These

commenters argued that bad debts are

part of the burden of providing care to

uninsured, and underinsured patients

for whom the hospital receives no

payment. The commenters believe that

the proposed rule is inconsistent with

Congressional intent, and actually

works to weaken the statute’s purpose.

These commenters cited the conference

report language for the Omnibus Budget

Reconciliation Act of 1993 provision

establishing the hospital-specific DSH

limit, stating that the cost of providing

services to uninsured patients would be

net of any out of pocket payments

received from uninsured individuals.

They argued that this language clearly

implies an intent that only amounts

received, and not bad debt should be

considered when implementing the

hospital-specific DSH limit.

Response: Implicit in these comments

is a misunderstanding of the term ‘‘bad

debt.’’ Bad debt arises when there is

non-payment on behalf of an individual

who has third party coverage. Section

1923(g)(1) is clear that the hospital-

specific uncompensated care limit is

calculated based only on costs arising

from individuals who are Medicaid

eligible or uninsured, not costs arising

from individuals who have third party

coverage. Thus, while the Medicaid

statute does not specifically exclude bad

debt from the definition of

uncompensated care costs, there is

nothing in the statute that would

suggest that any costs related to services

provided to individuals with third party

coverage, including bad debt, are within

that definition.

Comment: One commenter noted that

if an uninsured patient does not pay the

amount he or she was expected to pay,

that may be recorded by the hospital as

bad debt. The OBRA 1993 limit as

prescribed by Section 1923(g) provides

that the costs of furnished services are

net of non-DSH payments under

Medicaid and payments by uninsured

patients. The statute does not authorize

reductions to uncompensated care costs

for amounts that patients were expected

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to pay, only for payments that are

actually made.

Response: We agree. The statutory

definition of uncompensated care

includes the costs of furnishing hospital

services to uninsured patients, minus

the payments actually received from

those patients.

To the extent that hospitals do not

currently separately identify

uncompensated care related to services

provided to individuals with no source

of third party coverage from

uncompensated care costs of patients

with insurance, hospitals will need to

modify their accounting systems to

separate the two categories in order to

properly document that DSH payments

are within the hospital-specific limit.

Uncompensated inpatient and

outpatient hospital care costs for

individuals without third party coverage

is then offset by payments actually

made by or on behalf of those patients

in the Medicaid State plan rate year

under audit, except for payments made

by State-only or local-only government

programs for services provided to

indigent patients.

Comment: Numerous commenters

asserted that the proposed rule was

contrary to the interpretation that bad

debt should be considered when

implementing the hospital-specific DSH

limit that was found in CMS guidance

in 1994 and again in 2002, and asked for

a continuation of the prior

interpretation.

Response: In 1994, CMS clarified the

1993 hospital-specific ‘‘cost’’ limit to

include outpatient hospital services, in

addition to inpatient hospital services,

for Medicaid individuals and

individuals with no source of third

party coverage. This clarification of cost

under the hospital-specific DSH limit

was established in recognition of

historical Congressional references to

hospital services under its ongoing

instruction regarding DSH. The 1994

letter to State Medicaid Directors did

not specifically refer to bad debt, nor

did it contain any language that should

have suggested that the hospital specific

limit calculation should include costs

(whether compensated or

uncompensated) related to individuals

who had third party coverage. Similarly,

the State Medicaid Director letter dated

August, 2002 specifically addressed the

treatment of Medicaid supplemental

UPL payments for purposes of

calculating uncompensated care; the

treatment of costs associated with

inmates of correctional facilities; and,

the inclusion of Medicaid managed care

days in the Medicaid inpatient

utilization rate formula. Nothing in that

letter addressed the issue of bad debt

and the calculation of DSH eligible

costs. The provisions in this rule that

expressly exclude bad debt from the

calculation of the hospital specific limit

are based on the statutory language and

do not represent any change in CMS

policy.

Comment: Several commenters stated

that the proposed rule fails to clarify

how bad debt would be calculated.

Response: Bad debt arises when there

is non-payment on behalf of an

individual who has third party

coverage. Section 1923(g)(1) is clear that

the hospital-specific uncompensated

care limit is calculated based only on

costs arising from individuals who are

Medicaid eligible or uninsured, not

costs arising from individuals who have

third party coverage. To the extent that

hospitals do not currently separately

identify uncompensated care related to

services provided to individuals with no

source of third party coverage from bad

debts from patients with insurance,

hospitals will need to modify their

accounting systems to separate the two

categories in order to properly

document that DSH payments are

within the hospital specific limit. We

are not prescribing the details of how

hospitals can accurately measure

uncompensated care; the precise

methodology may vary depending on

individual circumstances (but will have

to provide an auditable basis for the

measurement). As described in later

comments, the source of this

information will be derived from

hospital cost reports, hospital financial

statements, and other hospital

accounting records.

Comment: One commenter said that

bad debts represent an enormous

uncompensated cost to providers and

pointed out that the Medicare program

recognizes this reality and reimburses

providers 70 percent of their Medicare

bad debt write-offs. The commenter

suggested that Medicaid should operate

similarly to Medicare in this respect.

Response: The Medicare DSH

program and the Medicaid DSH program

are separate programs authorized by

different Sections of the statute and

with different purposes and goals. The

Medicaid statute does not specifically

authorize payment based on bad debts,

nor does it authorize including bad

debts in the calculation of the hospital

specific limit under Section 1923(g)(1).

We note, however, that the hospital

specific limit is not a payment

methodology, and States could

recognize bad debts in constructing DSH

payment methodologies that provide for

payments less than or equal to the

hospital specific limit for each hospital.

Comment: One commenter noted that

the provider will report the ‘‘Provision

for Medicaid Bad Debt’’ as a component

of its uncompensated total. As such, the

Provision for Bad Debt is an estimate, a

Balance Sheet account, not an expense

account, and deductibles and

coinsurance, along with other charges,

are estimated in that account. The actual

bad debt expense is booked against the

provision and/or allowance and most

facilities would need to drill down on

the Provision for Bad Debt account to

get actual bad debt expense related to

uninsured cost.

Response: Setting up an accounting

category to aggregate charges and

revenues associated with uninsured

individuals receiving inpatient and/or

outpatient services from a hospital

should be an accounting system

adjustment not far removed from the

process of setting up an account for any

other payer category. To the extent that

hospitals do not currently separately

identify uncompensated care related to

services provided to individuals with no

source of third party coverage from

other uncompensated care costs,

hospitals will need to modify their

accounting systems to do so. For

purposes of the initial audits under the

transitional provision of the regulation,

States and auditors may need to develop

methodologies to analyze current

audited financial statements and other

accounting records to properly segregate

uncompensated costs.

Only the inpatient and outpatient

hospital charges associated with

individuals with no source of third

party coverage for such services can be

applied to the Medicare cost report for

purposes of calculating the uninsured

uncompensated care cost component of

the hospital-specific DSH limit.

Hospitals must also ensure that no

duplication of such charges exist in

their accounting records. This

information must be made available to

the auditor for certification.

Comment: One commenter questioned

whether claims denied by insurers for

lack of prior authorization or claims

submitted too late would be considered

uninsured since the service is not

reimbursed by the insurer and the

amount is not a contractual allowance.

The commenter asserted that, in that

instance, the cost of that portion of the

stay is uninsured.

Response: Section 1923(g)(1) refers to

the costs of hospital services furnished

by the hospital ‘‘in individuals who

* * * have no health insurance (or

other source of third party coverage).’’

We have always read this language to

distinguish between care furnished to

individuals who have health insurance

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or other coverage, and care furnished to

those who do not. We have never read

this language to be service-specific and

we believe that such an interpretation

would be inconsistent with the broad

statutory references to insurance or

other coverage. Furthermore, such a

reading would result in cost shifting

from private sector coverage to the

Medicaid program. We interpret the

phrase ‘‘who have health insurance (or

other third party coverage)’’ to broadly

refer to individuals who have creditable

coverage consistent with the definitions

under 45 CFR Parts 144 and 146, as well

as individuals who have coverage based

upon a legally liable third party payer.

The phrase would not include

individuals with insurance that

provides only excepted benefits, such as

those described in 45 CFR 146.145,

unless that insurance actually provides

coverage for the hospital services at

issue (such as when an automobile

liability insurance policy pays for a

hospital stay).

Improper billing by a provider does

not change the status of the individual

as insured or otherwise covered. In no

instance should costs associated with

claims denied by a health insurance

carrier for such a reason be included in

the calculation of hospital-specific

uncompensated care costs.

Comment: One commenter argued

that small hospitals budget for and

count on receiving funding related to

uncompensated bad debt, and argued

that it would be unfair to remove bad

debt from the DSH payment equation for

all of 2005.

Response: Bad debt arises when there

is non-payment on behalf of an

individual who has third party

coverage. Section 1923(g)(1) is clear that

the hospital-specific uncompensated

care limit is calculated based only on

costs arising from individuals who are

Medicaid eligible or uninsured, not

costs arising from individuals who have

third party coverage. As we discuss

below, the regulation provides a

transition period for reliance on audit

findings. Findings for Medicaid State

Plan years 2005–2010 will not be given

weight except to the extent that the

findings draw into question the

reasonableness of State uncompensated

care costs estimates used for

calculations of prospective DSH

payments for Medicaid State plan year

2011 and thereafter. This regulation

requires an independent certified audit

of Medicaid State plan DSH payments

beginning with the Medicaid State plan

rate year 2005, including comparison to

the hospital-specific limits. As

discussed above, this regulation does

not change the costs that are included

in calculating the hospital-specific limit.

As discussed in a prior response,

however, because the auditing process

is new and will need to be refined, the

2005 audit findings will be used solely

to review prospective DSH payments

beginning with Medicaid State plan rate

year 2011.

Comment: Several commenters stated

that the recent growth of health plans

and health savings accounts with high

deductibles and/or have exclusion

limits, is putting new burdens on

hospitals in terms of unreimbursed

costs. The proposed rule fails to clarify

whether non-payment of beneficiaries’

deductibles and co-payments would be

considered bad debt and/or should be

applied as a reduction in determining

uncompensated care costs.

Response: Costs associated with

services furnished to individuals who

have limited health insurance or other

third party coverage are not included in

the calculation of the hospital-specific

DSH limit. Specifically, the DSH limit

does not include amounts associated

with unpaid co-pays or deductibles for

such individuals (bad-debt associated

with third party coverage). Health

savings accounts associated with high

deductible third-party coverage

typically provide a source for co-pays

and deductibles as well as premium

contributions or co-insurance. When

health savings accounts are not

sufficient to cover such charges,

however, the individual remains

insured and therefore hospital services

costs are not considered not within the

statutory calculation of the hospital

specific limit.

Comment: A number of commenters

stated that hospitals should not be

denied DSH payments for uncollectible

co-pays and deductibles for patients

eligible for charity care based on a

hospital’s policy or for bad debts that in

fact are true charity care but cannot be

accounted for as such because the

patient would not or could not fill out

a hospital’s charity care application or

did not qualify for charity care but was

uninsured.

Response: States have considerable

flexibility in developing DSH payment

methodologies, and such uncollectible

amounts could be a factor in a State

DSH payment methodology but can only

be considered in calculating the

hospital-specific limit on DSH payments

if they meet the statutory criteria. Costs

that can be included in the hospital-

specific limit set forth at Section 1923(g)

of the Act are hospital costs associated

with uncompensated Medicaid costs

and uncompensated costs of hospital

services provided to individuals

without health insurance (for example,

the uninsured).

Charity care is a term used by

hospitals to describe an individual

hospital’s program of providing free or

reduced charge care to those that qualify

for the particular hospital’s charity care

program. The term also may be defined

by a State in determining qualification

for DSH payments under the low-

income utilization rate methodology set

forth in Section 1923(b)(3) of the Act.

Depending on the definition used,

hospital costs associated with the

uninsured may be a subset of charity

care in the hospital or may entirely

encompass a hospital’s charity care

program. Regardless of a hospital’s

definition/parameter on what

constitutes charity care, States and

hospitals must comply with Federal

Medicaid DSH law and policy guidance

in determining what portion of their

specific charity care program costs

qualify under the hospital-specific DSH

cost limits.

To the extent that hospitals do not

separately identify uncompensated care

related to services provided to

individuals with no source of third

party coverage, hospitals will need to

modify their accounting systems to do

so. And hospitals must ensure that no

duplication of such charges exist in

their accounting records. For purposes

of the initial audits, States and auditors

may need to develop methods to

analyze current audited financial

statements and other accounting records

to properly segregate uncompensated

costs.

Comment: A few commenters noted

that if a patient does not have health

insurance, the costs of services provided

to that patient may be included in

calculating the hospital-specific limit,

even if revenues related to that patient

are uncollectible and eventually written

off as bad debt. They argued that the

touchstone for purposes of the DSH

limit is whether the individual has third

party coverage, not whether the hospital

has or has not treated the patient’s

account as bad debt.

Response: We agree. As long as the

costs are for services furnished to

uninsured patients, they may be

included in the calculation of the

hospital-specific limit, regardless of

whether the hospital treats the costs as

bad debt on its own books.

Comment: A few commenters said

that hospitals are currently required to

report both charity and bad debt costs

to the State Medicaid program to assure

that the hospital will not receive excess

Medicaid DSH payment. The

commenters indicated that this

requirement is part of an approved

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Medicaid State plan that has been in

place for numerous years, and asserted

that the proposed requirements would

be an unwarranted departure from this

practice.

Response: We recognize that this rule

may necessitate some changes in current

practices, but we believe these changes

are warranted in order to ensure

compliance with the statutory hospital-

specific limit. As discussed above, the

statutory calculation does not refer to

charity care or bad debts, but expressly

refers to uncompensated costs of

furnishing hospital services to

individuals eligible for Medicaid or

individuals who have no health

insurance or other third party coverage.

Comment: A few commenters were

concerned that the regulation lacks a

clear and appropriate definition of

‘‘third-party coverage.’’ In particular, the

commenters believe that third-party

coverage should explicitly be defined in

a manner that makes clear that third-

party coverage does not include State

and local programs to pay for care for

indigent and uninsured individuals and

that ‘‘lack of third-party coverage’’ also

encompasses patients who lack coverage

for the service provided, not necessarily

any coverage at all.

Response: We disagree. As discussed

above, Section 1923(g)(1) of the Act

refers to costs of hospital services

furnished to ‘‘individuals without

health insurance (or other source of

third party coverage).’’ We have always

read this language to distinguish

between care furnished to individuals

who have health insurance or other

coverage, and care furnished to those

who do not. We have never read this

language to be service-specific and we

believe that such an interpretation

would be inconsistent with the broad

statutory references to insurance or

other coverage. Furthermore, such a

reading would result in cost shifting

from private sector coverage to the

Medicaid program. We interpret the

phrase ‘‘who have health insurance (or

other third party coverage)’’ to refer to

individuals who have creditable

coverage consistent with the definitions

under 45 CFR Parts 144 and 146, as well

as individuals who have coverage based

upon a legally liable third party payer.

4. Dual Eligibles

Comment: A few commenters

indicated that days attributable to dual

eligibles should be included in the

calculation described in Section 1923(a)

relating to determining DSH eligibility.

Response: The Medicaid Inpatient

Utilization Rate (MIUR) is a calculation

that includes all Medicaid eligible days.

To the extent that an inpatient hospital

day for a dually-eligible Medicare/

Medicaid patient qualifies as a Medicaid

day, that day would be included in the

MIUR calculation.

Comment: One commenter questioned

whether the costs attributable to dual

eligibles be included in the calculation

described in SSA § 1923(g) relating to

uncompensated care costs. The

commenter asserted that these costs

should be excluded because the purpose

of the DSH upper payment limit is to

limit DSH payments to hospitals to no

more than the difference between the

cost and payments of Medicaid and the

uninsured. The commenter indicated

that, since Medicare is the primary

payer for the duals, it seems appropriate

to exclude the costs of those patients

from this calculation, since the

payments are also excluded.

Response: We disagree; since Section

1923(g)(1) does not contain an exclusion

for dually eligible individuals, we

believe the costs attributable to dual

eligibles should be included in the

calculation of the uncompensated costs

of serving Medicaid eligible individuals.

But in calculating those uncompensated

care costs, it is necessary to take into

account both the Medicare and

Medicaid payments made, since those

payments are contemplated under Title

XIX. In calculating the Medicare

payment for service, the hospital would

have to include the Medicare DSH

adjustment and any other Medicare

payment adjustment (Medicare IME and

GME) with respect to that service.

5. Charity and Indigent Care

Comment: One commenter questioned

how a hospital would classify

individuals who had Medicaid coverage

for some discharges and no insurance

for others.

Response: The hospital-specific DSH

limit comprises uncompensated care

costs of furnishing inpatient and

outpatient hospital services to Medicaid

eligible individuals and individuals

with no source of third party coverage

for the inpatient and outpatient hospital

services they receive. If an individual is

Medicaid eligible on the day they

received inpatient or outpatient hospital

services, then those services would be

included in calculating the hospital-

specific limit. To the extent the

Medicaid payment does not fully cover

the cost of the inpatient or outpatient

hospital services provided, the

unreimbursed costs of those services

would be counted in calculating that

limit. Services that are not within the

State’s definition of inpatient or

outpatient hospital services, and any

revenue associated with such services,

however, would not be included in that

calculation. The same is true for

hospital services furnished to

individuals whose insurance status

fluctuates; hospital services furnished

while individuals are uninsured would

be included in the calculation, and

those furnished while individuals are

insured would not be included.

Comment: One commenter requested

an explanation of the difference

between ‘‘charity care’’ and care

provided to the uninsured.

Response: As we explained above,

charity care is a term used by hospitals

to describe an individual hospital’s

program of providing free or reduced

charge care to those that qualify for the

particular hospital’s charity care

program. The term also may be defined

by a State in determining qualification

for DSH payments under the low-

income utilization rate (LIUR)

methodology set forth in Section

1923(b)(3) of the Act. Depending on the

parameters of the individual charity

care programs, hospital costs associated

with the uninsured may be a subset of

charity care in the hospital or may

entirely encompass a hospital’s charity

care program. Regardless of a hospital’s

definition/parameter on what

constitutes charity care, States and

hospitals must comply with Federal

Medicaid DSH law and policy guidance

in determining what portion of their

specific charity care program costs

qualify under the hospital-specific DSH

cost limits.

As noted, charity care is addressed in

the Medicaid statute at Section

1923(b)(3)(B)(i) of the Act and is a

variable in the formula used to

determine a hospitals low-income

utilization rate as part of the

qualification criteria for DSH payments.

The charity care variable, while not

further defined by statute is offset in the

LIUR formula by the subsidies provided

by state and local governments to assist

hospitals in serving individuals with no

other source of third party coverage. For

purposes of defining a hospital’s LIUR,

States may adopt a reasonable definition

of charity care to reflect care given free

or with reduced charge to indigent

individuals.

The term is not used in Section

1923(g) of the Act which defines the

costs eligible for DSH payments and that

limits DSH eligible costs to the

uncompensated inpatient and

outpatient hospital costs associated with

Medicaid eligible individuals and

individuals without health insurance,

(for example, the uninsured).

For purposes of Section 1923(g)(1)

hospital-specific DSH limits, uninsured

individuals are those individuals

without a source of third-party coverage

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(except coverage from State or local

programs based on indigency). Self-pay,

in terms of the hospital-specific DSH

limits, are those individuals who are

responsible to pay for the hospital

services provided them because they

have no source of third party coverage,

(for example, the uninsured). Revenues

required to be offset against a hospital’s

DSH limit would include any amounts

received by the hospital by or on behalf

of either ‘‘self-pay’’ or uninsured

individuals during the Medicaid State

plan rate year under audit (except

payments from State or local programs

based on indigency).

To the extent that hospitals do not

separately identify uncompensated care

related to services provided to

individuals with no source of third

party coverage from other

uncompensated care costs, hospitals

will need to modify their accounting

systems to do so. For purposes of the

initial audits, States and auditors may

need to develop methodologies to

analyze current audited financial

statements and other accounting records

to properly segregate uncompensated

costs. It is important to note that only

the inpatient and outpatient hospital

charges associated with individuals

with no source of third party coverage

for such services can be applied to the

Medicare cost report for purposes of

calculating the uninsured

uncompensated care cost component of

the hospital-specific DSH limit.

Hospitals must also ensure that no

duplication of such charges exist in

their accounting records. This

information must be made available to

the auditor for certification.

To the extent that hospitals include

such eligible uncompensated inpatient

and outpatient hospital care as part of

their hospital-specific DSH limit

calculation, the included costs must be

offset by payments actually made by or

on behalf of patients with no source of

third party coverage in the Medicaid

State plan rate year under audit. These

payments do not include payments

made by State-only or local-only

government programs for services

provided to indigent patients.

Comment: A few commenters

requested a definition of Indigent Care

Revenue. They believe the language

suggests that this term refers to revenue

from individuals with no source of third

party coverage for inpatient and

outpatient hospital services they

receive, irrespective of the individuals’

income, despite the fact that ‘‘indigent’’

usually implies low income. The

commenters would like CMS to confirm

that this interpretation is correct.

Response: We agree that this term was

confusing and we have changed its

usage in the final regulation. We refer

instead to ‘‘uninsured’’ revenue to refer

to compensation for hospital services

received from or on behalf of

individuals with no source of third

party coverage (regardless of whether

the patient is indigent). These payments

do not include payments made by State-

only or local-only government programs

for services provided to indigent

patients.

Comment: Some commenters asked

for more clarity with regard to what is

included in the category of indigent care

revenue (§ 447.299(c)(12)), and a

definition of third party payments. They

asked in particular about the treatment

of payments made by State and other

government programs make payments to

hospitals on behalf of indigent

individuals. The regulation should

contain language that clarifies this in

order to avoid confusion.

Response: We agree. Section

1923(g)(1)(A) of the Act specifies that,

‘‘payments made to a hospital for

services provided to indigent patients

by a State or a unit of local government

within a State, shall not be considered

to be a source of third party payment.’’

Therefore, we have changed the usage of

the term ‘‘indigent care revenue’’ and

refer instead to ‘‘uninsured revenue.’’ In

addition, we have added language to

clarify that uninsured revenue does not

include payments for hospital services

provided to indigent patients by a State

or a unit of local government within a

State.

Comment: One commenter questioned

how CMS previously audited indigent

care revenue.

Response: CMS has previously

performed certain reviews of State DSH

programs as part of its financial

management work plan under Medicaid.

In addition, the Office of the Inspector

General has previously performed

several reviews of State DSH programs

nationally.

Comment: One commenter stated

CMS should clarify whether the

required data element refers to services

provided to patients whose third party

coverage makes no payment to the

hospital; for example, the patient may

have exhausted benefits coverage, the

hospital may have failed to properly bill

for the service, or the service provided

may not be a covered benefit.

Response: Costs included in

calculating the hospital-specific limit do

not include costs associated with

individuals who are not Medicaid-

eligible and have health insurance, even

if that health insurance is limited. In no

instance should costs associated claims

denied by a health insurance carrier due

to improper billing be included in the

hospital-specific DSH limit. In addition,

to the extent that the inpatient and/or

outpatient hospital services received are

not within the definition of inpatient

and/or outpatient hospital services

under the State Medicaid plan, such

service costs should not be included in

calculating the hospital-specific DSH

limit. The treatment of inpatient and

outpatient hospital services provided to

the uninsured and underinsured also

must be consistent with the definition of

inpatient and/or outpatient services

under the approved Medicaid State

plan.

Comment: One commenter questioned

at what point an individual is coded as

self pay.

Response: The hospital-specific limit

is calculated, in part, using

uncompensated costs of providing

inpatient and outpatient hospital

services to individuals without health

insurance (for example, the uninsured).

While some hospitals may refer to such

individuals as ‘‘self-pay,’’ that term

could have a broader meaning.

For purposes of determining hospital-

specific DSH limits, uninsured

individuals are those individuals

without health insurance or another

source of third-party coverage for

inpatient and/or outpatient hospital

services. Information on insurance or

third party coverage status is routinely

collected by hospitals, and should be

found in patient records. We interpret

the phrase ‘‘who have health insurance

(or other third party coverage)’’ to

broadly refer to individuals who have

creditable coverage consistent with the

definitions under 45 CFR Parts 144 and

146, as well as individuals who have

coverage based upon a legally liable

third party payer. The phrase would not

include individuals who have insurance

that provides only excepted benefits,

such as those described in 42 CFR

146.145, unless that insurance actually

provides coverage for the hospital

services at issue (such as when an

automobile liability insurance policy

pays for a hospital stay).

Revenues required to be offset against

a hospital’s DSH limit would include

any amounts received by the hospital by

or on behalf of uninsured individuals

during the Medicaid State plan rate year

under audit.

Comment: One commenter noted that

the phrasing of this requirement implies

that the State should report all

payments unrelated to third party

coverage. The commenter suggested

that, as some individuals can pay for

certain hospital bills privately, these

payments would be included within

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this definition and those private pay

amounts would be included as Indigent

Care Revenue. The commenter asserted

that, if this is correct, bad debts should

be included in uncompensated care; and

if this is incorrect, CMS should clarify

what amounts are to be included as

revenue from the indigent, and how the

indigent and their revenues are to be

identified.

Response: It would be incorrect to

include reductions in uncompensated

care in calculating the hospital-specific

limit based on private pay amounts for

individuals with insurance or other

third party coverage. Revenues required

to be offset against a hospital’s DSH

limit would include any amounts

received by the hospital by or on behalf

of uninsured individuals during the

Medicaid State plan rate year under

audit. Section 1923(g)(1)(A) of the Act

requires that the hospital-specific cost

limit be reduced by payments under

Title XIX and payments made by

uninsured patients. To the extent that

hospitals do not separately identify

uncompensated care related to services

provided to individuals with no source

of third party coverage from

uncompensated care costs not eligible

under the hospital-specific DSH limits,

hospitals will need to modify their

accounting systems to do so. For

purposes of the initial audits, States and

auditors may need to develop

methodologies to analyze current

audited financial statements and other

accounting records to properly segregate

uncompensated costs.

In sum, to the extent that hospitals

include such uncompensated inpatient

and outpatient hospital care as part of

their hospital-specific DSH limit

calculation, the included costs must be

offset only by payments actually made

by or on behalf of patients with no

source of third party coverage in the

Medicaid State plan rate year under

audit. These payments do not include

payments made by State-only or local-

only government programs for services

provided to indigent patients, nor do

they include payments by patients with

a source of third party coverage. We

have revised the regulation text to try to

clarify these points.

Comment: One commenter believes

CMS’ use of the term ‘‘uncompensated

care costs’’ throughout the regulation

and preamble may be confusing because

the hospital industry generally uses the

same term to mean the combined costs

related to charity care and bad debt for

all patients (not limited to uninsured

patients). The commenter suggested that

CMS intends a more limited use of the

term in this regulation that would be

restricted to uncompensated care costs

associated with Medicaid and

uninsured patients. The commenter

suggested that CMS should not use the

term ‘‘uncompensated care costs’’ to

refer to uncompensated costs associated

only with Medicaid and uninsured

patients. To better facilitate hospital

compliance, the commenter

recommends that CMS use a different

term, such as ‘‘uncompensated

Medicaid and uninsured costs.’’

Response: While we regret any

confusion, the term ‘‘uncompensated

care costs’’ has been used in this

concept since the statutory change in

1993, and we have sought to alleviate

confusion by explaining in detail the

meaning of the term in this context. The

uncompensated care costs eligible under

DSH were clearly articulated in the

August 26, 2005 proposed regulation.

That is, the uncompensated care costs

eligible under the hospital-specific DSH

limit include the unreimbursed costs of

providing inpatient and outpatient

hospital services to Medicaid eligible

individuals and the unreimbursed costs

of providing inpatient and outpatient

hospital services to individuals with no

source of third party reimbursement.

Therefore, all uncompensated costs

billed as inpatient hospital services and

outpatient hospital services to Medicaid

eligible individuals and to individuals

with no source of third party

reimbursement are eligible under the

DSH limit.

To the extent that hospitals do not

separately identify uncompensated care

related to services provided to

individuals with no source of third

party coverage from uncompensated

care costs not eligible under the

hospital-specific DSH limits, hospitals

will need to modify their accounting

systems prospectively to do so. For

purposes of the initial audits, States and

auditors may need to develop

methodologies to analyze current

audited financial statements and other

accounting records to properly segregate

uncompensated costs.

Comment: A few commenters

requested a definition of what is

considered uninsured.

Response: We interpret the statutory

phrase ‘‘who have health insurance (or

other third party coverage)’’ to broadly

refer to individuals who have creditable

coverage consistent with the definitions

under 45 CFR Parts 144 and 146, as well

as individuals who have coverage based

upon a legally liable third party payer.

The phrase would not include

individuals who insurance that provides

only excepted benefits, such as those

described in 42 CFR 146.145, unless

that insurance actually provides

coverage for the hospital services at

issue (such as when an automobile

liability insurance policy pays for a

hospital stay).

Comment: One commenter stated that

there could be a case where a patient

comes into a hospital and has an income

over the charity care level (for example,

400 percent over the poverty level) and

the patient charges are not booked to

uncompensated care but booked to self-

pay. The patient does not pay and the

account is written off to bad debt. In

that case, the commenter asked whether

the cost of that charge would be counted

as Medicaid DSH or as a component of

bad debt. In addition, the commenter

asked if the facility could write-off the

account as uncompensated care and not

bad debt. Currently, many facilities may

be writing off to bad debt because the

regulations appear to be more specific.

Response: This regulation does not

directly address all potential DSH

payment methodologies, but does

address the calculation of the hospital-

specific limit on DSH payments. As

discussed in previous responses, the

categories of charity care and self pay

are not relevant to calculation of the

hospital-specific limit. For the

calculation, it is necessary to know the

uncompensated costs of providing

inpatient and outpatient hospital

services to individuals without health

insurance (for example, the uninsured).

To the extent that hospitals do not

separately identify uncompensated care

related to services provided to

individuals with no health insurance or

other source of third party coverage,

hospitals will need to modify their

accounting systems to do so.

Comment: One commenter questioned

whether it is CMS’ intent that the

uninsured, their charges, their

payments, and their costs be calculated

and reported without regard to any

income or asset threshold? Please

explain CMS’ intent regarding asset and

income thresholds and the uninsured.

Response: The statutory provision at

Section 1923(g)(1) does not provide for

any income or asset threshold in

measuring uncompensated care for

uninsured individuals for purposes of

the hospital-specific limit on DSH

payments. Presumably, such individuals

with higher incomes will be able to pay

some or all of the cost of their care, and

the costs will thus not be

uncompensated. Moreover, we reiterate

that the hospital-specific limit is not a

DSH payment methodology, and States

may impose stricter limits on costs that

they will consider in determining

payment.

Comment: One commenter noted that

the CMS proposed rule would reward

hospitals whose liberal charity policies

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result in high charity care amounts. By

not using their best efforts to collect on

patient’s accounts, the commenter

indicated that these institutions pass on

a greater financial burden to the

Medicaid program under this proposal.

The commenter asserted that hospitals

have a duty to make a reasonable effort

when collecting accounts from patients

who do not have insurance or in

instances where insurance does not

provide complete coverage.

Response: This rule implements the

audit and reporting of DSH payments to

determine compliance with the

hospital-specific DSH limits and is not

intended to create an incentive for

qualifying DSH hospitals not to collect

on patients’ accounts. First, States are

limited in their ability to make DSH

payments by their annual DSH

allotments. Second, States are not

required to make DSH payments to

qualifying hospitals in an amount equal

to the hospital-specific limit. The

hospital-specific limit is not a DSH

payment methodology, and States may

impose stricter limits on costs that they

will consider in determining payment.

Taken together, we believe it is unlikely

hospitals will forgo revenues from

patients in hope that such costs/services

would be fully subsidized by the

Medicaid DSH payment.

Comment: One commenter said that

several States have many non-Medicaid

indigent care programs. In many of

these programs, the commenter

indicated that the sponsoring

government or agency provides a

minimal payment to the hospital. The

commenter noted that the proposed

regulations are not clear whether the

loss on such programs/patients is

includable in uncompensated care costs.

Response: Inpatient and outpatient

hospital service costs provided to

beneficiaries of State-only indigent care

programs that have no other source of

third party coverage may be included in

a hospital’s DSH cost limit. Section

1923(g)(1)(A) of the Act specifies that,

‘‘payments made to a hospital for

services provided to indigent patients

by a State or a unit of local government

within a State, shall not be considered

to be a source of third party payment.’’

Such State or local government

payments should not be offset against

the inpatient and outpatient hospital

service costs associated with

individuals qualifying for such State or

local government payment programs.

However, it is important to note that

Medicaid inpatient and outpatient

hospital revenues received by hospitals

in excess of Medicaid inpatient and

outpatient hospital costs must also be

offset against the eligible

uncompensated inpatient and

outpatient hospital costs associated with

individuals with no source of third

party coverage for the inpatient

outpatient hospital services they

received.

Comment: One commenter requests

CMS clarify how the indigent are to be

identified. In particular, the commenter

asked for clarification on the treatment

of other State or local funded services

for indigent patients and how that fits

into the reporting for the uninsured, and

noted that some hospitals have included

items in the ‘‘uninsured’’ category that

are State or locally funded. Examples

include items such as county jail

patients, public employee workers’

compensation funded services, and

services to juveniles referred from

secure State facilities.

Response: We interpret the phrase

‘‘who have health insurance (or other

third party coverage)’’ to broadly refer to

individuals who have creditable

coverage consistent with the definitions

under 45 CFR Parts 144 and 146, as well

as individuals who have coverage based

upon a legally liable third party payer.

The phrase would not include

individuals who insurance that provides

only excepted benefits, such as those

described in 42 CFR 146.145, unless

that insurance actually provides

coverage for the hospital services at

issue (such as when an automobile

liability insurance policy pays for a

hospital stay). The phrase also does not

include coverage or payments made on

the basis of indigency by a State or a

local unit of government within the

State, pursuant to Section 1923(g)(1)(A)

of the Act.

Inpatient and outpatient hospital

costs incurred for individuals for which

the State or local government is

responsible on a basis other than

indigency should not be included in

calculating the hospital-specific limit.

This would include costs for care for

which the State makes payments on the

basis of status as State employees,

prisoners or other wards of the State. A

State Medicaid Director letter dated

August 16, 2002 specifically addressed

the issue of treatment for Medicaid DSH

purposes of hospital costs associated

with inmates of correctional facilities.

The letter specified that these costs were

ineligible as uncompensated costs for

purposes of DSH because the inmates

are wards of the State and the State is

directly responsible for their basic

economic and medical needs. Failure to

do so would be in violation of the eighth

Amendment of the Constitution.

Similarly, inmates of a county jail or

juvenile facility are wards of the State

or local government detaining them and

their basic economic and medical needs

are the obligation of that governmental

entity.

In addition, uncompensated inpatient

and/or outpatient hospital costs

associated with providing services for

public employee worker’s compensation

programs are not eligible for inclusion

in a hospital’s DSH limit. Worker’s

compensation programs provide third

party coverage for medical services that

is not based on indigency.

Comment: One commenter said that

CMS should further clarify what costs

may be included in the costs of services

for the uninsured, in particular, how

ancillary and pharmacy services should

be addressed.

Response: There are no special

accounting principles related to the

reporting and auditing requirements

under this regulation. Costs and

revenues should be determined based

on otherwise applicable cost accounting

principles for hospitals. As part of the

Medicare 2552–96 cost reporting and

allocation step down process, ancillary

service costs may be allocated to

inpatient and outpatient hospital

services provided to Medicaid eligible

patients and patients with no source of

third party coverage. To the extent that

the allocated ancillary service costs are

not reimbursed they may be included in

the hospital-specific DSH limit.

Pharmacy service costs are separately

identified on the Medicare 2552–96 cost

report and are not recognized as an

inpatient or outpatient hospital service.

Pharmacy service costs that are not part

of an inpatient or outpatient rate and are

billed as pharmacy service and

reimbursed as such are not considered

eligible for inclusion in the hospital-

specific uncompensated cost limit.

Comment: Many commenters stated

that the current accounting systems at

most hospitals would not allow them to

accurately segregate payments received

from individuals with third party

coverage from payments received from

individuals without third party

coverage.

Response: To the extent that hospitals

do not separately identify

uncompensated care related to services

provided to individuals with no source

of third party coverage from

uncompensated care costs not eligible

under the hospital-specific DSH limits,

hospitals will need to modify their

accounting systems to prospectively do

so. Setting up an accounting category to

aggregate charges and revenues

associated with uninsured individuals

receiving inpatient and/or outpatient

services from a hospital should be an

accounting system adjustment not far

removed from the process of setting up

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an account for any other payer category.

For purposes of the initial audits, States

and auditors may need to develop

methodologies to analyze audited

financial statements and other

accounting records to properly segregate

uncompensated costs.

Comment: A few commenters stated

that, in their States, for the vast majority

of DSH hospitals, the State achieves

compliance with the hospital-specific

DSH limit because DSH payments are

less than Medicaid uncompensated care

alone, which is calculated for each

hospital on the Medicaid cost reporting

forms. For this reason, the commenters

asserted that the State does not require

most DSH hospitals to report costs of

uninsured patients on the cost reporting

forms, and requiring them to do so

would be an unnecessary and

significant burden. The commenters

recommended that the proposed rule be

amended to include a provision granting

States the option to not report

uninsured costs for some or all hospitals

where Medicaid losses justify the DSH

payment made. Some commenters

recommend that the proposed rule be

amended to include a provision granting

States the option to not report

uninsured costs for some or all hospitals

where Medicaid losses alone justify the

DSH payment.

Response: The statute requires that

each State report to CMS data, and

submit a certified audit, that verifies

that all hospitals receiving DSH

payments under the Medicaid State plan

actually qualify to receive such

payments and that such payments do

not exceed the hospital-specific DSH

limit. Even if a State only makes DSH

payments under its approved Medicaid

State plan that relate to the

uncompensated care of providing

inpatient and outpatient hospital

services to Medicaid individuals (that

is, Medicaid shortfall), it would be

possible for payments to a hospital to

exceed the hospital-specific limit if the

hospital had a surplus in furnishing

hospital services to the uninsured.

While this may be an unlikely

circumstance, we cannot at this time be

certain that it never occurs. Therefore,

in such a circumstance we will accept

reporting limited to Medicaid

uncompensated care only when the

hospital provides a certification that it

incurred additional uncompensated care

costs serving uninsured individuals.

When we review certified audit reports

submitted by States, we will consider

whether more flexibility would be

warranted, and we may address the

issue in future reporting instructions.

Comment: Numerous commenters

cited the agency’s 1994 letter to State

Medicaid programs as offering

additional guidance by stating that the

cost of services provided individuals

with third party coverage, but whose

third party coverage did not cover the

hospital services the individual

received, could be included. These

commenters asked for CMS to

incorporate this principle into this final

rule.

Response: We do not agree with this

reading of the 1994 CMS State Medicaid

Director letter, which did not refer to

underinsured individuals. Moreover,

the statute appears to be clear on this

issue. While we regret any

misconceptions about that letter, we

take this opportunity to clarify that the

only costs relevant to the calculation of

the hospital-specific limit are costs of

furnishing hospital services to

individuals who are Medicaid eligible

or who have no health insurance (or

other source of third party coverage).

Comment: One commenter questioned

whether claims denied by insurers for

lack of medical necessity are considered

uninsured.

Response: The costs of services for

individuals who have health insurance

are not included in calculating the

hospital-specific limit, even if insurance

claims for that particular service are

denied for any reason. Section

1923(g)(1) of the Act includes in the

calculation costs of providing hospital

services to individuals without health

insurance or other third party coverage

(for example, the uninsured). Claims

denied by a health insurance carrier,

including a Medicaid contracted

managed care organization, for any

reason other than the inpatient/

outpatient service or services provided

were not covered services within the

individuals health benefit package are

furnished to individuals who have

health insurance coverage. The same is

true of services for which claims are

denied due to improper billing, lack of

preauthorization, lack of medical

necessity, or non-coverage under the

third party insurance package.

Comment: One commenter stated that

if an individual has an ambulatory

benefit, but does not have an inpatient

benefit, this individual should be

considered uninsured when inpatient

hospital treatment is provided. The

costs a hospital incurs for the provision

of care to these individuals should be

included in determining the cost of

uncompensated care.

Response: We interpret the phrase

‘‘who have health insurance (or other

third party coverage)’’ to broadly refer to

individuals who have creditable

coverage consistent with the definitions

under 45 CFR Parts 144 and 146, as well

as individuals who have coverage based

upon a legally liable third party payer.

The phrase would not include

individuals who have insurance that

provides only excepted benefits, such as

those described in 42 CFR 146.145,

unless that insurance actually provides

coverage for the hospital services at

issue (such as when an automobile

liability insurance policy pays for a

hospital stay). An individual with

insurance that provides only an

ambulatory benefit would qualify as

having health insurance unless the

benefit is further limited so that it is

considered an excepted benefit (for

example, restricted to onsite ambulatory

medical clinics, limited to a particular

diagnosis, or restricted to an indemnity

benefit). We are not aware of health

insurance plans that offer only

ambulatory benefits, and do not believe

this is a common practice in the

industry.

6. Section 1011 Payments

Comment: Numerous commenters

requested an explanation of the

rationale for requiring States to consider

Section 1011 payments in DSH limit

calculations when the statute does not

refer to Section 1011 payments as a

factor in determining the hospital’s

uncompensated care burden. They

asserted that Section 1011 payments do

not appear to fit in the statutory

categories of Medicaid payments, health

plan payments, or payments made by

uninsured patients, that are required to

be ‘‘netted’’ from cost for the purpose of

the DSH limit calculations. The

commenters request CMS to amend the

proposed rule to eliminate the proposed

treatment of Section 1011 payments.

Response: Section 1011 payments are

made to a hospital for the costs incurred

for the provision of specific services to

specific aliens to the extent that the

provider was not otherwise reimbursed

(through insurance or otherwise) for

such services. Because a portion of the

Section 1011 payments are made for

uncompensated care costs that are also

eligible under the hospital-specific DSH

limit (for example, costs associated with

those Section 1011 eligible aliens with

no source of third party coverage for the

inpatient and outpatient hospital

services they receive and inpatient and

outpatient hospital services not

considered eligible under Section 1011),

a defined portion of the Section 1011

payment must be recognized as an

amount paid on behalf of those

‘‘uninsured’’ Section 1011 eligible

aliens, which would offset the hospital’s

uncompensated cost under the hospital-

specific limit. The information

necessary to properly segregate eligible

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1011 costs under the hospital-specific

DSH limit from Section 1011 costs not

eligible under the hospital-specific limit

is already maintained in hospital

accounting records for purposes of

compliance with Section 1011. Section

1011 costs not eligible under the

hospital-specific DSH limit include any

inpatient and/or outpatient service

provided to a Section 1011 eligible

individual who also had a source of

third party coverage for such services

(for example, commercial insurance,

workmen’s compensation, automobile

insurance coverage). Similarly, Section

1011 revenues attributable to inpatient

and outpatient hospital services

provided to Section 1011 eligible aliens

with a source of third party coverage for

the inpatient and outpatient hospital

services they receive or that are

inpatient and outpatient hospital

services not considered eligible under

Section 1011 would not be offset against

eligible uncompensated care costs under

the hospital-specific limit.

Considering the portion of Section

1011 payments attributable to eligible

aliens with no source of third party

coverage for the inpatient and

outpatient hospital services they receive

as revenue for purposes of calculating

the hospital-specific DSH limit does not

change the hospital’s ability to be fully

reimbursed for eligible uncompensated

inpatient and outpatient hospital

services. This portion of the Section

1011 payments are an additional source

of funding to hospitals and can assist

States in managing the DSH allotments

in a manner that recognizes a broader

universe of hospitals that provide a

disproportionate share of services to

Medicaid and low-income individuals.

Offsetting the portion of the Section

1011 payments in no way prevents a

hospital from receiving DSH payments

up to 100 percent of the unreimbursed

cost of providing inpatient and

outpatient hospital services to

individuals with no source of third

party coverage. Section 1011 revenues

attributable to inpatient and outpatient

hospital services provided to Section

1011 eligible aliens with a source of

third party coverage for the inpatient

and outpatient hospital services they

receive or that are inpatient and

outpatient hospital services not

considered eligible under Section 1011

would not be offset against eligible

uncompensated care costs under the

hospital-specific limit.

The form associated with the

reporting requirements has been

modified to separately identify Section

1011 payments from other revenue

sources.

Comment: A few commenters noted

the State does not have access to

information on Section 1011 payments

made to hospitals by the Secretary. The

commenters asked whether CMS

intends to provide each State a hospital-

specific report that quantifies the

Section 1011 payments and the time

period during which the payments were

made. If not, the commenters asked for

clarification on how States should

collect and validate this information.

Response: CMS has produced a

General DSH Audit and Reporting

Protocol, which specifically addresses

the source documents to be utilized in

performing the DSH audit and report.

One of the source documents will be

hospital audited financial statements.

The Section 1011 payments would

necessarily be identified as a revenue

source in the hospitals’ audited

financial statements. Each DSH hospital

must identify to the State the portion of

Section 1011 payments received during

the Medicaid State plan rate year under

audit as described in the prior response

to comment. These payments will then

be considered a revenue offset against

the total eligible uncompensated care

comprising the hospital-specific DSH

limit. The information necessary to

properly segregate eligible Section 1011

costs under the hospital-specific DSH

limit from Section 1011 costs not

eligible under the hospital-specific limit

is already maintained in hospital

accounting records for purposes of

compliance with Section 1011. Section

1011 costs not eligible under the

hospital-specific DSH limit include any

inpatient and/or outpatient service

provided to a Section 1011 eligible

individual who also had a source of

third party coverage for such services

(for example, commercial insurance,

workmen’s compensation, automobile

insurance coverage). Similarly, Section

1011 revenues attributable to inpatient

and outpatient hospital services

provided to Section 1011 eligible aliens

with a source of third party coverage for

the inpatient and outpatient hospital

services they receive or that are

inpatient and outpatient hospital

services not considered eligible under

Section 1011 would not be offset against

eligible uncompensated care costs under

the hospital-specific limit.

Comment: One commenter requests

clarification as to how CMS proposes

that such information be considered. If

a State is required to rely on self-

reported hospital data then the State

also requests clarification regarding why

self-reported hospital data is sufficient

for one purpose (Section 1011 payments

or managed care payments) but not

another (regular rate payments).

Response: We anticipate that States

and auditors will use the best available

data. The DSH audit will rely on

existing financial and cost reporting

tools currently used by all hospitals

participating in the Medicare program,

and available State data on Medicaid

fee-for-service payments. These

documents would include the Medicare

2552–96 cost report and audited

hospital financial statements and

accounting records in combination with

information provided by the States’

Medicaid Management Information

Systems (MMIS) and the approved

Medicaid State plan governing the

Medicaid payments made during the

audit period. There are three specific

types of revenues that must be included

in the audit to which the State

conducting the audit will not have

access. They are: (1) Medicaid and DSH

payments received from States other

than the State in which the hospital is

located, (2) Medicaid MCO payments

and, (3) payments by or on behalf of

uninsured individuals (other than State

and local government indigent care

payments). The State and CMS must

rely on hospital audited financial

statements and accounting records to

provide this information. In addition,

hospital cost information is available

only from a reporting hospital. The State

and CMS must rely on hospital 2552–96

cost reports to provide this information.

When the State has the most central and

current information through its MMIS

(for example, data on Medicaid

payments in State fee-for-service

inpatient hospital, outpatient hospital

and DSH payments) that system will be

the best source of the information.

Comment: One commenter suggested

that CMS should offset Medicare DSH

payments with these payments.

Response: There is no statutory

authority to support the commenter’s

suggestion. The hospital-specific DSH

limit does not contemplate

consideration of costs and revenues for

services provided to Medicare

beneficiaries except when those

beneficiaries are dually eligible for

Medicaid services. Moreover, Medicare

DSH payments are governed under

separate statutory authority and

recognize the higher costs incurred by

DSH facilities that are associated with

Medicare hospital services, and do not

recognize costs related to services

provided to uninsured individuals.

In contrast, Section 1011 payments

specifically reimburse hospital costs of

providing uncompensated emergency

services they are required to provide

under Section 1867 of the Act

(EMTALA) to undocumented and other

eligible aliens, some of whom have no

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source of third party coverage for the

inpatient and outpatient hospital

services they receive. To the extent a

portion of Section 1011 payments are

paid to a hospital to offset these

uncompensated care costs eligible under

the hospital-specific DSH limit, a

defined portion of the Section 1011

payment must be recognized as a

payment on behalf of those individuals

when determining a hospital’s eligible

uncompensated cost under the hospital-

specific DSH limit. If the hospital also

received a Section 1011 payment to

satisfy the same uncompensated costs

that are included as part of the

hospital’s specific DSH limit, the

Section 1011 payment must be included

as an offsetting revenue source reducing

the total amount of uncompensated care

eligible for Medicaid DSH payments.

Comment: One commenter said that

the requirement to consider Section

1011 payments as revenue offsetting

costs of services for the uninsured could

significantly reduce DSH payments for

vulnerable DSH-eligible hospitals and

children’s hospitals.

Response: CMS does not believe that

treating the portion of Section 1011

payments, for those uninsured Section

1011 eligible aliens, as revenue for

purposes of calculating the hospital-

specific DSH limit in any way

compromises the hospital’s ability to be

fully reimbursed for uncompensated

inpatient and outpatient hospital

services. Instead, Section 1011

payments are an additional source of

funding to hospitals and can assist

States in managing the DSH allotments

in a manner that recognizes a broader

universe of hospitals that provide a

disproportionate share of services to

Medicaid and low-income individuals.

Offsetting the portion of Section 1011

payments in no way prevents a hospital

from receiving DSH payments up to 100

percent of the unreimbursed cost of

providing inpatient and outpatient

hospital services to individuals with no

source of third party coverage. Section

1011 revenues attributable to inpatient

and outpatient hospital services

provided to Section 1011 eligible aliens

with a source of third party coverage for

the inpatient and outpatient hospital

services they receive or that are

inpatient and outpatient services not

considered eligible under Section 1011

would not be offset against eligible

uncompensated care costs under the

hospital-specific limit.

Comment: One commenter

complained that this regulation places a

reporting and verification requirement

on the State and on hospitals in the

State for the Federally administered

Section 1011 program.

Response: The reporting obligation is

based on the requirements under the

Medicaid program, which is

administered by States. To the extent

that Section 1011 payments are paid to

a hospital to offset uncompensated care

costs eligible under the hospital-specific

DSH limit, this Section 1011 payment

must be recognized as a payment on

behalf of Section 1011 eligible

individuals when determining a

hospital’s eligible uncompensated cost

under the hospital-specific DSH limit.

The Section 1011 payments are Federal

payments that directly pay hospitals

and certain other providers for their

otherwise unreimbursed costs of

providing services required by Section

1867 of the Act (EMTALA). The

hospital-specific limit is calculated

taking into consideration payments

made by or on behalf of uninsured

individuals, and there is no statutory

exception for payments made under

Section 1011.

Comment: One commenter asserted

that it would be harmful to States to

identify which hospitals received

Section 1011 payments and the amount

of Section 1011 payments received prior

to allocating DSH funds.

Response: It is not clear what harm

would result from greater understanding

of the revenues available to pay for

uncompensated care. Moreover,

reporting is consistent with the need to

verify the appropriateness of DSH

payments, for the reasons discussed

above. And, as we discussed above,

proper accounting for Section 1011

payments may provide States with

additional flexibility in the use of their

limited DSH allotment.

Comment: One commenter requests

CMS to clarify for providers and states

that only supplemental Medicaid

payments (to the exclusion of Section

1011 funds, which are not Medicaid

program payments) be included for

purposes of counting which payments

are deemed to have been paid to a

hospital as part of the hospital-specific

DSH limit. The commenter requested

that CMS explicitly exclude the Section

1011 funds from the ‘‘Verification 4’’

requirement.

Response: We disagree with the

commenter and instead are clarifying

that all Medicaid payments must be

considered in the calculation of

revenues offsetting costs, as well as a

portion of Section 1011 payments.

Verification four specifically directs the

auditor to ensure that, ‘‘States included

all payments under this title, including

supplemental payments, in the

calculation of hospital-specific DSH

payment limits.’’ This verification

addresses the treatment of Medicaid

payments and in particular, payments

that are in excess of Medicaid cost. To

alleviate any confusion, we separately

address Section 1011 payments, which

are made by the Federal government on

behalf of undocumented and other

specified aliens receiving emergency

services required under Section 1867 of

the Act. These payments do not meet

the State or local government exclusion

and must be treated as a payments

received on behalf of uninsured

individuals for purposes of determining

a hospitals’-specific DSH limit.

The form associated with the

reporting requirements has been

modified to separately identify Section

1011 payments from other revenue

sources.

7. Unduplicated Medicaid and

Uninsured Counts

Comment: Numerous commenters

stated it is feasible for States to report

the unduplicated number of Medicaid

eligible individuals, but not to report

unduplicated uninsured patients. These

commenters asserted that such

information appears to serve no purpose

relative to the requirements this rule is

intended to enforce. The commenters

believe this requirement to be

unreasonable, unwarranted, and/or

unnecessary, with no clear relationship

between this data and DSH program and

this reporting requirement should be

eliminated.

Response: The regulation has been

modified to remove the requirement to

report unduplicated counts of both

Medicaid and uninsured patients. The

form associated with the reporting

requirements has been modified to

remove the Section addressing

unduplicated Medicaid counts and

unduplicated uninsured counts.

8. MIUR and LIUR Calculations

Comment: Many commenters asserted

that the proposed rule would

inappropriately limit the charity care

component of the Low Income

Utilization Rate (LIUR) DSH

qualification measurement under

Section 1923(b)(3) of the Act to only

charity care rendered to the uninsured,

who do not have third-party coverage

for hospital services, thereby excluding

charity care for the underinsured. They

argued that the statute does not limit

this ratio to services provided uninsured

individuals. They pointed out that,

while the lack of third-party coverage is

an important factor in any hospital’s

charity care policy, it is not the only

factor. They asserted that charity care is

often appropriate, and should be

recognized, when some third-party

coverage exists, but it is inadequate

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given the financial circumstances of the

patient.

Response: We agree, and the

regulation has been modified to

maintain consistency with Section

1923(b) regarding the calculation of the

LIUR. Specifically, CMS recognizes that

hospital charity care policy may go

beyond individuals with no source of

third party coverage and may include

underinsured individuals. For purposes

of the LIUR only, individuals that

qualify under a hospital’s charity care

policy may be included.

Comment: One commenter stated that

this new annual reporting requirement

should not be associated to the CMS 64

quarterly report. The commenter

suggested that DSH reporting should be

submitted directly to CMS on the same

day that the required independent

certified audit is submitted.

Response: We agree. CMS is not

requiring States to submit either the

annual report or the certified

independent DSH audits in conjunction

with the CMS 64 quarterly report.

Instead, the annual report and the final

audit must be submitted to CMS within

90 days of the completion of the audit.

The submissions associated with

Medicaid State plan rate year 2005 and

2006 are due no later than December 31,

2009. Each subsequent audit report

beginning with Medicaid State plan rate

year 2007 must be completed by

September 30 of the year ending three

years from the Medicaid State plan rate

year at issue, and the submissions are

due by the following December 31st.

This means that the 2007 Medicaid

State plan rate year annual report and

audit report must be submitted to CMS

by December 31, 2010.

Comment: A few commenters state

that Federal regulations currently

require that hospitals be given the

option of qualifying for DSH based on

either their Medicaid inpatient

utilization rate or their low-income

utilization rate, but do not require that

hospitals submit information on both of

these rates. They stated that the

reporting requirements for MUIR and

LIUR are not specifically required in the

MMA, and do not appear to make a

contribution to determining State

compliance with the applicable

hospital-specific DSH limitation, which

is the objective of the proposed

regulation according to the MMA. One

commenter stated that this reporting

requirement for MUIR and LIUR

represents another attempt to adopt a

substantive policy change in the context

of these audit and reporting rules.

Response: The MMA imposes audit

and reporting requirements on States

regarding DSH payments to eligible

hospitals. As part of this process, CMS

must ensure if all hospitals receiving

DSH payments under the Medicaid

State plan actually qualify to receive

such payments. Sections 1923(b)(1)(A)

and (B) of the Act require that all

hospitals with certain threshold MIUR

or LIUR levels must be included by the

State as DSH eligible hospitals. This is

the minimum Federal standard. States

have the option to use alternative

qualifying criteria that are broader than

the minimum Federal standards.

States that use only the LIUR or only

the MIUR to determine DSH

qualification should report on the

statistic utilized in the approved

Medicaid State plan for the Medicaid

State plan rate year under audit. States

using a broader methodology should

report the statistic utilized in lieu of the

MIUR or LIUR. There is no change in

the MIUR or LIUR under this regulation.

The statute calls for reporting and

auditing of DSH payments, and this rule

requires such reporting and auditing,

consistent with all existing

requirements and limitations associated

with those payments. In an effort to

provide States with uniform

instructions, CMS provided detailed

identification of the data elements

necessary to comply with these

statutory reporting and auditing

requirements.

Comment: A few commenters noted

that their State’s DSH methodology

defines Medicaid inpatient utilization

differently than does 1923(b)(2). One

commenter gave as an example a State

that does not include dual eligible days

in a hospital’s Medicaid utilization rate

for DSH purposes, while 1923(b)(2)

appears to include these days. The

commenter indicated that, using the

State-defined Medicaid utilization rate

for the eligibility determination,

includes more hospitals as DSH

providers and pays a higher DSH

adjustment than is specified in 1923(c).

Another commenter’s State utilizes days

attributable to dual eligibles to calculate

the Medicaid Inpatient Utilization rate

(MIUR). Some commenters asked that

CMS clarify the standard to be used on

whether days attributable to dual

eligibles should be included in the

calculation of the MIUR for the

purposes of determining which

hospitals are deemed to be

disproportionate share hospitals.

Response: We have revised the

regulation to make clear that States that

use alternate broader qualifying criteria

than the MIUR should report on the

hospital’s measurement on such criteria.

With respect to the statutory MIUR, it is

a calculation that includes all Medicaid

eligible days. To the extent that an

inpatient hospital day for a dually-

eligible Medicare/Medicaid patient

qualifies as a Medicaid day, that day

may be included in the MIUR

calculation. States have the option to

use alternative qualifying criteria that

are broader. States using a broader

methodology should report that statistic

in lieu of the MIUR or LIUR.

Comment: One commenter said that

their State calculates each hospital’s

MIUR and LIUR for purposes of

determining DSH eligibility. The MIUR

used for a current year’s DSH eligibility

is based on data from prior years. The

commenter asked for clarification as to

whether the MIUR for reporting and

audit purposes should be the MIUR

used to determine the current year’s

DSH eligibility, or an MIUR calculated

based on the hospitals’ current year’s

operational data. One commenter

further questioned whether a State that

currently calculates DSH eligibility on a

calendar year basis, must now calculate

the Medicaid Inpatient Utilization Rate

on a State fiscal year basis to comply

with the reporting requirements.

Response: The data reported and used

in the certified audit should be from the

Medicaid State plan rate year. States

will continue to have the flexibility to

use time periods other than the

Medicaid State plan rate year to

estimate DSH qualification and DSH

payments, but must provide for

adjustments to ensure that final

qualification and payments are based on

actual data for the relevant time period.

Consistent with that principle, the

LIUR, MIUR or alternative DSH

qualifying statistics must be reported in

the audit using the actual hospital

utilization, payment and cost data

applicable to the Medicaid State plan

rate year under audit. For instance, if

the Medicaid State plan determines

DSH qualification in a given year based

on prior year Medicaid and/or low-

income utilization data, the audit must

report that qualifying statistic using

actual Medicaid State plan rate year

data to demonstrate that the hospital

was eligible to receive DSH payments.

CMS recognizes that States must use

estimates to determine a hospital’s DSH

qualification and DSH payments in a

given year. The regulation is intended to

ensure that hospitals are qualified to

receive DSH payments and that such

payments do not exceed the hospital-

specific DSH limit. The transition

period, discussed in earlier comments,

ensures that States may adjust those

estimates prospectively to avoid any

immediate adverse fiscal impact.

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9. Medicaid Revenues Defined

Comment: A few commenters

recognized the importance of the sum of

Regular Medicaid Payments, Medicaid

Managed Care Organization Payments

and Enhanced/Supplemental Medicaid

Payments in determining hospital

eligibility for Medicaid DSH payments

and in calculating the hospital-specific

limits for such payments. However, the

commenters do not understand why

these figures need to be reported

separately because those separate

figures, in and of themselves, do not

contribute to CMS’s ability to determine

the appropriateness of DSH payments

and is not mandated by the MMA.

Response: The statute called for

reporting of specific payments and data

necessary to ensure the appropriateness

those payments, and provides for States

to obtain independent certified audits of

such payments. The data elements we

are requiring are those that we believe

are necessary to determine the

appropriateness of DSH payments, and

to verify audit findings. In an effort to

provide States with uniform

instructions, CMS provided detailed

identification of the data elements

necessary to comply with Congressional

instruction on such reporting and

auditing.

To determine the eligible

uncompensated care hospital-specific

DSH limit and to ensure that all eligible

costs under such limit are offset by total

Medicaid payments made, the

regulation requires a separate

accounting of types of Medicaid

payments. The separate reporting of

each type of Medicaid payment creates

a verification mechanism to ensure that

all Medicaid payments are properly

offset against the hospital-specific DSH

limit. Regular Medicaid payment and

supplemental Medicaid payment

information is readily available to the

State via the Medicaid Management

Information System. Information

regarding Medicaid managed care

payments made to hospitals is available

from hospital accounting systems.

Comment: A few commenters did not

understand, based on the proposed

regulation, whether the categories of

‘‘Regular Medicaid payments’’ and

‘‘Medicaid managed care organization

payments’’ are mutually exclusive.

Several commenters requested

clarification of the phrase, ‘‘regular

Medicaid payments,’’ stating it is a new

term that would benefit from more

explicit definition.

Response: We intended in the

proposed rule that the terms regular

Medicaid payment and Medicaid MCO

payments would be mutually exclusive,

but because the term ‘‘regular’’ was

apparently confusing we are revising the

regulatory language to be more specific.

We viewed ‘‘regular’’ Medicaid

payments as the fee-for-service (FFS) at

the base rates that States set for

Medicaid services offered through the

approved Medicaid State plan. We also

included as ‘‘regular’’ Medicaid

payments under a FFS rate system any

add-ons to rates that account for specific

costs. We have now revised the

regulation text to identify this category

more specifically as IP/OP Medicaid fee-

for-service (FFS) basic rate payments.

We distinguish as a separate reporting

data element payments to each hospital

from MCOs because those payments are

derived from different data sources

(hospital records). Medicaid MCO

payments are payments from MCOs to

hospitals for inpatient and outpatient

services provided to Medicaid managed

care enrollees. We also distinguish as a

separate data element supplemental

and/or enhanced Medicaid payments

that are not part of regular FFS

Medicaid rate structure but instead are

additional reimbursement to providers

above the basic service rate.

Supplemental and/or enhanced

Medicaid payments are not necessarily

available to all participating Medicaid

providers and may not be triggered by

a claim for Medicaid services provided.

A supplemental Medicaid payment may

be based solely on qualifying criteria

defined in the Medicaid State plan.

Comment: One commenter noted that

the regulation specifies how Medicaid

MCO payments to hospitals are treated,

but does not appear to contemplate the

treatment of payments from other

managed care entities’ that are not

solely Medicaid MCOs. The regulations

should clarify how all revenues from

managed care entities for hospital

services should be treated.

Response: Because the regulation

specifically addresses Medicaid DSH

payments and hospital-specific DSH

limits, hospitals will be required to

report only the MCO revenues

associated with Medicaid inpatient and

outpatient hospital services. Only the

unreimbursed inpatient hospital and

outpatient hospital costs associated with

Medicaid managed care (for example,

Medicaid shortfall) are eligible to be

included in the hospital-specific DSH

limit. To determine any eligible

Medicaid shortfall, hospitals must

include costs associated only with

inpatient and outpatient hospital

services provided to Medicaid managed

care enrollees net of the inpatient and

outpatient hospital payments made to

the hospital from Medicaid MCOs.

10. Intergovernmental Transfers

Comment: One commenter noted that

the proposed rule requirement of

reporting transfer payments is not

mandated by the MMA. A few

commenters requested a definition of

the term transfers (§ 447.299(c)(13)),

which is undefined in existing Federal

statute and regulation. One commenter

requested definition and clarification of

the phrase, ‘‘as a condition of receiving

any Medicaid payment or DSH

payment.’’

Response: We have removed this

proposed data element because we agree

that it is not appropriate in the context

of this reporting and auditing obligation,

but instead relates to concerns that are

better addressed through other oversight

procedures. In using the term ‘‘transfer,’’

we intended to reference

intergovernmental transfer obligations

that a DSH hospital may have under a

State’s Medicaid program. As explained

in a response to a subsequent comment,

intergovernmental transfer obligations

are not considered costs eligible under

the hospital-specific DSH limit.

11. Costs Defined

Comment: A few commenters

requested a definition of cost indicating

that some agencies grant States some

leeway in the definition of costs.

Response: Uncompensated care costs

eligible under the hospital-specific DSH

limit were clearly articulated in the

August 26, 2005 proposed regulation.

That is, the uncompensated care cost

eligible under the hospital-specific DSH

limit include the unreimbursed costs of

providing inpatient and outpatient

hospital services to Medicaid eligible

individuals and the unreimbursed costs

of providing inpatient and outpatient

hospital services to individuals with no

source of third party reimbursement for

the inpatient and outpatient hospital

services they receive. Therefore, all

costs for services that are within the

definition of inpatient hospital services

and outpatient hospital services that are

furnished to Medicaid eligible

individuals and to individuals with no

source of third party reimbursement

should be included in calculating the

hospital-specific DSH limit. States do

not have the flexibility to broaden or

narrow the costs included in calculating

the hospital-specific DSH limit, because

the universe of costs is defined in the

statute. States do have the flexibility to

vary the level of DSH payment between

individual hospitals as long as the

payments are at or below the hospital-

specific limit. And States are not

required to make DSH payments that

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cover all costs included in calculating

the hospital-specific DSH limit.

Comment: One commenter noted a

reference to the cost determination

method via the Medicare cost report

would be beneficial.

Response: CMS agrees that the same

methods used in preparing the Medicare

2552–96 cost report should be applied

in determining costs to be used in

calculating the DSH hospital-specific

limits. We believe that hospitals’

Medicare cost report and audited

financial statements and accounting

records should contain the information

necessary for reporting and auditing

responsibilities, in combination with

information provided by the States’

Medicaid Management Information

Systems (MMIS) and the approved

Medicaid State plan governing the

Medicaid payments made during the

audit period.

It is important to note that, in using

a cost-to-charge ratio in calculating

costs, only the inpatient and outpatient

hospital charges associated with

individuals with no source of third

party coverage for such services can be

applied to the Medicare cost report for

purposes of calculating the uninsured

uncompensated care cost component of

the hospital-specific DSH limit.

Hospitals must also ensure that no

duplication of such charges exist in

their accounting records. This

information must be made available to

the auditor for certification.

CMS has developed a General DSH

Audit and Reporting Protocol which

will be available on the CMS Web site

to assist States and auditors in using

information from each source identified

above to determine uncompensated care

costs consistent with the statutory

requirements.

Comment: A number of commenters

asked for clarification of the

requirement in the proposed rule that

States should report ‘‘separately’’ the

‘‘total annual cost’’ or the ‘‘total annual

amount of uncompensated care costs,’’

respectively, ‘‘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.’’ The commenters

suggested that CMS remove the word

‘‘separately’’ from §§ 447.299(c)(14) and

447.299(c)(15) and clarify that only one

data item must be reported for both

‘‘total cost of care’’ and

‘‘uncompensated care costs.’’

Response: The reporting form has

been modified to address many

comments concerning the necessary

data elements to fulfill the audit and

reporting requirements. The data

element referring to ‘‘Total Annual

Uncompensated Care Costs’’ represents

the total amount of unreimbursed care

to be considered under the hospital-

specific DSH limit. This figure is the

result of summing ‘‘Total Cost of Care

Medicaid IP/OP Services’’ and ‘‘Total

Cost of IP/OP for uninsured’’ and then

subtracting ‘‘Total Medicaid IP/OP

Payments’’ and ‘‘IP/OP Uninsured

Revenues,’’ and ‘‘Total Applicable

Section 1011 Payments’’. The source of

this information will be the hospital’s

Medicare 2552–96 cost reports, hospital

audited financial statements and

accounting records, and MMIS data.

Comment: Numerous commenters

said that a review of the legislative

history of the MMA DSH reporting and

auditing requirements does not reveal

that Congress raised any concerns about

the calculation of uncompensated care

costs, about how unreimbursed costs

were determined for setting the

hospital-specific DSH limit by the CMS

or State Medicaid programs. Several

commenters stated that as a procedural

matter, CMS fails to acknowledge that it

is changing the definition of a key term,

uncompensated care. The new

definition is simply included in the

preamble and regulation text as though

nothing is being substantively changed.

Response: We disagree with the

premise of the commenters that the DSH

reporting and auditing requirements do

not indicate Congressional concern

about the appropriateness of DSH

payments. And we disagree that this

rule changes the definition of

uncompensated care that is counted in

calculating the hospital-specific DSH

limit.

Section 1923(g)(1)(A) of the Act

specifics that DSH payments cannot

exceed, ‘‘the costs incurred during the

year of furnishing hospital services (as

determined by the Secretary and net of

payments under this title, other than

under this Section, and by uninsured

patients) by the hospital to individuals

who either are eligible for medical

assistance under the Medicaid State

plan or have no health insurance (or

other source of third party coverage)’’.

This language plainly identifies the

limited population, whose costs were to

be included in the calculation, and

specifies offset of revenues associated

with those costs.

The reporting and auditing

requirement, by their nature, indicate

concern with the calculation of the

hospital-specific limit. In an effort to

provide States with uniform

instructions, CMS provided detailed

identification of the data elements

necessary to comply with Congressional

instruction on such reporting and

auditing. The definitions of the data

elements track the statutory language,

and do not change the calculation that

should have always been performed.

Comment: One commenter states that

CMS proposes to redefine

uncompensated care costs in a very

narrow fashion for DSH reporting, yet

for reporting uncompensated care in the

Medicare cost report, hospitals are

instructed to include bad debts and non-

Medicaid indigent care plans. The

commenter believes that a uniform

definition should be in place for all

hospital reporting.

Response: Medicare and Medicaid are

separate programs. The Medicare

program uses a different, broader,

definition of uncompensated care than

is authorized for purposes of the

Medicaid DSH hospital-specific limit. It

is important to note that the statutory

provision at Section 1923(g)(1) of the

Act does not use the term

‘‘uncompensated care’’ and we use it

only because of its longstanding use in

this context. The definition we have

been using tracks the statutory

requirements for the hospital-specific

DSH limit.

Comment: One commenter noted that

historically, there has been great

difference in how uncompensated care

costs have been calculated from State to

State and asked if this rule would

establish a uniform methodology among

all States for calculating the

uncompensated care costs for Medicaid

eligible individuals and individuals

with no source of third party coverage.

One commenter stated CMS should

clarify what amounts (revenue charges

and costs) are to be included in

uncompensated care.

Response: This regulation sets forth

reporting and auditing requirements for

DSH payments and necessarily will

result in greater uniformity in State

practices but this regulation does not

change the underlying statutory

requirements for DSH payments. In an

effort to provide States with uniform

instructions, CMS provided detailed

identification of the data elements

necessary to comply with Congressional

instruction on such reporting and

auditing.

Comment: One commenter said that

public hospitals in their State typically

screen uninsured patients to determine

the extent of their ability to pay for

services rendered. The determination

generally results in an allowance that is

applied to reduce the amount due from

the uninsured patient. The commenter

recommends a revision to clarify that

discounts for the uninsured are not

applied to reduce the hospital’s

uncompensated care costs. The full cost

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should be recognized as uncompensated

notwithstanding the discount or

allowance process.

Response: We agree that the amount

of calculations of uncompensated care

should not be reduced by amounts that

are not paid because of a provider

discounted charge. The statute provides

for costs of furnishing services to

uninsured patients to be reduced only

by the amount of payments received

from or for those patients, except for

payments for care to indigent patients

from a State or unit of local government

within a State. We have clarified the

data elements in this final rule, and we

believe they more clearly track those

statutory elements. We note that

hospitals may need to ensure that, to the

extent that they determine costs based

on a cost-to-charge ratio, the unreduced

charge is used in the calculation.

Comment: One commenter noted that

the ‘‘payer discount’’ exclusion is

inappropriate with respect to both the

uninsured and Medicaid beneficiaries.

With respect to uninsured patients, no

third party payer is involved. For

services rendered to Medicaid patients,

the difference between the Medicaid

rates (or Medicaid managed care plan

payments) and the costs of furnishing

the services constitutes the Medicaid

shortfall, that is a component of

uncompensated care costs.

Response: As noted above, we agree

that payment discounts extended to

uninsured individuals should neither

increase nor decrease uncompensated

care, since offset is required only for

actual revenues from or for these

individuals. The reference in the

proposed regulation was intended to

refer to payment discounts extended to

health insurers or other third party

payers. We have clarified this language

in the final rule.

To the extent that hospitals do not

separately identify uncompensated care

related to services provided to

individuals with no source of third

party coverage from uncompensated

care costs not eligible under the

hospital-specific DSH limits, hospitals

will need to modify their accounting

systems to do so.

Comment: A few commenters stated

that contractual allowances and payer

discounts for persons with 3rd party

coverage are the only items that should

not be permissible in this Section. They

recommended that the definition of

uncompensated care cost be modified to

include all uncompensated care costs

other than contractual allowances and

third party insurance discounts given to

plans other than indigent care plans.

Response: As enacted by OBRA 93,

the hospital-specific DSH limit is

comprised only of the uncompensated

care costs of providing inpatient and

outpatient hospital services to Medicaid

individuals and to individuals with no

source of third party coverage for the

inpatient and outpatient hospitals

services they received.

Comment: One commenter requested

clarification of whether the requirement

for verifying ‘‘The extent to which

hospitals in the State have reduced their

uncompensated care costs to reflect the

total amount of payment adjustments

under this Section.’’, and the new

§ 455.204(c)(1), should be read to

require verification that obligations of

the qualifying DSH hospital to fund the

non-Federal share of a DSH payment or

any other Medicaid payment are not

included as uncompensated care costs

for purposes of the hospital-specific

DSH limit.

Response: The proposed first

verification was based on the statutory

language of Section 1923(j)(2)(A) of the

Act. Since there is no statutory

requirement that hospitals actually use

DSH payments for uncompensated care,

we are reading this verification to

require examination of whether the DSH

payments made to each hospital are

retained by the hospital and are actually

available to offset uncompensated care

costs. We have encountered numerous

instances in which Medicaid hospital

providers are not permitted to retain

Medicaid payments for normal hospital

purposes. Instead the hospital is

required to divert the funding either by

returning it to the payor (either directly

or indirectly) or is required to use the

funding for another purpose. We have

revised the wording of this verification

to better reflect our reading of its

meaning.

We confirm that intergovernmental

transfers (IGTs) cannot be included as a

cost for purposes of calculating the

hospital-specific DSH limit. IGTs are not

costs of providing health care services;

they are a financing mechanism and

should not be included in the

calculation of the hospital-specific DSH

limits. DSH payments are limited to the

costs of providing inpatient and

outpatient hospital services to Medicaid

eligible individuals and individuals

with no source of third party coverage.

Comment: One commenter stated that

based on the accompanying discussion

found in the Federal Register, the State

interprets this provision to mean that

any amount of funds, certified or

transferred by or from a hospital or

other governmental entity, that is used

to claim Federal DSH funding, must be

reported as a DSH payment to the

hospital in the evaluation of the

hospital-specific DSH limit.

Response: We agree with the reading

that Medicaid hospital payments

include the total computable federal and

non-federal share payment amount,

even when the non-federal share is not

funded directly by the State Medicaid

agency. Certified public expenditures

(CPEs) and intergovernmental transfers

(IGTs) are non-Federal share funding

mechanisms utilized by States to share

the cost of financing the Medicaid

program with other local government

entities, including governmentally

operated health care providers. To the

extent that governmentally operated

health care providers are the source of

the non-Federal share funding of a non-

DSH Medicaid payment, such sources of

non-Federal share become part of the

total computable Medicaid payment

received by the provider and non-DSH

Medicaid payments are a revenue

source that offsets costs for purposes of

calculating the hospital-specific DSH

limit. And to the extent that these

mechanisms are used to finance the

DSH payments themselves, the total

DSH payment would include the total

computable expenditure.

It should be noted that IGTs made by

hospitals cannot be included as a cost

of hospital services under the hospital-

specific DSH limit. DSH payments are

limited to the costs of providing

inpatient and outpatient hospital

services to Medicaid eligible individuals

and individuals with no source of third

part coverage. IGTs are not costs of

providing health care services, they are

a financing mechanism and should not

be included in the calculation of the

hospital-specific DSH limits.

CPEs are also a financing method but

CPEs are based on actual costs incurred

which are certified by a unit of

government to represent a Medicaid

payment. CPEs by a governmentally

operated hospital that represent costs

incurred for hospital services for

Medicaid-eligible individuals can be

included as costs in the hospital-

specific limit calculation, but would be

completely offset by the Medicaid

payments that they represent. When the

DSH methodology is based directly on

payment for incurred costs of serving

the uninsured, CPEs by a

governmentally operated hospital may

represent the DSH payment. In that

instance, the CPE would also represent

costs that could be included in the

hospital-specific limit, but there would

be no payment offset in the calculation.

Instead, the total computable amount

would be considered as a DSH payment

CPEs by a local government entity

that is not a health care provider (when

the entity has made a total computable

Medicaid payment on behalf of the State

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and under the authority of the approved

Medicaid State plan) the hospital in

receipt of such payment must consider

the full amount of that payment as a

Medicaid payment that offsets costs in

the calculation of the hospital-specific

limit.

Comment: Numerous commenters

seek clarification that the same

methodology for determining

uncompensated care costs need not be

used for every DSH hospital in the State.

They asserted that CMS has previously

recognized that any definition of

‘‘allowable cost’’ is acceptable, ‘‘as long

as the costs determined under such a

definition do not exceed the amounts

that would be allowable under the

Medicare principles of cost

reimbursement.’’ The commenters

indicated that, in some States, a variety

of methodologies may be used to

determine the uncompensated care costs

for different categories of hospitals, such

as public and private hospitals, or for

particular hospitals. They suggested that

using different methodologies for

different hospitals is entirely justified,

because not every hospital has the same

accounting practices or incurs the same

types of costs.

Response: States have considerable

discretion to determine allowable

inpatient and outpatient costs when

determining payment rates under their

Medicaid State plan, but Section

1923(g)(1) of the Act provides for a

Federal limitation based on costs that

must be calculated in accordance with

Federal accounting standards. In

accordance with this principle, the 1994

guidance provided State flexibility to

define Medicaid costs for purposes of

setting Medicaid payment rates. But this

flexibility does not apply to calculation

of hospital-specific DSH limits to the

extent that State-defined costs exceed

those permitted under Medicare cost

principles.

Moreover, the hospital-specific limit

is based on the costs incurred for

furnishing ‘‘hospital services’’ and does

not include costs incurred for services

that are outside either the State or

Federal definition of inpatient or

outpatient hospital services. While

States have some flexibility to define the

scope of ‘‘hospital services,’’ States must

use consistent definitions of ‘‘hospital

services.’’ Hospitals may engage in any

number of activities, or may furnish

practitioner or other services to patients,

that are not within the scope of

‘‘hospital services.’’ A State cannot

include in calculating the hospital-

specific DSH limit cost of services that

are not defined under its Medicaid State

plan as a Medicaid inpatient or

outpatient hospital service.

Comment: One commenter noted that

its State agency receives state legislative

authority to make distribution to

hospitals from general revenue. The

State requests confirmation from CMS

that these payments, unmatched by

Federal funds, are excluded from the

hospital’s DSH limit calculations.

Response: Section 1923(g)(1)(A) of the

Act specifies that, ‘‘payments made to a

hospital for services provided to

indigent patients by a State or a unit of

local government within a State, shall

not be considered to be a source of third

party payment.’’ State or local only,

(non-DSH) payments received through

an appropriation to the hospital for the

provision of indigent care and for which

Federal matching funds are not claimed

would not be considered a revenue

offset for purposes of determining a

hospital-specific DSH limit. If, however,

the ‘‘distributions to hospitals from

general revenue’’ represent DSH

payments (or any other Medicaid

payment) for which the State will claim

Federal matching dollars through the

use of certified public expenditures, the

State must count the ‘‘distributions’’ as

DSH payments (or any other Medicaid

payments) for purposes of the audit and

report.

Comment: One commenter requests

CMS clarify that provider taxes are costs

that may be included in a hospital’s

calculation of its uncompensated care

costs.

Response: Existing Medicaid policy

recognizes permissible health care taxes

as an allowable cost for the purposes of

Medicaid reimbursement. A portion of a

permissible hospital tax may also be

allocated to indigent care days as part of

the hospital cost report step-down cost

allocation process. Specifically, the

portion of a permissible health care

related tax allocated to the cost of

providing inpatient and outpatient

hospital services to patients with no

source of third party coverage may be

included in the hospital-specific DSH

limit.

Comment: One commenter wants to

assure hospitals’ incurred costs of

furnishing services to undocumented

aliens are includable in the costs

incurred by hospitals for furnishing

services to individuals with no source of

third party coverage for the services

they receive.

Response: The costs of inpatient and

outpatient hospital services provided to

undocumented aliens with no source of

third party coverage for the inpatient

and outpatient hospital services they

receive are eligible under the hospital-

specific DSH limit. These costs must be

offset by any payments received by the

hospital by or on behalf of the

individuals with no source of third

party coverage for the inpatient and

outpatient hospital services they

receive, including the applicable

portion of the funding under Section

1011 of the MMA for those Section 1011

eligible aliens with no source of third

party coverage for the inpatient and

outpatient hospital services they receive

or any inpatient and outpatient services

not considered eligible under Section

1011. It is important to note that

inpatient and outpatient hospital costs

related to Section 1011 eligible aliens

with a source of third party coverage for

the inpatient and outpatient hospital

service they receive are not eligible

under the hospital-specific DSH limit,

as discussed previously.

Comment: Numerous commenters

recommended that the language of

verification #1 be revised to require that

the total amount of claimed DSH

expenditures for each hospital that

qualifies for a DSH payment in the State

is no more than the hospital’s

uncompensated care costs, exclusive of

DSH payments.

Response: The commenters’

recommendation appears to reflect the

issue that is addressed in the second

required verification. The proposed first

verification was based on the statutory

language of Section 1923(j)(2)(A) of the

Act. Since there is no statutory

requirement that hospitals actually use

DSH payments for uncompensated care,

we are reading this verification to

require examination of whether the DSH

payments made to each hospital are

retained by the hospital and are actually

available to offset uncompensated care

costs. We have encountered numerous

instances in which Medicaid hospital

providers are not permitted to retain

Medicaid payments for normal hospital

purposes. Instead the hospital is

required to divert the funding either by

returning it to the payor (either directly

or indirectly) or is required to use the

funding for another purpose. We have

revised the wording of this verification

to better reflect our understanding.

Comment: A few commenters said

that in order to ensure timely payments

to providers, States should be allowed

to continue to use prospective systems

to determine uncompensated care costs.

Response: CMS recognizes that States

must make prospective DSH payments

and that they must estimate eligible

hospital uncompensated care costs as

part of that process. But, as indicated in

numerous audit reports by the HHS

Inspector General, such estimates often

result in improper payments if not

reconciled to actual uncompensated

care costs in the rate year. The new

statutory reporting and auditing

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requirements make clear that such

estimates must be reconciled to actual

costs in order to apply the statutory

hospital-specific limits. As described in

responses to comments regarding audit

requirements, CMS has clarified that the

Medicaid State plan rate years 2005

through 2010 audit findings will be

used only for purposes of assisting

States in developing estimates for

Medicaid State plan rate years 2011

through 2015. As discussed in

subsequent comments and applicable

regulation text, the 2005 and 2006 audit

findings will be used solely to ensure

prospective DSH payments do not

exceed hospital-specific limits

beginning with Medicaid State plan rate

year 2011. No retroactive fiscal impact

will occur because of the transitional

period.

Comment: One commenter had a

question about the proposed reporting

form, requesting clarification on

whether the definition of

uncompensated care includes a

description of the sources of data used

in the calculation as well as a

description of the methodology used to

calculate uncompensated care cost by

the State.

Response: CMS has created a General

DSH Audit and Reporting Protocol to

provide guidance to states, hospitals,

and auditors in the completion of the

DSH audit. The total eligible

uncompensated care block contained in

the reporting form should include, by

hospital, the total amount of eligible

uncompensated care. This value should

be expressed by its dollar value,

determined in accordance with the

General DSH Audit and Reporting

Protocol. This protocol provides general

instructions regarding the types and

sources of information to be provided to

the State and its auditor as well as the

calculations the auditor will make based

on the data provided. The protocol will

be available on the CMS Web site.

Comment: One commenter questioned

whether CMS agrees with the method of

calculating uncompensated care costs

by using the ratio of cost to charges from

the hospital’s most recent ‘‘as filed’’ cost

report and applies this ratio to a twelve-

month period of uncompensated

charges as reported by the hospital for

purposes of completing the reporting

form.

Response: The uncompensated care

block contained in the reporting form

should include, by hospital, the total

amount of eligible uncompensated care

actually provided during the Medicaid

State plan rate year under audit. This

value should be expressed by its dollar

value and must be based on the actual

costs incurred by a hospital and

reflected on the Medicare cost report(s)

for the period under audit.

CMS has created a General DSH Audit

and Reporting Protocol to provide

guidance to States, hospitals, and

auditors in the completion of the DSH

audit. This protocol provides general

instructions regarding the types and

sources of information to be provided to

the State and its auditor as well as the

calculations the auditor will make based

on the data provided. The protocol will

be available on the CMS Web site.

12. Physician Costs

Comment: Several commenters

disagreed with the proposed exclusion

of physician services from consideration

as a cost of hospital services in

calculating the hospital-specific DSH

limits. They argued that inclusion of

such costs is consistent with Federal

statute, the legislative history of the

statute, and the purpose of the Medicaid

Disproportionate Share Hospital

Program. Several commenters noted that

States have previously relied on the

description of ‘‘cost of services’’

contained in a 1994 letter to State

Medicaid Directors, which stated that

CMS ‘‘would permit the State to use the

definition of allowable costs in its State

plan, or any other definition, as long as

the costs determined under such a

definition do not exceed the amounts

that would be allowable under the

Medicare principles of cost

reimbursement.’’ Several commenters

stated that physician services in a

hospital are inseparable from other

services furnished to hospital patients.

The commenters recommend allowing

the uncompensated care costs of

hospital-salaried physician services to

be included in the calculation of the

hospital-specific DSH limit. Many

commenters cited correspondence with

CMS regarding the inclusion of

physician cost as a component of

hospital services.

Response: The statute at Section

1923(g)(1) includes in the calculation of

the hospital-specific DSH limit the

unreimbursed costs of providing

inpatient and outpatient ‘‘hospital

services’’ furnished to specified

populations (Medicaid-eligible and

uninsured). Therefore, all costs

included must be for services that meet

a definition of ‘‘hospital services.’’ That

is a term that is used elsewhere in the

Medicaid statute, in the definition of

‘‘medical assistance’’ at Sections

1905(a)(1) and 1905(2)(A) of the Act,

referring to inpatient and outpatient

hospital services. Under normal

principles of statutory construction and

administrative practice, this term

should be given a consistent meaning.

Thus, we interpret this term under

Section 1923(g)(1) of the Act to mean

the same as it means under the

approved Medicaid State plan

description of inpatient hospital

services and outpatient hospital

services.

Physician services are generally not

considered hospital service costs in

either Medicare or Medicaid programs,

and are recognized as separate costs in

the Medicare hospital cost reporting

process. Specifically, the physician

service costs are generally identified as

professional costs and are removed from

inpatient and outpatient hospital costs

as part of the hospital cost allocation

step-down process. The Medicare 2552–

96 cost report does not include services

furnished by a physician. Physician

services are, as a matter of routine,

separately billed and reimbursed as a

professional service and are not

included as part of the inpatient

hospital service benefit. Medicaid

programs generally follow Medicare

payment principles in this respect.

Therefore, the uncompensated costs of

those services generally cannot be

included in the inpatient hospital

component of the hospital-specific DSH

limit.

In addition, under the Medicaid

program, separately reimbursed

physician professional services are

generally not included in State

definitions of outpatient hospital

services, but are covered under a

separate benefit category. Therefore, the

inclusion of separately reimbursed

Medicaid physician services in the

outpatient hospital service component

of the hospital-specific DSH limit would

not be allowable because, under the

statute, the DSH limit may only include

inpatient and outpatient hospital

services.

In sum, physician costs that are billed

as physician professional services and

reimbursed as such should not be

considered in calculating the hospital-

specific DSH limit, which is comprised

only of the unreimbursed costs of

providing inpatient and outpatient

hospital services to Medicaid and

uninsured individuals.

Comment: Many commenters said it

was not the intent of Congress to

exclude physician costs from DSH

limits because Congress expressed the

expectation that hospitals receiving

DSH payments were responsible for

assuring access to physician services, as

articulated in the requirement that a

DSH facility have at least two

obstetricians on its medical staff.

Response: The commenters infer

Congressional intent regarding what

costs should be included within a

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hospital-specific DSH cost limit by

referencing a DSH qualification

requirement and not the hospital-

specific DSH limit requirements.

Section 1923(d) specifies requirements

for hospitals to qualify for DSH

payments. The staff obstetrical

requirements are part of the DSH

qualification requirements.

Separate treatment of hospital

services and professional services has

been a longstanding practice that

predates the hospital-specific DSH limit

and was affirmed by Congress in

enacting prospective payment systems

for Medicare hospital services. We have

to presume that Congress understood

what it meant in using the term

‘‘hospital services’’ rather than a more

open-ended term. In light of the limited

DSH allocations, we read this term to

indicate the limited purpose for which

Congress elected to make Federal DSH

funds available for responsibilities that

it may have deemed to be State

responsibilities. Since physician

services are generally not considered

hospital services and the costs of

physician services are generally

recognized as separate costs in the

Medicare hospital cost reporting

process, we do not believe that Congress

intended to generally include these

costs in the hospital-specific DSH limit

calculation. To the extent that there are

States that have consistent practices of

including physician services as an

integral part of hospital services for

coverage and payment purposes, and

does not provide for separate payment

(either directly or through an add-on

methodology), we would agree that this

practice would be applicable in

calculating the hospital-specific DSH

limit.

Comment: One commenter noted that

even Medicare recognizes physician

services as hospital services.

Response: This is not correct.

Physician services are not generally

recognized as hospital service costs in

the Medicare hospital cost reporting

process. Most physician service costs

are identified as professional costs and

are removed from inpatient and

outpatient hospital costs as part of the

hospital cost allocation step-down

process. To the extent that there may be

some limited exceptions when a

physician performs hospital service

functions, these exceptions would also

be recognized in calculating the

hospital-specific DSH limit.

Comment: Numerous commenters

stated that exclusion of physician costs

from the hospital-specific DSH limit

calculation appears to be announcing a

new standard/policy, one that is a

substantive change in longstanding DSH

policy, that is not currently embodied in

law, regulation or guidance and that is

likely to produce substantial confusion.

The commenters stated that this is the

first time CMS has suggested that a

hospital’s legitimate physician costs

may never be included in the DSH limit

and that this represents a policy reversal

by the agency.

Response: This regulation reflects the

statutory requirements and existing law

and policy. The statute provides for

consideration only of the costs of

hospital services and the treatment of

physician service costs under this rule

is consistent with that requirement,

with the definition of hospital services

generally used by CMS and by States in

other contexts. The statute called for

reporting and auditing of specific

payments and the existing

Congressional limitations associated

with those payments. In an effort to

provide States with uniform

instructions, CMS provided detailed

identification of the data elements

necessary to comply with Congressional

instruction on such auditing and

reporting.

Comment: A few commenters stated it

is inappropriate to address the treatment

of physician services in the preamble to

this regulation, in light of pending

disputes. The commenters asserted that

it is improper for the agency to change

course unilaterally via one sentence in

a preamble, and should not receive

deference in any judicial appeals.

Response: This regulation reflects but

does not modify existing law regarding

the treatment of physician services in

the calculation of the hospital-specific

limit. CMS has had a consistent position

on this issue, and the Departmental

Appeals Board issued a decision on May

18, 2007 in one of the pending disputes

cited by commenters, in which the

Board upheld a disallowance on this

basis. Moreover, even if this were

regarded as a new or changed policy,

the rulemaking process that has been

undertaken is an appropriate method for

its promulgation.

The issue is rooted in the language of

the statute, which at Section 1923(g)(1)

refers only to hospital services, and does

not include physician services

furnished in a hospital. Physician

services are not generally regarded as

part of hospital services, but are

generally regarded as separate

professional services. This treatment of

physician services has been consistently

applied since before the 1993 enactment

of the hospital-specific DSH limit.

The data elements identified in the

proposed regulation were necessary to

ensure compliance with the direction of

the statute and those elements represent

longstanding CMS policy.

Comment: One commenter stated that

their State’s Medicaid outpatient

payments to hospitals are ‘‘bundled,’’ in

that the payment includes both a

hospital and physician component.

Medicaid MCO outpatient payments are

similar. Hospitals are unable to separate

out the physician-related component of

outpatient rates. In order to

appropriately match costs to payments

for the DSH limit calculations, the

commenter believes it is appropriate to

include Medicaid outpatient costs

related to hospital-based physicians in

its DSH limit calculations.

Response: To the extent that a State

consistently includes physician services

as an integral part of outpatient hospital

services and does not make a separate

payment for physician services either

directly or as an add-on to the hospital

rate, we would agree that the State can

use the same methodology for

calculating the hospital-specific limit.

We do not believe this is a customary

practice.

With respect to MCO payments,

payments by the State to the MCO are

not relevant for purposes of the

hospital-specific limit. The relevant data

elements are hospital costs and

revenues associated with inpatient and

outpatient services provided to

Medicaid MCO enrollees and payments

received by the hospital from the MCO

for those services. To the extent that the

MCO payment combines payment for

inpatient and outpatient hospital

services with payment for other

services, the hospital may need to

allocate the revenues based on the ratio

of charges for hospital services to total

charges, or another reasonable

allocation method.

Comment: Many commenters noted

that the proposed rule does not prohibit

the inclusion of physician costs in the

case of salaried physicians employed by

the hospital delivering services. If the

physician costs are excluded in these

circumstances, any hospital that directly

employs physicians would be directly

impacted by this rule.

Response: This rule does not establish

any new principles for the treatment of

physician service costs, but requires

consistent use of existing hospital

accounting principles applicable under

Federally supported programs. As noted

above, States and hospitals should use

a consistent definition of hospital

services. Under Medicare, it is not by

itself relevant that a hospital pays the

salary of a physician; physician services

are generally not considered hospital

service costs and are recognized as

professional fees in the Medicare

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hospital cost reporting process.

Specifically, the physician service costs

are identified as professional costs and

are removed from inpatient and

outpatient hospital costs as part of the

hospital cost allocation step-down

process.

In sum, physician costs that are billed

as physician professional services and

reimbursed as such are not included as

hospital services in calculating the

hospital-specific DSH limit.

Comment: Several commenters asked

about the treatment of physician clinics

and other clinic services. They

indicated that physician clinics, in both

hospital and office settings, focus on

primary care to the underserved and

function at a financial loss due to

inadequate medical reimbursement

rates. The commenters recommended

that the costs of such clinics be

included as hospital services under the

hospital-specific DSH limit when

services are furnished to Medicaid

eligible and uninsured patients.

Response: As indicated above,

hospitals and States should use a

consistent treatment of physician and

other provider-based clinics. All costs

that are associated with services that are

defined and reimbursed under the

approved Medicaid State plan as

inpatient hospital services and

outpatient hospital services to Medicaid

eligible individuals and to individuals

with no source of third party coverage

for such services may be included in

calculating the hospital-specific DSH

limit.

Comment: Numerous commenters

stated that hospitals, especially critical

access hospitals, incur costs to secure

the services of physicians to serve the

indigent patients, and these costs (fees,

contractual agreements or salary costs)

should be allowed in the establishment

of hospital-specific DSH limits. The

commenters indicated that this may be

the only way to assure availability of

physicians to serve uninsured

individuals. They argued that physician

costs should not be treated any

differently than other costs used to treat

the uninsured, particularly when they

are incurred to meet EMTALA

obligations. They urged that CMS

consider expanding the definition of

DSH-limit services to include all costs

that a hospital incurs providing services

to uninsured patients. Otherwise, the

purposes of the DSH statute, to assist

safety net hospitals and other hospitals

to meet their costs of serving the

uninsured, would be thwarted.

Response: Section 1923(g)(1)(A) of the

Act does not authorize inclusion in the

hospital-specific DSH limit of any costs

associated with treating Medicaid-

eligible and uninsured patients, but

specifically authorizes inclusion only of

costs of furnishing ‘‘hospital services.’’

We understand that there may be a

variety of other costs involved in

treating uninsured patients, but other

costs were not included by Congress. As

indicated above, hospitals and States

should use a consistent treatment of

physician and other provider-based

clinics. All costs that are associated

with services that are defined and

reimbursed under the approved

Medicaid State plan as inpatient

hospital services and outpatient hospital

services to Medicaid eligible individuals

and to individuals with no source of

third party coverage for such services

may be included in calculating the

hospital-specific DSH limit.

Comment: One commenter noted that

the proposed regulation does not

address how physician costs should be

treated for DSH purposes for public

teaching hospitals that have elected to

receive cost-based reimbursement for

their physicians as provided for at

§ 415.160.

Response: Regardless of the

reimbursement methodology (cost

reimbursement or prospective payment

system), uncompensated care costs that

may be included in calculating the

hospital-specific DSH limit include only

the unreimbursed costs of providing

inpatient and outpatient hospital

services to Medicaid eligible individuals

and the unreimbursed costs of providing

inpatient and outpatient hospital

services to individuals with no source of

third party reimbursement. Therefore,

all costs defined and reimbursed under

the approved Medicaid State plan as

inpatient hospital services and

outpatient hospital services to Medicaid

eligible individuals and to individuals

with no source of third party coverage

for such services that remain

uncompensated reimbursement are

eligible under the hospital DSH limit.

Comment: Numerous commenters

said that hospitals contract with doctors

to perform administrative services such

as a Medical Director. This is a direct

payment from the hospital to the doctor

for ‘‘Part A’’ services and not direct

patient care. This portion of physician

services should be included.

Response: Because this rule is not

devoted to the treatment of physician

services as hospital services, we are not

going to address every potential

arrangement in this rule. As discussed

above, physician services are generally

not regarded as part of hospital services,

but are generally regarded as separate

professional services. This treatment of

physician services has been consistently

applied since before the 1993 enactment

of the hospital-specific DSH limit. There

are some exceptions to this general

principle, and this rule does not change

either the general principle or the

exceptions. States and hospitals should

use a consistent definition of hospital

services.

We note that, under Medicare, it is

not by itself relevant that a hospital pays

the salary of a physician; physician

services are generally not considered

hospital service costs and are

recognized as professional fees in the

Medicare hospital cost reporting

process. There may be exceptions when

a physician is not performing direct

patient care and is instead performing

general hospital administration

functions. When the physician service

costs are identified as professional costs,

however, they are removed from

inpatient and outpatient hospital costs

as part of the hospital cost allocation

step-down process.

13. Revenues Defined

Comment: One commenter was

concerned that a State could lose FFP

on its DSH payments to a hospital based

on MCO payments that the State does

not control. The commenter posed the

hypothetical of an MCO, at its sole

discretion, being a generous payer to a

hospital, and potentially placing the

State in jeopardy of losing FFP on DSH

payments. The commenter indicated

that this did not seem fair when the

State does not control the MCO

payment. The commenter urged that

Medicaid MCO services should be

excluded from the uncompensated care

costs limit test.

Response: In every State, significant

segments of the Medicaid population

are served through MCOs.

Notwithstanding that delivery system,

the costs of serving that population and

the revenues received for doing so

remain Medicaid costs and revenues to

the hospital. Under the statutory

hospital-specific DSH limit, it is

necessary to calculate the costs of

furnishing services to the Medicaid

population, including those served by

MCOs, and offset those costs with

payments received by the hospital for

those services. Payments received by the

MCO are a necessary part of that

statutory calculation. To the extent that

hospitals earn profits on Medicaid MCO

business, this profit must be offset

against other uncompensated costs in

the same manner that any Medicaid FFS

profits must be offset against other

uncompensated costs. Overall, the

calculation results in the net

uncompensated care in serving the

Medicaid and uninsured populations.

Disregarding Medicaid MCO revenues

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from the hospital-specific DSH limit

overstates a hospital’s uncompensated

care in serving those populations.

Comment: Numerous commenters did

not question the general purpose of this

requirement, but questioned whether it

was fair to limit DSH payments when

the Medicaid shortfall is less than

projected because of hospital cost

controls. These commenters cited the

situation in which basic Medicaid

payments determined on a prospective

basis and individual hospitals are able

to control costs sufficiently to earn a

profit on their Medicaid business. They

argued that requiring that profit to be

offset against uncompensated care costs

would mean that a hospital that

undertakes aggressive cost containment

in the end would receive less in total

Medicaid revenues than another

hospital that forgoes cost containment

(and therefore realizes no profit on its

basic Medicaid payments) but incurs the

same level of unreimbursed uninsured

costs. The commenters urge CMS to

modify its proposed regulations to

provide that for purposes of applying

the individual hospital DSH limit, a

hospital’s costs of serving Medicaid

patients will be deemed to be no less

than the base payment made to that

hospital under a prospective payment

system.

Response: Current Federal law

expressly demands the offset of all

payments under Title XIX other than

DSH payments when determining a

hospital-specific DSH cost limit. Section

1923(g) states that a DSH payment is

inconsistent with the statute, ‘‘if the

payment adjustment exceeds the costs

incurred during the year of furnishing

hospital services (as determined by the

Secretary and net of payments under

this title, other than under this Section,

and by uninsured patients) by the

hospital to individuals who either are

eligible for medical assistance under the

Medicaid State plan or have no health

insurance (or other source of third party

coverage) for services provided during

the year.’’ Calculating certain Medicaid

costs based on prospective payments

received by a hospital does not

accurately identify cost and could

effectively overstate the hospital-

specific DSH limit.

Comment: One commenter questioned

whether it is the expectation that

hospitals that receive DSH funds that

are subsequently passed on to other

entities show the gross DSH payment as

revenue and the payment to the external

entity as an expense.

Response: Payments to hospitals for

which Federal matching is claimed are

made for specified purposes; either to

pay for covered services furnished by

the hospital or to account for the costs

of serving a disproportionate share of

low income patients. To the extent that

a hospital is required to pass a Medicaid

payment on to another entity, that

payment is no longer within those

statutory purposes and would be

unallowable. In other words, hospitals

must retain 100 percent of the total

computable DSH payments claimed by

States. Any redirection of Medicaid

payments (including DSH payments) is

inconsistent with the Medicaid statute

governing expenditures. For purposes of

the hospital-specific limit, DSH

payments are not recognized as

revenues (because the limit applies to

DSH payments, they are not part of the

calculation themselves). Finally, non-

Federal share obligations to which a

hospital is obligated must be transferred

prior to receipt of the DSH payment (or

any other Medicaid payment) and

cannot be included as a cost (expense)

eligible under the hospital-specific DSH

limit.

Comment: One commenter questioned

whether indigent care revenue, as

defined, will also include any revenue

received by the individual hospital

associated with liens (or other such

remedies) placed upon an uninsured

individual’s property or assets? The

commenter asked if such revenues

(collection from liens and other

remedies) would reduce the claimed

uncompensated care costs for uninsured

individuals during the period in which

the revenue is realized (funds received)?

Response: The statutory authority

under MMA instructed States to report

and audit specific payments and

specific costs. In order to accommodate

the precise instruction from Congress,

States must perform audits associated

with defined periods of time and must

identify the actual costs incurred and

the actual payments received during

that defined time period.

CMS received many comments

regarding the treatment of revenues

received by hospitals by or on behalf of

individuals with no source of third

party coverage. The comments indicated

that often these ‘‘self-pay’’ revenues

received in a given year could in fact be

related to a prior period. Similarly, CMS

received comments regarding the

treatment of liens and collections which

may occur after an audit is complete but

relate to a prior period. Under either

circumstance, the hospital would

necessarily have received and booked

the revenues in a subsequent period.

Due to the inability to control these

revenue streams and to foster

administrative ease, audits should take

into account these self-pay revenues

(including liens and collections) during

the year in which they are received,

irrespective of whether such revenues

are applicable to a prior period. In other

words, the revenue adjustment would

be measured during the audit of the

Medicaid State plan rate year in which

the revenues were received.

14. Timing

Comment: One commenter was

concerned that the State is required to

indicate the total annual DSH payments

made in the audited SFY when DSH

payments may be made by the State at

a minimum of up to one year after the

SFY being reported. The commenter

indicated that obtaining the audited

SFY DSH payments by the end of the

following SFY is not possible for the

State.

Response: The statutory authority

instructed States to report and audit

specific payments and specific costs.

Consistent with that provision, States

must perform audits associated with

defined periods of time and must

identify the actual costs incurred and

payments received during that defined

time period. In order for the audits to

properly measure these elements and in

consideration of the many comments

related to retroactivity and timing issues

associated with gathering the data

necessary to identify the costs and

revenues, CMS has made several

revisions to the final rule including

identifying that: (i) The Medicaid State

plan rate year 2005 is the first time

period subject to the audit; and, (ii) the

deadline on reporting the audit findings

has been extended to at least three full

years after the close of the Medicaid

State plan rate year subject to audit.

Therefore, hospitals would have

received all Medicaid and DSH

payments associated with that Medicaid

State plan rate year.

This three year period accommodates

the one-year concern expressed in many

comments regarding claims lags and is

consistent with the varying cost report

period and adjustments. It should be

noted that, to the extent that a State

makes a retroactive adjustment to non-

DSH payments after the completion of

the audit for that particular Medicaid

State plan rate year, the hospital would

necessarily have received and booked

the revenues in a subsequent Medicaid

State plan rate year. Under these

circumstances, the revenue adjustment

would be measured during the audit of

the Medicaid State plan rate year in

which the revenues were received.

Comment: Several commenters

indicated the establishment of a State

fiscal year reporting timeline may prove

problematic because some States

currently include in their annual DSH

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data collections information from two or

more State fiscal years, and then

distribute DSH on a Federal fiscal year

basis. State fiscal year reporting for DSH

may also be inconsistent with a DSH

methodology that involves selection of a

base year and trending forward.

Response: The auditing and reporting

requirements enacted under the MMA

supersede prior DSH reporting

requirements enacted under the

Balanced Budget Act of 1997. This

regulation does not require States to

implement retrospective DSH

methodologies or otherwise change

basic approach to DSH payment used by

the States. Nor would it require delay in

making DSH payments consistent with

the authority of the approved Medicaid

State plan. CMS recognizes that States

may need to estimate uncompensated

care to determine DSH payments in an

upcoming Medicaid State plan rate year.

The regulation is intended to ensure

that those estimates are based on the

most current final data. Moreover, the

regulation will ensure that CMS has the

data necessary to determine whether the

ultimate DSH payment was consistent

with all statutory requirements. Because

FFP is only available for proper DSH

payments, some States may determine

that a retrospective reconciliation is

desirable. The transition period in the

regulation ensures that States are not

adversely impacted retrospectively by

the availability of new data resulting

from the statutory reporting and

auditing requirements.

Comment: One commenter noted that

the State reconciles outpatient hospital

payments to 72% of cost and the

reconciliations may take several years to

finalize. How should those

reconciliation payments/recoveries be

reported?

Response: In consideration of the

many comments related to retroactive

adjustments and timing issues

associated with gathering the data

necessary to identify the costs and

revenues, CMS has revised the final

rule, in part, to identify that the

deadline on reporting the audit findings

has been extended to at least three full

years after the close of the Medicaid

State plan rate year subject to audit. By

that time, hospitals would have received

all Medicaid and DSH payments

associated with that Medicaid State plan

rate year. This three year period

accommodates the one-year concern

expressed in many comments regarding

claims lags and is consistent with the

varying hospital cost report periods and

adjustments.

It should be noted that, to the extent

that a State makes a retroactive

adjustment to non-DSH payments, and

that adjustment occurs after the

completion of the audit for that

particular Medicaid State plan rate year,

the hospital would necessarily have

received and booked the revenues in a

subsequent Medicaid State plan rate

year. Under these circumstances, the

revenue adjustment would be measured

during the audit of the Medicaid State

plan rate year in which the revenues

were received.

Comment: A few commenters

indicated that several reporting

requirements under the proposed rule

will be of little use without the

methodology to show how the reported

data yielded DSH payments. The

commenters suggested States could

highlight the items requested in

§§ 447.299(c)(6) through (c)(16)

whenever they appear on the pages or

worksheets. Putting the requested data

in the context of a calculation should

help CMS more quickly determine the

appropriateness of payment

adjustments, as required in the MMA,

while simplifying the reporting

requirements for the States.

Response: As we gain more

experience, we intend to refine and

improve the reporting forms. In this

rule, we have focused on defining the

minimum data elements that are

required for analysis of DSH payments.

We currently believe that these data

elements will provide sufficient

information to do so, when considered

along with the approved Medicaid State

plan and independent certified audits.

Comment: One commenter noted that

the proposed rule requires that a State

report the payment elements that can be

used to determine each hospital’s DSH

limit payment. In order to avoid undue

delays in disbursing needed DSH funds

on a timely basis, the commenter

suggests it should be acceptable for a

State to identify the Medicaid payment

amounts based on data collected for a

recent prior period, with appropriate

adjustments for expected changes

between the data collection period and

the DSH reporting period. The

commenter also asked for clarification

as to whether States will need to

estimate DSH payments and then do a

settlement, or whether DSH payments

will need to be retrospective.

Response: This regulation is not

intended to require States to implement

retrospective DSH methodologies nor

delay the making of DSH payments

consistent with the authority of the

approved Medicaid State plan. CMS

recognizes that States must estimate

uncompensated care to determine DSH

payments in an upcoming year. The

regulation will ensure, however that

those estimates are based on the most

current final data. Moreover, the

regulation will ensure that CMS has

data necessary to determine whether the

ultimate DSH payment was consistent

with all statutory requirements. Because

FFP is only available for proper DSH

payments, some States may determine

that a retrospective reconciliation is

desirable. The transition period in the

regulation ensures that States are not

adversely impacted retrospectively by

the availability of new data resulting

from the statutory reporting and

auditing requirements.

Comment: A few commenters said

some of these data elements are not

available within the specified

timeframes. They indicated that, while

Medicaid related data is readily

available directly to the State, data

regarding Medicare payments and

discharges and non-Medicaid/non-

Medicare data are not readily available

to the State in efficient formats and

timeframes required by the proposed

rule. Moreover, they said that the lag in

hospital cost reporting provides States

with a very small, possibly

unmanageable, window of time to

complete and submit the newly required

independent certified audit.

Response: Under Section 1923(j) of

the Act, States must perform audits

associated with defined periods of time.

In consideration of the many comments

related to timing issues associated with

gathering the data necessary to identify

the costs and revenues, CMS has revised

the final rule to include the following

changes, which we believe will afford

ample time to obtain final data and

analyze that data.

In order to provide for some

uniformity in the application of the

report and audit requirements among

the States, we have identified Medicaid

State plan rate year 2005 as the first

time period subject to the audit. This

revision recognizes that fiscal periods

used by hospitals, States and the

Federal Government may vary. The

Medicaid State plan rate year is a time

period defined and used by each State

to make DSH payments under the

approved Medicaid State plan, and

should be the base period for analysis

and audit of DSH payments. The statute

refers to the reporting and audit

requirements applying to ‘‘fiscal year

2004 and thereafter’’, but we are

specifying Medicaid State plan rate year

2005 because, in some States Medicaid

State plan rate year 2004 may have

begun prior to the beginning of Federal

fiscal year 2004.

In recognition of potential delays in

obtaining needed information, we have

extended the period for ongoing report

and audit submission until the end of

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the Federal fiscal year that is at least

three years after the close of the

Medicaid State plan rate year. We

believe that hospitals would have

received most Medicaid, DSH payments,

and other payments associated with that

Medicaid State plan rate year. This three

year period accommodates the concern

expressed in many comments regarding

claims lags and is consistent with the

varying hospital cost report periods and

adjustments. And we have provided an

additional extension of the time period

for the reports and audits for Medicaid

State plan rate year 2005 and 2006

which may be concurrently completed

by September 30, 2009.

It should be noted that, to the extent

that a State makes a retroactive

adjustment to the non-DSH payments

after the completion of the audit for that

particular Medicaid State plan rate year,

the hospital would necessarily have

received and booked the revenues in a

subsequent Medicaid State plan rate

year. Under these circumstances, the

revenue adjustment would be measured

during the audit of the Medicaid State

plan rate year in which the revenues

were received.

Comment: A few commenters would

like clarification as to whether the

independent auditor can base

certification on the fact that Medicaid

losses alone justify the DSH payment,

thereby allowing the auditor to ignore

uninsured uncompensated care costs in

the certification. The commenters

recommend for clarity sake that the

proposed rule be amended to include a

provision granting States the option to

not report uninsured costs for some or

all hospitals where Medicaid losses

justify the DSH payment made.

Response: Most States do not make

DSH payments based solely on

Medicaid uncompensated care costs.

But, as discussed previously, if a State

does so, then the State may report only

the Medicaid portion of uncompensated

care for each hospital, if it obtains from

the hospital a certification that the

hospital also incurred uncompensated

care for individuals who have no health

insurance or other third party coverage.

When we review certified audit reports

submitted by States, we will consider

whether more flexibility would be

warranted, and we may address the

issue in future reporting instructions.

15. Institutions for Mental Disease

Comment: One commenter noted that

the proposed rule, under Verification 3,

does not reference § 441.40, which

provides a definition of an Institution

for Mental Disease (IMD). This is

problematic since the Social Security

Act clearly establishes that IMDs are

entitled to participate in Medicaid DSH

programs.

Response: We agree with the

suggestion that the reporting

requirement should include

identification of whether the DSH

facility is an IMD; we have revised the

regulation and reporting form to do so.

An additional limit applies to the

percentage of the total Federally

determined DSH allotment for each

State that can be used for payments to

IMDs that otherwise qualify for DSH

payments under the Medicaid State

plan. Identification of whether a DSH

facility is an IMD will assist CMS in

assessing the appropriateness of the

DSH payment.

The IMD limit does not supersede the

hospital-specific limit that is the

primary focus of the reporting and

auditing requirements under this

regulation. For purposes of the hospital-

specific limit, reporting must take into

consideration the Medicaid coverage

limitations under Section 1905(a) of the

Act, which excludes coverage for

patients in an IMD who are under age

65, except for coverage of inpatient

psychiatric hospital services for

individuals under age 21. For Medicaid-

eligible individuals under age 21, or

over age 65, uncompensated care costs

those eligible individuals would be

reported as uncompensated costs for the

Medicaid population. For the costs of

services provided to those patients

between the ages of 22 and 64 who are

otherwise eligible for Medicaid, the

treatment for the hospital-specific limit

may vary based on State practices. Many

States remove these individuals from

eligibility rolls for administrative

convenience (and must reinstate them if

they are discharged from the IMD); if so,

the costs should be reported as

uncompensated care for the uninsured.

States that do not remove the

individuals from the Medicaid

eligibility rolls should report the costs

as uncompensated care for the Medicaid

population. DSH payments made to

IMDs are subject to the same audit and

report requirements as all other DSH

hospitals to which the State has made

payments.

16. Ownership and Type of Hospital

Comment: A few commenters noted

that reporting on the type of hospital,

type of ownership and the classification

of operator is not required under

Section 1001 of the MMA. They

questioned why CMS proposes such

information to be necessary to comply

with the reporting requirements

included as uncompensated care.

Response: We agree. The regulation

and reporting form have been modified

to remove the requirement to report the

ownership status of a hospital and type

of hospital.

C. Auditing

1. General

Comment: Many commenters

questioned the ability of the States to

actually collect this information and

have an independent audit completed

within one year after the end of SFY

2005. One commenter said that

demanding 2005 cost report data for

SFY 2005 also means that most, if not

all, of the cost report data forwarded to

CMS will be as submitted by the

hospitals because the States will not be

able to review and audit the cost reports

before the reporting deadline.

Response: The information required

under the audit is readily available to

hospitals and the State based on existing

financial and cost reporting tools. As

discussed above, we have revised the

timing requirements to extend the

length of time to submit required reports

and audits to permit submission as late

as the last day of the Federal fiscal year

ending 3 years after the end of the

Medicaid State plan rate year, with a

special timing provision for the audits

for 2005 and 2006, which will be due

by December 31, 2009. We believe this

accommodates most of these concerns.

We also note that we expect that reports

and audits will be based on the best

available information. If audited

Medicare cost reports are not available,

the DSH report and audit may need to

be based on Medicare cost reports as

filed.

Comment: One commenter noted that

most of the reporting requirements will

require the hospital to report

information directly to the State, and

requested explanation of the State’s due-

diligence responsibility for

confirmation/assurance of the

completeness and accuracy of the data

provided by the hospital?

Response: We expect that States will

obtain needed information from the

hospital’s Medicare 2552–96 cost report,

audited hospital financial statements,

and other hospital accounting records,

in combination with information

provided by the States’ Medicaid

Management Information Systems.

Because these source documents are

prepared for other purposes, no single

document will contain the precise

information needed for DSH reporting

and auditing purposes. States will need

to work with hospitals to develop a

methodology that can be applied to

these records to properly calculate

uncompensated care costs incurred in

furnishing hospital services for

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individuals without health insurance or

other third party coverage. This

methodology will need to exclude costs

from the calculation costs for services

furnished to individuals with third

party coverage, prisoners, duplicate

accounts, individuals included in

calculating the Medicaid shortfall,

charges associated with elective

procedures, and any professional

charges. The methodology must operate

in such a way as to provide the State’s

independent auditor confidence that the

data is an accurate representation of the

hospital’s eligible uncompensated care

charge and revenue data.

Comment: A few commenters

questioned access to hospital records

and other jurisdictional issues. Such

access would need to be discussed,

decided and clarified for the States.

State auditors may not have jurisdiction

to audit private hospitals.

Response: States already have

authority to obtain the primary data

sources needed to complete the DSH

audit and the accompanying report.

Information can be obtained from

existing cost reports and financial

information. These documents would

include the Medicare 2552–96 cost

report, audited hospital financial

statements, and hospital accounting

records. States and auditors also have

access to information from the States’

Medicaid Management Information

Systems. We expect that States and

auditors will need to work with

hospitals to develop a methodology that

can be applied to these records to

properly calculate uncompensated care

costs incurred in furnishing hospital

services for individuals without health

insurance or other third party coverage.

Comment: A few commenters noted

that although hospitals submit the

newly required S–10 Worksheet (S–10)

for their Medicare cost reports, the

information required by that Worksheet

does not directly parallel the data

required in the new reporting

requirements. In addition, although both

seek determinations of hospitals’ total

uncompensated care costs, they apply

different methodologies for calculating

such costs. Thus, DSH recipients will be

confronted with making one set of

calculations for their annual reports and

another for their State’s annual DSH

report. If States perform calculations

with the requested data to determine

DSH payments, why not discard (c)(6)

through (c)(16), and instead request a

copy of DSH payment calculations for

all hospitals in a particular fiscal year?

Each hospital’s payment calculation

could appear on separate pages or

worksheets.

Response: Worksheet S–10 is not part

of the Medicare 2552–96 step-down

process used to allocate inpatient and

outpatient hospital costs. The cost

allocation process utilized in the 2552–

96 cost report is considered a key

component of determining Medicaid

and uninsured hospital costs for

purposes of calculating the hospital-

specific DSH limit. The Medicare 2552–

96 cost report, in conjunction with

hospital financial information,

including hospital accounting records

and Medicaid Management Information

Systems data, may be used to determine

uncompensated care costs for the

calculation of the hospital-specific DSH

limits. We expect these calculations to

rely primarily on existing information,

as outlined in the General DSH Audit

and Reporting Protocol that will be

available on the CMS Web site. We

recognize, however, there may be

situations in which the hospital may

have to work with the State to develop

new data or methodologies to allocate or

adjust existing data.

Comment: A few commenters said

that currently, there is no one source of

data to meet the increased reporting

requirements. The sources of data are

from various data warehouses and

under various State and hospital

management systems. The likelihood

that data will not be from consistent

data sets is possible.

Response: We expect these

calculations to rely primarily on

existing information, as outlined in the

General DSH Audit and Reporting

Protocol available on the CMS Web site.

We recognize, however, there may be

situations in which the hospital may

have to work with the State to develop

new data or methodologies to allocate or

adjust existing data. And it may be

necessary for auditors to develop

methods to test, verify the accuracy of,

and reconcile data from different

sources. CMS has developed a General

DSH Audit and Reporting Protocol

available on the CMS Web site that may

assist States and auditors to utilize

information from each source identified

above and develop the methods under

which costs and revenues will be

determined.

Comment: One commenter noted that

one State Medicaid agency annually

surveys all hospitals near the beginning

of its fiscal year and hospitals report

their data for a twelve month period, but

this period does not match the State

fiscal year. Further, the commenter

noted difficulties in analyzing the data

because Federal DSH payments are

provided on a Federal fiscal year, and at

changing match percentages. Another

commenter indicated that another

State’s DSH payment program operates

on a Federal fiscal year basis, which

provides consistency with Medicare

hospital payment systems, the timing of

changes in their Federal financial

participation rate and with the timing of

their DSH allotment. These commenters

noted that the requirement in the

proposed regulation for States to report

and audit their DSH and enhanced

payment programs on a State fiscal year

basis will cause significant

administrative burden and will not

accurately reflect the basis upon which

the State is making payments.

Response: We have modified the

regulation to indicate the Medicaid

State plan rate year as the period subject

to the annual audit. The basis for this

modification is recognition of varying

fiscal periods between hospitals and

States. The Medicaid State plan rate

year is the period which each State has

elected to use for purposes of DSH

payments and other payments made in

reference to annual limits.

In instances where the hospital

financial and cost reporting periods

differ from the Medicaid State plan rate

year, States and auditors may need to

review multiple audited hospital

financial reports and cost reports to

fully cover the Medicaid State plan rate

year under audit. At most, two financial

and/or cost reports should provide the

appropriate data. The data may need to

be allocated based on the months

covered by the financial or cost

reporting period that are included in the

Medicaid State plan period under audit.

CMS has developed a General DSH

Audit and Reporting Protocol which

will be available on the CMS Web site

that may assist States in using the

information from each source identified

above and developing the methods

under which costs and revenues will be

determined.

Comment: Several commenters said

this would be a reporting burden on

Critical Access Hospitals and will

distract from needed resources to

provide services to the uninsured. One

commenter noted that a reporting

burden exists because hospitals may not

keep self-pay collection logs.

Response: The DSH audit will

primarily rely on existing financial and

cost reporting tools currently used by all

hospitals participating in the Medicare

program and therefore, should not

generally divert resources necessary to

provide services to the uninsured. These

documents would include the Medicare

2552–96 cost report, audited hospital

financial information, and hospital

accounting records in combination with

information provided by the States’

Medicaid Management Information

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Systems and the approved Medicaid

State plan governing the Medicaid and

DSH payments made during the audit

period.

To the extent that hospitals do not

separately identify uncompensated care

related to services provided to

individuals with no source of third

party coverage from uncompensated

care costs not eligible under the

hospital-specific DSH limits, hospitals

will need to modify their accounting

systems to do so. Setting up an

accounting category to aggregate charges

and revenues associated with uninsured

individuals receiving inpatient and/or

outpatient services from a hospital

should be an accounting system

adjustment not far removed from the

process of setting up an account for any

other payer category.

For purposes of the initial audits,

States and auditors may need to develop

methodologies to analyze current

audited financial information including

hospital accounting records to properly

segregate uncompensated costs.

Comment: A few commenters stated

the regulation should provide more

specificity about the level of precision

expected in calculating the total cost of

care. They noted that, due to the timing

lag for reporting and auditing, some

States use the hospital’s latest available

Medicare cost report to calculate that

hospital’s overall cost-to-charge ratio. In

that instance, the commenters indicated

that the State converts the Medicaid and

uninsured charges to cost using the

hospital’s overall cost-to-charge ratio.

The commenters also pointed out that

relatively few hospitals have a cost

reporting period that is the same as the

State fiscal year and, therefore, there

would be two cost reporting periods

during a State fiscal year. The

commenters asked if applying a

hospital’s latest available cost-to-charge

ratio to that hospital’s Federal fiscal

year Medicaid and uninsured charges be

an acceptable and reasonable method to

calculate that total cost of care.

Response: We expect that State

reports and audits will be based on the

best available information. If audited

Medicare cost reports are not available

for each hospital, the DSH report and

audit may need to be based on Medicare

cost reports as filed. We note that

hospitals must follow the cost reporting

and apportionment process as

prescribed by the Medicare 2552–96

cost report process. To the extent that

these cost reports do not contain the

precise information needed for the DSH

calculation (for example, by not

distinguishing the categories of

uncompensated care costs that are

needed), it may be necessary for

hospitals to modify their accounting

techniques. In those circumstances, for

the initial audits, it will be necessary to

review other source materials such as

audited hospital financial records and

other records, and to develop

methodologies to determine the

necessary information from such

records. We expect States, independent

auditors and hospitals to work

cooperatively to develop such

methodologies.

CMS has developed a General DSH

Audit and Reporting Protocol which

will be available on the CMS Web site

that should assist States and auditors in

utilizing information from each source

identified above and developing

methods to determine uncompensated

costs of furnishing hospital services to

the Medicaid and uninsured

populations.

Comment: One commenter questioned

how to identify, ‘‘* * * costs incurred

for furnishing those services provided to

individuals with no source of third

party coverage for the inpatient hospital

and outpatient hospital services they

receive.’’

Response: CMS has developed a

General Audit and Reporting Protocol to

provide guidance to States, DSH

hospitals and auditors in the completion

of the DSH audit. This Protocol includes

general instructions regarding the types

of information to be provided by

hospitals to the State and its auditor as

well as the calculations the auditor will

make based on the data provided.

Specifically, the protocol details the

process of using the Medicare 2552–96

cost report, hospital cost to charge ratios

and hospital charges for inpatient and

outpatient hospital services for which

the recipient had no source of third

party coverage. The protocol also details

the process for determining eligible

Medicaid uncompensated care for the

Medicaid State plan rate year under

audit. The protocol will be available on

the CMS Web site.

Comment: One commenter noted that

identifying uninsured patients is

complicated by the restrictions on

which uninsured patient accounts

qualify (for example, if one cannot claim

accounts denied due to medical

necessity issues). This requires a

painstaking and time-intensive process

of reviewing each account history to

identify the reason that an insurance

company did not pay.

Response: To the extent that hospitals

do not separately identify

uncompensated care related to services

provided to individuals with no source

of third party coverage from

uncompensated care costs not eligible

under the hospital-specific DSH limits,

hospitals will need to modify their

accounting systems to do so. Setting up

an accounting category to aggregate

charges and revenues associated with

uninsured individuals receiving

inpatient and/or outpatient services

from a hospital should be an accounting

system adjustment not far removed from

the process of setting up an account for

any other payer category.

For purposes of the initial audits,

States and auditors may need to develop

methodologies to analyze current

audited financial information, and

hospital accounting records to properly

segregate and identify DSH eligible

uncompensated care costs.

Comment: One commenter noted that

a State’s Department of Social Services

signed a Partnership Plan for the

purpose of ‘‘establishing a stable

funding mechanism for the State’s

Medicaid program that embodies

accountability while assuring the

availability of financial resources to

provide needed health care to the

program’s beneficiaries.’’ The

commenter noted that additional

auditing and reporting requirements, as

addressed in the proposed regulation,

seem to be unduly burdensome and

potentially costly to the State and the

hospitals.

Response: Section 1923(j) of the Act

contains audit and reporting

requirements applicable to all States

that make DSH payments. As part of this

process, CMS must determine if all

hospitals receiving DSH payments

under the Medicaid State plan actually

qualify to receive such payments and

that actual DSH payments do not exceed

the hospital-specific DSH limit for the

same period.

To the extent that a State makes DSH

payments within a Section 1115 waiver

demonstration and/or a Partnership

Plan, the State is not exempted from the

rules surrounding DSH payments,

particularly those at 1923(g) of the Act,

and the audit and reporting

requirements would still apply to that

State.

It should be noted that the

Partnership Plan primarily addresses

funding of the Medicaid program, and is

not relevant to the issue of whether

particular payments are authorized

under the approved Medicaid State plan

and may be the basis for FFP under the

Federal statute. Funding issues are not

the subject of this regulation.

Comment: A few commenters

suggested the creation of a $500,000

threshold of DSH payments before an

in-depth audit pursuant to 42 CFR 455,

new Subpart C is triggered. Many small

hospitals have historically low DSH

allotments, and the administrative costs

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of the proposed DSH reporting and

auditing requirements are

disproportionately onerous. If this

exemption is not possible, the

commenters request that any State with

a DSH allotment under $500,000 be

allowed to use a hospital’s independent

auditor attestation to meet the audit

requirements for hospital data used in

DSH calculations. A few commenters

suggested that CMS consider evaluating

whether the cost associated with

detailed audits are justified and whether

an audit that reviews a sample of

hospitals annually might be just as

effective and considerably less costly.

One commenter recommended that the

requirement be to verify that the State’s

calculation formula provides for

inclusion of only uncompensated care

costs of furnishing inpatient and

outpatient hospital services to Medicaid

eligible individuals and individuals

with no source of third party coverage.

Response: There is no statutory

authorization for an exception to audit

and reporting requirements with respect

to hospitals that receive low DSH

payments. The audit and reporting

requirements under Section 1923(j) of

the Act apply to all States that make

DSH payments, with respect to each

hospital receiving a DSH payment. The

statute further requires that CMS obtain

information sufficient to verify that such

payments are appropriate.

Relying on a sample of cost reports

and financial information will not

ensure that each DSH payment is

appropriate and does not exceed the

hospital-specific DSH limit.

The data elements necessary for the

State to complete the DSH audit and

report should, in part, be information

the State already gathers to administer

the DSH program. The responsibility of

the auditor is to measure DSH payments

received by a hospital in a particular

year against the eligible uncompensated

care costs of that hospital in that same

year as determined using the data

provided in the cost, utilization and

financial reporting documents described

above.

Finally, auditing a State’s overall DSH

payment methodology will not ensure

that DSH payments to each hospital do

not exceed the statutorily required

hospital-specific DSH limit.

Comment: Commenting State

Medicaid offices stated that the

Medicaid program already represents a

huge audit task for their offices, and that

adding the additional responsibility of

auditing hospital data for each hospital

receiving a DSH payment would be an

extremely large amount of additional

work that would be nearly impossible to

fit within required time frames. One

commenter said that unless this

requirement can be met through the

acceptance of evidentiary

documentation from the qualifying

hospitals, further verification can only

be made by the auditors’ actual

observation of the hospitals’ records.

The commenter complained that

sending auditors to physically visit

every qualifying hospital is onerous and

expensive and the commenter

questioned whether it is CMS’ intent to

require this extensive a drill-down.

Response: Section 1923(j) of the Act

instructs States to audit and report

specific payments and specific costs.

The responsibility of the auditor is to

measure DSH payments received by a

hospital in a particular year against the

uncompensated care costs for the

Medicaid and uninsured populations

incurred by that hospital in that same

year. The auditor must follow accepted

audit standards and develop sufficient

confidence in the data to certify the

results.

CMS has developed a General DSH

Audit and Reporting Protocol to provide

guidance to States, DSH hospitals and

auditors in the completion of the DSH

audit. This protocol provides general

instructions regarding the types of

information to be provided to the State

and its auditor as well as the

calculations the auditor will make based

on the data provided. The Protocol will

be available on the CMS Web site.

Comment: Several commenters noted

that a reconciliation that must be

completed no later than one year after

the completion of each State’s fiscal

year will place a substantial burden on

hospitals. They asserted that this would

mean that hospitals will have to provide

the State with uncompensated care data

for FY 2005 before it is required for the

FY 2007 DSH computation. They further

indicated that this is not practical,

because uninsured patients are difficult

to identify until all collection efforts

with other payers have been pursued,

which can take several years.

Response: As discussed above, we

have revised the timing requirements to

extend the length of time to submit

required reports and audits to permit

submission as late as the last day of the

Federal fiscal year ending 3 years after

the end of the Medicaid State plan rate

year, with a special timing provision for

the audits for 2005 and 2006, which will

be due by December 31, 2009. We

believe this accommodates most of these

concerns. We also note that we expect

that reports and audits will be based on

the best available information. If audited

Medicare cost reports are not available,

the DSH report and audit may need to

be based on Medicare cost reports as

filed.

Comment: A few commenters said

that CMS should not impose

unnecessary administrative burdens that

will raise costs for * * * hospitals and

States (that ultimately will be shared by

the Federal Government) that result

neither in improved quality or access

nor in any measurable gain in accuracy

or efficiency, particularly at this time

when Congress and the Administration

are intently focused on reining in

Medicaid expenditures. They argued

that diversion of scarce hospital

resources from other productive

activities to achieve, at best, only

marginal gains in accuracy of the

uncompensated care cost calculation

should be reconsidered. The increased

costs outweighing the benefit of the

reconciliation mandate.

Response: Section 1923(g)(1)(A) of the

Act specifies that DSH payments cannot

exceed a hospital-specific limit. Section

1923(j) of the Act, as added by the

MMA, instructed States to audit and

report DSH payments made by States

and compare those payments to the

uncompensated care costs as set forth in

that hospital-specific DSH limit. This

regulation implements those statutory

audit and report requirements and is not

a discretionary agency action.

We expect that States and auditors

will rely on existing financial and cost

reporting processes currently used by all

hospitals participating in the Medicare

program and therefore should not create

an undue burden on states and hospitals

in reporting compliance with Federal

Medicaid law.

CMS has developed a General Audit

and Reporting Protocol to provide

guidance to States, DSH hospitals and

auditors in the completion of the DSH

audit. This protocol provides general

instructions regarding the types of

information to be provided to the State

and its auditor as well as the

calculations the auditor will make based

on the data provided. The Protocol will

be available on the CMS Web site.

Comment: One commenter noted that

neither the MMA nor the proposed rule

clearly state if the independent auditor

is providing an opinion on whether the

State’s calculation formula includes

‘‘Only uncompensated care costs of

furnishing inpatient and outpatient

hospital services to Medicaid eligible

individuals and individuals with no

source of third party coverage * * *’’,

or whether the intent is for the

independent auditor to perform an

indepth annual audit of the hospitals

records and cost reports in order to

verify the hospital reporting processes

as well as audit the State’s methodology.

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One commenter questions whether the

requirement is that each State hire an

auditor to look at each hospital’s

uninsured calculations.

Response: Section 1923(j) of the Act,

as added by the MMA requires States to

audit and report on hospital-specific

DSH payments and this rule makes clear

that this obligation includes specific

cost data. The responsibility of the

auditor is to measure DSH payments

received by a hospital in a particular

year against the eligible uncompensated

care costs of that hospital in that same

year.

States and auditors will need to

obtain data from hospitals and may

need to work with hospitals to develop

new data or methodologies to allocate or

adjust existing data. And it may be

necessary for auditors to develop

methods to test, verify the accuracy of,

and reconcile data from different

sources. This audit function is not the

same as the function of the hospital’s

own auditors, however, and would not

involve a review of the hospital’s

financial controls and internal reporting

procedures. But the auditors must

review the overall methodology for

accumulating data to ensure that the

resulting data reflects the required

elements. In other words, the

independent auditors must review the

methodology for arriving at hospital-

specific data, and must have confidence

that the data accurately represents the

hospital’s eligible uncompensated care

costs consistent with the statutory

criteria.

Comment: One commenter said that

in their State hospital representatives

are required to sign a survey of data for

DSH purposes, in order to certify that

the data is accurate and in accordance

with hospital records. There is a

requirement that hospitals maintain the

supporting documentation for potential

audits. The commenter asked if this

process was sufficient or whether all the

supporting documentation needed to be

housed at the Medicaid agency.

Response: Section 1923(j) of the Act

requires audit and report of hospital-

specific DSH payments and hospital-

specific uncompensated care costs.

While survey data submitted by the

hospital may be an important source of

information, the auditors may need to

examine the methodology followed to

arrive at that survey data, and may need

to develop methods to test, verify the

accuracy of, and reconcile data from

different sources. One ultimate

responsibility of the auditor is to

compare DSH payments received by a

hospital in a particular year with the

actual eligible uncompensated care

costs incurred by the hospital in that

same year. Unreviewed survey data is

not sufficient to satisfy the statutory

instruction of the MMA.

CMS has developed a General DSH

Audit and Reporting Protocol to provide

guidance to States, DSH hospitals and

auditors in the completion of the DSH

audit. This protocol provides general

instructions regarding the types of

information to be provided to the State

and its auditor as well as the

calculations the auditor will make based

on the data provided. The Protocol will

be available on the CMS Web site.

Comment: Many commenters stated

that the auditing requirements are costly

and burdensome to both the hospitals

and the State, creating another source of

disincentive to hospital participation.

The commenters request CMS be

mindful of the additional financial costs

that hospitals would incur and

compensate hospitals accordingly.

Response: CMS believes that audits

will rely primarily on documents

already available to hospitals, and thus

the audit data burden will neither be

significant nor costly. CMS also believes

that it is unlikely that a hospital will

decline to receive Medicaid DSH

payments merely because they must

provide information to the State to

verify that DSH payments do not exceed

the hospital’s DSH eligible

uncompensated care costs.

Comment: One commenter asked

whether the ‘‘independent audit’’ is a

financial audit, or an audit of agreed-

upon procedures. The commenter

indicated that, if it is an audit of agreed-

upon procedures, it would be helpful if

audit program and procedures

clarification were provided by CMS.

Response: The purpose of the audit is

to ensure that States make DSH

payments under their Medicaid program

that are in compliance with Section

1923 of the Act. The nature of the audit

encompasses both program and

financial elements making it impossible

to label as a traditional financial or

programmatic/governmental audit.

The audit review of the State’s

Medicaid program is limited to ensuring

that DSH payments are consistent with

the approved Medicaid State plan and

Federal statutory limits. The DSH audit

will rely in part on financial, accounting

and cost report data provided by

hospitals. This data should be subject to

generally accepted accounting

principles, and auditors may need to

verify the methodology used for

calculating such data. These financial

elements will demonstrate that Federal

payments were claimed in compliance

with Federal statutes.

Comment: One commenter’s opinion

about the most practical manner in

which the State could meet this

regulation is to require hospitals to

expand their current financial audits to

include the appropriate hospital-related

compliance issues and have their

uncompensated care data audited as

part of their annual financial statement

audit. Auditors of the Medicaid program

(as part of the State’s Single Audit)

could then rely on these audited

certifications and evaluate each State’s

DSH payment calculations and other

information being reported by the State

to the Secretary.

Response: The statute places audit

and reporting requirements upon States,

and these regulations reflect those

requirements. These regulations do not

impede States from developing

procedures to meet these requirements

that place particular burdens on

hospitals receiving DSH payments. For

example, States may establish

procedures for hospitals to provide

detailed audited data that can be relied

on by the independent certified DSH

auditors. We do not agree that these

procedures can completely substitute

for an independent certified audit

obtained by the State itself. Nor do we

agree that the State’s single audit can

substitute for the DSH audit

responsibility under Section 1923(j) of

the Act. The purpose of the State’s

single audit is different from the DSH

audit responsibility, and we read the

statute to require a distinct, focused

review of DSH payments.

Comment: Several commenters

recommend that CMS accept the current

audit processes of their State. One

commenter said that hospitals in the

State that are currently required to

complete annual certified independent

audits of their uncompensated care data

are only required to perform audits

using generally accepted accounting

principles and strongly recommended

that the definition be changed so that

audits may be performed under those

principles already in place for a

hospital’s audited financial data. The

hospitals of some States already

independently certify uncompensated

care data submitted to the State and

submit these audited financial

statements along with their annual cost

reports. The information in the cost

reports comes from the hospitals’

accounting systems that have been

independently audited. Another

commenter recommended that CMS

exempt States with satisfactory

independent certification programs

already in place from this provision.

Response: The statute places audit

and reporting requirements upon States,

and these regulations reflect those

requirements. These regulations do not

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impede States from developing

procedures to meet these requirements

that place particular burdens on

hospitals receiving DSH payments. For

example, States may establish

procedures for hospitals to provide

detailed audited data that can be relied

on by the independent certified DSH

auditors. We do not agree that these

procedures can completely substitute

for an independent certified audit

obtained by the State itself. Nor do we

agree that the State’s single audit can

substitute for the DSH audit

responsibility under Section 1923(j) of

the Act. The purpose of the State’s

single audit is different from the DSH

audit responsibility, and we read the

statute to require a distinct, focused

review of DSH payments.

Comment: Numerous commenters

noted that the proposed requirement

that the audit must be conducted

pursuant to the government auditing

standards is unduly burdensome. Most

auditors in the private sector use

generally accepted accounting

principles (‘‘GAAP’’) to audit hospitals’

financial data. Thus, the independent

auditors involved in performing

hospital audits and who use the GAAP

standards to do these audits may not

even be familiar with the generally

accepted government auditing

standards. In any case, it is inefficient

to require these auditors to perform

another audit of the same data using

different auditing standards. At a

minimum, States or hospitals should be

allowed to use either the GAAP

standards or the government auditing

standards in meeting the audit

requirements.

Response: Generally Accepted

Government Auditing Standards

(GAGAS) are the principles governing

audits conducted of government

organizations, programs activities,

functions or funds. In general,

government audits are either

performance audits or financial audits.

In either type, the focus is on the

government entity, its management of a

program and/or the financial

management and reporting systems

associated with that program.

The fact that there are some

differences between GAGAS and GAAP,

however, is a further reason why

hospital audit efforts and the DSH audit

have separate focuses and require

separate analyses.

The DSH audit and report is a

statutorily required component in the

administration of the Medicaid program.

The purpose of the audit is to ensure

that States make DSH payments under

their Medicaid program that are in

compliance with Section 1923 of the

Social Security Act. The audit does not

encompass the review of the State’s

Medicaid program, it simply ensures

that one portion of the program is

conducted in line with Federal statutory

limits. In addition, the DSH audit will

rely on financial and cost report data

provided by hospitals that are subject to

generally accepted accounting

principles as part of their primary

reporting function.

Comment: One commenter said some

auditors may find that base year figures

cannot be verified to the extent

necessary to provide a valid base

because data or audit trails not

previously necessary, are now required.

Response: States and auditors will

need to obtain data from hospitals and

may need to work with hospitals to

develop new data or methodologies to

allocate or adjust existing data. And it

may be necessary for auditors to

develop methods to test, verify the

accuracy of, and reconcile data from

different sources.

Comment: One commenter noted that

the proposed rule appears to have

greatly expanded the required scope (of

Section 1923(j)(2)(E)) by making the

State responsible for retaining

documentation of patient-specific data.

Assuming that CMS does not intend to

place such a reporting burden on the

States, the commenter requested that

CMS clarify that the documentation

requirement for hospital-reported data is

limited to collecting, documenting and

retaining State data and does not

include documentation for data that a

hospital might otherwise have available.

Response: States and auditors will

need to work with hospitals to

determine the extent to which original

patient-specific source data is required

and needs to be retained by the State.

2. Timing of Payments Under Review

Comment: A few commenters

questioned whether DSH payments

made by a State after SFY 2005 for dates

of services prior to SFY 2005 are subject

to the new auditing and reporting

requirements. They noted that,

currently, a few States make DSH

payments after receipt of settled cost

report from the Medicare fiscal

intermediary and applies the DSH

allotment based on dates of service. For

example, one State made its DSH

payment in SFY 2003 for dates of

service in 2000 (using the 2000 Federal

DSH allotment and settled Medicare

cost reports).

Response: Unless otherwise specified

in a State plan, the year in which

payment is contemplated and accrues

(even when subject to adjustment) is the

DSH rate year to which it applies. Many

States have provisions that provide for

DSH payments based on prior year data,

but that does not mean that those

payments are prior year payments. (In

the cited example, if that was the case,

then the effect of any change in the DSH

payment methodology would take three

years to result in payment changes.)

Each State should be aware of the

Medicaid State plan rate year for which

a DSH payment is made.

Comment: A few commenters said

while Medicaid related data is readily

available directly to the State, data

regarding Medicare payments and

discharges and non-Medicaid/non-

Medicare data is not readily available to

the State in efficient formats and

timeframes required by the proposed

rule.

Response: The commenter specifically

questions the availability of non-

Medicaid hospital data necessary to

complete the audit. The only non-

Medicaid related data relevant for the

DSH audit would be the inpatient and

outpatient hospital charges to

individuals with no source of third

party coverage. This information is

available in hospital accounting records.

Since the deadline for reporting the

audit findings has been extended to at

least three full years after the close of

the Medicaid State plan rate year subject

to audit, hospitals would have

necessarily included this charge data in

their as-filed Medicare cost reports.

Comment: One commenter noted it

would avoid misunderstanding if CMS

clarified whether the required data

element refers to gross revenue (full

charges for services) or net revenue

(expected collections after revenue

adjustments.)

Response: Uncompensated care costs

under the hospital-specific DSH limit

are calculated by reducing costs

incurred in furnishing hospital services

to the Medicaid and uninsured

populations, reduced by revenues

received under Medicaid (not including

DSH payments) and further reduced by

payments received from or on behalf of

the uninsured population (not including

payments made by a State or local

government for services to indigent

patients).

Comment: Many commenters

recognized that the proposed

regulations are effective for SFY 2005

and stated it is inappropriate to require

an audit for SFY 2005, when the rule

outlining the required data to be audited

had only been proposed two months

after the close of SFY 2005 (August 26,

2005). The commenters urged a

prospective application of these

requirements effective for the first State

fiscal year that begins after the date the

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final rule is issued, to allow sufficient

time for respondents to identify data

being required and processes to

accumulate such data. A few

commenters said the proposed

regulation is impossible for both States

and hospitals from an operational

standpoint because this methodology

uses actual costs and payments, and

because of the deadlines for the audits

and reports, neither Medicaid payments

nor audited cost information are

available. Numerous commenters stated

that should CMS require an

independent audit, it would be virtually

impossible for States to meet the one-

year filing deadline.

Response: The statutory provision at

Section 1923(j) of the Act requires

audits and reports for fiscal year 2004,

but we are implementing this provision

prospectively with Medicaid State plan

rate year 2005, because that is the first

Medicaid State plan rate year that

necessarily begins in or after Federal

fiscal year 2004. With that clarification,

and because audits are prospective

activities, we do not believe this rule

has any retroactive effect. Moreover, as

discussed above, CMS has modified the

regulation to address the timing

concerns expressed by these

commenters. The regulation has been

modified to:

1. Identify the Medicaid State plan

rate year 2005 as the first time period

subject to the audit requirement.

2. Extend the time period for

submission of completed audit reports

to the last day of the Federal fiscal year

(FFY) ending three years from the

Medicaid State plan rate year under

audit. This means that the 2007

Medicaid State plan rate year must be

audited by the last day of FFY 2010.

3. Provide for a special transition time

period for concurrent completion of

Medicaid State plan rate year 2005 and

2006 audits by September 30, 2009.

4. Provide for submission of each

audit report within 90 days of the

completion of the audit.

5. Provide for a transition period for

reliance on audit findings, so that audit

findings will not be given weight until

Medicaid State plan rate year 2011 and

thereafter in calculating uncompensated

care cost estimates and associated DSH

payments.

Comment: Many commenters said

that this requirement could not be met

if the regulations required a

retrospective audit, because final

settlement of hospitals’ cost reports is

typically contingent upon completion

by a Medicare intermediary of audits

that can take several years. One

commenter noted that the requirement

that the certified audit be completed one

year after the close of the fiscal year is

unattainable because the majority of the

data required can only be derived from

the Medicaid cost report, which is

submitted no sooner than five months

after the end of the fiscal year. Given the

detail involved in the audit, the

commenters indicated that there will

not be enough time to receive cost

reports, review and settle the reports,

and provide data to the auditor, who

would need to certify this tentatively

settled cost report data for each of the

States’ DSH providers. One commenter

stated that the regulation should be

clarified to permit the required report to

be based on a hospital’s as-filed cost

report, and time should be allowed for

States to collect the additional data

needed to meet the reporting

requirements. One commenter said the

hospitals in the State accumulate and

report costs based on the hospital’s

fiscal year utilizing the audited

Medicare cost report (HCFA–2552–96)

which is generally not available before

21 months after the hospital’s year end.

Moreover, the commenter indicated that

such reports do not use the same fiscal

year as the SFY, and thus the cost

information is not available on a SFY

basis. The commenters also indicated

that timing issues are also complicated

by the fact that Medicaid claims may be

submitted by hospitals to the State up

to one year after the date of service.

Response: We discussed above the

revisions made to address comments on

timing issues and extend the time

frames for reporting and auditing

requirements. We expect that reports

and audits will be based on the best

available information. If audited

Medicare cost reports are not available,

the DSH report and audit may need to

be based on Medicare cost reports as

filed. We recognize that, in many

instances, hospital financial and cost

report periods will differ from the

Medicaid State plan rate year. In these

instances, States and auditors may need

to use multiple audited financial reports

and hospital cost reports (CMS 2552–96,

finalized when available or as-filed) to

fully document the appropriateness of

DSH payments for the Medicaid State

plan rate year under audit. The data

would then be allocated based on the

months covered by the financial or cost

reporting period that are within the

Medicaid State plan period under audit.

For instance, if a Medicaid State plan

rate year runs from July 1, 2004 through

June 30, 2005, but a DSH hospital

receiving payments under the Medicaid

State plan operates its financial and cost

reporting based on a calendar year, the

State and auditors may need to use

information from financial and cost

reports for calendar years 2004 and

2005. Costs and revenues of serving the

Medicaid and uninsured populations

would be allocated from each financial

and cost reporting period, in this case

half from each report, to determine the

data for Medicaid State plan rate year

2005.

Comment: One commenter said that

due to delays in receiving settled cost

reports from Medicare Intermediaries, a

State may distribute more than one year

of DSH payments to hospitals in a given

State Fiscal Year. The commenter asks

for confirmation that the State should

submit a separate Annual DSH Report

for each year of DSH payments,

regardless of the date of DSH payment.

Response: The DSH Audit must be

performed and reported to CMS on an

annual basis, which should reflect the

basis for all DSH payments made for the

Medicaid State plan rate year, even if

the DSH payment for that period is

made in a subsequent year.

Comment: A few commenters

questioned whether a detailed audit

manual should be prepared by CMS in

order to assure compliance with the rule

when promulgated and to avoid

disputes after payments have been

made.

Response: CMS has developed a

General DSH Audit and Reporting

Protocol to provide guidance to States,

DSH hospitals and auditors in the

completion of the DSH audit. This

Protocol includes general instructions

regarding the types of information to be

provided by hospitals to the State and

its auditor as well as the calculations

the auditor will make based on the data

provided. The Protocol will be available

on the CMS Web site.

3. Audit Objective and Data Sources

Comment: Several commenters

expressed their opposition to the audit

aspect of the proposed regulation. While

recognizing the need for audits, the

commenters believe that the audits

should fulfill only the following three

objectives: determine whether

individual States are following their

own formulas for the calculation of DSH

payments and hospital-specific DSH

payment limits; verify the accuracy of

States’ calculations; and determine

whether individual States are making

good-faith efforts to make those

calculations in compliance with Federal

guidelines. The commenters believe the

proposed regulation exceeds these three

objectives. The commenters hope that

CMS will instruct auditors that there

are, in fact, various ways for States to

make these calculations while

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remaining in compliance with Federal

guidelines.

Response: Section 1923(j) of the Act

requires that States audit actual DSH

payments made under the approved

Medicaid State plan against actual

eligible uncompensated hospital costs

in the same time period. Hence, the

audit requirement necessarily will

measure whether DSH payments made

under the formulas in the approved

Medicaid State plan are within the

hospital-specific DSH payment limits as

calculated by the State. The Medicaid

State plan includes the reimbursement

methodologies States utilize to make

Medicaid DSH payments. While States

typically include a provision within the

Medicaid State plan that such payments

will not exceed each qualifying

hospital’s DSH limit, such

reimbursement methodologies do not

identify cost components that are

necessary for calculation of the hospital-

specific DSH limits. Instead, States often

for payment purposes rely on survey

data reported by DSH hospitals to

calculate hospital-specific DSH limit,

data which is not typically audited by

States to ensure compliance with the

statutory limits on DSH payments.

While CMS recognizes that States

must use estimates to determine DSH

payments in a given Medicaid State

plan rate year, Section 1923(j) of the Act

requires confirmation that such

payments do not exceed the cost

limitations imposed by Congress under

the Omnibus Budget Reconciliation Act

of 1993.

Comment: A few commenters

suggested the regulation should clarify

the source for the information to be

provided for the audit, particularly as it

pertains to the payments made for the

services. The commenters specifically

asked whether the information should

be on discharges during a State fiscal

year (Medicare pays based on

discharges), admissions during a State

fiscal year (some States pay based on

admissions), or actual payments made

during the State fiscal year regardless of

when the services were provided.

Response: Section 1923(j) of the Act

requires states to report and audit

hospital-specific DSH payments and

hospital-specific uncompensated care

costs. To meet this requirement, States

must perform audits associated with

defined periods of time and must

identify the actual costs incurred and

payments received during that defined

time period.

As noted previously, we expect that

States and auditors will obtain

information whenever possible from

existing sources. States and auditors

should use consistent practices in their

reports and audits. Because each State

uses different hospital payment

methodologies, there is no national rule

on whether, for example, admissions or

discharges should be used to measure

whether services were furnished within

a Medicaid State plan rate year. The

same methodology should be used to

measure uncompensated care costs as is

used in determining payments under

the Medicaid State plan.

CMS has developed a General DSH

Audit and Reporting Protocol will be

available on the CMS Web site to assist

States and auditors in developing

methodologies to use existing sources of

information to determine

uncompensated care costs in furnishing

hospital services to the Medicaid and

uninsured populations.

Comment: A few commenters stated

they currently have no way of verifying

payments to hospitals by Medicaid

managed care organizations for

inpatient and outpatient hospital

services furnished to Medicaid eligible

individuals because payments to

hospitals are paid directly by the

managed care plans. The commenters

indicated that States have no first hand

knowledge, and no claims

documentation regarding these

payments. The commenters questioned

whether CMS would accept the use of

self-reported hospital financial

information that references these

payments in total for purposes of the

Annual DSH Reports.

Response: There are three specific

types of revenues that must be included

in the audit to which the State

conducting the audit will not have

direct access. They are: (1) Medicaid

and DSH payments received by the

hospital from a State other than the

State in which the hospital is located;

(2) Medicaid MCO payments; and, (3)

uninsured payments. The State must

rely on hospital audited financial

statements and hospital accounting

records for this information. The State’s

Medicaid Management Information

System has the most central and current

information for in-State Medicaid fee-

for-service inpatient and outpatient

hospital payments, Medicaid

supplemental and enhanced payments

and DSH payments and will be the

source of such payment.

In addition, hospital cost information

is available only from a reporting DSH

hospital. The State and CMS must rely

on hospital Medicare 2552–96 cost

reports to provide this information.

Comment: One commenter requested

CMS clarify that it is acceptable to

report data for a recent prior period,

with appropriate adjustments for

expected changes between the data

collection period and the DSH reporting

period.

Response: We read the report and

audit requirements to call for actual

data, rather than estimated data. To

accommodate the delays in obtaining

data, we have extended the deadlines

for submission of the reports and audits.

While CMS recognizes that States must

use estimates to determine initial DSH

payments in a given Medicaid State

plan rate year, Section 1923(j) of the Act

requires confirmation that such

payments do not exceed the cost

limitations imposed by Congress under

the Omnibus Budget Reconciliation Act

of 1993. We do not believe estimates are

sufficient to meet this requirement.

Comment: One commenter questioned

the ramifications of reporting costs and

payments in out-of-State and border

hospitals, and asked whether the audit

team would be responsible for DSH

amounts for only hospitals in the State

or for all hospitals (in State and out of

State) that received Medicaid DSH

dollars from that State. The commenter

suggested that, in order to avoid

duplicate payments, CMS should

outline a methodology to be utilized

when auditing hospitals that receive

DSH payments from more than one

State.

Response: A State is required to audit

DSH payments and eligible

uncompensated care costs for only those

DSH hospitals that are located within

the State. This method will allow the

auditor to recognize DSH payments

received by a hospital from other States

in addition to the DSH payments

received by that hospital under the

‘‘home-State’s’’ approved Medicaid

State plan.

For States that make DSH payments to

hospitals located in other States, the

State must include in the reporting

requirements the DSH payments made

to hospitals located outside of the State,

but would not be required to audit those

out-of-State DSH hospital’s total DSH

payments/total eligible uncompensated

care costs. This method will ensure that

no DSH hospital is audited more than

one time per year for purposes of the

DSH auditing and reporting

requirements under the MMA.

Comment: Many commenters noted

that the DSH program has allowed

hospitals to extend access to healthcare

for many poor and uninsured

individuals. They noted that the new

requirements include significant

administrative expenses and

responsibilities to both the States and

hospitals. Several State Medicaid

Agencies were concerned that a likely

outcome will be that hospitals decline

to participate in the DSH program,

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resulting in a decline in the delivery of

healthcare services to the uninsured

citizens and the patients treated from

some Indian Reservations.

Response: CMS does not believe that

the audit data burden will be significant

since the audit relies on documents

already available to hospitals. CMS also

believes that it is unlikely a hospital

will decline to receive Medicaid DSH

payments for uncompensated care

simply because the hospital must

provide information to the State to assist

in the verification that DSH payments

do not exceed the hospital’s eligible

uncompensated care costs as required

by Federal law.

The State is responsible for the

administration of its Medicaid program

and the successful completion of the

DSH audit as part of that administration.

Costs associated with the audit are

eligible for Federal administrative

matching funds.

Comment: Many commenters stated it

would be extremely labor intensive and

an excessive reporting burden for (DSH)

hospitals to match payments received

from individuals to payments received

for individuals for which there was no

third party coverage because it does not

currently do that automatically.

Response: To the extent that hospitals

do not separately identify

uncompensated care related to services

provided to individuals with no source

of third party coverage for the inpatient

and outpatient hospital services they

receive from uncompensated care costs

not eligible under the hospital-specific

DSH limits, hospitals will need to

modify their accounting systems

prospectively to do so. Setting up an

accounting category to aggregate charges

and revenues associated with uninsured

individuals receiving inpatient and/or

outpatient services from a hospital

should be an accounting system

adjustment not far removed from the

process of setting up an account for any

other payer category.

For purposes of the initial audits,

States and auditors may need to develop

methodologies to analyze current

audited hospital financial statements

and hospital accounting records to

properly segregate uncompensated

costs.

Comment: Many commenters have

stated that it is unclear who must pay

for the audit.

Response: The DSH audit and report

is a necessary element in the

administration of the Medicaid program.

The cost of the audit is the

responsibility of the State and can be

matched by the Federal Government as

a Medicaid administrative cost of the

State.

Comment: Several commenters noted

the proposed requirement for the

independent certified audits is unduly

burdensome. Several States have had in

place for a number of years a

requirement that hospitals submit

certified public audit or certifications of

hospitals’ uncompensated care data.

This is followed by the single State

audit of State’s DSH program which

tests and verifies all of the elements that

are currently required by the DSH state

plan and State law requirements. To

impose an additional layer of auditing at

considerable expense to States is

unnecessary.

Response: Section 1923(j) of the Act

requires States to audit actual DSH

payments made under the approved

Medicaid State plan against actual

eligible uncompensated hospital costs

in the same time period. Hence, the

audit requirement will necessarily

measure whether payments made under

the formulas in the approved Medicaid

State plan are within the hospital-

specific DSH payment limits as

calculated by the State. The certification

required in the regulation is a

certification of the audit performed to

determine compliance with the

hospital-specific limitations imposed by

Section 1923 of the Act.

While the DSH audit will rely on

existing financial and cost reporting

tools currently used by all hospitals

participating in the Medicare program

including audited hospital financial

statements, hospital accounting records

and the Medicare 2552–96 cost report,

these source documents simply provide

data to the auditor. Certification of these

source documents is not sufficient to

ensure that DSH payments do not

exceed the hospital-specific limits and

would not allow CMS to carry out the

intent of the law which was to ensure

that each DSH hospital will not exceed

its hospital-specific limit. The

independent certified audit will verify

that the DSH payments authorized

under the approved Medicaid State plan

are within the hospital-specific DSH

limits defined under Federal law.

Comment: Several commenters

requested clarification regarding who is

responsible for obtaining the

independent audit and ensuring the

requirements are met. For example, it

could be presumed that these audit

requirements are the responsibility of

the State’s auditor, the State Medicaid

program’s auditor, the Medicaid

agency’s staff or their agent, or the

hospital’s auditor.

A few commenters said it is not clear

what constitutes ‘‘independent,’’ and

propose that CMS consider

‘‘independent audit’’ to mean an audit

independent of the hospital that does

not require the State to contract with a

private-sector auditing firm to complete

and certify. One commenter questioned

whether the terms in the rule stating

that the audit must be independent and

certified presumes that a certified public

accountant or comparable professional

must perform the audit or is the State

allowed to engage the services of a

contractor with different skill sets as

long as the auditor is independent? One

commenter questioned whether

‘‘independent audit’’ means that a State

may employ its current outside auditors

to conduct audit and reporting

requirements required by the proposed

regulations, recognizing that audit

programs will be modified to meet the

additional auditing and reporting

requirements demanded?

Response: The term ‘‘independent’’

means that the Single State Audit

Agency or any other CPA firm that

operates independently from either the

Medicaid agency (or other agency

making Medicaid payments) or the

subject hospital(s) may perform the DSH

audit. States may not rely on non-CPA

firms, fiscal intermediaries,

independent certification programs

currently in place to audit

uncompensated care costs, nor expand

audits of hospital financial statements to

obtain audit certification of the hospital-

specific DSH limits.

Section 1923(j) of the Act requires

States to report and audit specific

payments and specific costs. The

responsibility of the auditor is to

measure DSH payments received by a

hospital in a particular year against the

eligible uncompensated care costs of

that hospital in that same year.

Certification means that the

independent auditor engaged by the

State reviews the criteria of the Federal

audit regulation and completes the

verification, calculations and report

under the professional rules and

generally accepted standards of audit

practice. This certification would

include a review of the State’s audit

protocol to ensure that the Federal

regulation is satisfied, an opinion for

each verification detailed in the

regulation, a determination of whether

or not the State made DSH payments

that exceeded any hospital’s specific

DSH limit in the Medicaid State plan

rate year under audit. The certification

should also identify any data issues or

other caveats that the auditor identifies

as impacting the results of the audit.

Comment: Several commenters

believe the most practical manner in

which the State could meet this audit

regulation is by requiring hospitals to

have their uncompensated care data

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audited as part of their annual financial

statement audit. Auditors of the

Medicaid program (as part of the State’s

Single Audit) could then rely on these

audited certifications and evaluate each

State’s DSH payment calculations and

other information being reported by the

State to the Secretary. Numerous

commenters stated it would be more

efficient and less burdensome for the

individual hospitals to make the

required verifications for their own

financial data. Most hospitals already

have their financial information

reviewed and certified by an

independent auditor, so the auditor

could complete these verifications as

part of the standard audit process. One

commenter stated it is not clear if audit

procedures applied in any other audits

the hospital has undergone would be

sufficient to rely upon in this

verification. One commenter suggests

that data submitted by a hospital which

has had its own independent audit be

considered ‘‘certified’’ for the

independent audit requirements of this

rule.

Response: States may not rely on

independent certification programs

currently in place to audit

uncompensated care costs nor expand

audits of hospital financial statements to

obtain audit certification of the hospital-

specific DSH limits. Section 1923(j) of

the Act MMA imposes audit and

reporting requirements on States. CMS

must determine if all hospitals receiving

DSH payments under the Medicaid

State plan actually qualify to receive

such payments and that actual DSH

payments do not exceed the hospital-

specific limit for the same period. The

certification required in the regulation is

a certification of the audit performed to

determine compliance with Section

1923 of the Social Security Act.

While the DSH audit will rely on

existing financial and cost reporting

tools currently used by all hospitals

participating in the Medicare program

including audited hospital financial

statements, hospital accounting records,

and the Medicare 2552–96 hospital cost

report, these source documents simply

provide data to the auditor. Certification

of source documents or uncompensated

care cost programs is not sufficient to

ensure that DSH payments do not

exceed the hospital-specific limits and

would not allow CMS to carry out the

intent of the law which was to ensure

that each DSH hospital will not exceed

its hospital-specific limits.

Comment: Several commenters

indicated that most of the requirements

outlined in the proposed regulations

require data that will be obtained from

hospital cost reports. The commenters

questioned whether the States will be

responsible for completing individual

hospital audits in greater detail prior to

completing the DSH report. One

commenter questioned whether having

the data audited by an independent

audit firm engaged by the DSH hospitals

would satisfy the independent audit

requirement, or whether States would

be required to audit the data?

Response: We anticipate that the audit

will rely primarily on already available

documents. The State and auditors can

use data extracted from existing hospital

cost and financial reporting tools

supplemented with State generated data

from the State’s Medicaid Management

Information System. The data elements

necessary for the State to complete the

DSH audit and report should, in part, be

information the State already gathers to

administer the DSH program.

States and auditors will need to

obtain data from hospitals and may

need to work with hospitals to develop

new data or methodologies to allocate or

adjust existing data. And it may be

necessary for auditors to develop

methods to test, verify the accuracy of,

and reconcile data from different

sources. This audit function is not the

same as the function of the hospital’s

own auditors, however, and would not

involve a review of the hospital’s

financial controls and internal reporting

procedures. But the auditors must

review the overall methodology for

accumulating data to ensure that the

resulting data reflects the required

elements. In other words, the

independent auditors must review the

methodology for arriving at hospital-

specific data, and must have confidence

that the data accurately represents the

hospital’s eligible uncompensated care

costs consistent with the statutory

criteria.

Comment: A few commenters

indicated that many States have

invested an increasing amount of time

and expense managing Federal audits

and presumed the increased audit

requirements would be at the States’

expense.

Response: CMS does not believe the

audit data burden will be that

significant since the audit may rely

primarily on already available

documents. The State and auditors can

use data extracted from existing hospital

cost and financial reporting tools

supplemented with State generated data

from the State’s Medicaid Management

Information System. The data elements

necessary for the State to complete the

DSH audit and report should, in part, be

information the State already gathers to

administer the DSH program. The State

would incur additional cost associated

with engaging an auditor but that cost

is eligible for Federal administrative

matching funds.

Comment: One commenter stated that

using an independent auditor would

add administrative costs to the

Medicaid program. The State requests

CMS to confirm if DSH funds can be

used to fund the cost of the audit, and

if the State can claim FFP at the DSH

matching rate.

Response: State costs of the audit are

administrative costs of the Medicaid

program, and not DSH costs. The DSH

program was established by Congress to

help offset uncompensated inpatient

and outpatient care provided by

hospitals to Medicaid individuals and

the uninsured. States may not access

Federal DSH funding for purposes other

than reimbursing hospitals for

unreimbursed inpatient and outpatient

services provided to Medicaid

individuals and individuals with no

source of third party coverage for the

inpatient and outpatient hospital

services they received.

The DSH audit and report is a

necessary element in the administration

of the Medicaid program. The State is

responsible for the successful

completion of the DSH audit as part of

that administration. Costs associated

with the audit are eligible for Federal

administrative matching funds.

Comment: Numerous commenters

noted that the proposed rule does not

address how the audits will be paid for

and there is a concern that the State

Medicaid programs will pass on these

additional costs to DSH hospitals. The

commenters recommended that CMS

state affirmatively that the cost of the

audits should not be passed on to

hospitals. A few commenters noted that

since the cost of auditing each DSH

hospital’s records to satisfy the new

audit requirements will be substantial

and recommended it be funded by a

special appropriation to the States for

such purpose. Many commenters

recommended that CMS reconsider its

conclusion that the regulation would

not have a significant economic impact

and should undertake appropriate

analyses under Executive Order 12866

and the regulatory impact analysis to

consider how the burden on hospitals

could be lessened.

Response: We still do not believe that

this regulation will impose a significant

impact. The final rule allows the DSH

audits to be part of a hospital’s existing

annual financial. If this is the case, the

costs to the hospital should be minimal

since the annual hospital financial audit

is already a requirement. States are

responsible for the administration of

their Medicaid programs and the

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successful completion of the DSH audit

as part of that administration.

Comment: Numerous commenters

indicated significant confusion

regarding the mechanics of compliance

with the requirement for States to have

DSH payment programs independently

audited annually and to submit those

certifications annually to the DHHS

Secretary. The commenters requested

further guidance and explicit details of

standards and procedures required by

CMS.

Response: As a condition of

continued Federal DSH funding,

pursuant to § 455.204, States will need

to be in compliance with audit and

reporting requirements. CMS has

developed a General DSH Audit and

Reporting Protocol which will be

available on the CMS Web site to assist

States and auditors in utilizing

information from each source identified

above and the methods under which

costs and revenues will be determined.

In addition, an auditing and reporting

schedule is described in earlier

responses to comments and is also

included in the final regulation.

Comment: A few commenters noted

that their States have experienced

numerous difficulties when contracting

with external auditing firms. Subjecting

each hospital’s DSH data to another

audit at the State level would be an

extremely time-consuming and very

expensive process for the State would

not add any value to the auditing

process.

Response: The DSH audit and report

is a necessary element in the

administration of the Medicaid program.

The State is responsible for the

successful completion of the DSH audit

as part of that administration. Costs

associated with the audit are eligible for

Federal administrative matching funds.

The term ‘‘independent’’ means that

the Single State Audit Agency or any

other CPA firm that operates

independently from the Medicaid

agency and the subject hospitals may

perform the DSH audit. States may not

rely on non-CPA firms, fiscal

intermediaries acting as agents for a

State’s Medicaid program, independent

certification programs currently in place

to audit uncompensated care costs, nor

expand hospital financial statements to

obtain audit certification of the hospital-

specific DSH limits.

States may use Medicaid agency

auditors to gather the data and perform

initial data analysis for the DSH audit.

However, the audit must be certified by

an independent auditor as described

above.

Comment: One commenter questioned

whether it is CMS’ intent to prevent an

independent CPA firm, contracted by a

State to audit Medicaid cost reports on

the State’s behalf, from being able to

audit that same state’s DSH program

through the independence requirements

of the Government Auditing Standards.

If so, the commenter questioned if any

contract with a State’s Medicaid agency

would impair the independence of a

CPA firm in performing the DSH audit

required in the rule.

Response: The intent of the

requirement that States use independent

auditors to certify the DSH audit is to

provide a quality end product based on

consistently applied auditing standards

to produce unbiased findings. An

independent auditor must operate

independently from the Medicaid

agency and the subject hospitals. The

fact that a CPA firm contracts with the

Medicaid agency to audit Medicaid cost

reports does not disqualify that firm

from being considered independent and

therefore qualified to perform the DSH

audit as long as the contract permits the

auditor to exercise independent

judgment.

Comment: Many commenters

questioned whether the State audit

agency would be appropriate for a

certified independent audit according to

generally accepted government auditing

standards. If an independent audit of

each facility is required, the

commenters asked if State Medicaid

program auditors would be considered

independent to perform the hospital

portion of the work.

Response: The term ‘‘independent’’

means that the Single State Audit

Agency or any other CPA firm that

operates independently from the

Medicaid agency or subject hospitals is

eligible to perform the DSH audit. States

may not rely on non-CPA firms, fiscal

intermediaries acting as Agents for a

State’s Medicaid program, independent

certification programs currently in place

to audit uncompensated care costs, nor

expand hospital financial statements to

obtain audit certification of the hospital-

specific DSH limits.

States may use Medicaid agency

auditors to gather the data and perform

initial data analysis for the DSH audit.

However, the audit must be certified by

an independent auditor as described

above.

Comment: A few commenters stated

that the financial effectiveness of the

audits would be enhanced if the

Medicare fiscal intermediaries were

available to do the audits.

Intermediaries provide services at a

lower cost than private accounting

firms. Time world be saved because the

intermediaries have all the necessary

information. This may also be helpful to

States that require a lengthy

procurement bidding process.

Response: States may contract with

Medicare fiscal intermediaries to the

extent that the Medicare fiscal

intermediary meets the definition of an

independent CPA firm and operates

under a contract that ensures

independent judgment. The term

‘‘independent’’ means that the Single

State Audit Agency or any other CPA

firm operates independently from the

Medicaid agency or subject hospitals.

Comment: One commenter questioned

whether it would be appropriate for the

State’s Auditor General’s office to

perform the independent audit of DSH

Payments using the Generally Accepted

Government Auditing Standards.

Response: The term ‘‘independent’’

means that the Single State Audit

Agency or any other CPA firm that

operates independently from the

Medicaid agency or subject hospital

may be qualified to perform the DSH

audit.

Generally Accepted Government

Auditing Standards are the principles

governing audits conducted of

government organizations, programs

activities, functions or funds. In general,

government audits are either

performance audits or financial audits.

In either type, the focus is on the

government entity, its management of a

program and/or the financial

management and reporting systems

associated with that program.

The DSH audit and report is a

necessary part of the administration of

the Medicaid program. The purpose of

the audit is to ensure that States make

DSH payments under their Medicaid

program that are in compliance with

Section 1923 of the Act. The audit does

not encompass the review of the State’s

overall Medicaid program, it simply

ensures that one portion of the program

is conducted in line with Federal

statutory limits. In addition, the DSH

audit will rely on financial and cost

report data provided by hospitals that

are subject to generally accepted

accounting principles as part of their

primary reporting function.

Comment: Many commenters

expressed concern for the financial

stability of disproportionate share

hospitals and States and their

requirement for finality, with respect to

prior year DSH payment determinations.

They asserted that allowing States to

make good-faith efforts to estimate

hospital-specific DSH payment limits,

so long as States are using the most

recently available data, would help

prevent situations in which States

would need to attempt to take back past

DSH payments to hospitals—a situation

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that would be especially burdensome

for the very kinds of hospitals that DSH

payments are intended to help. One

commenter stated that the new rules

impose an extremely heavy penalty on

certain small hospitals. That commenter

indicated that it would be unlikely that

these hospitals could repay any

amounts to the Medicaid program from

current operating income.

Response: We recognize that States

must use estimates to determine DSH

payments in a given year. The

regulation will provide information that

will help ensure that the actual DSH

payment made by States based on those

estimates do not exceed the actual

eligible uncompensated costs under the

hospital-specific DSH limit. The

transition period included in this

regulation ensures that States will have

time to adjust those estimates

prospectively.

Comment: Numerous commenters did

not see how the verification requirement

could be completed without an

additional annual cost report for an

annual period that differs from its

established fiscal year cost reporting

period and an additional audit that

would tie the hospital costs to the State

year-end versus hospital year end and

DSH payments with the same year

actual uncompensated care costs. They

asserted that the verification

requirement is an extraordinary

unreasonable and completely

unnecessary administrative and

economic burden on hospitals and

States due to time-consuming, costly,

and often duplicative audits. Many

critical access hospitals do not have the

excess manpower and resources to

accomplish this additional audit. In

many States, it disturbs an effective and

efficient system that already meets

Federal standards for program integrity.

Response: The DSH audit will rely on

existing financial and cost reporting

tools currently used by all hospitals

participating in the Medicare program.

We expect that State reports and audits

will be based on the best available

information. If audited Medicare cost

reports are not available for each

hospital, the DSH report and audit may

need to be based on Medicare cost

reports as filed. CMS does not believe

that the audit data burden will be

significant since the audit relies on

documents already available to

hospitals.

Comment: Many commenters noted

that it would be an administrative

burden to perform retrospective reviews

and adjust each year’s DSH payments.

Therefore, the commenters request that

CMS audit the data used by the State to

determine the prospective DSH

payments paid during the State fiscal

year based upon the CMS approved

DSH State plan payment methodology

to determine the actual uncompensated

care costs in the same audited SFY.

Response: Section 1923(j) of the Act

imposes audit and reporting

requirements on all States that make

DSH payments to all DSH eligible

hospitals within the State. As part of

this process, CMS must determine if all

hospitals receiving DSH payments

under the Medicaid State plan actually

qualify to receive such payments and

that actual DSH payments made do not

exceed the hospital-specific DSH limit

for the same period.

DSH payments are limited by Federal

law to each qualifying hospital’s

specific eligible uncompensated care

cost in a given year. Auditing a State’s

DSH payment methodology will not

ensure that DSH payments actually

made by States do not exceed the

statutorily required hospital-specific

DSH limit. Verifying cost elements

within a DSH payment methodology

would not allow CMS to carry out the

intent of the law which was to ensure

that each DSH hospital will not exceed

its hospital-specific DSH limit.

Comment: One commenter said

Verification 3 would be a burden on the

State. Another commenter stated that

the requirements in Verification 3

would dictate significant additional

work by the independent auditor (and

added cost to the State and Federal

governments) for unnecessary data

analysis.

Response: CMS does not believe that

Verification 3 in the regulation will

create significant additional work for

the independent auditor nor the States.

The auditor engaged by a State to

complete the DSH audit must rely on

information provided by the State and

DSH hospitals. This information will be

based on existing financial and cost

reporting tools as well as information

provided by the State’s Medicaid

Management Information System and

the existing approved Medicaid State

plan. DSH hospitals must provide the

State with hospital-specific cost and

revenue data, including backup

documentation, so that independent

auditor may utilize in developing audit

report. The State must provide the

auditor with information pertaining to

the Medicaid State plan DSH payment

methodologies and the methodology

utilized by the State uses to estimate the

hospital-specific DSH limits.

CMS has developed a General DSH

Audit and Reporting Protocol to provide

guidance to States, DSH hospitals and

auditors in the completion of the DSH

audit. This Protocol includes general

instructions regarding the types of

information to be provided by hospitals

to the State and its auditor as well as the

calculations the auditor will make based

on the data provided. The Protocol will

be available on the CMS Web site.

The DSH audit and report is a

necessary element in the administration

of the Medicaid program. The cost of the

audit is the responsibility of the State

and can be matched by the Federal

government as a Medicaid

administrative cost of the State.

Comment: One commenter questioned

whether it is CMS’ intent that the term

‘‘appropriate’’ indicates documentation

that has been verified and/or audited.

The vagueness of the term may also

make it difficult for an independent

auditor to provide an opinion. As an

alternative, and assuming that all other

requirements will be clearly defined, the

commenter recommends that CMS

consider an alternative that a State

employs a methodology for calculating

the hospital-specific DSH limit that is

permissible under Federal rules.

Response: The statutory process

requires examination of whether all

hospitals receiving DSH payments

under the Medicaid State plan actually

qualify to receive such payments and

whether actual DSH payments made are

within the hospital-specific DSH limit

for the same period. DSH payments are

limited by Federal law to each

qualifying hospital’s specific eligible

uncompensated care cost limit. Several

audits by the Inspector General have

highlighted the need for greater scrutiny

and have indicated that calculations

performed by State agencies or hospitals

are not reliable.

Concerning the degree of data

verification required, States and

auditors will need to obtain data from

hospitals and may need to work with

hospitals to develop new data or

methodologies to allocate or adjust

existing data. And it may be necessary

for auditors to develop methods to test,

verify the accuracy of, and reconcile

data from different sources. This audit

function is not the same as the function

of the hospital’s own auditors, however,

and would not involve a review of the

hospital’s financial controls and internal

reporting procedures. But the auditors

must review the overall methodology for

accumulating data to ensure that the

resulting data reflects the required

elements. In other words, the

independent auditors must review the

methodology for arriving at hospital-

specific data, and must have confidence

that the data accurately represents the

hospital’s eligible uncompensated care

costs consistent with the statutory

criteria.

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Comment: A few commenters are

concerned that the reporting

requirements, as stated in the proposed

regulation, suggest that there is only one

way to calculate DSH payments and

hospital-specific DSH payment limits

when, in reality, Federal guidelines give

States some leeway in making these

calculations. The commenters are

concerned that auditors will interpret

their mandate very literally. One

commenter said the State may find itself

disagreeing with its auditor over the

definitions of certain requirements and

methodologies. Without additional CMS

clarification, the auditor may revert to a

reasonableness test when clarification is

lacking, which may not meet the

objectives of CMS in promulgating these

rules.

Response: We agree that States may

have some flexibility in interpreting the

payment provisions under their State

plan, and we expect that auditors will

consult with the State agency on such

interpretative issues. The calculation of

the hospital-specific limits is less

discretionary; DSH payments are

limited by Federal law to each

qualifying hospital’s specific

uncompensated care costs incurred in

furnishing hospital services to the

Medicaid and uninsured populations.

Comment: A few commenters said

this rule would adversely affect access

to health care for all children, not just

Medicaid beneficiaries. Hospitals may

be forced to close programs or clinics in

order to cover revenue losses and access

to care for all children, not just

Medicaid beneficiaries would be

limited. Children and their families

would be forced to seek care in

emergency rooms, which is a more

expensive visit for Medicaid and will

invariably result in ever more crowded

emergency rooms.

Response: DSH payments are a way to

provide additional funding to hospitals

that serve a disproportionate share of

low income patients, but the statute

limits DSH payments to each hospital to

the total uncompensated care costs in

serving the Medicaid and uninsured

populations. Since these limitations

have been in place since 1993, CMS

does not believe that any hospital could

reasonably have relied on receiving

funding above that level. CMS

recognizes that States must use

estimates to determine DSH payments

in a given year. The information

available through the reporting and

auditing program under this regulation

will assist States in ensuring that those

estimates do not generate DSH

payments that exceed the hospital-

specific DSH limit.

Comment: One commenter believes

the independent audit requirements

should be included in the existing

framework for audits of Federal

programs under the Single Audit Act

and include the five items requiring

verification in the OMB Circular A–133

Compliance Supplement. One

commenter suggested revision of OMB

Circular A–133 Compliance Supplement

to require the State Medicaid program’s

auditor test this reporting requirement

by ensuring the Medicaid program

received the information and audit

assurances from the hospitals,

accumulated the information, and

properly reported the results to the

Centers for Medicare and Medicaid

Services.

Response: The DSH audit and report

is a necessary element in the

administration of the Medicaid program.

The purpose of the audit is to ensure

that States make DSH payments under

their Medicaid program that are in

compliance with Section 1923 of the

Social Security Act. DSH payments are

a small portion of a State’s Medicaid

program and the OMB Circular A–133

direction is far larger in scope than this

audit.

It would be inappropriate to make the

requested revisions to OMB Circular A–

133 as OMB Circular A–133 specifically

exempts Medicaid payments made by

the State because these Medicaid

payments are not considered to be

‘‘federal awards expended under this

Section [Section 205, Basis for

Determining Federal Awards

Expended]’’. In addition, Subpart E also

indicates that the scope of the A–133

Audit shall cover the entire operations

of the auditee or a department, agency

or other organizational unit.

It should be noted that the Single

State Audit Agency qualifies as

operating independently from the

Medicaid Agency and, therefore, could

perform the DSH audit albeit separate

from the Single State Audit Act.

Comment: One commenter requests

confirmation that the audit would be a

Program Performance Audit of the State

as defined in Government Auditing

Standards, July 1999, Chapter 2, and as

such would not require verification by

a Certified Public Accounting firm as in

the case of financial audits that lead to

the expression of an opinion as defined

in Chapter 3. One commenter noted that

requiring the audits of the States to be

performed under Generally Accepted

Government Auditing Standards

(GAGAS) will ensure that the reports are

accurate and can be relied upon by third

party users. One commenter stated that

there are three sets of standards within

GAGAS: Financial Audits, Attestation

Engagements, and Performance Audits

and questioned which set of standards

would apply to the independent audit of

DSH payments.

Response: The standards in GAGAS

generally exceed the scope and

objectives of the DSH audit and report.

GAGAS rules govern the audits of

government organizations, programs

activities, functions or funds. In general,

government audits are either

performance audits, attestation

engagements or financial audits.

In financial and performance audits,

the focus is on the government entity,

its management of a program and/or the

financial management and reporting

systems associated with that program.

The DSH audit and report is a review of

a segment of the Medicaid program and

therefore does not fall within the scope

of a performance or financial audit

under GAGAS rules.

Attestation engagements may take a

narrower focus (less than full program

review) and, therefore, may seem to

more directly fit with the scope of the

DSH audit and report. However,

attestation agreements under GAGAS

rules include standards beyond non-

governmental attestation agreements

and these additional standards exceed

the scope of the DSH audit and report.

The DSH audit and report is a

necessary part of the administration of

the Medicaid program. The purpose of

the audit is to ensure that States make

DSH payments under their Medicaid

program that are in compliance with

Section 1923 of the Social Security Act.

The audit does not encompass the

review of the State’s Medicaid program,

it simply ensures that one portion of the

program is conducted in compliance

with Federal statutory limits. In

addition, the DSH audit will rely on

financial and cost report data provided

by hospitals that are subject to generally

accepted accounting principles as part

of their primary reporting function.

4. Section 1115 Demonstrations

Comment: One commenter believes

the proposed rule as presently drafted

will have a significant impact on

hospitals if an exemption is not

provided. The State has operated its

DSH program for a number of years in

strict accordance with the prescriptive

terms negotiated between the State and

CMS.

Response: The MMA imposes audit

and reporting requirements on all States

that make DSH payments. As part of this

process, CMS must determine if all

hospitals receiving DSH payments

under the Medicaid State plan actually

qualify to receive such payments and

that actual DSH payments do not exceed

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the hospital-specific DHS limit for that

same period. To the extent that a State

makes DSH payments under a waiver

demonstration, the State is not

exempted from the rules surrounding

DSH payments, particularly those at

1923(g) of the Act, and the audit and

reporting requirements would still

apply to that State.

Comment: Several commenters had

questions regarding how States that

operate their Medicaid programs under

Federal waivers would do their

Medicaid DSH reporting. The

commenters suggest the regulation

should specify that the DSH reporting

and audit requirements do not apply to

States that do not make DSH payments

or are not required to comply with DSH

requirements pursuant to Federal

waivers of DSH requirements. The

commenters urge CMS to exempt States

with 1115 waivers from this rule if the

waivers are based on certified public

expenditures (CPEs) for Medicaid and

DSH payments. One commenter stated

that the recent implementation of the

State’s 1115 waiver completely changes

the way DSH payments are calculated

for the State’s hospitals, therefore, this

audit requirement would be duplicative.

Response: These DSH audit and

reporting requirements apply to States

with Section 1115 demonstrations to the

extent that the waiver list associated

with the demonstration does not

explicitly waive the State from

compliance with Section 1923 of the

Act. The DSH audit and reporting time

frames for States with DSH programs

and Section 1115 demonstrations are

subject to the same time frames as those

States without 1115 demonstrations.

The only exception would be if a State

has a demonstration project under

Section 1115 that includes a waiver of

the requirements of Section 1923 so that

the State does not make Medicaid DSH

payments at all. In that instance, since

there are no DSH payments, the DSH

audit and reporting requirements would

not apply.

5. Time Period Subject to DSH Audit

and Report

Comment: One commenter asked for

clarification of the treatment of DSH

payments when a State makes a portion

of the fiscal year’s DSH payments after

the end of its fiscal year. One

commenter asked whether, when DSH

payments are made on an accrual

accounting basis and adjusted after the

report has been filed, whether the State

must file a corrected report. Several

commenters indicated that dissatisfied

hospitals have the ability to appeal their

payments, a process that could extend

the period of time before the final

payment is known. They asked how to

report regular Medicaid rate payments

that are not known at the end of any

given State fiscal year. One commenter

said that many States allow Medicaid

providers up to a year to submit claims

following the date of service. As such,

the commenter indicated that there is

often a significant lag in payments to

Medicaid hospitals and uncompensated

care figures would be overstated if only

cost incurred and payments received

during a SFY are considered.

Response: Since the deadline for

reporting the audit findings has been

extended to at least three full years after

the close of the Medicaid State plan rate

year subject to audit, hospitals would

have received all Medicaid and DSH

payments associated with that Medicaid

State plan rate year. This two-year

period accommodates the one-year

concern expressed in many comments

regarding claim lags and is consistent

with the varying hospital cost reporting

periods and adjustments and

accommodates DSH payments made

from different allotment years.

It should be noted that, to the extent

that a State makes a retroactive

adjustment to non-DSH payments after

the completion of the audit for that

particular Medicaid State plan rate year,

the hospital would necessarily have

received and booked the revenues in a

subsequent Medicaid State plan rate

year. Under these circumstances, the

revenue adjustments would be

measured during the audit of the

Medicaid State plan rate year in which

the revenues were received.

The treatment of post-audit Medicaid

payments, including regular Medicaid

rate payments, supplemental and

enhanced payments, Medicaid managed

care payments, DSH, and ‘‘self-pay’’

revenues and other collections

including liens would be treated as

revenues applicable to the Medicaid

State plan rate year in which they are

received.

Comment: Several commenters noted

that the State is required to indicate the

Medicaid Managed Care Organization

Payments paid to the hospital for the

SFY being reported. Claims may be

submitted to the Medicaid Managed

Care Organization (MCO) for payment

up to one year after the date of service.

Therefore, payments made by the MCO

for claims with date of service in the

SFY may be submitted up to a year after

the service date by the hospital. The

payments would not be available before

12 months after the SFY at a minimum.

Obtaining the amount paid by the MCO

for the SFY being reported is not

possible by the end of the SFY.

Response: Based on the modifications

to the audit and reporting deadlines and

the Medicaid two-year timely filing

claim limit, there should not be a

significant adjustment to Medicaid

payments that would warrant a

corrected report. To the extent that such

an adjustment to Medicaid payments

occurs, no corrected audit or report is

necessary. To the extent that a State

makes a retroactive adjustment to non-

DSH payments after the completion of

the audit for that particular Medicaid

State plan rate year, the hospital would

necessarily have received and booked

the revenues in a subsequent Medicaid

State plan rate year. Under these

circumstances, the revenue adjustments

would be measured during the audit of

the Medicaid State plan rate year in

which the revenues were received.

6. Verification I—Proper Reduction to

Uncompensated Care Cost

Comment: Several commenters

believe that different parts of the

regulation define ‘‘uncompensated care

costs’’ differently, and they should be

modified and made consistent. The

commenters provided suggested

changes in an effort to eliminate a

contradiction between the definitions,

contained in §§ 447.299(c)(15) and

455.204(c). Several commenters believe

that Verification #1 requires each

hospital receiving DSH payments

reduce its uncompensated care costs by

the amount of DSH payments received

in any given year. The commenters

argued that the statute clearly defines

the DSH limit so that DSH payments

should not be offset against the hospital

specific limits. They noted that the

language of Section 1923(j) only

requires the auditors to verify ‘‘‘the

extent to which’’ the costs have been

reduced. Thus, if costs have not been

reduced at all, the auditor would verify

that fact and the audit requirement

would be met. The regulatory language

should be revised to be consistent with

the statutory requirement. Other

commenters stated that the proposed

rule requires an audit verification that

each disproportionate share hospital in

the State has reduced its

uncompensated care costs in order to

reflect the total amount of claimed DSH

expenditures. They are not clear how a

hospital can demonstrate this, as costs

generally are not reduced by

expenditures. One commenter

recognizes that CMS likely based its

formulation of the verification

requirement on the statutory language,

which contains similarly confusing

terminology, requiring the audit to

verify ‘‘the extent to which hospitals in

the State have reduced their

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uncompensated care costs to reflect the

total amount of claimed expenditures

made under [the Medicaid DSH

statute].’’ The commenter suggests that

a more useful interpretation of this

statutory language would be to require

verification that DSH payments have not

exceeded uncompensated care costs.

Response: The purpose of the statute

is for States to audit actual DSH

payments made under the approved

Medicaid State plan against actual

eligible uncompensated hospital costs

for the same time period. In reviewing

the meaning of the statutory language,

we have determined that verification 1

is designed to ensure that hospitals are

able to fully retain the DSH payments

made to them for the uncompensated

cost of providing inpatient and

outpatient hospital services to Medicaid

beneficiaries and individuals with no

source of third party coverage net of all

Medicaid payments received and

payments by or on behalf of individuals

with no source of third party coverage

for the services they received. We have

revised the regulation text to make this

clearer.

7. Verification 2—Calculation of Eligible

Uncompensated Care Cost, Prospective

Estimates Versus Reconciled Cost

Comment: Many commenters

indicated that for States that determine

the individual hospital DSH limit

prospectively, the one-year filing

requirement may be attainable (at least

after these rules take effect) if the

requirement is only to validate the

accuracy of the prospective calculation.

But for those States that do base the

determination on current year costs, a

report based on a final audit of hospital

cost reports could not be submitted

within one year. Final settlement of

hospitals’ cost reports is typically

contingent upon completion by a

Medicare intermediary of audits—a

process that can take several years. CMS

should allow these States additional

time to submit the audit certifications,

so these certifications can be based on

the final settled cost report.

Alternatively, CMS could clarify the

rule to permit the required report to be

based on a hospital’s as-filed cost report.

If necessary, there could be later

reconciling adjustment after the cost

report is finally settled and an audit

certification can be made.

Response: CMS recognizes that States

may need to use estimates to determine

DSH payments made by States to

individual qualifying hospitals in an

upcoming Medicaid State plan rate year.

Section 1923(j) of the Act requires States

to report and audit hospital-specific

DSH payments and hospital-specific

uncompensated care costs. To meet this

requirement, States must perform audits

associated with defined periods of time

and must identify the actual costs

incurred and payments received during

that defined time period. To respond to

comments on the practicality of audit

timing, we have modified the time

frame for the audit and reporting

requirements as discussed above. We

also note that we expect that reports and

audits will be based on the best

available information. If audited

Medicare cost reports are not available,

the DSH report and audit may need to

be based on Medicare cost reports as

filed.

Comment: Numerous States indicated

that if the audit requirement is simply

to verify the manner in which the DSH

limit was applied prospectively, the

one-year timeline may be realistic for

years subsequent to the adoption of a

final regulation for States using

prospective methods, and hospitals with

fiscal years different than the State’s

should not present as much of a

concern, because the prospectively

determined limit would have been

calculated based on cost reports for

earlier time periods. Accordingly, the

commenters request that CMS clarify

that the proposed regulations are not

intended to disturb the use of

prospective calculations to apply the

individual hospital DSH limit.

Response: This regulation is not

intended to require States to implement

retrospective DSH methodologies. CMS

recognizes that States may need to use

estimates to determine DSH payments

in an upcoming Medicaid State plan

rate year. However, Section 1923(j) of

the Act requires confirmation that DSH

payments made by States to individual

qualifying hospitals do not exceed the

actual cost limitation imposed by

Congress.

Based on the revisions to the auditing

and reporting timeframes, which, in

part, requires the Medicaid State Plan

rate year 2005 and 2006 audits to be

completed no later than the last day of

Federal fiscal year 2009, it is feasible for

the audit to measure eligible

uncompensated care costs incurred

against the DSH payments received in a

given time frame. The transition period

included in the final regulation ensures

that States may adjust those estimates

prospectively to avoid any immediate

adverse fiscal impact and to ensure that

future DSH payments do not exceed the

hospital-specific DSH limits.

Comment: Several commenters noted

that there is no current law requiring

that DSH payments made in a fiscal year

correspond to costs from that same

fiscal year. In addition, CMS has never

before imposed a reconciliation

requirement. A few commenters stated

Section 1923(g) of the Act does not

require that the OBRA 1993 limits be

recalculated and reapplied to reflect

subsequently available year-of-service

data.

Response: Section 1923(j) of the Act

requires States to report and audit

specific payments and specific costs.

These reports must assess compliance

with the statutory hospital-specific

limitations on the level of DSH

payments to which qualifying hospitals

were entitled. Section 1923(g)(1)(A)

specifies that DSH payments cannot

exceed, ‘‘the costs incurred during the

year of furnishing hospital services (as

determined by the Secretary and net of

payments under this title, other than

under this Section, and by uninsured

patients * * *)’’. The goal of the

regulation is to audit DSH payments

made under the authority of the

Medicaid State plan and to ensure that

States do not make DSH payments that

exceed the hospital-specific cost limit

defined under the Omnibus Budget

Reconciliation Act of 1993.

CMS recognizes that States may need

to use estimates to determine DSH

payments in an upcoming Medicaid

State plan rate year. However, the

statute requires confirmation that DSH

payments do not exceed the actual cost

limitation imposed by Congress.

Comment: Numerous commenters

stated that the DSH reporting and

auditing requirements contained in

MMA were intended only to ensure

compliance with the DSH requirements,

not to change the DSH requirements

themselves. They asserted that nothing

in the statute either requires or

encourages a change in CMS’s

longstanding policy that DSH payments

can be based on a prospective estimate

of a hospital’s uncompensated care

costs. They argued that the statute does

not require that payments be based on

actual audited costs and nothing in the

statute requires CMS to impose this

dramatic shift in policy. This approach

allows for adjustment during future

years for reconciling DSH payments to

actual costs. Numerous commenters

said that CMS has always acknowledged

that the law permits States to base their

DSH payments on a prospective

estimate of a hospital’s uncompensated

care costs for a given year, derived from

the hospital’s costs in prior years, and

many if not most States utilize this

approach. A few commenters noted that

CMS has allowed States flexibility to

use estimates of current year

uncompensated costs. One commenter

stated the statute provides that a DSH

payment adjustment ‘‘during a fiscal

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year’’ is considered non-compliant with

the limit if the adjustment exceeds the

uncompensated costs for Medicaid and

uninsured patients incurred ‘‘during the

year’’ and that CMS appears to be basing

this burdensome reconciliation

requirement solely on this language.

The commenter believes that while the

provision does limit current year

payments to current year costs, nothing

in the language mandates the use of

actual audited costs. Indeed, the

commenter indicated that reliable

estimates based on audited prior year

data will produce sufficient controls on

the DSH payments and fulfill Congress’

intent of limiting DSH expenditures on

a hospital-specific basis.

Response: Section 1923(g)(1)(A) of the

Act specifies that DSH payments cannot

exceed, ‘‘the costs incurred during the

year of furnishing hospital services (as

determined by the Secretary and net of

payments under this title, other than

under this Section, and by uninsured

patients * * *)’’. The goal of the

regulation is to audit DSH payments

made under the authority of the

Medicaid State plan and to ensure that

States do not make DSH payments that

exceed the hospital-specific cost limit

defined under the Omnibus Budget

Reconciliation Act of 1993.

Section 1923(j) of the Act expressly

requires States to report and audit

specific payments and specific costs. As

part of this process, CMS must obtain all

information necessary to determine if all

hospitals receiving DSH payments

under the authority of the approved

Medicaid State plan actually qualify to

receive such payments and that actual

DSH payments made by States do not

exceed the hospital-specific limit for the

same period. DSH payments are limited

by Federal law to each qualifying

hospital’s specific eligible

uncompensated care cost limit.

CMS recognizes that States may need

to use estimates to determine DSH

payments in an upcoming Medicaid

State plan rate year. However, the

statute requires confirmation that DSH

payments do not exceed the actual cost

limitation imposed by Congress. CMS

has modified the regulation to include

a transition period to ensure that States

may adjust those estimates

prospectively to avoid any immediate

adverse fiscal impact and to ensure that

future DSH payments do not exceed the

hospital-specific DSH limits.

Auditing actual payments made in a

given year against estimated hospital

uncompensated care costs in that same

year would not ensure that DSH

payments did not exceed actual

uncompensated care costs. Several

Inspector General audits attest to the

discrepancies in the results. In fact,

measuring the difference between DSH

payments and estimates of

uncompensated care costs would never

produce a true determination of whether

or not DSH payments in a given year

exceeded the Congressionally defined

cost limit for that year.

Comment: Numerous commenters

indicated that States cannot determine

the actual uncompensated care costs

prior to or during the year that DSH

payments are made. The commenters

stated that this could prevent States

from making prospective estimates of

Medicaid shortfalls and uninsured

costs. The commenters recommend that

States be allowed to continue to utilize

historical information to perform

prospective DSH limit calculations.

Response: CMS recognizes that States

may need to use estimates to determine

DSH payments in an upcoming

Medicaid State plan rate year. However,

CMS does not have authority to

authorize payments that exceed

statutory hospital-specific limits and

those limits are based on actual

uncompensated care costs. The goal of

the regulation is to audit DSH payments

made under the authority of the

Medicaid State plan and to ensure that

States do not make DSH payments that

exceed those statutory hospital-specific

cost limits. The information necessary

for such confirmation is readily

available to hospitals and the State

based on existing financial and cost

reporting tools.

Comment: Many commenters noted

that the proposed methodology would

be inconsistent with their approved

Medicaid State plan and conflicts with

past CMS guidance and practice. They

indicate that a retrospective audit to

determine the accuracy of the estimates

used to determine uncompensated care

costs based on the approved prospective

methodology would require changing

the State plan. They ask how this audit

should be conducted by States that

already have CMS approval for use of

prospective methodologies, not to

mention that a retroactive audit could

significantly affect already approved

programs.

Response: This regulation is not

intended to require States to implement

retrospective DSH methodologies. CMS

recognizes that States may need to use

estimates to determine DSH payments

in an upcoming Medicaid State plan

rate year. However, CMS cannot

authorize DSH payments that exceed the

limitations imposed by Congress. States

will have to determine how to best

ensure that prospective DSH

methodologies do not result in

payments that exceed those limitations,

either by revising those methodologies

or by providing for reconciliation of

prospective payments with those limits.

CMS as always is available to offer

technical assistance to States in

developing such methodologies.

CMS has modified the regulation to

include a transition period to ensure

that States may adjust prospective

estimates to avoid any immediate

adverse fiscal impact.

8. Fiscal Impact—Effect on Federal

Financial Participation

Comment: A few commenters

questioned whether CMS will withhold

Federal Financial Participation from the

States until its Independent Audit of

DSH Payments is completed and filed

with CMS.

Response: The final regulation defines

the time periods applicable to the

auditing and reporting of DSH

payments. These deadlines provide

sufficient time for States to comply with

the statute. The final regulation also

provides that Federal financial

participation for DSH payments is not

available to any State that has not

submitted its required audits and

reports.

Comment: A few commenters said

that the proposed regulation states the

penalty for failure to provide the

required information by the stipulated

deadline but does not address the

question of whether or not CMS will

require States to return DSH funds if the

information collected is unsatisfactory

to CMS.

Response: The goal of the regulation

is to audit DSH payments made under

the authority of the Medicaid State plan

and to ensure that States do not make

DSH payments that exceed the hospital-

specific cost limit defined in Section

1923(g) of the Act. CMS has modified

the regulation to include a transition

period to ensure that States have an

opportunity to refine audit and

reporting practices and determine the

impact on the State DSH methodologies.

The final regulation provides that

Federal financial participation for DSH

payments is not available to any State

that has not submitted its required

audits and reports. However, CMS

intends to work with States to ensure

that the audits and reports meet all

statutory and regulatory requirements.

Comment: A few commenters asked

for clarification on the actions that may

be taken against States if States are not

found to be in compliance with all

verifications required as part of the

audit (§ 455.204(c)).

Response: The final regulation defines

the time periods applicable to the

auditing and reporting of DSH

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payments. These deadlines provide

sufficient time for States to comply with

the statute. The final regulation also

provides that Federal financial

participation in DSH payments is not

available to any State that has not

submitted its required audits and

reports. As mentioned above, CMS

intends to work with States to ensure

that the audits and reports meet all

statutory and regulatory requirements.

Comment: A few commenters said the

proposed regulation is silent on the

question of post-audit adjustments. In

some cases, audits will reveal actual

costs that were not included in the

estimated uncompensated care costs

provided. In such cases, provided there

are funds remaining in the State’s DSH

allotment or other money available for

such purposes, the commenters

recommended that States should be

permitted to compensate hospitals.

Response: CMS has modified the

regulation to lengthen the time frame for

preparation of the required report and

audit, and to include a transition period

to ensure that States have time to refine

their audit processes. The instance of

post audit adjustments will be

significantly lessened as a result.

9. Verification Three—Data Sources

Used in Calculation of Eligible

Uncompensated Care Costs

Comment: Many commenters

requested clarity on the mechanics of

reconciliation. Although the MMA

requires an annual certified public

audit, the proposed rule is unclear about

how the audit will reconcile DSH

payments and the hospitals’ calculation

of actual compensated care. Hospitals

submit accurate data on Medicaid and

uncompensated care at a point in time.

Data can change over time as claims and

payment appeals are settled.

Response: We believe that the three-

year period allotted for completion of

the audit accommodates these concerns.

Sufficient time is available to ensure

that necessary cost reports and other

financial data are available to make

these determinations. This

accommodates the concern expressed in

many comments regarding claims lags

and is consistent with the varying

hospital cost report periods and

adjustments. CMS has developed a

General DSH Audit and Reporting

Protocol to provide guidance to States,

DSH hospitals and auditors in the

completion of the DSH audit. This

protocol provides general instructions

regarding the calculations the auditor

will make based on the data provided.

10. Verification Four—Proper

Accounting of Medicaid and Uninsured

Revenues

Comment: A few commenters noted

that the audit and reporting

requirements are unnecessary in several

States where the federal DSH allocation

to the States has consistently fallen

short of the State’s aggregate DSH limit

by at least $200 million in each of the

past five years.

Response: The Statewide aggregate

DSH allotment is only one of the

limitations on DSH payments. The audit

and reporting requirements also concern

hospital-specific limitations, which

involve review of specific payments and

specific costs by individual hospital.

The goal of the audit and report is to

ensure that DSH payments made by

States under the authority of the

approved Medicaid State plan do not

exceed the hospital-specific

uncompensated care cost limit as

required by Section 1923(g) of the Act.

Irrespective of a State’s aggregate DSH

allotment, or overall levels of

uncompensated care, a DSH hospital

may not receive more in DSH payments

than the individual hospital’s eligible

uncompensated care costs.

Comment: A few commenters stated

that the financial exposure for the

Federal government through the use of

estimated rather than reconciled data is

not significant, as total DSH

expenditures are limited by the

Statewide DSH allotment. The benefit

obtained through the reconciliation

mandate is therefore far outweighed by

its costs.

Response: As discussed above, the

Statewide DSH allotment and hospital-

specific limitations are separate and

distinct. Section 1923(g)(1)(A) of the Act

specifies that DSH payments cannot

exceed, ‘‘the costs incurred during the

year of furnishing hospital services (as

determined by the Secretary and net of

payments under this title, other than

under this Section, and by uninsured

patients * * *)’’. Section 1923(j) of the

Act and this regulation require States to

audit DSH payments made under the

authority of the Medicaid State plan and

to ensure that States do not make DSH

payments that exceed this hospital-

specific cost limit.

The data elements necessary for the

State to complete the DSH audit and

report should, in part, be information

the State already gathers to administer

the DSH program. Thus, CMS believes

that the burden on the State will not be

substantial. The State will have some

additional cost associated with engaging

an auditor but that cost is eligible for

Federal administrative matching funds.

Comment: Numerous commenters

expressed concern about the proposed

rule because adoption would greatly

reduce the DSH payments to hospitals.

Such a reduction would eliminate some

of the future services hospitals provide.

The largest burden would be on the

impoverished communities since many

of those people could not travel to

receive those services elsewhere.

Response: Hospitals should not

realize a significant reduction in DSH

payments based on the audit and

reporting requirements. Moreover, any

reduction would simply be the result of

ensuring that limited State DSH funds

are used appropriately and meet the

requirements of the Medicaid statute.

This rule will help to ensure that

Medicaid DSH payments appropriately

recognize allowable unreimbursed

Medicaid and uninsured

uncompensated care costs. The DSH law

was enacted to recognize needs of

hospitals that serve a disproportionate

number of Medicaid and low-income

patients. In 1993, Congress imposed

hospital-specific limitations on the level

of DSH payments to which qualifying

hospitals were entitled. Section

1923(g)(1)(A) specifies that DSH

payments cannot exceed, ‘‘the costs

incurred during the year of furnishing

hospital services (as determined by the

Secretary and net of payments under

this title, other than under this Section,

and by uninsured patients * * *)’’.

Congress clearly identified the DSH

limit as specific to the costs incurred for

providing certain hospital services to

Medicaid individuals and individuals

with no source of third party coverage.

Comment: Several commenters

expressed concern that the results of

audits may be used to attempt to take

back money from States and/or

hospitals for failing to meet standards

that they never knew existed, long after

hospital’s fiscal year is over. If the State

would be required to return DSH money

to the Federal Government, this would

necessitate the return of DSH money to

the State by hospitals. This would be

extremely burdensome for hospitals,

which undoubtedly would already have

spent that money serving their low-

income and uninsured patients. One

commenter said that after-the-fact

exposure is untenable for States with

balanced budget requirements.

Response: CMS has modified the

regulation to include a transition period

to ensure that States may adjust

uncompensated care estimates

prospectively to avoid any immediate

adverse fiscal impact and to assist States

in ensuring that future DSH payments

do not exceed the hospital-specific DSH

limit. To permit States an opportunity to

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develop and refine audit procedures,

audit findings from Medicaid State plan

rate year 2005–2010 will be limited to

use for the purpose of estimating

prospective hospital-specific

uncompensated care cost limits in order

to make actual DSH payments in the

upcoming Medicaid State plan rate

years. CMS is not requiring retroactive

collection for Medicaid State plan rate

years that have already passed. By using

that time to improve State DSH payment

methodologies, States may avoid

circumstances in which DSH payments

that exceed Federal statutory limits

must be recouped from hospitals. CMS

will also be available to provide

necessary technical assistance to States

to ensure proper implementation of

these requirements.

Comment: One commenter said that

their State plan permitted DSH

payments to DSH-eligible, out-of-State

hospitals that service the State’s

Medicaid recipients. The commenter

requested clarity regarding the State’s

responsibility in terms of hospital-

specific DSH limit calculations and

auditing and reporting requirements

insofar as these out-of-State hospitals

are concerned.

Response: A State is required to audit

payments and costs for only those DSH

hospitals that are located within the

State. This method will allow the

auditor to recognize DSH payments

received from other States in addition to

the DSH payments received by that

hospital under the ‘‘home-State’s’’

approved Medicaid State plan.

For States that make DSH payments to

hospitals in other States, the State must

include in the reporting requirements

the DSH payments made to hospitals

located outside of the State but would

not be required to audit those out-of-

State DSH hospital’s total DSH

payments/total eligible uncompensated

care costs. This method will ensure that

no DSH hospital is audited more than

one time per year for purposes of the

DSH auditing and reporting

requirements under Section 1923(j) of

the Act.

Comment: A few commenters asked

whether CMS will require States to

include in the report information on

patients from another State.

Response: The goal of the audit and

report is to ensure that DSH payments

made by States under the authority of

the approved Medicaid State plan do

not exceed the hospital-specific cost

limit. In order to do this, all applicable

revenues must be offset against all

eligible costs. For purposes of

determining the hospital-specific DSH

limit, revenues would include all

Medicaid payments made to hospitals

for providing inpatient and outpatient

hospital services to Medicaid

individuals (irrespective of the State in

which the individual is eligible) and all

payments made by or on behalf of

patients with no source of third party

coverage for the inpatient and

outpatient hospital services they

received. For purposes of the DSH audit

and to determine whether hospital-

specific cost limits have been exceeded,

all DSH payments made by States and

received by a hospital would need to be

offset against the determined eligible

uncompensated care cost limit.

Any Medicaid payments received by

a hospital from any Medicaid agency (in

state or out of state) should be counted

as revenue offsets against total incurred

Medicaid costs. Any DSH payments

received by a hospital from any

Medicaid agency (in state or out of state)

must be counted as an offset against

uncompensated care for purposes of the

DSH audit and ensuring that the

hospital-specific DSH limit is not

exceeded.

Comment: One commenter requested

instructions for reporting information to

CMS related to DSH payments on an

annual basis. Annual reporting

requirements also contain specific

reporting requirements related to DSH

payments. The commenter asked for

clarification as to whether the proposed

rules supersede the reporting

requirements detailed in the March 26,

2004, Federal Register Notice [CMS–

2062–N].

Response: All DSH reporting

requirements published under CMS–

2062–N are superseded by Section

1923(j) of the Act and this implementing

regulation.

Comment: A few commenters noted

the proposed § 447.299(c)(8) incorrectly

refers to Section 1923(g) instead of

referring to the entire Section 1923.

Response: The regulation has been

modified to reflect the correct statutory

citation.

Comment: A few commenters noted

that the Reporting form was not

included with the proposed rules and

requested a copy of the example

Reporting form.

Response: A modified Reporting form

is included in this regulation.

Comment: One commenter noted that

in FY 2003, total Federal DSH

allotments to States totaled just under

$9 billion. The commenter requests

copies of any audit findings and/or

programs associated with CMS’ historic

and ongoing efforts to audit and/or

verify the figures used by States to

justify Federal funds.

Response: The commenter may

request information consistent with the

authority of the Freedom of Information

Act.

Comment: One commenter noted

CMS has not pointed to any systematic

findings that call into question the

reasonableness of approved

methodologies.

Response: The statutory authority

under MMA instructed States to report

and audit specific payments and

specific costs. This rule does not call

into question the reasonableness of

approved methodologies; it simply

implements the statutory reporting and

auditing requirements to determine

whether DSH payments were proper

with respect to the specific DSH

hospitals that were paid.

C. Regulatory Impact

Comment: Several commenters stated

that there would be a significant burden

on the States for the reporting

requirement in terms of time and effort

to prepare and submit the required

information and that CMS’ estimate of

the time needed for the proposed

§ 447.299(c) reporting requirements is

underestimated. One commenter

questioned whether this estimate is

based upon an assumption by CMS that

States have historically been collecting

and verifying the information required

in the report to CMS. The commenter

requested that CMS provide details on

how this estimate was calculated.

Response: CMS believes that since the

audit relies on documents already

available to hospitals that the audit data

burden will neither be significant nor

costly. The reporting of each year’s

audit findings will be achieved through

the completion of a one-page Reporting

form. The elements necessary for this

report will be extrapolated from the data

and analysis performed by the auditor

and will be based on existing source

documentation.

Comment: One commenter noted that

if a State utilizes different criteria for

qualifying hospitals as a DSH than the

Medicaid Inpatient Utilization Rate or

the Low-Income Utilization Rate, then

these two calculations would be

unnecessary. The commenter asserted

that requiring a State to calculate and

submit the Medicaid Inpatient

Utilization Rate and Low-Income

Utilization Rate calculations would be

an additional burden. The commenter

asked if CMS considered this added

effort in the estimate of States’ time and

effort to prepare and submit the

required information.

Response: Section 1923(j) of the Act

imposes audit and reporting

requirements on States regarding

payments to DSH eligible hospitals. As

part of this process, CMS must

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determine if all hospitals receiving DSH

payments under the Medicaid State plan

actually qualify to receive such

payments. Sections 1923(b)(1)(A) and

(B) of the Act require that all hospitals

meeting the Medicaid Inpatient

Utilization Rate (MIUR) or the Low

Income Utilization Rate (LIUR)

calculated therein are deemed DSH

hospitals. This is the minimum Federal

standard. States have the right to use

alternative qualifying criteria that are

broader. States that use only the LIUR

or only the MIUR to determine DSH

qualification should report on the

statistic utilized in the approved

Medicaid State plan for the Medicaid

State plan rate year under audit. State

using a broader methodology should use

that statistic in lieu of the MIUR or

LIUR.

We believe that since the audit relies

on documents already available to

hospitals that the audit data burden will

neither be significant nor costly. The

reporting of each year’s audit findings

will be achieved through the completion

of a one page Reporting form. The

elements necessary for this report will

be extrapolated from the data and

analysis performed by the auditor and

will be based on existing source

documentation.

Comment: A few commenters believe

that the information collection burden is

significant, that in many cases the

information requested is ambiguous or

inaccurate and there are likely more

efficacious means of implementing the

statutory requirements, for instance, by

more closely tracking the S–10

categories. The commenters urge CMS

to revise the regulation to reduce the

paperwork burden associated with the

new audit and reporting requirements

and avoid imposing unnecessary

additional administrative costs on States

and hospital providers by considering

less burdensome means of collecting

necessary information.

Response: Hospitals will be required

to provide the State with data extracted

from existing cost and financial

reporting tools as well as copies of the

source documents. The State must

provide these data as well as Medicaid

Management Information Systems and

Medicaid State plan information to the

auditor. The source documents would

include the Medicare 2552–96 cost

report, audited hospital financial

statements and hospital accounting

records in combination with

information provided by the State’s

MMIS.

We believe that since the audit relies

on documents already available to

hospitals that the audit data burden will

neither be significant nor costly. The

reporting of each year’s audit findings

will be achieved through the completion

of a one page Reporting form. The

elements necessary for this report will

be extrapolated from the data and

analysis performed by the auditor and

will be based on existing source

documentation.

Worksheet S–10 is not part of the

Medicare 2552–96 step-down process

used to allocate inpatient and hospital

outpatient costs. The cost allocation

process utilized in the Medicare 2552–

96 cost report is considered a key

component of determining Medicaid

and uninsured hospital costs.

Comment: One commenter said that

while collection activities in response to

audit requirements are exempt from the

Paperwork Reduction Act, CMS should

acknowledge that the new substantive

requirements that it is announcing in

the form of audit standards will impose

independent new paperwork burdens

on States separate and apart from the

response to the audits. For example,

CMS’ proposal that the audits verify that

DSH payments do not exceed actual

year costs will impose a massive new

DSH reconciliation requirement on

States so that the audits do not conclude

that they have exceeded the hospital-

specific DSH limits. Therefore, the

commenters believe CMS should

evaluate the paperwork burden

associated with new standards

announced as part of the audit

requirements as well as the reporting

requirements.

Response: The goal of the regulation

is to audit DSH payments made under

the authority of the Medicaid State plan

and to ensure that States do not make

DSH payments that exceed the hospital-

specific cost limit defined under Section

1923(g) of the Act. The information

necessary for such confirmation is

readily available to hospitals and the

State based on existing financial and

cost reporting tools. The reporting of

each year’s audit findings will be

achieved through the completion of a

one page Reporting form. The elements

necessary for this report will be based

on existing source documentation.

Comment: Several commenters noted

that the proposed rules will have a

significant economic impact and

therefore, the Regulatory Flexibility Act

(RFA) requires CMS to analyze options

for regulatory relief of small businesses,

such as hospitals. The newly announced

DSH requirements contained in the

proposed rule and discussed throughout

this comment letter may result in

decreased DSH funding for some

hospitals, jeopardizing their ability to

provide broad access to services for the

uninsured and underinsured.

Response: CMS believes that this rule

would not have a significant economic

impact on a substantial number of small

entities. The regulation requires States

to audit and report DSH payments made

to DSH eligible hospitals in a given

Medicaid State plan rate year. Hospitals

will only be required to provide data to

States from existing primary source

documents such as the Medicare 2552–

96 cost report, audited hospital

financials, and hospital accounting

records. The regulation also includes a

transition period to ensure that no

immediate fiscal impact is realized by

States or hospitals.

Comment: Many commenters noted

that the cost for hospital audits can

reach $50,000 or higher per hospital and

therefore contended that the estimate

clearly suggests the economic impact of

this one audit requirement will meet the

test of a major rule under the Regulatory

Flexibility Act.

Response: Although the State will

have some additional cost associated

with engaging an auditor, but that cost

is eligible for Federal administrative

matching funds. The DSH audit and

report is a necessary element in the

administration of the Medicaid program

to ensure that hospital-specific DSH

limits are not exceeded by DSH

payments made under the approved

Medicaid State plan for a given year.

Hospitals should not incur additional

costs as they will be required to provide

the State with data extracted from

existing hospital cost and financial

reporting tools supplemented with State

generated data from the State’s

Medicaid Management Information

System.

IV. Changes to the Proposed Rule

As explained in our responses to

comments, we have made the following

revisions to the DSH Auditing and

Reporting regulations published in the

August 26, 2005 Proposed Rule:

A. Reporting Requirements

1. Audit Year and Submission Dates

Defined

CMS has modified the regulation at

§ 447.299(c) to address concerns

regarding the inability to complete the

audit and report within a year from the

end of SFY 2005. The regulation has

been modified to identify the Medicaid

State plan rate year 2005 as the first

time period subject to the audit. The

basis for this modification is recognition

of varying fiscal periods between

hospitals and States. The Medicaid State

plan rate year is the one uniform time

period under which all States must

estimate uncompensated costs in order

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to make DSH payments under the

approved Medicaid State plan. The

regulation has also been modified to

identify that each audit report must be

submitted to CMS within 90 days of the

completion of the independent certified

audit. The reports associated with

Medicaid State plan rate years 2005 and

2006 are due no later than December 31,

2009. Each subsequent audit report is

due no later than December 31st of the

FFY ending three years after the

Medicaid State plan rate year under

audit.

2. Report Data Elements

CMS has modified the regulation at

§ 447.299(c) to address many comments

concerning the necessary data elements

to fulfill the audit and reporting

requirements. Specifically, the

regulation has been modified to remove

the following data elements:

1. Medicare provider number.

2. Medicaid provider number.

3. Type of hospital.

4. Type of hospital ownership.

5. Transfers.

6. Medicaid eligible and uninsured

individuals.

In addition, the regulation at

§ 447.299(c) has been modified to add or

clarify the following data elements

which are necessary to fulfill the

auditing and reporting requirements:

1. Identification of facilities that are

Institutes for Mental Disease (IMD)

receiving DSH payments;

2. Identification of out-of-state

hospitals receiving DSH payments;

3. State estimate of hospital-specific

DSH limit;

4. Medicaid inpatient utilization rate

(if applicable);

5. Low-income utilization rate (if

applicable);

6. State-defined DSH eligibility

statistic (if applicable);

7. Total inpatient and outpatient

Medicaid payments;

8. Total inpatient and outpatient

Medicaid cost of care;

9. Total Medicaid inpatient and

outpatient uncompensated care;

10. Total inpatient and outpatient

uninsured and self-pay revenues;

11. Total applicable Section 1011

payments received by the hospital;

12. Total inpatient and outpatient

uninsured cost of care;

13. Total inpatient and outpatient

uninsured uncompensated care;

14. Total eligible inpatient and

outpatient uncompensated care.

The Reporting form has also been

modified to reflect these modifications.

B. Audit Requirements

1. Definitions

CMS has modified the regulation at

§ 455.201 to clarify the definition of

independent certified audit to mean that

the Single State Audit Agency or any

other CPE firm that operates

independently from the Medicaid

agency is eligible to perform the DSH

audit and to define Medicaid State plan

rate year as the time period subject to

the audit. The definition of State fiscal

year has been removed.

2. Certified Independent Audit

Requirements

Based on many comments regarding

the potential immediate adverse fiscal

impact of the DSH audit on States, CMS

has modified the regulation at

§ 455.204(a) to indicate conditions

related to the audit that States must

meet in order to receive Federal

disproportionate share hospital

payments. A transition period related to

audit findings for Medicaid State plan

rate year 2005 through 2010 is included

in this Section. Instructions regarding

audit findings and their applicability to

Medicaid State plan rate year 2011

forward are also included. The

modifications are as follows:

• Transition period. Findings of the

2005 and 2006 Medicaid State plan rate

year audit and report will be available

to States during their SFY 2010. These

findings must be taken into

consideration for Medicaid State plan

rate year 2011 uncompensated care cost

estimates and associated DSH payments.

• Audit findings associated with

Medicaid State plan rate years 2007

through 2010 must be similarly

considered for Medicaid State plan rate

years 2012 through 2015. Findings from

Medicaid State plan rate year 2005–

2010 will be used only for the purpose

of determining prospective hospital-

specific eligible uncompensated care

cost limits and associated DSH

payments.

• DSH payments that exceed the

hospital-specific eligible

uncompensated care cost limit related to

Medicaid State plan rate year 2011 must

be returned to the Federal government

or redistributed by States to other

qualifying hospitals.

In response to many public comments

regarding the inability of States to

complete the audit within one year of

the end of the State fiscal year, CMS has

modified the regulation at § 455.204(b)

to indicate a new time period for the

submission of the independent certified

audit. The new time period is as

follows:

• Identify that the Medicaid State

plan rate year 2005 and 2006 audits

must be completed no later than the last

day of Federal fiscal year 2009. Each

subsequent audit beginning with

Medicaid State plan rate year 2007 must

be completed by the last day of the

Federal fiscal year ending three years

from the Medicaid State plan rate year

under audit. Therefore, for the 2007

Medicaid State plan rate year, the audit

must be completed by the last day of

Federal fiscal year 2010.

The regulation was modified at

455.204(c) to include a new Section

identifying the primary sources and

source documents from which States

will draw data necessary to complete

the independent certified audit. These

documents are identified as:

• The approved Medicaid State plan

for the State plan rate year under audit.

• State Medicaid Management

Information System payment and

utilization data.

• The Medicare 2552–96 cost report

or subsequent Medicare defined

hospital cost report tool.

• DSH hospital audited financial

statements and hospital accounting

records.

The regulation was modified to

redesignate § 455.204(c) as § 455.204(d)

(1) through (6) to accommodate the new

§ 455.204(c).

In addition, CMS developed a General

DSH Auditing and Reporting Protocol to

provide States with guidance on the

completion of the DSH Audit and

Report. This protocol will be available

on the CMS Web site.

V. Collection of Information

Requirements

Under the Paperwork Reduction Act

of 1995, we are required to provide 30-

day notice in the Federal Register and

solicit public comment before a

collection of information requirement is

submitted to the Office of Management

and Budget (OMB) for review and

approval. In order to fairly evaluate

whether an information collection

should be approved by OMB, Section

3506(c)(2)(A) of the Paperwork

Reduction Act of 1995 requires that we

solicit comment on the following issues:

• The need for the information

collection and its usefulness in carrying

out the proper functions of our agency.

• The accuracy of our estimate of the

information collection burden.

• The quality, utility, and clarity of

the information to be collected.

• Recommendations to minimize the

information collection burden on the

affected public, including automated

collection techniques.

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Therefore, we are soliciting public

comment on each of these issues for the

following information collection

requirements discussed below.

Section 447.299 Reporting

Requirements

Paragraph (c) of this Section requires

the States to submit to CMS information

for each DSH for the most recently-

completed fiscal year beginning with

the first full State fiscal year (SFY) after

the enactment of Section 1001(d) of the

MMA, which for all States will begin

with their respective SFY 2005 and each

subsequent SFY. This paragraph

presents the information to be

submitted.

The burden associated with this

requirement is the time and effort for

the States to prepare and submit the

required information. We estimate that

it will take each State approximately 30

minutes to prepare and submit the

information for each of its DSHs. On

average, each State has approximately

75 DSHs. Therefore, we estimate it will

take 38 hours per State to comply for a

total of 1,976 annual hours. The burden

for this requirement is currently

approved under OMB # 0938–0746 with

an expiration date of August 31, 2011.

Section 455.204 Condition for Federal

Financial Participation

In summary, this Section states what

information must be included in the

audit report and submitted to CMS.

The PRA exempts the information

collection activities referenced in this

Section. In particular, 5 CFR 1320.4

excludes collection activities during the

conduct of administrative actions,

investigations, or audits involving an

agency against specific individuals or

entities.

As required by Section 3504(h) of the

Paperwork Reduction Act of 1995, we

have submitted a copy of this final

regulation to OMB for its review of these

information collection requirements

described above.

If you comment on these information

collection and recordkeeping

requirements, please mail copies

directly to the following:

Centers for Medicare & Medicaid

Services, Office of Strategic Operations

and Regulatory Affairs, Division of

Regulations Development, Attn.:

Melissa Musotto, CMS–2198–F, Room

C5–14–03, 7500 Security Boulevard,

Baltimore, MD 21244–1850.

Office of Information and Regulatory

Affairs, Office of Management and

Budget, Room 10235, New Executive

Office Building, Washington, DC 20503,

Attn.: Katherine T. Astrich, CMS Desk

Officer, CMS–2198–F,

Katherine_T._[email protected]. Fax

(202) 395–6974.

VI. Regulatory Impact Analysis

We have examined the impact of this

rule as required by Executive Order

12866 (September 1993, Regulatory

Planning and Review), the Regulatory

Flexibility Act (RFA) (September 19,

1980, Pub. L. 96–354), Section 1102(b)

of the Social Security Act, the Unfunded

Mandates Reform Act of 1995 (Pub. L.

104–4), and Executive Order 13132 on

Federalism, and the Congressional

Review Act (5 U.S.C. 804(2)).

Executive Order 12866, as amended,

directs agencies to asses 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).

A regulatory impact analysis (RIA) must

be prepared for major rules with

economically significant effects ($100

million or more in any 1 year). This rule

does not reach the economic threshold

and thus is not considered a major rule.

The RFA requires agencies to analyze

options for regulatory relief of small

businesses. For purposes of the RFA,

small entities include small businesses,

nonprofit organizations and government

agencies. Most hospitals and most other

providers and suppliers are small

entities, either by nonprofit status or by

having revenues of $7 million to $34.5

million in any 1 year. Individuals and

States are not included in the definition

of a small entity. We are not preparing

an analysis for the RFA because the

Secretary has determined and we certify

that this rule would not have a

significant economic impact on a

substantial number of small entities.

This rule will directly affect States.

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 and has

fewer than 100 beds. Therefore, the

Secretary has determined and we certify

that this final rule will not have a

significant impact on the operations of

a substantial number of small rural

hospitals.

Section 202 of the Unfunded

Mandates Reform Act (UMRA) of 1995

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 2008 that

threshold level is approximately $130

million. Since this rule would not

mandate spending on State, local, or

tribal governments in the aggregate, or

by the private sector of $130 million or