CMS’ Final Rule, “Medicaid; Disproportionate Share Hospital Payments – Uninsured Definition”, published on December 3, 2014, may offer relief to some hospitals receiving Medicaid disproportionate share hospital (DSH) payments under the Social Security Act.[1] Starting December 31, 2014, the rule’s definition of “uninsured,” used to calculate the hospital-specific limitation on DSH payments, will allow for the inclusion of various categories of patients previously excluded from calculating the Medicaid shortfalls and uninsured costs.[2][3]

Specifically, the amended definition allows the cost of inpatient and outpatient hospital services provided to Medicaid patients who have exhausted applicable state coverage limits to be used in calculating Medicaid shortfalls. Additionally, the cost of uncompensated care provided to hospital patients who have exhausted private insurance benefits or lifetime insurance limits may now be counted as uninsured costs in calculating the hospital-specific limitation on DSH payments. Finally, hospital services provided to individuals under the Indian Health Service (IHS) program can also be counted as uninsured costs. Such services are included so long as the service was provided by a non-IHS hospital and not through an IHS health services contract.

CMS issued the Final Rule “to provide additional clarity on which costs can be considered uninsured costs for purposes of determining the hospital-specific limit.” The amended definition of “uninsured” will now be applied on a “service-specific” basis, “so that the calculation of uncompensated care for purposes of the hospital-specific DSH limit will include the cost of each service furnished to an individual by that hospital for which the individual had no health insurance or other source of third party coverage.” Prior to the amended definition, the definition of “uninsured” was applied on an “individual-specific” basis, which excluded uncompensated costs now included under the service-specific framework.

The financial impact of the Final Rule for specific hospitals remains to be seen. CMS noted in the Final Rule that it does not anticipate significant financial effects on State Medicaid Programs. The amended definition does not modify the DSH allotment amounts that are paid annually to a state for aggregate DSH payments made to hospitals.

For hospitals that are directly affected by the final rule, CMS anticipates that they “should have higher DSH eligible costs,” resulting in an increase in the hospital-specific DSH limit. Hospitals with a high volume of services to individuals with limited coverage plans, lifetime limits, or exhausted benefits, stand to benefit the most. Importantly, states are not required to increase DSH payments to affected hospitals based on increases in hospital-specific DSH limits.