The Centers for Medicare and Medicaid Services (CMS) published its final rule relating to the reporting and auditing of Medicaid disproportionate hospital payments (DSH) December 19, 2008, three years following the publication of a proposed rule on August 26, 2005. Controversy surrounding the proposed rule involved the perceived expansion of the regulatory authority by CMS and allegations that the proposed rule could detrimentally affect DSH payments to hospitals. The final rule generated 119 formal comments, all of which are detailed in the preamble to the rule.

The final rule sets out reporting requirements for states beginning with the individual Medicaid state plan rate year 2005. States must now submit detailed information to CMS to permit verification of the appropriateness of DSH payments to each hospital located within their boundaries, including: each hospital's estimated hospital-specific DSH limit, Medicaid inpatient utilization rates, state DSH qualification criteria, inpatient (IP) and outpatient (OP) Medicaid fee-for-service basic rate payments, IP/OP Medicaid managed care organization payments, supplemental/enhanced Medicaid IP/OP payments, total Medicaid uncompensated care, uninsured IP/OP revenue, total Section 1011 payments, total cost of IP/OP care for the uninsured, total uninsured IP/OP uncompensated care costs, DSH hospital payments, and total annual uncompensated care costs. The calculations and interpretation of each of the data elements are addressed in the preamble to the final rule.

While many comments levied accusations that the rules exceeded CMS's statutory authority, the agency countered that the rules merely addressed the required reporting and data elements related to the appropriateness of DSH payments, which fell wholly within the purview of the Secretary's statutory authority. Many comments dealt with concern over the implementation of the audits and retroactivity of potential DSH overpayments back to the 2005 time frame. CMS responded by providing a transition period. While 2005 would be the first year audited, there would be a trial period for auditors to refine audit methodologies. As a result, findings from Medicaid state plan rate year 2005-2010 would be used only for the purpose of determining prospective hospital-specific cost limits. Beginning in 2011, any DSH payments that exceed the documented hospital-specific limit will be considered an overpayment.

The preamble to the final rule contains a significant discussion regarding the difference between uncompensated care costs, bad debts, costs associated with the uninsured and charity care. Generally, CMS makes clear that costs associated with any individual who is covered by a third-party payor, even if a specific service is not covered or reimbursed, should not be counted for purposes of DSH calculation. Section 1011 reimbursements also are identified as reimbursements that should be counted for purposes of the calculations. CMS makes clear that hospitals should identify separately uncompensated care related to services provided to individuals with no source of third-party coverage from bad debts from patients with insurance. CMS further clarifies 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.

Finally, CMS indicates, in response to many comments, that it has developed a General DSH Audit and Reporting Protocol that will be available on the CMS website to assist states and auditors in using information from each component to determine uncompensated care costs consistent with the statutory requirements.