The final rule implementing a new payment method for Medicare disproportionate share hospital (DSH) payments, published by the Centers for Medicare and Medicaid Services (CMS) in August, clarifies a significant question regarding payment for uncompensated care costs by Medicare Advantage plans under Part C of the Medicare. In general, Medicare program requirements provide that the plans must pay hospitals what “original Medicare” would have paid, under parts A and B, when they treat plan enrollees out-of-network. And many plans pay in-network providers on the same basis under contractual arrangements with the hospitals. In the final rule, CMS confirms that Medicare Advantage plan payments to such hospitals must include the payment for uncompensated care costs. This payment may also have to be included in Medicare Advantage plan payments to hospital that have contractual arrangements with the plan calling for payment of the amount that would be paid under Medicare Part A.                      

But the final rule is not all good news on the Part C front. The final IPPS rule, which includes the final DSH payment rule, also purports to readopt a policy that CMS claims to have first adopted in a 2004 to include Medicare Advantage patient days in the Medicare Part A/Supplemental Security Income (SSI)  fraction and exclude them from the numerator of the Medicaid fraction used to calculate the traditional DSH payment. This move has the effect of substantially reducing that payment and, derivatively, the additional payment for uncompensated care costs (the calculation of which starts from a projection as to the amount of the DSH payment that would be made for a year under the traditional DSH payment method). The validity of this aspect of the rule is doubtful.

There is a fair bit of history on this issue. In response to “questions,” CMS clarified in 2003 in the May 19, 2003, Federal Register that days for patients in Medicare Part C plans (then called Medicare+Choice) are not considered to be days for which those patients are “entitled to benefits under part A” of Medicare.a As such, the Part C patient days would not be included in the Medicare Part A/SSI fraction and they would be counted in the numerator of the Medicaid fraction to the extent that the patient is eligible for Medicaid.

A year later, CMS adopted a policy change to begin counting Part C patient days in the Medicare Part A/SSI fraction and excluding them from the Medicaid fraction numerator (even if eligible for Medicaid).b In 2011, the United States Court of Appeals for the D.C. Circuit invalidated the application of the 2004 policy change retroactively to prior cost reporting periods.c And in November of 2012, the federal district court in D.C. invalidated the 2004 policy change going forward on the grounds that the CMS failed to provide adequate notice for the proposed rule change and did not furnish a rational explanation for the change in position.d The court, therefore, issued an order vacating the 2004 rule on this point and later, related changes to the regulation text. HHS appealed that decision to the D.C. Circuit, and although the appeal has not yet been decided, the final IPPS rule for 2014 seeks to readopt the policy change first announced in 2004.

The preamble discussion of this policy in the final IPPS rule for FFY14 might give the impression that there was a mix of opinions about the policy on the treatment of Part C days in the DSH payment calculation, but that is not the case. Comments on the recent proposed rule overwhelmingly opposed CMS’s policy. CMS failed to meaningfully address many of those comments in the final rule, and the agency still has not acknowledged or explained the reason for its change from the policy that was in place before 2004.

Although the validity of the “readopted” policy remains to be established, the agency nevertheless has baked that policy into future payments to be made under the new DSH payment method. The agency’s steadfast refusal to acknowledge that point itself underscores the magnitude of the adverse payment impact on hospital. In response to a comment that CMS’s projected 2014 DSH payments (under Factor 1 of new DSH methodology) are understated by $1.1 billion as a result of the incorrect treatment of Medicare Advantage days, CMS, incredibly, asserted an inability to accurately estimate the impact of its own policy. On the other hand, elsewhere in the final rule, CMS alleges to have accounted accurately for the payment impact of a future expansion of Medicaid eligibility in 2014 in calculating Factor 1 of the calculation used to determine the uncompensated care payment. If the agency can do that, then it certainly has the capacity to assess the impact of its policy on the counting of Part C days for the recent years for which that very same policy has been very recently applied in calculating Medicare Part A/SSI fractions with Part C days included and Medicaid fractions with those days excluded.

For more information, see Christopher Keough and Stephanie Webster's " The New Medicare DSH Payment: What's Baked into the Pie - and How It's Sliced", hfm, October, 2013

Christopher L. Keough, JD, is a partner in the health practice group, Akin Gump Strauss Hauer & Feld, LLP, Washington D.C..

Stephanie A. Webster, JD, is a partner in the health practice group, Akin Gump Strauss Hauer & Feld, LLP, Washington D.C.. 


a CMS, “Medicare Program; ProposedChanges to the Hospital Inpatient Prospective Payment Systems and Fiscal Year2004 Rates,” Federal Register, May 19, 2003.

b. CMS, “Medicare Program; Changes to theHospital Inpatient Prospective Payment Systems and Fiscal Year 2005 Rates,” Federal Register, Aug. 11, 2004.

c. NortheastHosp. Corp. v. Sebelius, 657 F.3d 1 (D.C. Cir. 2011)

d. Allina Health Services v. Sebelius, 904 F. Supp. 2d 75 (D.D.C. 2012)

Publication Date: Monday, October 07, 2013

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