Medicare Payment and Reimbursement

CMS issues RFI to gather best practices for identifying and supporting safety net hospitals

There are increasing calls among healthcare policy analysts to replace the DSH payment formula with a more precise methodology.

May 22, 2023 9:02 am

As part of the FY24 proposed rule for hospital inpatient payments, CMS is seeking healthcare stakeholder input on how to best support safety net hospitals in the Medicare program.

The agency is considering ways to reimburse safety net hospitals via supplemental payments that may be better targeted than disproportionate share hospital (DSH) and uncompensated care (UC) payments.

Part of the impetus for the request for information (RFI) was a June 2022 report by the Medicare Payment Advisory Commission (MedPAC), which highlighted the potential for “undue financial strain” on safety net providers. Such challenges could lead to closures of facilities or units that are vital to their communities.

CMS also is keen to support safety net hospitals as part of the Biden administration’s overarching focus on improving health equity, the agency wrote.

The RFI asks, in part, whether it is worth having separate definitions and payment computations for rural safety net hospitals such as sole-community hospitals and critical access hospitals. Comments on the RFI (and all aspects of the proposed rule for hospital inpatient payments) can be submitted through June 9 at (see page 1188 at this link for specific questions to consider).

An upgraded formula

One possible version of an improved payment system is the Safety Net Index, developed by MedPAC over the past year. The formula incorporates a hospital’s:

  • Medicare volume associated with low-income beneficiaries. This calculation would consider those who are dually eligible for Medicare and Medicaid or receive the Part D low-income subsidy (LIS).
  • Share of revenue spent on uncompensated care. This calculation would be based on cost report data from Worksheet S-10 and Worksheet G-3.
  • Reliance on Medicare volume. Cost report data would be used to determine the Medicare share of total inpatient days (the ratio would be halved in the formula).

Some circumstances may not be neatly captured by the formula, such as hospital openings and mergers, hospitals with multiple cost reports, and cost-reporting periods that are shorter or longer than 365 days or that span more than one fiscal year. CMS is seeking comment on how to account for such issues, including whether approaches used in the UC payment methodology might work, and whether the three most recent years of data should be used in the Safety Net Index.

In its 2022 report, MedPAC stated that the index “was our strongest measure in terms of predicting closures” when looking retrospectively. The index also predicted total margins comparably to using a hospital’s share of LIS beneficiaries.

Where the index also has an edge over the LIS metric and the DSH formula, MedPAC said, is that it avoids a negative correlation between a hospital’s share of Medicare enrollees and its payment received.

Another approach

Alternatively, area-level indices could be used to identify safety net hospitals in Medicare, CMS wrote in the RFI.

“This approach could potentially better target policies to address the social determinants of health as well as address the lack of community resources that may increase risk of poor health outcomes and risk of disease in the population,” the agency said.

Pertinent mechanisms include the Area Deprivation Index (ADI) and the Social Deprivation Index, CMS wrote, citing findings from a report by HHS’s Office of the Assistant Secretary for Planning and Evaluation.

For example, the ADI “is intended to capture local socioeconomic factors correlated with medical disparities and underservice,” CMS wrote. Living in an area with a score of 85 or above is linked to higher readmission rates and lower rates of cancer survival, among other health-outcome concerns, after accounting for individual social and economic risk factors.

Starting this year, the ADI is being used in the Medicare Shared Savings Program to help determine quarterly advance payments for program participants that care for underserved beneficiary populations.


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