The 2018 IPPS Final Rule was published in the Federal Register on August 14, 2017. The finalized changes will go into effect October 1, 2017. The Federal Register version can be viewed HERE (Medicare DSH begins on page 38189). Below is SCA’s brief, yet comprehensive summary on the Medicare DSH/Uncompensated Care payment portion of the final rule as it will affect DSH hospitals.
2018 Final Rule Highlights
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Updated estimate for Factor 1
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Factor 2 uninsured percentages remained unchanged from proposed rule
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Inclusion of cost report Worksheet S-10 data in Factor 3 to calculate and distribute UC payments
- Benchmarking mechanism
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A scaling factor for ALL hospitals, annualized cost reports and CCR trim where applicable
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Definition of uncompensated care costs
In this post, we will touch on each of the highlights above beginning with Factor 1.
Factor 1
Factor 1 establishes the gross uncompensated care pool. CMS estimates the difference between what would have been paid to qualifying hospitals under the historical DSH formula and the 25% empirically justified amount. The source of this estimate is the most recently available projections of Medicare DSH reimbursement as calculated by the CMS Office of the Actuary, most recently filed cost reports and the most recent DSH information provided in the IPPS impact file. For 2018, the estimate generally begins with cost reporting periods beginning in FFY 2014 with some exceptions and modifications described in the final rule. The net result is Factor 1.
CMS Office of the Actuary estimates FY18 DSH at $15.553 billion. This final rule DSH estimate came in at $450 million less than what was projected in the proposed rule, however, it is $1.156 billion more than the FY17 final rule DSH estimate of $14.397 billion. After removing the empirically justified DSH amount (25%), the final Factor 1 as proposed is:
2018 Factor 1 ≈ $11.665 billion ($15.553 * 75%)
For reference, Factor 1 for FY 2017 as estimated by CMS was $868 million less coming in at $10.797 billion.
Factor 2
Factor 2 reduces the Uncompensated Care Pool (Factor 1), established above, by the change in the national uninsured rate.
For FY 2014 through FY 2017, Factor 2 equaled 1 minus the percentage change in individuals under 65 years old that were uninsured. The change in the number of uninsured was between the payment year and 2013, which was the last year before the ACA became effective. The data source for this information, until now, was the Congressional Budget Office (CBO) reports. The CBO projected an uninsured rate of 10% in FY 2017, which yielded a Factor 2 of 55.36% and a UC Pool of $5.977 billion (≈ $10.797B * 55.36%).
Beginning in FY 2018, as proposed, CMS is changing the source of the data that it used to derive the uninsured factor. The source is now the CMS Office of the Actuary report as part of the National Health Expenditure Accounts. This new source is a complicated configuration of data sets and sources seen in the table HERE that represents the total U.S. population, not just individuals under the age of 65 as the CBO reports did.
As stated above, starting in FY 2018, Factor 2 will be calculated using all age groups rather than the under 65 age group used in previous years. With the change in age group, the pre-ACA baseline (2013) of uninsured has been reduced from 18% in the 2017 final rule to 14%.
Per the new source and data sets, the uninsured rate for 2017 is projected to be 8.3% (was 10% in the 2017 final rule) and the projected uninsured rate for 2018 is 8.1%. After blending to convert the raw data from a calendar year basis to a federal year basis and then running it through the statutory formula, the resulting adjustment factor is .5801, thus resulting in a UC pool value of $6.767 billion.
CY 2017 uninsured: 8.3%
CY 2018 uninsured: 8.1%
FY 2018 weighted uninsured: (8.3% * .25) + (8.1% * .75) = 8.15%
FY 2013 uninsured: 14%
FY 2018 ACA reduction: 0.2%
1- ((8.15% - 14%) / 14%) - 0.2% = 58.01%
$11.665B * 58.01% = $6.767B distributed to 2,427 hospitals
projected to qualify for DSH in 2018
For more information on the Factor 2 formula and FY 2017 comparison, click HERE.
Factor 3
For 2018, CMS re-proposed introducing S-10 into the Factor 3 calculation concluding, “we have reached a tipping point with respect to the use of S-10 data. Specifically, we can no longer conclude that the alternate data are available…that are a better proxy for costs of subsection (d) hospitals for treating individuals who are uninsured than the data on uncompensated care costs reported on worksheet S-10.”
CMS also proposed continuing to use the average of three cost reports. For FY 2018, CMS has finalized the following combination to calculate a provider’s average Factor 3:
NOTE: Hospitals need to review the Factor 3 data file and supplemental merger data file published in conjunction with the final rule. Providers have until August 31 to review and comment on the accuracy of their Factor 3.
1st Factor 3: FY 2012 cost report low-income days and FY 2014 SSI days
2nd Factor 3: FY 2013 cost report low-income days and FY 2015 SSI days
3rd Factor 3: FY 2014 Uncompensated care cost per Worksheet S-10
Other items to note:
S-10 data will not be used for Puerto Rico hospitals, IHS/Tribal hospitals or all-inclusive rate providers
CMS will “annualize” Medicaid and uncompensated care cost data if the hospital’s cost report does not equal 12 months of data.
CMS will also use a “scaling factor” to normalize data for all hospitals
Worksheet S-10, Line 30 will be used as the data metric for uncompensated care costs (more on this below).
CMS will implement a trim methodology for cost-to-charge ratios that fall outside three standard deviations from the national mean.
NEW benchmarking mechanism finalized to limit aberrant data
For FY 2014, for hospitals where the ratio of UC costs relative to total operating costs (as reported on Worksheet G) exceeds 50%, CMS will look to the FY 2015 cost report and apply that ratio to FY 2014 total operating costs to determine an adjusted amount of uncompensated care.
Worksheet S-10 Uncompensated Care Definition, Instructions & Audits
Unchanged from the proposed rule, CMS finalizes the use of uncompensated care costs for purposes of calculating Factor 3 from Line 30 of cost report Worksheet S-10 which includes the sum of cost of charity care from Line 23 and the cost of non-Medicare bad debt expense from line 29. CMS "recognized" commenters concerns regarding Medicaid shortfalls, but stated they continued to believe the arguments to exclude Medicaid shortfalls to be more compelling.
In the final rule, CMS included a reminder that the cost report instructions were revised. Please refer to Transmittal 10 issued on November 18, 2016, which clarifies the reporting of charges for charity care. For cost reports beginning on or after October 1, 2016, charity discounts should be reported based on write-off date. They also reference an audit protocol which is still under development but will be provided to MACs ASAP.
If you'll recall, in the proposed rule, CMS stated, “cost reports beginning in FY 2017 will be the first cost reports for which the Worksheet S-10 data will be subject to a desk review. We do not anticipate making any further modifications to the Worksheet S-10 instructions at this time so that hospitals can begin to review and conform to the current instructions in Transmittal 10.” For the first time, CMS stated in the final rule, "WE EXPECT COST REPORTS BEGINNING IN FY 2014, FY 2015, AND FY 2016, TO BE SUBJECT TO FURTHER SCRUTINY AFTER SUBMISSION."
Again, the most time sensitive "To-Do", is to review the Factor 3 data file and supplemental merger data file published in conjunction with the final rule. Providers have until August 31st to review and comment on the accuracy of their Factor 3. We will continue to post additional recommendations to complete as a result of the final rule later this month. Stay tuned...
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