Federal Register, Volume 77 Issue 11 (Wednesday, January 18, 2012)

[Federal Register Volume 77, Number 11 (Wednesday, January 18, 2012)]
[Proposed Rules]
[Pages 2500-2507]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-734]

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 447

[CMS-2315-P]
RIN 0938-AQ37

Medicaid Program; Disproportionate Share Hospital Payments--
Uninsured Definition

AGENCY: Centers for Medicare & Medicaid Services (CMS), HHS.

ACTION: Proposed rule.

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SUMMARY: This proposed rule addresses the hospital-specific limitation
on Medicaid disproportionate share hospital (DSH) payments under the
Social Security Act. Under this limitation, DSH payments to a hospital
cannot exceed the uncompensated costs of furnishing hospital services
by the hospital to individuals who are Medicaid-eligible or ``have no
health insurance (or other source of third party coverage) for the
services furnished during the year.'' This rule would provide that the
quoted phrase would refer in context to a lack of coverage on a
service-specific basis, so that the calculation of uncompensated care
for purposes of the hospital-specific DSH limit would include the cost
of each service furnished to an individual who had no health insurance
or other source of third party coverage for that service.

DATES: To be assured consideration, comments must be received at one of
the addresses provided below, no later than 5 p.m. on February 17,
2012.

ADDRESSES: In commenting, please refer to file code CMS-2315-P. Because
of staff and resource limitations, we cannot accept comments by
facsimile (Fax) transmission.
You may submit comments in one of four ways (please choose only one
of the ways listed):
1. Electronically. You may submit electronic comments on this
regulation to http://www.regulations.gov. Follow the ``Submit a
comment'' instructions.
2. By regular mail. You may mail written comments to the following
address ONLY: Centers for Medicare & Medicaid Services, Department of
Health and Human Services, Attention: CMS-2315-P, P.O. Box 8016,
Baltimore, MD 21244-8016.
Please allow sufficient time for mailed comments to be received
before the close of the comment period.
3. By express or overnight mail. You may send written comments to
the following address ONLY: Centers for Medicare & Medicaid Services,
Department of Health and Human Services, Attention: CMS-2315-P, Mail
Stop C4-26-05, 7500 Security Boulevard, Baltimore, MD 21244-1850.
4. By hand or courier. Alternatively, you may deliver (by hand or
courier) your written comments ONLY to the following addresses prior to
the close of the comment period:
a. For delivery in Washington, DC-- Centers for Medicare & Medicaid
Services, Department of Health and Human Services, Room 445-G, Hubert
H. Humphrey Building, 200 Independence Avenue SW., Washington, DC
20201.

[[Page 2501]]

(Because access to the interior of the Hubert H. Humphrey Building
is not readily available to persons without Federal government
identification, commenters are encouraged to leave their comments in
the CMS drop slots located in the main lobby of the building. A stamp-
in clock is available for persons wishing to retain a proof of filing
by stamping in and retaining an extra copy of the comments being
filed.)
b. For delivery in Baltimore, MD-- Centers for Medicare & Medicaid
Services, Department of Health and Human Services, 7500 Security
Boulevard, Baltimore, MD 21244-1850.
If you intend to deliver your comments to the Baltimore address,
call telephone number (410) 786-9994 in advance to schedule your
arrival with one of our staff members.
Comments erroneously mailed to the addresses indicated as
appropriate for hand or courier delivery may be delayed and received
after the comment period.
For information on viewing public comments, see the beginning of
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT: Rory Howe (410) 786-4878.

SUPPLEMENTARY INFORMATION:
Inspection of Public Comments: All comments received before the
close of the comment period are available for viewing by the public,
including any personally identifiable or confidential business
information that is included in a comment. We post all comments
received before the close of the comment period on the following Web
site as soon as possible after they have been received: http://www.regulations.gov. Follow the search instructions on that Web site to
view public comments.
Comments received timely will also be available for public
inspection as they are received, generally beginning approximately 3
weeks after publication of a document, at the headquarters of the
Centers for Medicare & Medicaid Services, 7500 Security Boulevard,
Baltimore, Maryland 21244, Monday through Friday of each week from 8:30
a.m. to 4 p.m. To schedule an appointment to view public comments,
phone 1-(800) 743-3951.

I. Background

A. Introduction

On December 19, 2008, we published a final rule in the Federal
Register (73 FR 77904) entitled ``Medicaid Disproportionate Share
Hospital Payments'' (herein referred to as the 2008 DSH final rule)
that implemented section 1001 of the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (MMA), requiring State
reports and audits to ensure the appropriate use of Medicaid
Disproportionate Share Hospital (DSH) payments and compliance with the
DSH limit imposed at section 1923(g) of the Social Security Act (the
Act). The limit at section 1923(g) of the Act is commonly referred to
as the hospital-specific DSH limit and specifies that only the
uncompensated costs of providing inpatient hospital and outpatient
hospital services to Medicaid eligible individuals and uninsured
individuals as described in section 1923(g)(1)(A) of the Act are
included in the calculation of the hospital-specific DSH limit. The
statute describes uninsured individuals as those ``who have no health
insurance (or other source of third party coverage) for the services
furnished during the year.''
Citing an effort to adhere to an accurate representation of the
broad statutory references to insurance or other coverage and to
delineate more definitively the meaning of the term uninsured, we
defined the phrase ``who have health insurance (or other third party
coverage)'' to refer broadly to individuals who have creditable
coverage consistent with the definitions under 45 CFR Part 144 and 45
CFR Part 146, as well as individuals who have coverage based upon a
legally liable third party payer. This regulatory definition was not
the same as the preliminary guidance previously issued to States and
providers in 1994.
In an August 17, 1994 letter to State Medicaid Directors (SMD), CMS
included a summary of the DSH provisions in the Omnibus Budget
Reconciliation Act of 1993 (OBRA 93) (Pub. L. 103-66), as a preliminary
interpretation. In that letter, we endorsed a service-specific approach
in which individuals were considered ``uninsured'' for purposes of DSH
to the extent that they did not have third party coverage for the
specific hospital service that they received. A January 10, 1995,
letter to the Chair of the State Medicaid Director's Association
affirmed the service-specific interpretation of the definition of
uninsured by clarifying that: ``It would be permissible for States to
include in their determination of uninsured patients those individuals
who do not possess health insurance which would apply to the service
which the individual sought''.
The regulatory definition published in the 2008 DSH final rule was
more restrictive than the service-specific definition and is applied on
an individual-specific basis rather than a service-specific basis. This
interpretation of the definition of ``uninsured'' superseded all prior
interpretive issuances.
After publication of the 2008 DSH final rule, numerous States,
members of Congress, and related stakeholders expressed their concern
that the 2008 DSH final rule definition of the uninsured deviated from
prior guidance and would have a significant financial impact on States
and hospitals. This proposed rule is designed to mitigate some of the
unintended consequences of the uninsured definition put forth in the
2008 DSH final rule and to provide additional clarity on which costs
can be considered uninsured costs for purposes of determining the
hospital-specific limit.

B. Legislative History

Title XIX of the Act authorizes Federal grants to States for
Medicaid programs that provide medical assistance to low-income
families, the elderly, and persons with disabilities. Section
1902(a)(13)(A)(iv) of the Act requires that States make Medicaid
payment adjustments for hospitals that serve a disproportionate share
of low-income patients with special needs. Section 1923 of the Act
contains more specific requirements related to the DSH payments.
The OBRA 93 was signed into law on August 10, 1993. Section 13621
of OBRA 93 added section 1923(g) of the Act, limiting Medicaid DSH
payments to a qualifying hospital to the amount of eligible
uncompensated costs incurred. This hospital-specific limit requires
that Medicaid DSH payments to a qualifying hospital not exceed the
costs incurred by that hospital for providing inpatient and outpatient
hospital services furnished during the year to Medicaid patients and
individuals who have no health insurance or other source of third party
coverage for the services provided during the year, less applicable
revenues for those services.

C. Hospital-Specific DSH Limit

Section 1923(g)(1) of the Act defines a hospital-specific limit on
Federal financial participation (FFP) for DSH payments. Each State must
develop a methodology to compute this hospital-specific limit for each
DSH hospital in the State. As defined in section 1923(g)(1) of the Act,
the State's methodology must calculate for each hospital, for each
fiscal year, the difference between the costs incurred by that hospital
for furnishing inpatient hospital and outpatient hospital services
during the applicable State fiscal year to Medicaid individuals and
individuals who have no health insurance or other source of third party
coverage for the

[[Page 2502]]

inpatient hospital and outpatient hospital services they receive, less
all applicable revenues for these hospital services. This difference,
if any, between incurred inpatient hospital and outpatient hospital
costs and associated revenues is considered a hospital's uncompensated
care cost (UCC) limit, or hospital-specific DSH limit. FFP is not
available for DSH payments that exceed a hospital's UCC for furnishing
inpatient hospital and outpatient hospital services to Medicaid
eligible individuals and individuals who have no health insurance or
other source of third party coverage for the services they receive in
any given State plan rate year.
To be considered as an inpatient or outpatient hospital service for
purposes of Medicaid DSH, a service must meet the Federal and State
definitions of an inpatient hospital service or outpatient hospital
service and must be included in the State's definition of an inpatient
hospital service or outpatient hospital service under the approved
State plan. While States may have some flexibility to define the scope
of inpatient or outpatient hospital services, States must use
consistent definitions. Hospitals may engage in any number of
activities, or may furnish practitioner, nursing facility, or other
services to patients that are not within the scope of inpatient
hospital services or outpatient hospital services. These services are
not considered inpatient or outpatient hospital services.
Section 1923(a) and section 1923(c) of the Act provide States some
latitude in determining the level of DSH payment under the Medicaid
State plan. Section 1923(g) of the Act simply creates hospital-specific
limitations on FFP for DSH payments to individual hospitals. These
limits are comprised of specific net costs. The first component of the
net costs is described in statute as attributable to hospital costs
incurred by individuals eligible for medical assistance under the State
plan and net of payments made under title XIX of the Act. We currently
implement this provision by allowing all medically necessary inpatient
and outpatient costs associated with Medicaid eligible individuals
authorized under section 1905 of the Act and covered under the approved
Medicaid State plan regardless of whether those beneficiaries or
hospitals were entitled to payment as part of the Medicaid benefit
package under the State plan. To arrive at uncompensated Medicaid
costs, all Medicaid payments received from the State for Medicaid
hospital services, including supplemental payments, must be netted
against those costs.
The second type of costs allowable as part of the Medicaid DSH
limit are described in statute as attributable to hospital costs
incurred by individuals who have no health insurance or other source of
third party coverage for services provided during the year. The
statutory language uses the term ``services provided'' when discussing
allowable uninsured costs. The use of this term provides a clear link
to third party coverage of specific services provided by the hospital.

D. CMS Guidance Regarding the Definition of Uninsured

Following the passage of the OBRA 93, we did not issue a rule
implementing section 1923(g) of the Act. However, we did receive
questions concerning the implementation of section 1923(g) of the Act
from States, including many regarding the criteria used to determine
which of a hospital's patients ``have no health insurance or other
source of third party coverage for the services provided.'' In response
to these questions, we issued a letter on August 17, 1994 to all SMD's
delineating the Agency's interpretation of statutory provisions of
section 13621 of OBRA 93.
The SMD letter specifically established our interpretation of the
term ``uninsured'' patients for purposes of the calculating OBRA 93 DSH
limits. We developed a definition of ``individuals who have no health
insurance or other source of third party coverage for the services
provided'' based on the statutory language linking coverage and the
provision of services throughout the year in which the service was
provided. The August 17, 1994 SMD letter articulated this policy
interpretation by stating that individuals who have no health insurance
(or other source of third party coverage) for the services provided
during the year include those ``who do not possess health insurance
which would apply to the service for which the individual sought
treatment.'' We affirmed this guidance in a January 10, 1995, letter to
the Chair of the SMD's Association. This interpretation remained in
effect until the January 19, 2009 effective date of the 2008 DSH final
rule implementing the DSH auditing and reporting requirements.

E. MMA and the 2008 DSH Final Rule

Based on several U.S. Department of Health & Human Services Office
of Inspector General (OIG) audits and U.S. Government Accountability
Office (GAO) reports detailing violations in the DSH program, there was
concern that CMS did not have the authority to appropriately monitor
State compliance with section 1923 of the Act. In particular, concerns
were expressed that States were not enforcing the OBRA 93 limits within
their DSH programs. Section 1001(d) of MMA added new audit and
reporting requirements. Specifically, section 1923(j)(1) of the Act
requires States to submit an annual report and audit to ensure the
appropriate compliance with DSH limits imposed at section 1923(g) of
the Act.
In promulgating the 2008 DSH final rule, we defined the phrase
``who have health insurance (or other third party coverage)'' by
referencing individuals who have a legally liable third party payer for
the services provided by a hospital and by referencing regulations that
define creditable coverage under 45 CFR Part 144 and 45 CFR Part 146.
The regulatory definition of creditable coverage at 45 CFR Part 144 and
45 CFR Part 146 was developed to implement, in part, the Health
Insurance Portability and Accountability Act (HIPAA) of 1996 and was
designed to offer protection to the broadest number of individuals.
This definition of creditable coverage, which did not exist in 1994
when we issued initial guidance on the Medicaid DSH definition of
uninsured, is applied on an individual-specific basis (that is, does an
individual have coverage) rather than on the existing service-specific
interpretation (that is, does an individual have coverage for a
service). Creditable coverage includes coverage of an individual under
a group health plan, Medicare, Medicaid, a medical care program of the
Indian Health Service (IHS) or tribal organization, and other examples
as outlined in the rules relating to creditable coverage at 45 CFR
146.113.
The new interpretation of the definition of ``individuals who have
no health insurance or other source of third party coverage for the
services provided'' articulated in the 2008 DSH final rule, which
relied on the existing regulatory definition of creditable coverage,
superseded all prior interpretive issuances.

F. Concerns Raised

Numerous States, members of the Congress, hospitals and related
stakeholders expressed concerns following the publication of the 2008
DSH final rule that the rule's definition of uninsured individuals
would have a significant negative financial impact on States and
hospitals. As States and hospitals began to complete the initial audits
as defined in the final rule, they identified specific issues relating
to the regulatory definition of uninsured adopted under the rule.
Specific

[[Page 2503]]

consequences regarding the practical application of the creditable
coverage definition were identified and some stakeholders questioned
the impact of the new definition of uninsured as it relates to
individuals who had IHS and tribal health coverage for services and
individuals who had exhausted their insurance benefits or who had
reached their lifetime insurance limits. Uncompensated costs to
hospitals for these services were no longer eligible DSH costs under
the creditable coverage definition.
The issue involving IHS and tribal programs arises because IHS
coverage is within the scope of ``creditable coverage'' under the
regulations at 45 CFR Part 144 and 45 CFR Part 146, and thus
individuals with such coverage could not be considered ``uninsured''
even if the IHS or tribal health program did not provide the service or
authorize coverage through the contract health service program (through
a purchase order or equivalent document). In that circumstance, the
hospital is not able to count, as costs eligible for Medicaid DSH
payments, costs of uncompensated care associated with the provision of
inpatient or outpatient hospital services to American Indians/Alaska
Natives with access to IHS and tribal coverage (but no other source of
third party payment).
The IHS and Tribal health programs provide two primary types of
services, direct health care services and contract health services.
Direct health care services are oftentimes limited to primary care
services and are limited to eligible beneficiaries identified at 42 CFR
136.12. Many of the beneficiaries that receive direct care services
have no other source of third party coverage. Contract health services
(CHS) are services provided outside of an IHS or Tribal facility to an
eligible beneficiary (Sec. 136.23). CHS appropriations are
discretionary; therefore, coverage is determined based on a priority
system. Coverage for CHS services is specifically authorized on a case-
by-case basis through a CHS purchase order or equivalent document. IHS
and tribal health programs can also issue referrals that do not
authorize CHS coverage of a service.
For Medicaid DSH purposes, we propose that American Indians/Alaska
Natives are considered to have third party coverage for inpatient and
outpatient hospital services received directly from IHS or tribal
health programs (direct health care services) and for such services
specifically authorized under CHS. The service-specific determination
of third party coverage status of American Indian/Alaska Natives for
services not authorized to be within the scope of coverage by CHS
should be performed in the same manner as for services that are outside
the scope of coverage from any other insurer or third party payer.
The second issue concerns the interaction between the creditable
coverage definition in current regulation and hospital services
provided to individuals with creditable coverage but without coverage
for specific hospital services received. By utilizing the existing
regulatory creditable coverage definition an individual is considered
either to have coverage, as broadly described in regulation, or not to
have coverage during the period a hospital service was provided. If a
service was provided to an individual with creditable coverage at the
time of the provision of such service, that service cannot be
considered provided to an uninsured individual. In practical
application, this definition appeared to exclude from uncompensated
care for DSH purposes the costs of many services that were provided to
individuals with creditable coverage but were outside the scope of such
coverage. Costs affected include those associated with individuals who
have exhausted their insurance benefits or who have reached lifetime
insurance limits for certain services, as well as services not included
in a benefit package as covered, but which are identified in section
1905 of the Act and covered under the approved Medicaid State plan.
For purposes of defining uncompensated care costs for the Medicaid
hospital-specific DSH limit, we believe that uncompensated costs of
providing inpatient and outpatient hospital services to individuals who
do not have coverage for those specific services should be considered
costs for which there is no liable third party payer and thus eligible
costs for Medicaid DSH payments. An example of such a situation would
involve an individual with basic hospitalization coverage that has an
exclusion for transplant services. Should the individual need the
excluded service, the cost of that service could be included in the
Medicaid hospital-specific DSH limit. An additional example involves an
individual with excluded benefits or services, or exhaustion of
coverage or benefits for a limited covered service, due to a pre-
existing condition (for example, cancer or diabetes). Though both
examples involve medically necessary services for which an individual
is uninsured, associated costs would have been prohibited from
inclusion in calculating the hospital-specific DSH limit based on the
2008 DSH final rule and related guidance.
If an individual is Medicaid eligible, all costs incurred in
providing inpatient and outpatient hospital services identified in
section 1905 of the Act and covered under the approved Medicaid State
plan should be included in calculating Medicaid hospital costs, not
uninsured hospital costs, for purposes of calculating the hospital-
specific DSH limit, regardless of whether the individual's benefits
have been exhausted or whether coverage limits have been reached.

II. Provisions of the Proposed Rule

A. Definition of Uninsured Under Section 1923(g) of the Act

We are proposing to add a new Sec. 447.295 Hospital-Specific
Disproportionate Share Hospital Payment Limit--Definition of
Individuals Who Have no Health Insurance (or Other Source of Third
Party Coverage) for the Services Furnished During the Year and the
Determination of an Individual's Third Party Coverage Status.
Specifically, Sec. 447.295(a) would describe the scope of the new
regulatory section and its focus on defining the term ``individuals who
have no health insurance (or other source of third party coverage) for
the services furnished during the year.''
We are proposing at Sec. 447.295(b) to define through regulation
``individuals who have no health insurance (or other source of third
party coverage) for the services furnished during the year'' for
purposes of calculating the hospital-specific DSH limit as described in
section 1923(g) of the Act effective for 2011. Proposed Sec.
447.295(b) would also provide specific definitions for the terms
``service-specific coverage determination'' and ``lifetime or annual
health insurance coverage limit.''
In this proposed rule, we are proposing to define ``individuals who
have no health insurance (or other source of third party coverage) for
the services furnished during the year'' for purposes of calculating
the hospital-specific DSH limit on a service-specific basis rather than
on an individual basis, and thus would not make reference to the
regulatory definition of creditable coverage. The proposed definition
would instead require a determination of whether, for each specific
service furnished during the year, the individual has third party
coverage. We are also proposing a definition of ``no source of third
party coverage for a specific inpatient or outpatient service'' to mean
that the service is not within a

[[Page 2504]]

covered benefit package under a group health plan or health insurance
coverage, and is not covered by another legally liable third party. We
would specify that services beyond annual or lifetime limits on
insurance coverage would not be considered to be within a covered
benefit package.
Because funding limitations for services furnished through the IHS
or tribal health programs are similar in nature to benefit limitations,
we would consider them as such for this purpose. We propose to consider
services furnished to American Indians/Alaska Natives to be covered by
IHS or tribal health programs only to the extent that the individuals
receive services directly from IHS or tribal health programs (direct
health care services) or when IHS or a tribal health program has
authorized coverage through the contract health service program
(through a purchase order or equivalent document).
We are not including in this proposed rule a single test for how a
``service'' is defined for these purposes because of the variance in
the types of services that are at issue. We are, however, proposing to
include in Sec. 447.295(c)(1) ``Determination of an Individual's Third
Party Coverage Status,'' the principle that a ``service'' should
include the same elements that would be included for the same or
similar services under Medicaid generally. The intent is that the
hospital will generally determine that an individual is either insured
or not insured for a given hospital stay, and will not separate out
component parts of the hospital stay based on the level of payment
received.
Thus, we are proposing at Sec. 447.295(c) to specify that the
determination of an individual's third party coverage status is a
service-specific measure for purposes of calculating the hospital-
specific DSH limit, based on the coverage and benefit exclusions of
health insurers and the availability of coverage for that service from
other third party carriers. The determination of an individual's status
as an ``individual who has no health insurance (or other source of
third party coverage)'' for purposes of calculating the Medicaid
hospital-specific DSH limit would be based on coverage for the
particular inpatient or outpatient hospital service provided to an
individual under the terms of an insurance or other coverage plan, or
actual coverage for the service through such a plan or another third
party. The determination is not based on payment.

B. Lifetime Limits, Limited Coverage Plans, and Exhausted Benefits

This proposed rule would also clarify the definition of
``individuals who have no health insurance (or other source of third
party coverage) for the services furnished during the year'' so that
inpatient and outpatient hospital costs associated with individuals who
have creditable coverage but have reached annual or lifetime insurance
limits or have otherwise exhausted covered benefits can be included in
calculating the hospital-specific DSH limit. Additionally, inpatient
and outpatient hospital costs of services provided to individuals whose
coverage specifically excludes the hospital service provided can be
included in calculating the hospital-specific DSH limit. This
interpretation and definition of ``uninsured'' affords States and
hospitals maximum flexibility permitted by statute in calculating the
hospital-specific DSH limit. This proposed clarification would be
effective for DSH audits and reports submitted following the effective
date of the rule, thus avoiding any unintended, and potentially
significant, financial impact resulting from the 2008 DSH final rule.
While this proposed rule would provide some relief for certain
costs by allowing their inclusion in the calculation of the hospital-
specific DSH limit, we also believe that it is equally important to
address those costs that are currently prohibited from inclusion and
for which this rule provides no change in treatment under title XIX of
the Act. For the reasons described below, we continue to believe that
currently prohibited costs are not appropriate for purposes of Medicaid
DSH and are not consistent with statutory language with respect to the
hospital-specific DSH limit.

C. Bad Debt and Unpaid Coinsurance and Deductibles

We are proposing to clarify the definition of ``individuals who
have no health insurance (or other source of third party coverage) for
the services furnished during the year'' such that costs associated
with bad debt, including any unpaid coinsurance and deductibles, and
payer discounts cannot be included in calculating the hospital-specific
DSH limit for individuals with a source of third party coverage. In
these instances, the cost of the service in question was provided to an
individual with a source of third party coverage for the service, and
the amount due represents uncollected revenues not uninsured costs.
This clarification ensures that this proposed rule is consistent with
existing DSH statute, regulations, and longstanding CMS policy.
Section 1923(g) of the Act requires that costs associated with
individuals with a source of third party coverage be excluded from the
calculation of the hospital-specific DSH limit. The current DSH
regulations, as modified by the 2008 DSH final rule, also expressly
prohibit the inclusion of costs associated with unpaid coinsurance,
deductibles, bad debt, and payer discounts for individuals with a
source of third party coverage. This proposed rule would reiterate that
the allowability of these costs has not changed under the proposed
definition.

D. Prisoners

This proposed rule would clarify that the proposed definition of
``individuals who have no health insurance (or other source of third
party coverage) for the services furnished during the year'' maintains
the current position that individuals who are inmates in a public
institution or are otherwise involuntarily held in secure custody as a
result of criminal charges are considered to have a source of third
party coverage. These individuals are in secure custody pursuant to the
authority held by Federal, State or local law enforcement agencies, and
those agencies are legally liable for the cost of their care (even if
that agency has contracted with private parties for that secure
custody). Moreover, the exclusion of such costs is consistent with the
exclusion of such costs from the definition of ``Medical assistance''
in the statutory text at paragraph (A) following section 1905(a)(28) of
the Act. Accordingly, the costs associated with providing hospital
services to these individuals cannot be included in calculating the
hospital-specific DSH limit.
The proposed definition of ``individuals who have no health
insurance (or other source of third party coverage) for the services
furnished during the year'' as it relates to prisoner inmate care would
be consistent with the statute, regulations, and longstanding CMS
policy regarding the treatment of inmates of public institutions for
purposes of Medicaid eligibility and Medicaid DSH. A policy
clarification regarding prisoner inmate care and DSH was provided in a
SMD letter dated August 16, 2002. This proposed rule would serve to
define more definitively who is considered a prisoner inmate for
purposes of DSH.
The policy that inmates have third party coverage, based on the
assumption that their care is the responsibility of the

[[Page 2505]]

responsible law enforcement or corrections agency, is consistent with
the statutory framework that focuses on the distinction between an
``inmate'' and a ``patient.'' While the statutory provision at section
1905(a)(28)(A) of the Act generally excludes FFP for all care furnished
to inmates of public institutions, there is a statutory exception for
patients in a medical institution. We interpret this exception to be
limited to when the individual is no longer in secure custody by law
enforcement or a corrections agency and thus can be admitted as a
``patient'' rather than as an ``inmate'' to a hospital, nursing
facility, juvenile psychiatric facility, or intermediate care facility.
This is consistent with the fact that hospitals, or other institutional
facilities cannot, within the scope of their conditions of
participation, subject patients to restraints or seclusion. Thus
individuals held in secure custody would be outside the function of the
institution as a Medicaid-participating hospital and could not be
treated as ``patients.'' Accordingly, FFP is available for Medicaid
covered hospital services (or other covered institutional care) for
Medicaid-eligible individuals referred from or by law enforcement or
corrections authorities, or their contractors only to the extent that
they have been released from secure custody, and all other requirements
under the State plan are met. Applying this interpretation of the
statutory exclusion and exception to the hospital-specific limits for
DSH, costs and revenues associated with hospital services for
individuals (whether Medicaid eligible or uninsured) referred from or
by law enforcement or corrections authorities, or their contractors
would be included in calculating the limit only to the extent that the
individual has been released from secure custody by law enforcement or
a corrections agency.

E. Clarification of the Application of the Definition of ``Individuals
Who Have No Health Insurance (or Other Source of Third Party Coverage)
for the Services Furnished During the Year'' for Purposes of
Calculating Hospital-Specific DSH Limits

We are proposing at Sec. 447.295(d) to specify that costs
considered for purposes of calculating the hospital-specific limit are
limited to net costs incurred for individuals who have no health
insurance or source of third party coverage for the services furnished
during the year. This proposed section would ensure that the regulatory
definition of ``individuals who have no health insurance (or other
source of third party coverage) for the services furnished during the
year'' is appropriately applied for purposes of calculating hospital-
specific DSH limits.

IV. Collection of Information Requirements

This document does not impose information collection and
recordkeeping requirements. Consequently, it need not be reviewed by
the Office of Management and Budget under the authority of the
Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35).

IV. Response to Comments

Because of the large number of public comments we normally receive
on Federal Register documents, we are not able to acknowledge or
respond to them individually. We will consider all comments we receive
by the date and time specified in the ``DATES'' section of this
preamble, and, when we proceed with a subsequent document, we will
respond to the comments in the preamble to that document.

V. Regulatory Impact Statement

A. Overall Impact

We have examined the impact of this rule as required by Executive
Order 12866 on Regulatory Planning and Review (September 30, 1993),
Executive Order 13563 on Improving Regulation and Regulatory Review
(January 18, 2011), the Regulatory Flexibility Act (RFA) (September 19,
1980, Pub. L. 96-354), section 1102(b) of the Social Security Act,
section 202 of the Unfunded Mandates Reform Act of 1995 (March 22,
1995; Pub. L. 104-4), Executive Order 13132 on Federalism (August 4,
1999) and the Congressional Review Act (5 U.S.C. 804(2).
Executive Orders 12866 and 13563 direct agencies to assess all
costs and benefits of available regulatory alternatives and, if
regulation is necessary, to select regulatory approaches that maximize
net benefits (including potential economic, environmental, public
health and safety effects, distributive impacts, and equity). A
regulatory impact analysis (RIA) must be prepared for major rules with
economically significant effects ($100 million or more in any 1 year).
This rule does not reach the economic threshold and thus is not
considered a major rule.
The RFA requires agencies to analyze options for regulatory relief
of small entities. For purposes of the RFA, small entities include
small businesses, nonprofit organizations, and small governmental
jurisdictions. Most hospitals and most other providers and suppliers
are small entities, either by nonprofit status or by having revenues of
$7.0 million to $34.5 million in any 1 year. Individuals and States are
not included in the definition of a small entity. We are not preparing
an analysis for the RFA because we have determined, and the Secretary
certifies, that this proposed rule would not have a significant
economic impact on a substantial number of small entities.
In addition, section 1102(b) of the Social Security Act requires us
to prepare a regulatory impact analysis if a rule may have a
significant impact on the operations of a substantial number of small
rural hospitals. This analysis must conform to the provisions of
section 603 of the RFA. For purposes of section 1102(b) of the Act, we
define a small rural hospital as a hospital that is located outside of
a Metropolitan Statistical Area for Medicare payment regulations and
has fewer than 100 beds. We are not preparing an analysis for section
1102(b) of the Act because we have determined, and the Secretary
certifies, that this proposed rule would not have a significant impact
on the operations of a substantial number of small rural hospitals.
Section 202 of the Unfunded Mandates Reform Act of 1995 also
requires that agencies assess anticipated costs and benefits before
issuing any rule whose mandates require spending in any 1 year of $100
million in 1995 dollars, updated annually for inflation. In 2011, that
threshold is approximately $136 million. This rule would have no
consequential effect on State, local, or tribal governments or on the
private sector.
Executive Order 13132 establishes certain requirements that an
agency must meet when it promulgates a proposed rule (and subsequent
final rule) that imposes substantial direct requirement costs on State
and local governments, preempts State law, or otherwise has Federalism
implications. Since this regulation does not impose any costs on State
or local governments, the requirements of Executive Order 13132 are not
applicable.
To the extent that this proposed rule will have tribal
implications, and in accordance with E.O. 13175 and the HHS Tribal
Consultation Policy (December 2010), CMS will consult with Tribal
officials prior to the formal promulgation of this regulation.

B. Anticipated Effects

1. Effects on State Medicaid Programs
CMS does not anticipate that the final rule will have significant
financial effects on State Medicaid Programs.

[[Page 2506]]

Federal share DSH allotments, which are published by CMS in an annual
Federal Register notice, limit the amount of Federal financial
participation (FFP) that can be paid annually to a State for aggregate
DSH payments made to hospitals. This proposed rule does not modify the
DSH allotment amounts and will have no effect on a State's ability to
claim FFP for DSH payments made up to the published DSH allotment
amounts.
This proposed rule, however, may affect the calculation of the
hospital-specific DSH limit established at section 1923(g) of the Act.
This hospital-specific limit requires that Medicaid DSH payments to a
qualifying hospital not exceed the costs incurred by that hospital for
providing inpatient and outpatient hospital services furnished during
the year to Medicaid patients and individuals who have no health
insurance or other source of third party coverage for the services
provided during the year, less applicable revenues for those services.
This proposed rule defines ``individuals who have no health insurance
(or other source of third party coverage) for the services furnished
during the year'' for purposes of calculating the hospital-specific DSH
limit effective for 2011. This proposed rule also provides additional
clarification to States and hospitals regarding costs eligible for
inclusion in the calculation of the hospital-specific DSH limit. The
provisions of this rule may have an effect on the calculation of the
hospital's specific DSH limit amount for some hospitals depending upon
the method utilized by the hospital or State in calculating the limit
prior to the effective date of the proposed rule.
States retain considerable flexibility in setting DSH State plan
payment methodologies to the extent that these methodologies are
consistent with section 1923(c) of the Act and all other applicable
statute and regulations. Some States may determine that implementing a
retrospective DSH payment methodology or a DSH reconciliation in their
State plan is a reasonable way to manage its DSH allotment and ensure
that payments made in excess of hospital-specific DSH limits are
redistributed to hospitals that have not exceeded their limits.
Although the State may have to modify definitions provided to hospitals
in determining the hospital-specific DSH limit, the potential effect on
the calculation of these limits would not result in an increase or
decrease in the amount of FFP available to States for aggregate DSH
payments made to hospitals.
2. Effects on Providers
This proposed rule defines ``individuals who have no health
insurance (or other source of third party coverage) for the services
furnished during the year'' for purposes of calculating the hospital-
specific DSH limit effective for 2011. This proposed rule also provides
additional clarification to States and hospitals regarding costs
eligible for inclusion in the calculation of the hospital-specific DSH
limit. This proposed rule may affect the calculation of the hospital-
specific DSH limit established at section 1923(g) of the Act.
Hospitals, if affected by the proposed rule, should have higher DSH
eligible costs. This increase in eligible costs would result in an
increase in the hospital-specific DSH limit of affected hospitals. In
particular, DSH hospitals that provide a high volume of hospital
services to American Indians/Alaska Natives where CHS payment is not
authorized, individuals with creditable coverage but without coverage
for the hospital services received as it relates to DSH costs, or
individuals with limited coverage plans, lifetime limits, or exhausted
benefits, may recognize an increase in their hospital-specific DSH
limit. States are not required to increase DSH payments to affected
hospitals based on increases in hospital-specific DSH limits. The
increased DSH limits, however, may mitigate the potential return of DSH
payments to hospitals that would have been considered to exceed the
hospital-specific DSH limit absent the provisions of this proposed
rule.

C. Alternatives Considered

In developing this rule the following alternatives were considered.
We considered not revising the definition of uninsured for purposes of
determining the Medicaid DSH hospital-specific limit. However, we
believe the individual-specific application of the definition of
``uninsured'' under the current rule effectively precludes recognition
of uncompensated care costs for many services for which an individual
is uninsured and has no third party coverage. Costs affected also
include those associated with individuals who have reached annual or
lifetime insurance limits for certain services, have limited coverage
through IHS or tribal health programs, or have inadequate insurance
benefit packages.
An alternative approach that we considered when developing this
rule was to broaden even further the definition of uninsured to take
into account costs associated with bad debt and prisoners. However, we
believe that such an approach would not be consistent with the intent
of both the hospital-specific limit and with the general exclusion of
payment for services furnished to prisoners. We welcome comments not
only on the provisions of this rule, in whole or in part, but also on
alternatives that may more constructively address the underlying
problems and their likely impacts on States, hospitals, and individuals
receiving services in disproportionate share hospitals.

D. Conclusion

For the reasons discussed above, we are not preparing analysis for
either the RFA or section 1102(b) of the Act because we have determined
that this regulation would not have a direct significant economic
impact on a substantial number of small entities or a direct
significant impact on the operations of a substantial number of small
rural hospitals.
In accordance with the provisions of Executive Order 12866, this
regulation was reviewed by the Office of Management and Budget.

List of Subjects in 42 CFR Part 447

Accounting, Administrative practice and procedure, Drugs, Grant
programs-health, Health facilities, Health professions, Medicaid,
Reporting and recordkeeping requirements, Rural areas.

For the reasons set forth in the preamble, the Centers for Medicare
& Medicaid Services proposes to amend 42 CFR part 447 as set forth
below:

Title 42--Public Health

PART 447--PAYMENTS FOR SERVICES

1. The authority citation for part 447 continues as follows:

Authority: Sec. 1102 of the Social Security Act (42 U.S.C.
1302).

Subpart E--Payment Adjustments for Hospitals That Serve a
Disproportionate Number of Low-Income Patients

2. Add Sec. 447.295 to read as follows:

Sec. 447.295 Hospital-Specific Disproportionate Share Hospital
Payment Limit: Determination of Individuals without Health Insurance or
Other Third Party Coverage.

(a) Basis and purpose. This section sets forth the methodology for
determining the costs for individuals who have no health insurance or
other source of third party coverage for services furnished during the
year for purposes of calculating the hospital-

[[Page 2507]]

specific disproportionate share hospital payment limit under section
1923(g) of the Act.
(b) Definitions.
Individuals who have no health insurance (or other source of third
party coverage) for the services furnished during the year means
individuals who have no source of third party coverage for the specific
inpatient hospital or outpatient hospital service furnished by the
hospital.
Lifetime or annual health insurance coverage limit means an annual
or lifetime limit, imposed by a third party payer, that establishes a
maximum dollar value, or maximum number of specific services, on a
lifetime or annual basis, for benefits received by an individual.
No source of third party coverage for a specific inpatient hospital
or outpatient hospital service means that the service is not included
in an individual's health benefits coverage through a group health plan
or health insurer, and for which there is no other legally liable third
party. When a lifetime or annual coverage limit is imposed by a third
party payer, specific services beyond the limit would not be within the
individual's health benefit package from that third party payer. For
American Indians/Alaska Natives, IHS and tribal coverage is only
considered third party coverage when services are received directly
from IHS or tribal health programs (direct health care services) or
when IHS or a tribal health program has authorized coverage through the
contract health service program (through a purchase order or equivalent
document). Administrative denials of payment, or requirements for
satisfaction of deductible, copayment or coinsurance liability, do not
affect the determination that a specific service is included in the
health benefits coverage.
(c) Determination of an individual's third party coverage status.
Individuals who have no source of third party coverage for a specific
inpatient hospital or outpatient hospital service must be considered,
for purposes of that service, to be uninsured. This determination is
not dependent on the receipt of payment by the hospital from the third
party.
(1) The determination of an individual's status as having a source
of third party coverage must be a service-specific coverage
determination. The service-specific coverage determination can occur
only once per individual per service provided and applies to the entire
service, including all elements as that service, or similar services,
would be defined in Medicaid.
(2) Individuals who are inmates in a public institution or are
otherwise involuntarily in secure custody as a result of criminal
charges are considered to have a source of third party coverage.
(d) Hospital-specific DSH limit calculation. Only costs incurred in
providing inpatient hospital and outpatient hospital services to
Medicaid individuals, and revenues received with respect to those
services, and costs incurred in providing inpatient hospital and
outpatient hospital services, and revenues received with respect to
those services, for which a determination has been made in accordance
with paragraph (c) of this section that the services were furnished to
individuals who have no source of third party coverage for the specific
inpatient hospital or outpatient hospital service are included when
calculating the costs and revenues for Medicaid individuals and
individuals who have no health insurance or other source of third party
coverage for purposes of section 1923(g)(1) of the Act.

(Catalog of Federal Domestic Assistance Program No. 93.778, Medical
Assistance Program).

Dated: March 30, 2011.
Donald M. Berwick,
Administrator, Centers for Medicare & Medicaid Services.
Approved: October 31, 2011.
Kathleen Sebelius,
Secretary, Department of Health and Human Services.
[FR Doc. 2012-734 Filed 1-13-12; 11:15 am]
BILLING CODE 4120-01-P