[Federal Register Volume 78, Number 94 (Wednesday, May 15, 2013)]
[Proposed Rules]
[Pages 28551-28569]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-11550]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 447

[CMS-2367-P]
RIN 0938-AR31


Medicaid Program; State Disproportionate Share Hospital Allotment 
Reductions

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

ACTION: Proposed rule.

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SUMMARY: The statute, as amended by the Affordable Care Act, requires 
aggregate reductions to state Medicaid Disproportionate Share Hospital 
(DSH) allotments annually from fiscal year (FY) 2014 through FY 2020. 
This proposed rule delineates a methodology to implement the annual 
reductions for FY 2014 and FY 2015. The rule also proposes to add 
additional DSH reporting requirements for use in implementing the DSH 
health reform methodology.

DATES: To be assured consideration, comments must be received at one of 
the addresses provided below, no later than 5 p.m. on July 12, 2013.

ADDRESSES: In commenting, please refer to file code CMS-2367-P. Because 
of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission.

[[Page 28552]]

    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-2367-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-2367-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.
    (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) 786-7195 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 and Richard 
Strauss, (410) 786-2019.

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. Executive Summary

A. Purpose

    The statute as amended by the Affordable Care Act sets forth 
aggregate reductions to state Medicaid disproportionate share hospital 
(DSH) allotments annually from fiscal year (FY) 2014 through FY 2020. 
This proposed rule delineates the DSH Health Reform Methodology (DHRM) 
to implement the annual reductions for FY 2014 and FY 2015.

B. Summary of the Major Provisions

    The statute as amended by the Affordable Care Act directs the 
Secretary to implement the annual DSH allotment reductions using a 
DHRM. This rule proposes to amend part 447 by establishing the DHRM. 
The DHRM incorporates five factors identified in the statute.

C. Costs and Benefits

    Taking these five factors into account for each state, the proposed 
DHRM would generate a state-specific DSH allotment reduction amount for 
FY 2014 and FY 2015. The total of all DSH allotment reduction amounts 
would equal the aggregate annual reduction amounts identified in the 
statute for FY 2014 and FY 2015. To determine the effective annual DSH 
allotment for each state, the state-specific annual DSH allotment 
reduction amount would be applied to the unreduced DSH allotment amount 
for its respective state.

II. Background

A. Introduction

    As a result of the Affordable Care Act, millions of Americans will 
have access to health insurance coverage through qualified health plans 
offered through Health Insurance Exchanges (also called marketplaces) 
or through the Medicaid program. This increase in the number of 
individuals having access to health insurance is expected to 
significantly reduce levels of uncompensated care provided by 
hospitals.
    On the assumption that the number of uninsured people will fall 
sharply beginning in 2014, the statute reforms an existing initiative 
under the Medicaid program to address the situation of hospitals which 
serve a disproportionate share of low income patients and therefore may 
have uncompensated care costs. Under sections 1902(a)(13)(A)(iv) and 
1923 of the Social Security Act (the Act), states are required to make 
payments to qualifying ``disproportionate share'' hospitals (DSH 
payments). Section 2551 of the Affordable Care Act amended section 
1923(f) of the Act, by adding paragraph (7), to provide for aggregate 
reductions in federal funding under the Medicaid program for such DSH 
payments for the 50 states and the District of Columbia. This reform of 
the DSH payment authority is consistent with the reduction of 
uncompensated care costs (particularly those associated with the 
uninsured) expected to result from the expansion of coverage under the 
statute.
    Section 1923(f)(7)(A)(i) of the Act requires that the Secretary of 
Health and Human Services (the Secretary) implement the aggregate 
reductions in federal funding for DSH payments through reductions in 
annual state allotments of federal funding for DSH payments (state DSH 
allotments), and accompanying reductions in payments to each state. 
Since 1998, the amount of federal funding for DSH payments for each 
state has been limited to an annual state DSH allotment in accordance 
with section 1923(f) of the Act. Section 1923(f)(7) of the Act requires 
the use of a DHRM to determine the percentage reduction in each annual 
state DSH allotment to achieve the required aggregate annual reduction 
in federal DSH funding.
    Section 1923(f)(7)(B) establishes the following five factors that 
must be considered in the development of the DHRM. The methodology 
must:
     Impose a smaller percentage reduction on low DSH States;
     Impose larger percentage reductions on states that have 
the lowest

[[Page 28553]]

percentages of uninsured individuals during the most recent year for 
which such data are available;
     Impose larger percentage reductions on states that do not 
target their DSH payments on hospitals with high volumes of Medicaid 
inpatients;
     Impose larger percentage reductions on states that do not 
target their DSH payments on hospitals with high levels of 
uncompensated care; and
     Take into account the extent to which the DSH allotment 
for a state was included in the budget neutrality calculation for a 
coverage expansion approved under section 1115 as of July 31, 2009.
    The statutory provision for each factor contains explicit 
principles, described below, to apply when calculating the annual DSH 
allotment reduction amounts for each state through the DHRM.

B. Legislative History and Overview

    The Omnibus Budget Reconciliation Act of 1981 (OBRA '81) (Pub. L. 
97-35, enacted on August 31, 1981) amended section 1902(a)(13) of the 
Act to require that Medicaid payment rates for hospitals ``take into 
account the situation of hospitals that serve a disproportionate share 
of low-income patients with special needs.'' Over the more than 30 
years since this requirement was first enacted, the Congress has set 
forth in section 1923 of the Act payment targets and limits to 
implement the requirement and to ensure greater oversight, 
transparency, and targeting of funding to hospitals.
    To qualify as a DSH under section 1923(b) of the Act, a hospital 
must meet two minimum qualifying criteria in section 1923(d) of the 
Act. The first criterion is that the hospital has at least two 
obstetricians who have staff privileges at the hospital and who have 
agreed to provide obstetric services to Medicaid individuals. This 
criterion does not apply to hospitals in which the inpatients are 
predominantly individuals under 18 years of age or hospitals that do 
not offer nonemergency obstetric services to the general public as of 
the date of the enactment of the Act. The second criterion is that the 
hospital has a Medicaid inpatient utilization rate of at least 1 
percent.
    Under section 1923(b) of the Act, a hospital meeting the minimum 
qualifying criteria in section 1923(d) of the Act is deemed as a DSH if 
the hospital's Medicaid inpatient utilization rate (MIUR) is at least 
one standard deviation above the mean MIUR in the state, or if the 
hospital's low-income utilization rate exceeds 25 percent. States have 
the option to define disproportionate share hospitals under the state 
plan using alternative qualifying criteria as long as the qualifying 
methodology comports with the deeming requirements of section 1923(b) 
of the Act. Subject to certain federal payment limits, states are 
afforded flexibility in setting DSH state plan payment methodologies to 
the extent that these methodologies are consistent with section 1923(c) 
of the Act. Section 1923(f) of the Act limits federal financial 
participation (FFP) for total statewide DSH payments made to eligible 
hospitals in each federal FY to the amount specified in an annual DSH 
allotment for each state. Although there have been some special rules 
for calculating DSH allotments for particular years or sets of years, 
section 1923(f)(3) establishes a general rule that state DSH allotments 
are calculated on an annual basis in an amount equal to the DSH 
allotment for the preceding FY increased by the percentage change in 
the consumer price index for all urban consumers for the previous FY. 
The annual allotment, after the consumer price index increase, is 
limited to the greater of the DSH allotment for the previous year or 
twelve percent of the total amount of Medicaid expenditures under the 
state plan during the FY. Allotment amounts were originally established 
in the Medicaid Voluntary Contribution and Provider Specific Tax 
Amendments of 1991 based on each state's historical DSH spending.
    Section 1923(g) of the Act also limits FFP for DSH payments by 
imposing a hospital-specific limit on DSH payments. FFP is not 
available for DSH payments that exceed the hospital's uncompensated 
cost of providing inpatient hospital and outpatient hospital services 
to Medicaid patients and the uninsured, minus payments received by the 
hospital by or on the behalf of those patients.
    The statute, as amended by the Affordable Care Act, requires annual 
aggregate reductions in federal DSH funding from FY 2014 through FY 
2020. The aggregate annual reduction amounts are:
     $500,000,000 for FY 2014;
     $600,000,000 for FY 2015;
     $600,000,000 for FY 2016;
     $1,800,000,000 for FY 2017;
     $5,000,000,000 for FY 2018;
     $5,600,000,000 for FY 2019; and
     $4,000,000,000 for FY 2020.
    To implement these annual reductions, the statute requires that the 
Secretary reduce annual state DSH allotments, and payments to states, 
based on a DHRM specified in section 1923(f)(7)(B) of the Act. The 
proposed DHRM relies on the five statutorily identified factors 
collectively to determine a state-specific DSH allotment reduction 
amount to be applied to the allotment that is calculated under section 
1923(f) of the Act prior to the reductions under section 1923(f)(7) of 
the Act.

C. The Impact of a State's Decision To Adopt the New Low-Income Adult 
Coverage Group

    The statute provides significant federal financial support for 
states to extend coverage to low-income adults under section 
1902(a)(10)(A)(i)(VIII) of the Act. For a state that implements the new 
adult coverage group, the state and its hospitals will receive full 
Medicaid reimbursement for many previously uninsured patients. So on 
balance, we believe both hospitals and States stand to benefit greatly 
from expanding Medicaid.
    Implementation of the new coverage group is expected to affect the 
amount of uncompensated care and the percentage of uninsured 
individuals within states. Generally, we expect that states that do not 
implement the new coverage group would have relatively higher rates of 
uninsured, and more uncompensated care, than states that adopt the new 
coverage group.
    Because states that implement the new coverage group would have 
lower rates of uninsurance, the reduction in DSH funding may be greater 
for such states compared to States that do not implement the new 
coverage group. Consequently, hospitals in states implementing the new 
coverage group that serve Medicaid patients may experience a deeper 
reduction in DSH payments than they would if all states were to 
implement the new coverage group. Given the statutory reductions in the 
funding for Medicaid DSH in the Affordable Care Act, we intend to 
account for the different circumstances among states in the formula in 
future rulemaking.
    Currently, we do not have sufficient information on the relative 
impacts that would result from state decisions to implement the new 
coverage group, and thus we have determined to propose a DHRM only for 
the first two years during which the DSH funding reductions are in 
effect. The data that the reductions are based on for these two years 
will not reflect differential decisions to implement the new coverage 
group. Data reflecting the effects of the decision to implement the new 
coverage group may not be available to consider the impact of such a 
decision until 2016. Therefore, we intend to continue evaluating 
potential

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implications for accounting for coverage expansion in the DHRM. While 
we are interested in public comment on this issue, we intend to address 
this issue more completely in separate rulemaking for DSH allotment 
reductions for FY 2016 and thereafter.
    Accordingly, we are proposing to establish a DHRM that would be in 
effect for FY 2014 and FY 2015 and we are not including a method to 
account for differential coverage expansions in Medicaid for FY 2014 
and FY 2015.

D. DHRM Data Sources

    The statute establishes parameters regarding data and/or suggested 
data sources for specific factors in the development of the DHRM. We 
are proposing to utilize for the DHRM, wherever possible, data sources 
and metrics that are transparent and readily available to CMS, states, 
and the public, such as: United States Census Bureau data, Medicaid DSH 
data reported as required by section 1923(j) of the Act, existing state 
DSH allotments, and Form CMS-64 Medicaid Budget and Expenditure System 
(MBES) data. We are proposing to utilize the most recent year available 
for all data sources. For one data source, we intend to collect 
information directly from state Medicaid agencies outside of this rule.
    Specifically, we intend for states to submit the information used 
to determine which hospitals are deemed disproportionate share under 
section 1923(b) of the Act. Although we do not currently collect this 
information because states are required to make DSH payments to 
hospitals that are DSH eligible, states should have this information 
readily available. To ensure that all hospitals are properly deemed 
disproportionate share, states must determine the mean MIUR for 
hospitals receiving Medicaid payments in the state and the value of one 
standard deviation above the mean. We are also proposing to rely on 
data derived from Medicaid DSH audit and reporting data. The data is 
reported by states as required by section 1923(j) of the Act and the 
``Medicaid Disproportionate Share Hospital Payments'' final rule 
published on December 19, 2008 (73 FR 77904) (and herein referred to as 
the 2008 DSH final rule) requiring state reports and audits to ensure 
the appropriate use of Medicaid DSH payments and compliance with the 
DSH limit imposed at section 1923(g) of the Act. This is the only 
comprehensive data source for DSH hospitals that identifies hospital-
specific DSH payments, hospital-specific uncompensated care costs, and 
hospital-specific Medicaid utilization in a manner consistent with 
Medicaid DSH program requirements.
    To date, we have received rich, comprehensive audit and reporting 
data from each state that makes Medicaid DSH payments. To facilitate 
the provision of high quality data, we provided explicit parameters in 
the 2008 DSH final rule and associated policy guidance for calculating 
and reporting data elements. The 2008 DSH final rule included a 
transition period in which states and auditors could develop and refine 
audit and reporting techniques. This transition period covered data 
reported relating to state plan rate years 2005 through 2010. We 
recognize that the DSH audit and reporting data during this transition 
period may vary in its quality and accuracy from state to state and 
have considered utilizing alternative uncompensated cost data and 
Medicaid utilization data from sources such as the Medicare Form CMS-
2552. The DSH audit and reporting data, however, remains the only 
comprehensive reported data available that is consistent with Medicaid 
program requirements. States are already required to report this data 
by the last day of the federal fiscal year ending three years from the 
Medicaid State plan rate year under audit as required by the 2008 DSH 
final rule. However, state submitted audit and reporting data is 
subject to detailed CMS review and may require significant resources to 
ensure that it is compiled and prepared for use in the proposed DHRM. 
This means that the data used for the methodology may not be the most 
recently submitted data, but instead the most recent data available to 
us in usable form. We have been actively engaged in reviewing state 
audits and reports to ensure quality and accuracy. Consistent with 
ongoing efforts to ensure that the reported data is of the highest 
quality possible as we move through the transition period, we intend to 
issue additional detailed guidance to states by the end of calendar 
year (CY) 2013 that would be applicable to audits and reports due to us 
by the end of CY 2014.
    As required by the statute, the DHRM must impose the larger 
percentage DSH allotment reductions on the states that have the lowest 
percentages of uninsured individuals. Although other sources of this 
information could be considered for this purpose, the statute 
explicitly refers to the use of data from the Census Bureau for 
determining the percentage of uninsured for each state. We identified 
and considered two Census Bureau data sources for this purpose, the 
American Community Survey (ACS); and the Annual Social and Economic 
Supplement to the Current Population Survey (CPS). In consultation with 
the Census Bureau, we are proposing to use the data from the ACS for 
the following reasons. First, the ACS is the largest household survey 
in the United States; in that regard, the annual sample size for the 
ACS is over 30 times larger than that for the CPS--about 3 million for 
the ACS versus 100 thousand for the CPS. The ACS is conducted 
continuously each month throughout the year, with the sample for each 
month being roughly \1/12\ of the annual total, while the CPS is 
conducted in the first four months following the end of the survey 
year. Finally, although the definition of uninsured and insured status 
is the same for the ACS and the CPS, the CPS considers the respondents 
as uninsured if they are uninsured at any time during the year whereas 
the ACS whether the respondent has coverage at the time of the 
interview, which are conducted at various times throughout the year. 
For these reasons, and with the recommendation of the Census Bureau, we 
determined that the ACS is the appropriate source for establishing the 
percentage of uninsured for each state for purpose of the proposed 
DHRM.
    In addition to Census Bureau data, we considered using various 
alternative data with different population parameters and/or different 
definitions of uninsured individuals. We are also considering adjusting 
the definition of the uninsured for reductions applicable for FY 2016 
and beyond reductions through separate rulemaking.

III. Provisions of the Proposed Rule

A. DHRM Overview

    The statute requires aggregate annual reduction amounts for FY 2014 
through FY 2020 to be reduced through a DHRM designed by the Secretary 
consistent with the statutorily-established factors. Taking these 
factors into account for each state, the proposed DHRM would generate a 
state-specific DSH allotment reduction amount for FY 2014 and FY 2015 
for all 50 states and DC. The total of all DSH allotment reduction 
amounts would equal the aggregate annual reduction amounts identified 
in the Affordable Care Act for FY 2014 and FY 2015. To determine the 
effective annual DSH allotment for each state, the state-specific 
annual DSH allotment reduction amount would be applied to the unreduced 
DSH allotment amount for its respective state.
    We would calculate an unreduced DSH allotment for each state prior 
to the beginning of each FY, as we do currently. This unreduced 
allotment is

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determined by calculating the allotment in section 1923(f) of the Act 
prior to the application of the DHRM under section 1923(f)(7) of the 
Act. The unreduced allotment would serve as the base amount for each 
state to which the state-specific DSH allotment reduction amount would 
apply annually. In this proposed rule, we are utilizing estimated 
unreduced DSH allotments for FY 2014 for illustrative purposes.
    We propose to apply the DHRM to the unreduced DSH allotment amount 
on an annual basis for FY 2014 and FY 2015. Under the DHRM, we consider 
the five factors identified in the statute to determine each state's 
annual state-specific annual DSH allotment reduction amount. 
Limitations on the availability of data relating to some of the five 
factors affect the calculation and, therefore, we are seeking comment 
regarding readily available data sources that may be useful.
    The proposed DHRM utilizes available data and a series of 
interacting calculations that result in the identification of state-
specific reduction amounts that, when summed, equal the aggregate DSH 
allotment reduction amount identified by the statute for each 
applicable year. The proposed DHRM accomplishes this through the 
following summarized steps:
    1. Separate states into two state groups, non-low DSH states and 
low-DSH states.
    2. Proportionately allocate aggregate DSH funding reductions to 
each of these two state groups based on each state group's total 
unreduced DSH allotment amount.
    3. Apply a Low DSH State Percentage Reduction Factor to adjust each 
state group's DSH funding reduction amount while maintaining the 
combined aggregate DSH funding reduction.
    4. Divide each state group's DSH allotment reduction amount among 
three statutorily identified factors, the Uninsured Percentage Factor 
(UPF), the High Level of Uncompensated Care Factor (HUF), and the High 
Volume of Medicaid Inpatients Factor (HMF). We are proposing to assign 
a 33 and \1/3\ percent weight to the UPF and a 66 and \2/3\ percent 
combined weight for the two DSH payment targeting factors (a 33 and \1/
3\ percent weight for the HUF, and a 33 and \1/3\ percent weight for 
the HMF). This weight assignment provides a higher weight to the DSH 
payment targeting requirements than the UPF. We considered various 
alternative weight assignments prior to proposing equal weights. We 
could have assigned a 50 percent weight to the UPF, and a 50 percent 
combined weight for the two DSH payment targeting factors (25 percent 
for the HUF and 25 percent for the HMF). This weight assignment would 
have provided an equal weight to the requirement at 1923(f)(7)(B)(i)(I) 
of the Act and the requirement at 1923(f)(7)(B)(i)(II) of the Act. We 
also could have assigned an even lower weight to the uninsured factor 
than the payment targeting factors, or lower weights to the payment 
targeting factors than the uninsured factor. We also could have 
assigned no weight to the uninsured factor or no weight to the 
targeting factors. We are seeking public comment and input regarding 
alternate assignments. We also seek comments on how these weights would 
impact specific hospital types.
    5. For each state group, determine state-specific DSH allotment 
reduction amounts relating to the Uninsured Percentage Factor.
    6. For each state group, determine state-specific DSH allotment 
reduction amounts relating to the High Level of Uncompensated Care 
Factor.
    7. For each state group, determine state-specific DSH allotment 
reduction amounts relating to the High Volume of Medicaid Inpatients 
Factor.
    8. Apply a section 1115 Budget Neutrality Factor for each 
qualifying state.
    9. Identify the state-specific DSH allotment reduction amount.
    10. Subtract each state's state-specific DSH allotment reduction 
amount from each state's unreduced DSH allotment.
    The manner in which each of the five factors are considered and 
calculated in the proposed DHRM is described in greater detail below.
    The proposed DHRM recognizes the variations in the development of 
DSH allotments among states and the application of the methodology 
generates a lesser impact on low DSH states. Further, the proposed DHRM 
is designed to lessen the impact on states that have targeted DSH 
payments to hospitals that have high volumes of Medicaid inpatients and 
to hospitals that have high levels of uncompensated care. Concurrently, 
the proposed DHRM is designed to incentivize states to target current 
and future DSH payments to hospitals that have higher volumes of 
Medicaid inpatients and to hospitals that have higher levels of 
uncompensated care relative to all DSH eligible hospital in a state. 
The proposed DHRM also takes into account the extent to which the DSH 
allotment for a state was included in part or in whole in the budget 
neutrality calculation for a coverage expansion approved under section 
1115 as of July 31, 2009 by excluding from DSH allotment reduction the 
amount of DSH that qualifying states continue to divert specifically 
for coverage expansion in the budget neutrality calculation. Any amount 
of DSH diverted for other purposes under the demonstration would still 
be subject to reduction by automatically assigning qualifying states an 
average percentage reduction amount for factors for which the state 
does not have complete and/or relevant DSH payment data.

B. Factor 1--Low DSH Adjustment Factor (LDF)

    The first factor considered in the proposed DHRM is the Low DSH 
Adjustment Factor identified at section 1923(f)(7)(B)(ii) of the Act, 
which requires that the DHRM impose a smaller percentage reduction on 
``low DSH states'' that meet the criterion described in section 
1923(f)(5)(B) of the Act in 2003. To qualify as a low DSH state, total 
expenditures under the state plan for DSH payments for FY 2000, as 
reported to us as of August 31, 2003, had to have been greater than 
zero but less than 3 percent of the state's total Medicaid state plan 
expenditures during the FY. Historically, low DSH states (identified in 
Table 1) have received lower DSH allotments relative to their total 
Medicaid expenditures than non-low DSH states.
    We propose to apply the Low DSH Adjustment Factor (LDF) by imposing 
a greater proportion of the annual DSH funding reduction on non-low DSH 
states. The factor is calculated and applied as follows:
    1. Separate states into two groups, non-low DSH states and low-DSH 
states.
    2. Divide each state's unreduced preliminary DSH allotment for the 
year for which the reduction is calculated by estimated Medicaid 
service expenditures for that same year. Currently, we create a 
preliminary DSH allotment based on the estimates available in August of 
the prior year and we issue a final DSH allotment once the federal FY 
ends.
    3. For each state group, calculate the non-weighted mean of the 
value calculated in step 2 for states in the group.
    4. Divide the average calculated in step 3 for the low DSH state 
group by the average calculated in step 3 for the non-low DSH state 
group.
    5. Convert this number to a percentage. This percentage is the LDF.
    6. Multiply the proportionately allocated DSH funding reductions 
for the low-DSH state group by the LDF percentage to determine the 
aggregate DSH reduction amount that would be distributed across the low 
DSH state group.

[[Page 28556]]

    7. Subtract the aggregate DSH reduction amount determined in step 6 
from the proportionately allocated DSH funding reduction for the low-
DSH state group, and add the remainder to the aggregate DSH reduction 
amount that would be distributed across the non-low DSH state group.

We considered using various alternative proportional relationships to 
establish the LDF, including the proportion of each state group's 
annual Medicaid DSH expenditures to total Medicaid expenditures.

C. Factor 2--Uninsured Percentage Factor (UPF)

    The second factor considered in the proposed DHRM is the Uninsured 
Percentage Factor (UPF) identified at section 1923(f)(7)(B)(i)(I) of 
the Act, which requires that the DHRM impose larger percentage DSH 
allotment reductions on states that have the lowest percentages of 
uninsured individuals. The statute also requires that the percentage of 
uninsured individuals is determined on the basis of data from the 
Census Bureau, audited hospital cost reports, and other information 
likely to yield accurate data, during the most recent year for which 
such data are available.
    To determine the percentage of uninsured individuals in each state, 
the proposed DHRM relies on the total population and uninsured 
population as identified in the most recent ``1-year estimates'' data 
available from the ACS conducted by the Census Bureau. The Census 
Bureau generates ACS ``1-year estimates'' data annually based on a 
point-in-time survey of approximately 3 million individuals. For 
purposes of the proposed DHRM, we would utilize the most recent ACS 
data available at the time of the calculation of the annual DSH 
allotment reduction amounts.
    The UPF, as applied through the proposed DHRM, has the effect of 
imposing lower relative DSH allotment reductions on states that have 
the highest percentage of uninsured individuals. The UPF would mitigate 
the DSH reduction for states with the highest percentage of uninsured 
individuals.
    The proposed UPF is determined separately for each state group (low 
DSH and non-low DSH) as follows:
    1. Uninsured Value--Using Bureau of Census data, calculate each 
state's uninsured value by dividing the total state population by the 
uninsured in the state. (This is different than the percentage rate of 
uninsurance; the rate of uninsurance can be obtained by dividing 100 by 
this number)
    2. Uninsured Allocation Component--Determine the relative uninsured 
value for each state compared to other states in the state group by 
dividing the value in step one by the state group total of step one 
values. The result should be a percentage, and the total of the 
percentages for all states in the state group should total 100 percent.
    3. Allocation Weighting Factor--To ensure that larger and smaller 
states are given fair weight in the final UPF, divide each state's 
preliminary unreduced DSH allotment by the sum of all unreduced 
preliminary DSH allotments in the respective state group to obtain 
allocation weighting factor, expressed as a percentage. The sum of all 
weighting factors should equal 100 percent. Then, take this percentage 
for each state and multiply it by the state's uninsured allocation 
component determined in step 2. The result is the allocation weighting 
factor.
    4. For each state group, divide each state's allocation weighting 
factor by the sum of all allocation weighting factors. The resulting 
percentage is the UPF.
    We would determine the UPF portion of the final aggregate DSH 
allotment reduction allocation for each state by multiplying the 
state's UPF by the aggregate DSH allotment reduction allocated to the 
UPF factor for the respective state group. As with the prior factor, we 
propose to utilize preliminary DSH allotment estimates to develop the 
DSH reduction factors.

D. Factor 3--High Volume of Medicaid Inpatients Factor (HMF)

    The third factor considered in the proposed DHRM is the High Volume 
of Medicaid Inpatients Factor (HMF) identified at section 
1923(f)(7)(B)(i)(II)(aa) of the Act, which requires that the DHRM 
impose larger percentage DSH allotment reductions on states that do not 
target DSH payments to hospitals with the highest volumes of Medicaid 
inpatients. For purposes of the DHRM, the statute defines hospitals 
with high volumes of Medicaid patients as those defined in section 
1923(b)(1)(A) of the Act. These hospitals must meet minimum qualifying 
requirements at section 1923(d) of the Act and have an MIUR that is at 
least one standard deviation above the mean MIUR for hospitals 
receiving Medicaid payments in the state. Every hospital that meets 
that definition is deemed a disproportionate share hospital and is 
statutorily required to receive a DSH payment. The HMF, through the 
proposed DHRM, provides the mitigation of the DSH reduction amount for 
states that have been targeting and would in the future target DSH 
payments to these federally deemed hospitals.
    States that have been, and continue to, target a large percentage 
of their DSH payments to hospitals that are federally deemed as a DSH 
based on their MIUR would receive the lowest reduction amounts relative 
to their total spending. States that target the largest amounts of DSH 
payments to hospitals that are not federally deemed based on MIUR would 
receive larger reduction amounts under this factor. The current DSH 
allotment amounts are unrelated to the amounts of MIUR-deemed hospitals 
and their DSH-eligible uncompensated care costs. By basing the HMF 
reduction on the amounts that states do not target to hospitals with 
high volumes of Medicaid inpatients, this proposed methodology 
incentivizes states to target DSH payments to such hospitals.
    To ensure that all deemed disproportionate share hospitals receive 
a required DSH payments, states are already required to determine the 
mean MIUR for hospitals receiving Medicaid payments in the state and 
the value of one standard deviation above the mean. This rule proposes 
to rely on MIUR information for use in the DHRM that CMS intends to 
collect from states on an annual basis outside of this rule. When a 
state does not timely submit this separately required MIUR information, 
for purposes of this factor, CMS will assume that the state has the 
highest value of one standard deviation above the mean reported among 
all other states.
    The calculation of the HMF would rely on extant data that should be 
readily available to states. The following data elements are used in 
the HMF calculation: the preliminary unreduced DSH allotment for each 
state, the DSH hospital payment amount reported for each DSH in 
accordance with Sec.  447.299(c)(17), the MIUR for each DSH reported in 
accordance with Sec.  447.299(c)(3), and the value of one standard 
deviation above the mean MIUR for hospitals receiving Medicaid payments 
in the state reported separately.
    The proposed HMF is a state-specific percentage that is calculated 
separately for each state group (low DSH and non-low DSH) as follows:
    1. For each state, classify each disproportionate share hospital 
that has an MIUR at least one standard deviation above the mean MIUR 
for hospitals receiving Medicaid payments in the state as a High 
Medicaid Volume hospital.
    2. For each state, determine the amount of DSH payments to non-High 
Medicaid Volume DSH hospitals. This

[[Page 28557]]

data element should come from the most recently submitted and accepted 
DSH audit template.
    3. For each state, determine a percentage by dividing the state's 
total DSH payments made to non-High Medicaid Volume hospitals by the 
aggregate amount of DSH payments made to non-High Medicaid Volume 
hospitals for the entire state group.
    4. The result of step 3 is the HMF.
    We would determine each state's HMF reduction amount by applying 
the HMF percentage to the aggregate reduction amount allocated to this 
factor for each state group.
    As a result of this methodology, there are a number of interactions 
that may occur for states among DSH payment methodologies, DSH 
allotments, and DSH allotment reductions. Most of these scenarios work 
in concert with this factor's established reduction relationship. For 
example, if a state paid out its entire DSH allotment to hospitals with 
high volumes of Medicaid inpatients, it would receive no reduction 
associated with this factor because all DSH payments were made only to 
hospitals that qualify as high volume. The results of this scenario 
would be consistent with the methodology because the state is 
incentivized to target DSH payments to high Medicaid volume hospitals.
    Another example is a state that makes DSH payments up to the 
hospital-specific DSH limit to all hospitals with high Medicaid volume 
but also uses its remaining allotment to make DSH payments to hospitals 
that do not qualify as high volume. In this example, the state would 
receive a reduction under this factor based on the amount of DSH 
payments it made to non-high Medicaid volume hospitals. Though the 
state targeted DSH payments to hospitals with high Medicaid volume, the 
existing size of its DSH allotment permitted it to make DSH payments to 
hospitals that did not meet the statutory definition of high Medicaid 
volume. In that situation, this allotment reduction would effectively 
reduce a state's existing DSH allotment to the extent that the 
allotment exceeded the maximum amount that the state could pay to 
hospitals that are high Medicaid volume. The resulting HMF reduction 
would be greater for states with DSH allotments large enough to pay 
significant amounts to non-high Medicaid volume hospitals. This ensures 
that states target DSH payments to high Medicaid volume hospitals and 
distribute the reductions in such a way as to promote the ability of 
all states to provide DSH funds to high Medicaid volume hospitals.
    We would continue to analyze the proposed DHRM and comments to the 
proposed rule to ensure that the DHRM is effective in tying the level 
of DSH reductions to the targeting of DSH payments to high Medicaid 
volume hospitals.

E. Factor 4--High Level of Uncompensated Care Factor (HUF)

    The fourth factor considered in the DHRM is the HUF identified at 
section 1923(f)(7)(B)(i)(II)(bb) of the Act, which requires that the 
DHRM impose larger percentage DSH allotment reductions on states that 
do not target DSH payments on hospitals with high levels of 
uncompensated care. We are proposing to rely on the existing statutory 
definition of uncompensated care cost used in determining the hospital-
specific limit on 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 FY, the difference between the costs 
incurred by that hospital for furnishing inpatient hospital and 
outpatient hospital services during the applicable state FY to Medicaid 
individuals and individuals who have no health insurance or other 
source of third party coverage for the 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 limit, or 
hospital-specific DSH limit.
    For purposes of this rule, we are proposing to rely on this 
definition of uncompensated cost for the calculation of the HUF, as 
reported by states on the most recent available DSH audit and reporting 
data. For the proposed DHRM, hospitals with high levels of 
uncompensated care are defined based on a comparison with other 
Medicaid DSH hospitals in their state. Any hospital that exceeds the 
mean ratio of uncompensated care costs to total Medicaid and uninsured 
inpatient and outpatient hospital service costs within its state is 
considered a hospital with a high level of uncompensated care. This 
data is consistent with existing Medicaid DSH program definition of 
uncompensated care and is readily available to states and us.
    The following data elements are used in the HUF calculation:
     The preliminary unreduced DSH allotment for each state;
     DSH hospital payment amounts reported for each DSH in 
accordance with Sec.  447.299(c)(17);
     Uncompensated care cost amounts reported for each DSH in 
accordance with Sec.  447.299(c)(16);
     Total Medicaid cost amounts reported for each DSH in 
accordance with Sec.  447.299(c)(10); and
     Total uninsured cost amounts reported for each DSH in 
accordance with Sec.  447.299(c)(14).
    The statute also requires that uncompensated care used in this 
factor of the DHRM exclude bad debt. The proposed rule relies on the 
uncompensated care cost data derived from Medicaid DSH audit and 
reporting required by section 1923(f) of the Act and implementing 
regulations. This uncompensated care data excludes bad debt, including 
unpaid co-pays and deductibles, associated with individuals with a 
source of third party coverage for the service received during the 
year.
    The HUF is a state-specific percentage that is calculated 
separately for each state group (low DSH and non-low DSH) as follows:
    1. Determine each disproportionate share hospital's Uncompensated 
Care Level by dividing its uncompensated care cost by the sum of its 
total Medicaid cost and its total uninsured cost. This data element 
would come from the most recently submitted and accepted DSH audit 
template.
    2. For each state, calculate the weighted mean Uncompensated Care 
Level.
    3. Identify all hospitals that meet or exceed the mean 
Uncompensated Care Level as High Uncompensated Care Level hospitals. We 
also considered identifying a metric higher than the mean for purposes 
of identifying hospitals as High Uncompensated Care Level hospitals and 
are soliciting comments on this alternative.
    4. For each state, determine the amount of DSH payments to non-High 
Uncompensated Care Level hospitals.
    5. For each state, determine a percentage by dividing the state's 
total DSH payments made to non-High Uncompensated Care Level hospitals 
by the aggregate amount of DSH payments made to non-High Uncompensated 
Care Level hospitals for the entire state group. The result is the HUF.
    We would determine each state's HUF reduction amount by applying 
the HUF percentage to the aggregate reduction amount allocated to this 
factor for each state group. Similar to the HMF, this methodology may 
produce a number of interactions that could occur for states among DSH 
payment methodologies, DSH allotments, and DSH allotment

[[Page 28558]]

reductions. Most of these interactions work in concert with the intent 
of this factor's established reduction relationship. However, we have 
identified some potential scenarios where the interactions may be 
inconsistent with the methodology. For example, it is possible that a 
hospital may not be considered to have a high level of uncompensated 
care even though it provides a higher percentage of services to 
Medicaid and uninsured individuals and has a greater total qualifying 
uncompensated care costs than another hospital that does qualify as 
having a high level of uncompensated care. Specifically, Hospital A has 
$20 million in total hospital costs, $11 million in DSH-eligible 
Medicaid and uninsured costs, and $5 million in uncompensated care 
cost. Hospital B has $50 million in total hospital costs, $2 million in 
DSH-eligible Medicaid and uninsured costs, and $1 million in 
uncompensated care cost. Assuming the weighted mean uncompensated care 
cost level in the state is 50 percent, Hospital B would be considered 
to have high level of uncompensated care and Hospital A would not. 
Given that Hospital A has 5 times the total uncompensated care of 
Hospital B and serves a much higher percentage of Medicaid and 
uninsured individuals, the results of this scenario are counter to the 
intent of the methodology.
    This scenario exists because the proposed formula does not take 
into account total hospital costs due to extant data limitations. To 
address this concern, we are proposing to modify DSH reporting 
requirements to collect total hospital cost from Medicare cost report 
data for all DSH hospitals. Through separately issued rulemaking for FY 
2016 and thereafter, we intend to substitute total cost for the 
denominator in step one of the HUF calculation above. Since total cost 
is unavailable at this time, we are seeking comment on alternatives to 
the use of total uncompensated care cost as the denominator to 
alleviate this data issue.
    We would continue to analyze the proposed DHRM and comments to the 
proposed rule to ensure that the DHRM is effective in tying the level 
of DSH reductions to the targeting of DSH payments to hospitals with 
high levels of uncompensated care. We believe that the proposed 
methodology, in using the mean uncompensated care cost level as the 
measure to identify hospitals with high levels of uncompensated care, 
captures the best balance in tying the level of DSH reductions to the 
targeting of DSH payments to such high level hospitals. Understanding 
potential data limitations and that the proposed methodology does not 
precisely distinguish how states direct DSH payments among hospitals 
that are identified as at or above the mean uncompensated care, we 
solicit comments on alternative methodologies regarding state targeting 
of DSH payments to hospitals with high levels of uncompensated care.

F. Factor 5--Section 1115 Budget Neutrality Factor (BNF)

    The statute requires that we take into account the extent to which 
a state's DSH allotment was included in the budget neutrality 
calculation for a coverage expansion that was approved under section 
1115 as of July 31, 2009. Prior to the implementation of this proposed 
rule, these states possess full annual DSH allotments as calculated 
under section 1923(f) of the Act. Under an approved section 1115 
demonstration, however, the states may have limited authority to make 
DSH payments under section 1923 of the Act because all or a portion of 
their DSH allotment was included in the budget neutrality calculation 
for a coverage expansion under an approved section 1115 demonstration 
or to fund uncompensated care pools and/or safety net care pools. For 
applicable states, DSH payments under section 1923 of the Act are 
limited to the DSH allotment calculated under section 1923(f) of the 
Act less the allotment amount included in the budget neutrality 
calculation. If a state's entire DSH allotment is included in the 
budget neutrality calculation, it would have no available DSH funds 
with which to make DSH payments under section 1923 of the Act for the 
period of the demonstration.
    Consistent with the statute, for states that include DSH allotment 
in budget neutrality calculations for coverage expansion under an 
approved section 1115 demonstration as of July 31, 2009, we propose to 
exclude from DSH allotment reduction, for the HMF and the HUF factors, 
the amount of DSH allotment that each state currently continues to 
divert specifically for coverage expansion in the budget neutrality 
calculation. Amounts of DSH allotment included in budget neutrality 
calculations for non-coverage expansion purposes under approved 
demonstrations would still be subject to reduction. Uncompensated care 
pools and safety net care pools are considered non-coverage expansion 
purposes. For section 1115 demonstrations not approved as of July 31, 
2009, any DSH allotment amounts included in budget neutrality 
calculations, whether for coverage expansion or otherwise, under a 
later approval would also be subject to reduction.
    We are proposing to determine for each reduction year if any 
portion of a state's DSH allotment qualifies for consideration under 
this factor. To qualify annually, CMS and the state would have to have 
included its DSH allotment in the budget neutrality calculation for a 
coverage expansion that was approved under section 1115 as of July 31, 
2009, and would have to continue to do so at the time that reduction 
amounts are calculated for each FY.
    The proposed DHRM would take into account the extent to which the 
DSH allotment for a state was included in the budget neutrality 
calculation approved under section 1115 as of July 31, 2009 by 
excluding amounts diverted specifically for a coverage expansion and 
automatically assigning qualifying states an average reduction amount 
(based on the state group) for any DSH allotment diverted for non-
coverage expansion purposes and any amounts diverted for coverage 
expansion if the section 1115 demonstration was or is approved after 
July 31, 2009. DSH allotment reductions relating to two DHRM factors 
(the HUF and the HMF) are determined based on how states target DSH 
payments to certain hospitals. Since states qualifying under the budget 
neutrality provision would have limited or no relevant data for these 
two factors, we would be unable to evaluate how they spent the portion 
of their DSH allotment that was diverted for non-coverage expansion. 
Accordingly, we are proposing to maintain the HUF and HMF formula for 
DSH payments for which qualifying states would have available data. 
Because we would not have DSH payment data for DSH allotment amounts 
diverted for non-coverage expansion, we are proposing to assign average 
HUF and HMF reduction percentages for the portion of their DSH 
allotment that they were unable to use to target payments to 
disproportionate share hospitals. Instead of assigning the average 
percentage reduction to non-qualifying amounts, we considered using 
various alternative percentages. Additionally, for qualifying allotment 
amounts diverted specifically for coverage expansion, we considered 
applying the BNF reduction exclusion to the UPF in addition to the HMF 
and HUF. We are seeking comment regarding the use of different 
percentages for the reductions to non-qualifying diversion amounts and 
regarding alternative BNF methodologies that may prove preferable 
alternatives.

[[Page 28559]]

    We recognize that the goal of the expanded coverage and/or payment 
of uncompensated care is directly addressed by the statute. The goal is 
addressed by statute by offering states other, non-DSH funds for such 
expansions, thus limiting the need for the diverted DSH under 
demonstrations. Accordingly, the group of states affected by this 
factor today may change at a later time, depending on how their 
coverage continues to be financed. In addition, based on changes in the 
health coverage landscape, we will reevaluate this policy in future 
rulemaking.

G. Illustration of DSH Health Reform Methodology (DHRM)

    Table 1 and the values contained therein are provided only for 
purposes of illustrating the application of the DHRM and the associated 
DSH reduction factors described in this proposed rule to determine each 
states' DSH allotment reduction for FY 2014. Note that these values do 
not represent the final DSH reduction amounts for FY 2014.
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BILLING CODE 4120-01-C

IV. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995, we are required to 
provide 60-day notice in the Federal Register and solicit public 
comment before a collection of information requirement is submitted to 
the Office of Management and Budget (OMB) for review and approval. In 
order to fairly evaluate whether an information collection should be 
approved by OMB, section 3506(c)(2)(A) of the Paperwork Reduction Act 
of 1995 requires that we solicit comment on the following issues:
     The need for the information collection and its usefulness 
in carrying out the proper functions of our agency.
     The accuracy of our estimate of the information collection 
burden.
     The quality, utility, and clarity of the information to be 
collected.
     Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    To derive average costs, we used data from the U.S. Bureau of Labor 
Statistics for all salary estimates. The salary estimates include the 
cost of fringe benefits, based on the December 2012 Employer Costs for 
Employee Compensation report by the Bureau.
    We are soliciting public comment on each of the section 
3506(c)(2)(A)-required issues for the following information collection 
requirements (ICRs):

ICRs Regarding Reporting Requirements (Sec.  447.299)

    Beginning with each state's Medicaid state plan rate year 2005, for 
each Medicaid state plan rate year, the state must submit to CMS, at 
the same time as it submits the completed DSH audit required under 
Sec.  455.204, the following information for each DSH hospital to which 
the state made a DSH payment in order to permit verification of the 
appropriateness of such payments.
    The ongoing burden associated with the requirements under Sec.  
447.299 is the time and effort it would take each of the 50 state 
Medicaid Programs and the District of Columbia to complete the annual 
Medicaid DSH reporting requirements. Based on the information proposed 
in this rule, we estimate that it would take an additional 4 hours per 
state (from 38 approved hr to 42 total hr) to complete the DSH 
reporting spreadsheets. Consequently, we also estimate an additional 
204 (4 x 51) annual hours for all states and the District of Columbia 
(or 2,142 total hr) and an additional cost of $10,404 (or $85,434 
total).
    In deriving these figures, we used the following hourly labor rates 
and estimated the time to complete each task: $51.00/hr and an 
additional 102 hr (1,071 total hours) for management and professional 
staff to review and prepare reports, and $28.77/hr and an additional 
102 hr (1,071 total hours) for office staff to prepare the reports.
    The preceding requirements and burden estimates will be added to 
the existing PRA-related requirements and burden estimates that have 
been approved by OMB under OCN 0938-0746 (CMS-R-266). The revised total 
burden estimates amount to: 51 annual respondents, 51 annual responses, 
and 2,142 annual hours.

Submission of PRA-Related Comments

    We have submitted a copy of this proposed rule to OMB for its 
review of the rule's information collection and recordkeeping 
requirements. These requirements are not effective until they have been 
approved by the OMB.
    To obtain copies of the supporting statement and any related forms 
for the proposed paperwork collections referenced above, access CMS' 
Web site at http://www.cms.hhs.gov/Paperwork@cms.hhs.gov, or call the 
Reports Clearance Office at 410-786-1326.
    We invite public comments on these potential information collection 
requirements. If you comment on these information collection and 
recordkeeping requirements, please do either of the following:

    1. Submit your comments electronically as specified in the 
ADDRESSES section of this proposed rule; or
    2. Submit your comments to the Office of Information and 
Regulatory Affairs, Office of Management and Budget, Attention: CMS 
Desk Officer, (CMS-2367-P) Fax: (202) 395-6974; or Email: OIRA_submission@omb.eop.gov.

V. 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.

VI. Regulatory Impact Statement

A. Statement of Need

    The Affordable Care Act amended the Act by requiring aggregate 
reductions to state Medicaid DSH allotments annually from FY 2014 
through FY 2020. This proposed rule delineates the DHRM to implement 
the annual reductions for FY 2014 and FY 2015.

B. 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 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). This rule 
has been designated an ``economically significant'' rule measured by 
the $100 million threshold, under section 3(f)(1) of Executive Order 
12866. Accordingly, we have prepared a Regulatory Impact Analysis (RIA) 
that, to the best of our ability, presents the costs and benefits of 
the rulemaking. In accordance with the provisions of Executive Order 
12866, this regulation was reviewed by the Office of Management and 
Budget.
    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) 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 2013, that 
threshold is approximately $141 million. This final rule would not 
mandate any requirements for State, local, or tribal governments, nor 
would it affect private sector costs.
    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 rule does not impose any costs on State or 
local governments, the requirements of Executive Order 13132 are not 
applicable.
    The RFA requires agencies to analyze options for regulatory relief 
of small entities. For purposes of the RFA, small

[[Page 28566]]

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 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.
    Executive Order 13132 establishes certain requirements that an 
agency must meet when it issues 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.
    This proposed rule may be of interest to, and affect, American 
Indians/Alaska Natives. Therefore, we plan to consult with Tribes 
during the comment period and prior to publishing a final rule.

C. Anticipated Effects

1. Effects on State Medicaid Programs
    We anticipate, effective for FY 2014, that the proposed DSH 
allotment reductions would have a direct effect on the ability for some 
or all states to maintain state-wide Medicaid DSH payments at FY 2013 
levels. Federal share DSH allotments, which are published by CMS in an 
annual Federal Register notice, limit the amount of federal financial 
participation (FFP) in the aggregate that states can pay annually in 
DSH payments to hospitals. This proposed rule would reduce state DSH 
allotment amounts and would, therefore, limit the states' ability to 
make DSH payments and claim FFP for DSH payments at FY 2013 levels. By 
statute, the rule would reduce state DSH allotments by $500,000,000 for 
FY 2014 and $600,000,000 for FY 2015. We anticipate that the rule would 
reduce total federal financial participation claimed by states by 
similar amounts, although it may not equal the exact amount of the 
allotment reductions. Due to the complexity of the interaction among 
the proposed DHRM methodology, state DSH allotments, DHRM data, future 
state DSH payment levels and methodologies for FY 2014 and FY 2015, we 
cannot provide a specific estimate of the total federal financial 
impact for each year.
    The proposed rule utilizes a DHRM that would mitigate the negative 
impact on states that continue to have high percentages of uninsured 
and are targeting DSH payments on hospitals that have a high volume of 
Medicaid inpatient and on hospitals with high levels of uncompensated 
care.
2. Effects on Providers
    We anticipate that the final rule would affect certain providers 
through the reduction of state DSH payments. We cannot, however, 
estimate the impact on individual providers or groups of providers. 
This proposed rule would not affect the considerable flexibility 
afforded states 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. States would 
retain the ability to preserve existing DSH payment methodologies or to 
propose modified methodologies by submitting state plan amendments to 
us. Some states may determine that implementing a proportional 
reduction in DSH payments for all qualifying hospitals is the preferred 
method to account for the reduced allotment. Alternatively, states 
could determine that it the best action is to propose a methodology 
that would direct DSH payments reductions to hospitals that do not have 
high Medicaid volume and do not have high levels of uncompensated care. 
Regardless, the rule incentivizes states to target DSH payments to 
hospitals that are most in need of Medicaid DSH funding based on their 
serving a high volume of Medicaid inpatient and having a high level of 
uncompensated care.
    This proposed rule also does not 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.
    Although this rule would reduce state DSH allotments, the 
management of the reduced allotments still largely remains with the 
states. Given that states would retain the same flexibility to design 
DSH payment methodologies under the state plan and that individual 
hospital DSH payment limits would not be reduced, we cannot predict 
whether and how states would exercise their flexibility in setting DSH 
payments to account for their reduced DSH allotment and how this would 
affect individual providers or specific groups of providers.

D. Alternatives Considered

    The Affordable Care Act specifies the annual DSH allotment 
reduction amounts for FY 2014 and FY 2015. Therefore, we were unable to 
consider alternative reduction amounts. Alternatives to the proposed 
DHRM methodology are discussed through the preceding section of this 
rule.

E. Accounting Statement and Table

    As required by OMB Circular A-4 (available at http://www.whitehouse.gov/omb/circulars_a004_a-4/), we have prepared an 
accounting statement table showing the classification of the impacts 
associated with implementation of this proposed rule.

[[Page 28567]]



                                          Table 2--Accounting Statement
----------------------------------------------------------------------------------------------------------------
                                                                                       Units
                                                                 -----------------------------------------------
                    Category                         Estimates                                        Period
                                                                    Year dollar    Discount rate      covered
----------------------------------------------------------------------------------------------------------------
Transfers:
    Annualized Reductions in Disproportionate               -548            2013              7%       2014-2015
     Share Hospital Allotment (in millions).....
                                                            -549            2013              3%       2014-2015
                                                 ---------------------------------------------------------------
    From Whom to Whom...........................  Federal Government to the States due to assumed reduced number
                                                               of uninsured and uncompensated care.
----------------------------------------------------------------------------------------------------------------

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 chapter IV as set forth 
below:

PART 447--PAYMENTS FOR SERVICES

0
1. The authority citation for part 447 continues to read 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

0
2. Section 447.294 is added to read as follows:


Sec.  447.294  Medicaid disproportionate share hospital (DSH) allotment 
reductions for Federal fiscal year 2014 and Federal fiscal year 2015.

    (a) Basis and purpose. This section sets forth the DSH health 
reform methodology (DHRM) for calculating State-specific annual DSH 
allotment reductions from Federal fiscal year 2014 and Federal fiscal 
year 2015 as required under section 1923(f) of the Act.
    (b) Definitions. For purposes of this section--
    Aggregate DSH allotment reductions mean the amounts identified in 
section 1923(f)(7)(A)(ii) of the Act.
    Budget neutrality factor (BNF) is a factor incorporated in the DHRM 
that takes into account the extent to which the DSH allotment for a 
State was included in the budget neutrality calculation for a coverage 
expansion approved under section 1115 as of July 31, 2009.
    DSH payment means the amount reported in accordance with Sec.  
447.299(c)(17).
    Effective DSH allotment means the amount of DSH allotment 
determined by subtracting the State-specific DSH allotment from a 
State's unreduced DSH allotment.
    High level of uncompensated care factor (HUF) is a factor 
incorporated in the DHRM that results in larger percentage DSH 
allotment reduction for States that do not target DSH payments on 
hospitals with high levels of uncompensated care.
    High Medicaid volume hospital means a disproportionate share 
hospital that has an MIUR at least one standard deviation above the 
mean MIUR for hospitals receiving Medicaid payments in the State.
    High uncompensated care hospital means a hospital that exceeds the 
mean ratio of uncompensated care costs to total Medicaid and uninsured 
inpatient and outpatient hospital service costs for all 
disproportionate share hospitals within a state.
    High volume of Medicaid inpatients factor (HMF) is a factor 
incorporated in the DHRM that results in larger percentage DSH 
allotment reduction for States that do not target DSH payments on 
hospitals with high volumes of Medicaid inpatients.
    Hospital with high volumes of Medicaid inpatients means a 
disproportionate share hospital that meets the requirements of section 
1923(b)(1)(A) of the Act.
    Low DSH adjustment factor (LDF) is a factor incorporated in the 
DHRM that results in a smaller percentage DSH allotment reduction on 
low DSH States.
    Low DSH State means a State that meets the criterion described in 
section 1923(f)(5)(B) of the Act.
    Mean HUF reduction percentage is the mean of each State within a 
State group's quotient of its HUF reduction dividing by its unreduced 
DSH allotment.
    Medicaid inpatient utilization rate (MIUR) means the rate defined 
in section 1923(b)(2) of the Act.
    Non-high Medicaid volume hospital means a disproportionate share 
hospitals that does not meet the requirements of section 1923(b)(1)(A) 
of the Act.
    State group means similarly situated States that are collectively 
identified by DHRM.
    State-specific DSH allotment reduction means the amount of annual 
DSH allotment reduction for a particular State as determined by the 
DHRM.
    Total Medicaid cost means the amount reported in accordance with 
Sec.  447.299(c)(10).
    Total population means the 1-year estimates data of the total non-
institutionalized population identified by United States Census 
Bureau's American Community Survey.
    Total uninsured cost means the amount reported for each DSH in 
accordance with Sec.  447.299(c)(14).
    Uncompensated care cost means the amount reported in accordance 
with Sec.  447.299(c)(16).
    Uncompensated care level means a hospital's uncompensated care cost 
divided by the sum of its total Medicaid cost and its total uninsured 
cost.
    Uninsured percentage factor (UPF) is a factor incorporated in the 
DHRM that results in larger percentage DSH allotment reductions for 
States that have the lowest percentages of uninsured individuals.
    Uninsured population means 1-year estimates data of the number of 
uninsured identified by United States Census Bureau's American 
Community Survey.
    Unreduced DSH allotment means the DSH allotment calculated under 
section 1923(f) of the Act prior to annual reductions under this 
section.
    (c) Aggregate DSH allotment reduction amounts. The aggregate DSH 
allotment reduction amounts are as provided in section 
1923(f)(7)(A)(ii) of the Act.
    (d) State data submission requirements. States are required to 
submit the mean MIUR, determined in accordance with section 
1923(b)(1)(A) of the Act, for all hospitals receiving Medicaid payments 
in the State and the

[[Page 28568]]

value of one standard deviation above such mean. The State must provide 
this data to CMS by June 30 of each year identified in paragraph (c) of 
this section.
    (e) DHRM methodology. Section 1923(f)(7) of the Act requires 
aggregate annual reduction amounts for FY 2014 and FY 2015 to be 
reduced through the DHRM. The DHRM is calculated on an annual basis 
based on the most recent data available to CMS at the time of the 
calculation. The DHRM is determined as follows:
    (1) Establishing State groups. For each FY, CMS will separate low-
DSH States and non-low DSH states into distinct State groups.
    (2) Aggregate DSH allotment reduction allocation. CMS will allocate 
a portion of the aggregate DSH allotment reductions to each State group 
by the following:
    (i) Dividing the sum of each State group's preliminary unreduced 
DSH allotments by the sum of both State groups' preliminary unreduced 
DSH allotment amounts to determine a percentage.
    (ii) Multiplying the value of paragraph (e)(2)(i) of this section 
by the aggregate DSH allotment reduction amount under paragraph (c) of 
this section for the applicable fiscal year.
    (iii) Applying the low DSH adjustment factor under paragraph (e)(3) 
of this section.
    (3) Low DSH adjustment factor (LDF) calculation. CMS will calculate 
the LDF by the following:
    (i) Dividing each State's preliminary unreduced DSH allotment by 
their respective total Medicaid service expenditures for the applicable 
year.
    (ii) Calculating for each State group the mean of all values 
determined in paragraph (e)(3)(i) of this section.
    (iii) Dividing the value of paragraph (e)(3)(ii) of this section 
for the low-DSH State group by the value of paragraph (e)(3)(ii) for 
the non-low DSH state group.
    (4) LDF application. CMS will determine the final aggregate DSH 
allotment reduction allocation for each State group through application 
of the LDF by the following:
    (i) Multiplying the LDF by the aggregate DSH allotment reduction 
for the low DSH State group.
    (ii) Utilizing the value of paragraph (e)(4)(i) of this section as 
the aggregate DSH allotment reduction allocated to the low DSH State 
group.
    (iii) Subtracting the value of paragraph (e)(4)(ii) of this section 
from the value of paragraph (e)(2)(ii) of this section for the low DSH 
State group; and (iii) adding the value of paragraph (e)(4)(iii) of 
this section to the value of paragraph (e)(2)(ii) of this section for 
the non-low DSH State group.
    (5) Reduction factor allocation. CMS will allocate the aggregate 
DSH allotment reduction amount to three core factors by multiply the 
aggregate DSH allotment reduction amount for each State group by the 
following:
    (i) UPF--33 and \1/3\ percent.
    (ii) HMF--33 and \1/3\ percent.
    (iii) HUF--33 and \1/3\ percent.
    (6) Uninsured percentage factor (UPF) calculation. CMS will 
calculate the UPF by the following:
    (i) Dividing the total State population by the uninsured in State 
for each State.
    (ii) Determining the uninsured reduction allocation component for 
each State as a percentage by dividing each State's value of paragraph 
(e)(6)(i) of this section by the sum of the values of paragraph 
(e)(6)(i) of this section for the respective State group (the sum of 
the values of all States in the State group should total 100 percent).
    (iii) Determine a weighting factor by dividing each State's 
unreduced DSH allotment by the sum of all preliminary unreduced DSH 
allotments for the respective State group.
    (iv) Multiply the weighting factor calculated in paragraph 
(e)(6)(iii) of this section by the value of each State's uninsured 
reduction allocation component from paragraph (e)(6)(ii) of this 
section.
    (v) Determine the UPF as a percentage by dividing the product of 
paragraph (e)(6)(iv) of this section for each State by the sum of the 
values of paragraph (e)(6)(iv) of this section for the respective State 
group (the sum of the values of all States in the State group should 
total 100 percent).
    (7) UPF application and reduction amount. CMS will determine the 
UPF portion of the final aggregate DSH allotment reduction allocation 
for each State by multiplying the State's UPF by the aggregate DSH 
allotment reduction allocated to the UPF factor under paragraph (e)(5) 
of this section for the respective State group.
    (8) High volume of Medicaid inpatients factor (HMF) calculation. 
CMS will calculate the HMF by determining a percentage for each State 
by dividing the State's total DSH payments made to non-high Medicaid 
volume hospitals by the total of such payments for the entire State 
group.
    (9) HMF application and reduction amount. CMS will determine the 
HMF portion of the final aggregate DSH allotment reduction allocation 
for each State by multiplying the State's HMF by the aggregate DSH 
allotment reduction allocated to the HMF factor under paragraph (e)(5) 
of this section for the respective State group.
    (10) High level of uncompensated care factor (HUF) calculation. CMS 
will calculate the HMF by determining a percentage for each State by 
dividing the State's total DSH payments made to non-High Uncompensated 
Care Level hospitals by the total of such payments for the entire State 
group.
    (11) HUF application and reduction amount. CMS will determine the 
HUF portion of the final aggregate DSH allotment reduction allocation 
by multiplying each State's HUF by the aggregate DSH allotment 
reduction allocated to the HUF factor under paragraph (e)(5) of this 
section for the respective State group.
    (12) Section 1115 budget neutrality factor (BNF) calculation. This 
factor is only calculated for States for which all or a portion of the 
DSH allotment was included in the calculation of budget neutrality 
under a section 1115 demonstration for the specific fiscal year subject 
to reduction pursuant to an approval on or before July 31, 2009. CMS 
will calculate the BNF for qualifying states by the following:
    (i) For States whose DSH allotment was included in the budget 
neutrality calculation for a coverage expansion that was approved under 
section 1115 as of July 31, 2009, (without regard to approved 
amendments since that date) determining the amount of the State's DSH 
allotment included in the budget neutrality calculation for coverage 
expansion for the specific fiscal year subject to reduction. This 
amount is not subject to reductions under the HMF and HUF calculations.
    (ii) Determining the amount of the State's DSH allotment included 
in the budget neutrality calculation for non-coverage expansion 
purposes for the specific fiscal year subject to reduction.
    (iii) Multiplying each qualifying State's value of paragraph 
(e)(10)(ii) of this section by the mean HMF reduction percentage for 
the respective State group.
    (iv) Multiplying each qualifying State's value of paragraph 
(e)(10)(ii) of this section by the mean HUF reduction percentage for 
the respective State group.
    (v) For each State, calculating the sum of the value of paragraphs 
(e)(10)(iii) and of (e)(10)(iv) of this section.
    (13) Section 1115 budget neutrality factor (BNF) application. This 
factor will be applied in the State-specific DSH allotment reduction 
calculation.
    (14) State-specific DSH allotment reduction calculation. CMS will 
calculate the state-specific DSH reduction by the following:

[[Page 28569]]

    (i) Taking the sum of the value of paragraphs (e)(7), (e)(9), and 
(e)(11) of this section for each State.
    (ii) For States qualifying under paragraph (e)(12) of this section, 
adding the value of paragraph (e)(12)(v) of this section.
    (iii) Reducing the amount of paragraph (e)(14)(i) of this section 
for each State that does not qualify under paragraph (e)(12)(v) based 
on the proportion of each State's preliminary unreduced DSH allotment 
compared to the national total of preliminary unreduced DSH allotments 
so that the sum of paragraph (e)(14)(iii) of this section equals the 
sum of paragraph (e)(12)(v) of this section.
    (f) Annual DSH allotment reduction application. For each fiscal 
year identified in paragraph (c) of this section, CMS will subtract the 
State-specific DSH allotment amount determined in paragraph (e)(14) of 
this section from that State's final unreduced DSH allotment. This 
amount is the State's final DSH allotment for the fiscal year.
0
3. Section 447.299 is amended by adding paragraphs (c)(19), (c)(20) and 
(c)(21) to read as follows:


Sec.  447.299  Reporting requirements.

* * * * *
    (c) * * *
    (19) Medicaid provider number.
    (20) Medicare provider number.
    (21) Total hospital cost. The total annual costs incurred by each 
hospital for furnishing inpatient hospital and outpatient hospital 
services.
* * * * *
(Catalog of Federal Domestic Assistance Program No. 93.778, Medical 
Assistance Program)

    Dated: April 26, 2013.
Marilyn Tavenner,
Acting Administrator, Centers for Medicare & Medicaid Services.
    Approved: May 9, 2013.
Kathleen Sebelius,
Secretary, Department of Health and Human Services.
[FR Doc. 2013-11550 Filed 5-13-13; 11:15 am]
BILLING CODE 4120-01-P