Proposed DSH Rule for FFY 2014

1. Proposed DSH Rule for FFY 2014 Christopher Keough, Partner Stephanie Webster, PartnerPhone: 202.887.4038 Phone: 202.887.4049Email: ckeough@akingump.comEmail: swebster@akingump.com May 2, 2013

2. New Medicare DSH Payment Method • ACA added section 1886(r) to the Social Security Act • Section 1886(r) establishes new Medicare DSH payment method • Effective Federal fiscal year 2014 • Two payment components • 25 percent of what hospital would have been be paid under existing DSH payment formula • New payment based in part on uncompensated care

3. 25 Percent of the Existing DSH Payment • CMS proposes to revise interim claim payments to 25 percent of what otherwise would have been paid for DSH in 2014 • CMS proposes to make corresponding changes to the hospital cost report • More detailed operational and cost report instructions following issuance of the final rule

4. Eligibility for the Uncompensated Care Payment • PPS hospitals (“subsection (d) hospitals”) that qualify for existing DSH based on their “disproportionate patient percentage” or Pickle percentage • CMS proposes to exclude: • Sole community hospitals that are paid the hospital specific payment rate • Maryland hospitals paid under a waiver • Hospitals participating in the Rural Community Hospital Demonstration • Critical access hospitals

5. Three Factors Used to Calculate the Uncompensated Care Payment • CMS’s estimate of 75 percent of the amount of Medicare DSH payments that otherwise would have been paid under the existing DSH methodology • An adjustment for the percent change in the national uninsured rate (for individuals under 65) from a base 2013 rate • Each eligible hospital’s estimated uncompensated care amount relative to the estimated uncompensated care amount for all hospitals that are eligible to receive the standard DSH payment

6. Factor 1 – 75 Percent of Aggregate Amount under Old DSH • CMS proposes to estimate the pool in advance of each year • For 2014, CMS estimates that $12.338 billion would have been paid under the existing DSH payment formula • 75 percent of that amount would be $9.2535 billion for 2014 (prior to further adjustment for percentage change in the uninsured rate) • Initial estimate is based on a February 2013 estimate by the Office of the Actuary • Final estimate would be based on a July 2013 estimate by the Office of the Actuary

7. Factor 2 – Uninsured Rate Change – Source of Estimate for 2013 • For FYs 2014 through 2017, CMS proposes to set the 2013 baseline for estimating the percentage change in the uninsured rate based on a March 20, 2010 letter from the Director of the Congressional Budget Office to the Speaker of the House http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/113xx/doc11379/amendreconprop.pdf • The 2010 CBO letter estimated that the “Insured Share of the Nonelderly Population Including All Residents” would be 82 percent for 2013 • CMS, therefore, proposes to use 18% as the estimated uninsured rate for 2013

8. Factor 2 – Uninsured Rate Change – Source of Estimate for 2014 • CMS proposes to use a February 5, 2013 CBO report to estimate the uninsured rate for 2014 http://www.cbo.gov/sites/default/files/cbofiles/attachments/43900_ACAInsuranceCoverageEffects.pdf • That report estimates that the “Insured Share of the Nonelderly Population Including All Residents” will be 84 percent for 2014 • CMS, therefore, proposes to use 16% as the uninsured rate for 2014

9. Factor 2 – Calculation of Adjustment Factor for Reduced Uninsured Rate • 1 – |[(0.16 - 0.18)/0.18]| = 1 - 0.111 = 0.889 (88.9 percent) • 88.9 percent - 0.1 percentage points = 88.8 percent • The statute prescribes a reduction a 0.1 percentage points for 2014

10. Factor 2 – Adjusted Pool • CMS proposes that the adjusted uncompensated care pool for 2014 would be $8.217 billion • That amount is 88.8 percent of Factor 1 ($9.2535 billion) • That amount is 66.6 percent of CMS’s estimate of the aggregate DSH payments that otherwise would be paid under the existing DSH payment method for 2014 ($12.338 billion)

11. Factor 3 – Uncompensated Care Cost – Alternative Data • CMS proposes to use alternate data to measure uncompensated care cost for FY 2014, at least, and possibly additional years • For 2014, CMS proposes to use Medicaid patient days + Medicare SSI patient days from a prior period (2010/2011) • Proposed rationale: • Concern about the standardization and completeness of the Worksheet S-10 data • “[W]e wish to avoid creating a policy that would serve as a disincentive for States wishing to expand Medicaid.”

12. Factor 3 – Medicaid and Medicare/SSI Utilization • CMS is proposing to estimate each hospital’s percent-to-total of uncompensated care cost using a proxy • Medicaid days from the most recently available cost report • Medicare-SSI days from most recently available SSI ratios • For FY 2014, CMS is proposing to use: • 2010/2011 cost reports for the Medicaid days • FY 2011 SSI ratios for the Medicare-SSI days (CMS expects FY 2011 ratios to be available in Spring 2013) • CMS may use S-10 data later, once hospitals have adequate experience reporting all of the data elements on Worksheet S-10

13. Interim/Periodic Payments • If a hospital is not expected to qualify for the standard DSH payment for a fiscal year: • No interim payments for standard DSH or additional payment for uncompensated care • If the hospital ultimately does qualify for the standard payment at cost report settlement, then CMS would pay the 25 percent DSH payment and the new payment for uncompensated care cost at that time • If a hospital is expected to qualify for the existing DSH payment for a fiscal year: • Interim DSH payments (25 percent) on a discharge basis • New uncompensated care payments made periodically but not on a per discharge basis • If the hospital is found to be ineligible for DSH payments at cost report settlement, then CMS would recover interim/periodic payments made

14. Uncompensated Care Payments by Federal Fiscal Year • CMS proposes to pay the uncompensated care payment on the basis of the Federal fiscal year • CMS proposes “to reconcile that amount in the cost reporting period that begins in the respective Federal fiscal year”

15. Prospective Uncompensated Care Payment Calculations • CMS proposes that all three factors used to calculate uncompensated care payments would be based on estimates determined prospectively and not reconciled at cost report settlement • 75 percent of aggregate DSH payment for a year (Factor 1) • Adjustment for change in uninsured rate (Factor 2) • Each hospital’s percentage of total uncompensated care cost (Factor 3) • “We do not know of any reason to believe that there will be a bias toward systematic overpayment or underpayment from year to year.” • CMS may, however, decide to reconcile the numerator and denominator of the fraction used to calculate each hospital’s percentage of total uncompensated care cost (factor 3) “using more recent cost report data (and associated inputs)”

16. Limitations on Review • “Section 1886(r)(3) of the Act provides that there will be no administrative or judicial review under section 1869 of the Act, 1878 of the Act, or otherwise for any of the following: • Any estimate of the Secretary for purposes of determining the [three] factors. . . • Any period selected by the Secretary for such purposes.” • CMS proposes “to codify this policy” in the regulations

17. Capital DSH Unaffected • The new DSH payment rules do not revise or replace the capital DSH payment

18. Sole Community Hospitals • The uncompensated care payments would not be accounted for in determining whether an SCH is paid the higher of the Federal rate or the hospital-specific rate • CMS is proposing to exclude sole community hospitals paid under their hospital specific payment rate “from the application of section 1886(r) of the Act” (i.e., no DSH payment or new uncompensated care payment)

19. Medicare Advantage (Part C) Days • CMS proposes to adopt the policy change first announced in 2004 • include Medicare Advantage days in the SSI fraction • exclude the Medicaid-eligible portion of these days from the numerator of the Medicaid fraction • CMS did not propose any change to the regulation text “because the current text reflects the policy being proposed” • CMS’s response to the district court decision in Allina, whichdeclared invalid and vacated the 2004 rulemaking on the grounds that CMS did not follow the required notice-and-comment rulemaking procedure and CMS failed to provide a rational explanation for its policy change • The government has appealed the Allina decision to the D.C. Circuit

20. Thank You Christopher Keough, Partner Stephanie Webster, PartnerPhone: 202.887.4038 Phone: 202.887.4049Email: ckeough@akingump.com Email: swebster@akingump.com