DSH Uncompensated Care Proposed Changes – FY2017 Proposed Rules

From: Ron Knapp, Toyon Associates – 5/6/16

Significant changes are proposed regarding the current (FY2017) and future (FY2018 forward) allocation of the DSH Uncompensated Care pool that is officially termed “Factor 3.” The proposed changes are discussed below:

Brief History

This DSH Uncompensated care pool was implemented by the Affordable Care(ACA) and became effective in FY2014. The change carved out 75% of the previously paid Medicare DSH payments into a separate pool.  This pool of dollars was designed to be reduced over time as more individuals obtain insurance coverage through the implementation of ACA.  The idea was to help pay for the additional costs incurred through the expansion in insurance coverage.

The reduction of this pool or Factor 2 started with a baseline starting point of the estimated uninsured individual in the U.S. The base proxy uninsured was estimated to be 18% and that was developed by the Congressional Budget Office (CBO) in 2010.  As the uninsured declined, the available DSH pool is reduced.  For FY2017, the reported uninsured was estimated to be 10.25%.  Through the Factor 2 calculation, the DSH pool was reduced by 43% to $6.05B.  Below is a table showing the change of this DSH Uncompensated Care pool since its implementation in FY2014:


Proposed Factor 3 Change for FY2017

The allocation of the DSH Uncompensated Care Pool to individual Hospitals is called “Factor 3.” The basis for the allocation used by CMS is total Medicaid and Medicare SSI days for all Hospitals that projected to be DSH eligible providers.  For FY 2013 – 2016 a single year of the Medicaid and Medicare SSI days ratio was used to allocate the DSH pool.  For FY2017, CMS is proposing to use a three year average of the Medicaid (2011-2013) and Medicare SSI days (2012-2014).  The Factor 3 calculation is made for each of the individual years.  Then the three years of calculated factors are added and divided by 3 for the Factor 3 calculation proposed to be used for FY2017.

CMS has produced a table containing the respective DSH days that are proposed to be used. Click here to go to the CMS website containing the Proposed Rule Data Files. At the bottom of the page there is a download section, click on “FY 2017 IPPS Proposed Rule: Medicare DSH Supplemental Data File” to obtain a copy of this analysis spreadsheet.

Proposed Factor 3 Change to S-10 beginning FY2018

Based on the language in ACA, we always had believed that the Factor 3 allocation was going to be based on some form of uncompensated care costs that are recorded on the S-10 worksheet of the Medicare cost report. However, the overwhelming evidence was that the S-10 information on the cost reports was not consistently reported in the filed cost reports and had never been audited by the FI/MAC.  The alternative use of the Medicaid and Medicare SSI days was the accepted compromise until the quality of the S-10 reporting improved.

CMS believes that the time has come to start utilizing the S-10 data. The basis for this belief is based on an analysis they had performed by Dobson DaVanzo & Associates, LLC to compare the reported cost report S-10 data to the Internal Revenue Service (IRS) Form 990 filed by Hospitals.  This analysis was performed for multiple years (2010 – 2012).  They concluded that there is an increasing correlation between the two data sources from .71 in 2010 to .80 in 2012.  Based on this analysis CMS states in the FR that:

“This strong correlation indicates that Worksheet S-10 data would be a statistically valid source to use as part of the calculation or the uncompensated care payments in FY2018.”

They go on to say…

“Accordingly, because hospitals have been on notice since the FY2014 rulemaking that CMS intended eventually to use Worksheet S-10 as the data source for calculating uncompensated care payments, and in light of growing evidence that Worksheet S-10 data are improving over time, we believe it would be appropriate to use Worksheet S-10 as a data source for determining Factor 3 starting in FY2018.”

The approach for implementing S-10 data will transition over 3 years. As discussed above, for FY2017 CMS is proposing to use a three year average of the Factor 3 percentage.  Carrying this forward, this is how the transition will work:

  • FY2018 – 2/3 Based on Medicaid/SSI Days; 1/3 S-10 (2014)
  • FY 2019 – 1/3 Based Medicare/SSI Days; 2/3 S-10 (2014 & 2015)
  • FY 2020 – 100% Based on S-10 (2014 – 2016)

The S-10 data CMS is proposing to use as the basis is the cost of:

  • Charity Care Costs
  • + Non-Medicare Bad Debt Costs

What does this mean? It means there will be a massive redistribution of the DSH Uncompensated Care dollars when fully implemented.  We have prepared an analysis of the impact and summarized this by State.  California is the largest loser when fully implemented (with a projected loss of over $435M.  The largest winner from this redistribution is Texas with a gain over $569M.  There is a very strong correlation related to States that opted into the “Medicaid Expansion” incurring losses from the S-10 approach and “Non-Expansion States” having gains.  I have included summary tables of the States with the 5 largest gains and losses for your digestion.




Note: There is rounding that impacts the total gains and losses.

You can be sure that the various State Associations like CHA in California are all over this and will be working very hard to stop or delay the implementation of this change to the S-10 Factor 3 basis. The reality is this S-10 approach is what we expected when implemented.

We highly recommend extensive review of the filed cost report S-10 information for FY2014 (Generally, this is related to cost report periods beginning between 10/1/13 – 9/30/14). CMS is currently proposing to use this cost report year for the S-10.

If you have any questions about the proposed changes to the DSH Factor 3 formula, please contact Ron Knapp at 888-514-9312.


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