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Category: UCRS

Measuring Healthcare – Uncompensated Care DSH

The Affordable Care Act (ACA)
According to the ACA, Medicare’s Uncompensated Care Disproportionate Share (DSH) recognizes “the amount of uncompensated care for…treating the uninsured.”

“Uninsured” – as opposed to “charity” (or similar for low-income patients) – presents the following questions:

  • When is a patient considered uninsured? 
  • What is the difference between low-income uninsured patients and all other patients? 
  • How does a comprehensive process identifying all categories of uninsured patients affect hospital operations and the financial assistance policy?

This article looks at CMS’s proposed cost report instructions to provide more insight to these questions, while providing recommendations for hospital teams.

Notable Proposed Cost Report Changes
In November 2020, CMS proposed new cost reporting instructions for FFY 2021uncompensated care cost reporting on Worksheet S-10.[1] These proposed instructions include changes and clarifications in reporting noteworthy categories of uncompensated care cost:

  • Allowed: Liability for patients with insurance but determined to be uninsured.
    More under “Other Uninsured Charity Care”
  • Not Allowed: Charge discounts from inferred contractual relationships.
    More under “Inferred Contracts and Significant Losses”…
  • Allowed: Implicit Price Concessions[2] are reportable as bad debt costs.
    More under “Bad Debt and Discovery”
  • Not Allowed: Sub-acute care costs outside general short term hospital inpatient and outpatient services (not billable under the hospital CCN). This is a major shift in reimbursement.
    More under “Short Term Hospital Services Only”

[1] Federal Registers, Vol 85 No 218

[2] Accounting Standards Update, Topic 606


Other Uninsured Charity Care
CMS’s proposed language clarifies providers may report other forms of “charity” related to insured patients, provided this care is in the financial assistance policy.  Specifically, CMS states providers may report:

  • the “…portion of total charges for insured patients that were determined uninsured for the entire hospital stay;”[1] and
  • “charges other than deductible, coinsurance and copay (C+D) amounts that represent the insured patient’s liability for medically necessary hospital services”[2]

Both instructions relate to insured patients with charges that are not covered by the patient’s insurance carrier. Therefore, providers may consider reporting non-covered charges and exhausted benefit charges from all payers as forms of charity care, provided these discounts are specified in a hospital’s financial assistance policy. 

But what does it mean to specify non-covered charges from all payers as charity care in a financial assistance policy? For tax exempt providers, how does allowing non-covered charges from all payers relate to IRS 501 (r) requiring hospitals to include amounts and methods for patients to receive free or discounted care?

Contrary to complex cost reporting instructions, the financial assistance policy is a public facing document designed to help patients navigate the healthcare system. As more cost reporting instructions are dependent on this policy, it becomes muddied with caveats, as opposed to a concise, easy-to-read, patient-centered document. An internal policy – apart from the patient financial assistance policy – delineating the accounting of charity care may be prudent to 1) maintain a separate patient friendly policy; and 2) present evidence of compliance with cost report instructions.

When it comes to financial assistance policy governance, generally CMS does not regulate how providers articulate charity care in their policies (one notable exception relates to Medicare FFS bad debts, whereby CMS does not allow presumptive charity eligibility determinations).  For all other forms of charity, CMS states:

“(CMS) does not set charity care criteria policy for hospitals, and within reason, hospitals can establish their own criteria forwhat constitutes charity care in their charity care and/or financial assistance policies.[3]

CMS has not further elaborated on what constitutes “within reason,” to be considered as charity care. However, as presented above, the proposed cost report instructions indicate a broad definition including charges from a remaining patient liability.

Recommendation: Evaluate the reporting of non-covered and exhausted charges from all payers against current hospital procedure.  Hospital teams are encouraged to assess:

  • If patients are billed the outstanding amount. 
    For instance, a provider may pursue payment from secondary and tertiary payers, and then the patient for non-covered services.
  • When and where these transactions are reported in the patient financial system (i.e., account adjudication). 
    For instance, after collection attempts, and a payment is not received, the resulting “write-off” can end up in various transaction types including 1) bad debt – recognized as uncompensated care cost; 2) contractual allowance – not recognized as uncompensated care cost; or 3) denial | non-covered transaction code – recognition of uncompensated care cost depends (typically, providers report charges related to non-covered Medicaid from these codes). 
  • and 3) the benefit of changing policy and procedures so these amounts may be recognized as charity care.  

A statistic to help this evaluation: Providers are reimbursed approximately $250,000 for every $1M in charity cost.[4] 

A thought on policy variation and Section 501(r) – For reporting as uncompensated care cost, it is important to include financial assistance policy language discussing non-covered charges as patient financial assistance.  This helps ensure the policy includes the basis and method patients may receive financial assistance.  In question is the appropriateness of two beneficiaries with the same plan, whereby one is responsible for the coinsurance, while the other received charity related to a non-covered service.  This is an important question that must be considered and continuously evaluated.

[1] Reported on Worksheet S-10 Line 20, Column 1

[2] Reported on Worksheet S-10 Line 20, Column 2 and Line 25.01 Column 1

[3] FFY 2021 IPPS Final Rule

[4] Charges reduced by the cost to charge ratio.


Inferred Contracts and Significant Losses
As discussed above, non-covered charges and exhausted benefits charges from all payers are forms of charity care.  Okay got it.  However, CMS also proposes providers cannot report charges from insured patients under contract, or inferred contract with the hospital.  In the proposed cost report instructions for FFY 2021, CMS states providers may report:

“the portion of total charges for patients with coverage from an entity/insurer that does not have a contractual or inferred contractual relationship (a contractual relationship between an insurer and a provider will be inferred where a provider accepts an amount from an insurer as payment, or partial payment, on behalf of an insured patient) with the provider.” 

Separate from a “non-covered charge,” this proposed language seemingly follows the principle that payment shortfalls are not a form of charity care, focusing on insured patients not under contract with the hospital (e.g., “out of network”).   Consider the following example:

  • Charges: $200,000
  • Cost: $50,000
  • Payment from Auto Policy: $5,000
  • Unreimbursed Cost = $45,000

sizable charitable discount, the $45,000 shortfall may not be considered a form of charity care. 

However, this brings back the question – at what point does this patient become uninsured? 

Recommendation: Evaluate the out of network population, and determine if “splitting the account” is appropriate to break-apart the insurance portion from the patient portion.  If the $45,000 is considered as the patient portion, this may be the practical approach for recognizing the amount as charity care.[1]  As discussed above, this accounting exercise may be another reason an internal policy is beneficial to hospitals, while maintaining a separate patient centered document.  

It does not go unnoticed developing an internal policy may become a “Pandora’s box” identifying all types of charity care – resulting in variation of DSH hospitals across the country.  To address this issue, it is recommended CMS and other industry leaders develop a payment to cost ratio for out of network reimbursement.   Amounts below a threshold of “normal and customary” rates should be considered and re-evaluated as charity care eligible. 


[1] Provider would report $195,000 in charges, netting to approximately $45,000 in uncompensated care cost. 


Bad Debt and Discovery
After years of industry contemplation, CMS’s cost report instructions for reporting bad debt includes implied price concessions.[1]  Essentially, this is business as usual for reporting bad debts on Worksheet S-10 of the cost report.  Due to the change in bad debt reporting for audited financial statements, during audit providers may not be able to produce a bad debt “roll forward” schedule.[2]  In these cases, it is recommended providers disclose how “bad debts” relate to financial statements and request to be waived from the requirement of producing this reconciliation. 

Although it is business as usual for reporting bad debts, providers continue to discover anomalies with prior year bad debt accounts.  More specifically, providers are discovering old bad debt accounts that qualify for charity care. 

Why is this important?  Because when patient C+D amounts are reported as bad debt, they are reduced to an amount less than cost.  However, when patient C+D amounts are reported as charity care, the full amount is recognized as uncompensated care cost.  CMS has employed this calculation since the inception of uncompensated care cost for Uncompensated Care DSH payments (starting FFY 2018). 

Consider the impact to uncompensated care cost from thousands of accounts like the example below:

Reported as Charity Care

  • Amount Written Off to Charity Care: $5,000
  • Charity Cost: $5,000 (amount of recognized uncompensated care cost on Worksheet S-10)

The question that looms for providers discovering charity care in aged bad debt accounts – may old bad debt accounts be reversed and reclassified as charity care?  In a system of write-offs and reversals, this seems like a real possibility – especially considering the practice of “smoothing” costs so that the true answer is achieved over time. Another example of “smoothing” in reimbursement is in the wage index – providers report salaries from the general ledger (accrual-based accounting) and hours associated with paid salaries from the payroll file (cash-based accounting).[3] 

Ultimately, the ability to reclassify bad debt accounts may come back to how the amounts relate to a hospital’s financial statement in prior years.  A reclassification of bad debts may require a restatement of financial statements.  For optimization of Uncompensated Care DSH payments, these efforts certainly can be worth the time and resources. 

Recommendation: Hospitals are encouraged to evaluate prior year bad debt write-offs to determine if any amounts are truly charity care.

[1] Accounting Standards Update, Topic 606.

[2] Scheduling showing bad debts relationship in accounts receivable at the beginning of the hospital fiscal year vs. the end of the fiscal year.

[3] Per CMS 2552-10 instructions for wage index – “Although this methodology does not provide a perfect match between paid costs and paid hours for a given year, it approximates a match between costs and hours.”


Short Term Hospital Services Only
CMS’s proposal shifting Uncompensated Care DSH to only recognize short-term hospital services is a major change, especially for safety net hospitals providing essential sub-acute care services to low-income patients (e.g., behavioral health, rehabilitation, SNF, etc.).   Providers with subacute care need to prepare for significant decreases in Uncompensated Care DSH payments, estimated to be effective in FFY 2025.  This change emphasizes the importance of identifying all other uninsured costs, as discussed throughout this article.   In FFY 2021, providers with subacute care received $5.3bn (63%) of the $8.3bn in national Uncompensated Care DSH funding.

Recommendation: Hospitals providing subacute care[1], billed under a CMS Certification Number (CCN) apart for the Hospital CCN, should evaluate the portion of uncompensated care cost (Charity and Bad Debt), as well as the cost-to-charge structure, to determine the amount of uncompensated care cost CMS is proposing to exclude from future Uncompensated Care DSH payments.  This information can help hospitals prepare for this a potentially large swing in Medicare reimbursements. 

Uncompensated Care DSH and COVID-19

There is no doubt COVID-19 has changed access to healthcare and the amount of uncompensated care provided during 2020 and 2021.  Under CMS’s current method, these years would be the baseline driving Uncompensated Care DSH payments in FFY 2024 and FFY 2025. However, the data is atypical and with an uncertain future, recognizing these uncompensated care costs comes with consequences.  For instance, there will be variation in the amount of uncompensated care delivered at hospitals in states with longer stay at home mandates vs. hospitals in states with-out these restrictions (or less restrictions).  

Recommendation: As the industry moves forward, we should do so with caution, carefully evaluating the appropriateness using data from the public health emergency.  Last Federal Year, FFY 2020, CMS applied a COVID related adjustment to Uncompensated Care DSH, using a more current estimate of unemployment in determining “Factor 2,” resulting in an additional $500M in national funding.

The ACA mandates Uncompensated Care DSH is based on “appropriate data” or other “alternative data” that is “a better proxy for the costs. . . of treating the uninsured.”  As we adapt to life during and after COVID-19, the industry may also have to discover the alternative data that best measures uncompensated care provided during this extraordinary time.    

[1] Billed under a CMS Certification Number (CCN) apart from the Hospital CCN


Thank You

Toyon Associates, Inc. appreciates the opportunity to present and discuss reimbursement issues with thought leaders in the healthcare industry.  For more discussion and information, please contact Fred Fisher at 888.514.9312 or


Toyon Associates, Inc.

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Medicare DSH – Uncompensated Care (UC) Financial Assistance Policy Recommendations

Thank you for working with Toyon Associates and our Uncompensated Care Recognition Services (UCRS).  CMS’s requirements for reporting UC cost, and subsequent UC Disproportionate Share (DSH) payments, rely heavily on ever-changing regulations and language in the financial assistance policy (FAP).  Importantly, as recently reported in the FFY 2021 IPPS Final Rule, CMS states:

 “(CMS) does not set charity care criteria policy for hospitals, and within reason, hospitals can establish their own criteria for what constitutes charity care in their charity care and/or financial assistance policies.”

A hospital’s determination of its own financial charity care criteria – likely within reason of patients qualifying under federal poverty level [FPL] thresholds – provides hospitals discretion on how patient financial discounts are articulated in the FAP.   

To compliantly position hospitals for this important impact on reimbursement, Toyon is sharing recommended language for FAP consideration as it relates to Medicare UC DSH.  Toyon’s recommendations[1] are to assist hospitals compliantly report core areas of UC cost on worksheet S-10 of the Medicare cost report. 

For assistance on implementing best practices for FAP language and associated means of capturing the charges written off as charity care, please contact Toyon’s lead of Uncompensated Care Recognition Services, Fred Fisher at 888.514.9312,

Toyon’s recommendations are focused on the following UC cost areas:

  • Charity care for insured and underinsured
  • Self-pay discounts
  • Discounts to insurers with no contractual or inferred contractual relationship[2]
  • Presumptive charity eligibility process
  • Non-covered and denied Medicaid as charity care
  • Bad Debt and Implied Price Concessions

Below are Toyon’s updated recommendations for FAP language related to Medicare cost report worksheet S-10 and UC DSH.  Some of Toyon’s recommendations include FAP language italicized in blue.  Any language changes considered by hospitals and health systems should follow the appropriate approval procedure with hospital leadership / board of directors.

  1. Non-Covered Charges for Medicaid or other Indigent Care Program

Medicare cost report instructions allow charges related to “non-covered services for Medicaid eligible patients” to be included as UC cost, provided this coverage is specified in the FAP.  There are different industry interpretations regarding the level of specificity of non-covered Medicaid that must be in an FAP.  Toyon recommends hospitals consider FAP language stating:

“Non-covered and denied services provided to Medicaid eligible beneficiaries are considered a form of charity care.  Medicaid beneficiaries are not responsible for any forms of patient financial liability and all charges related to services not covered, including all denials, are charity care.  Examples may include, but are not limited to:

  • Services provided to Medicaid beneficiaries with restricted Medicaid (i.e., patients that may only have pregnancy or emergency benefits, but receive other hospital care)
  • Medicaid-pending accounts
  • Medicaid or other indigent care program denials
  • Charges related to days exceeding a length-of-stay limit
  • Out-of-state Medicaid claims with no payment”

  1. Presumptive Charity Care

In the FFY 2021 IPPS Final Rule, CMS affirmed presumptive eligibility tools are not allowable to determine patient financial status for Medicare bad debt reporting[3].  Toyon recommends the following regarding presumptive charity care determinations are applied by hospitals:

  • Presumptive charity care is applied to everyone except indigent Medicare fee for service patients.
  • For all patients receiving presumptive eligibility to qualify for financial assistance, it is recommended hospitals maintain a log of each instance, as well as any documentation from an outside agency to support presumptive eligibility (such as PARO like resources).

  1. Patient Billing – External Collection Agencies

Hospitals may discover additional charity care associated with patient accounts in collections.   Typically, outstanding patient receivables relate to coinsurance, copayment and deductible (C+D) amounts.  This is a significant population, considering when C+D are reported as charity care, these amounts are not reduced by the cost to charge ratio. 

Toyon recommends hospitals consider updating the FAP language to include additional information when charity is discovered during the collections process.  Example language may state:

Discovery of Patient Financial Assistance Eligibility During CollectionsDetermination of patient financial assistance as close to the time of service as possible is optimal.  However, additional time and resources are sometimes required to determine eligibility, and therefore some patients eligible for financial assistance may have not been identified as eligible for patient financial assistance prior to initiating external collection action.  Collection agencies shall be made aware of this possibility and are requested to refer-back patient accounts that may be eligible for financial assistance. When it is discovered an account is eligible for financial assistance, [Hospital | Health System] will reverse the account out of bad debt and document the respective discount in charges as charity care.” 

  1. Insured Patients Not Under Contract with the Hospital

Related to HHS CARES Provider Relief Funding (PRF)

CMS permits UC costs can include “patients with coverage from an entity that does not have a contractual relationship with the provider who meet the hospital’s FAP.”  

For cost reports beginning on after October 1, 2020, CMS clarifies providers may report amounts related to inferred contractual relationships.  CMS defines an inferred contractual relationship in new cost report instructions[4] as:

“a contractual relationship between an insurer and a provider will be inferred where a provider accepts an amount from an insurer as payment, or partial payment, on behalf of an insured patient”

Also importantly, the Terms and Conditions (T&C) for providers receiving CARES Provider Relief Funding prohibit billing in excess of:

“…an amount greater than what the patient would have otherwise been required to pay if the care had been provided by an in-network Recipient”.

Toyon recommends hospitals update FAP language to:

  • Stipulate when a carrier is “under contract” vs. obligated to reimburse the hospital as an “inferred contractual relationship”; and
  • Confirm “out of network” for a presumptive or actual case of COVID-19 is provided at an amount no greater than if the care was provided at an in-network provider.
  • Listed below is FAP language for hospital consideration:

Insured Patients Not Under Contract with the Hospital”Negotiations with insurance carriers involving inferred contractual relationships, for insured patients not under contract with [hospital / health system] will be conducted by executive management at [hospital/health system]. Although [hospital / health system] may agree to the terms of the negotiations with insurance companies, an inferred contractual relationship is not representative of a patient “under contract” with [hospital / health system]. All unreimbursed amounts are a form of patient financial assistance and determined as the difference between gross hospital charges and hospital reimbursement. Any care provided to a presumptive or actual case of COVID-19 is provided at an amount no greater than what the patient would have otherwise been required to pay if the care had been provided by an in-network provider.”

  1. Financial Assistance for Patients with Insurance

Medicare cost report instructions allow and differentiate[5] the reporting of financial assistance for insured patients as:

  • Amounts related to charity C+D amounts. These amounts have a material impact on the determination of uncompensated care cost, as they are not reduced by the cost to charge ratio.
  • Charges representing an insured patient’s liability for medically necessary hospital services, other than Charity C+D amounts. These amounts are reduced to cost using a hospital’s overall cost to charge ratio.

Toyon recommends hospitals consider updating FAPs, articulating insured patients are eligible for discounts related to charity C+D amounts as well as charge discounts to an insured patient’s liability for medically necessary hospital services. 

  1. Access to Healthcare Crisis FAP Language

In recognition for the extraordinary demand pandemics have on the healthcare system (including COVID-19), Toyon has crafted the FAP language below.  This is draft template language to assist hospitals if necessary.

“An Access to Healthcare Crisis must be proclaimed by [hospital leadership / approved by the board of directors] and attached to this patient financial assistance document as an addendum.  An Access to Healthcare Crisis may be related to an emergent situation whereby state / federal regulations are modified to meet the immediate healthcare needs of [hospital / health system’s] community during the Access to Healthcare Crisis.  During an Access to Healthcare Crisis [hospital / health system] may “flex” its patient financial assistance policy to meet the needs of the community in crisis.  These changes will be included in the patient financial assistance policy as included as an addendum.  Patient discounts related to an Access to Healthcare Crisis may be provided at the time of the crisis, regardless of the date of this policy (as hospital leadership may not be able to react quickly enough to update policy language in order to meet more pressing needs during the Access to Healthcare Crisis).”  


We appreciate the opportunity to provide regulatory and reimbursement services to you and your team.  At any point in time, should you have any questions about our work, or need any further assistance, please contact Fred Fisher at 888.514.9312,


Toyon Associates, Inc.

[1] FAP language changes should follow the approval procedure with hospital leadership / board of directors.

[2] A contractual relationship between an insurer and a provider will be inferred where a provider accepts an amount from an insurer as payment, or partial payment, on behalf of an insured patient.

[3] Per the FFY 2021 IPPS Final Rule, related to Medicare Bad Debts Although presumptive eligibility tools may reduce a provider’s burden when evaluating indigence, we disagree that presumptive eligibility tools should be used to determine a Medicare beneficiary’s indigence status for Medicare bad debt purposes.”


[5] For cost reports beginning on/after October 1, 2020. 

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CARES Act Funding Update

HHS allocates $14 billion in targeted “Round Two” payments.
Toyon’s August Series of CARES Updates

Toyon is pleased to provide this update on the CARES Act Public Health and Social Services Emergency Fund (PHSSEF). Toyon’s updates on the PHSSEF will be issued as a series this August. The first update applies to “Round Two” of CARES relief funding from July 2020. During the rest of August, Toyon will be providing these other important updates:

  • Toyon’s Take on HHS Reports due February 14, 2021 – HHS is releasing funding and documentation reporting instructions by August 17. Recipients have 45 days from the end of 2020 (Sunday, February 14, 2021) to report COVID-19 related expenditures through December 31, 2020.
  • Toyon’s Take on PHSSEF and Cost Reporting – Key takeaways on the importance of filed cost reports and the PHSSEF.


In July, HHS announced a second round of $14 billion related to three targeted distributions from the PHSSEF.

  • $10 billion High Impact Payments

  • $3 billion Safety Net Payments

  • $1 billion Rural Payments





Toyon is preparing estimates on PHSSEF qualification and funding for hospitals nationally. Please contact Fred Fisher if you would like an evaluation for your hospital(s).

Fred Fisher —
Toyon’s Covid-19 Funding Resources

HHS Releases $14 billion of “Round Two” Funds
Listed below is further insight on HHS’s Round Two targeted funding distributions totaling $14 billion. Based on a current tally of the PHSSEF, HHS committed to spend $116.4 billion of the $175 billion, leaving $58.6 billion remaining in the fund (not accounting for the HRSA COVID-19 Uninsured Program).

$10 Billion Round Two High Impact Payments
On July 17, HHS announced distribution of High Impact payments eligible to more than 1,000 providers
reporting any of the following (based on data submitted June 15):

  • Over 161 COVID-19 admissions between January 1 and June 10, 2020.
  • One COVID-19 admission per day.
  • A disproportionate intensity of COVID admissions that exceeds the average ratio of COVID
    admissions per bed. Responding to an FAQ dated July 22, HHS states the average
    admissions per bed ratio (threshold) is 0.54864.

Eligible hospitals are paid $50,000 per COVID-19 admission. In Round One, payment per admission
was $76,975, and included a DSH add-on. High Impact payments received from Round One were
considered in the second distribution.
As of August 3,HHS distributed $9.1 billion of the 10 billion, leaving $900 million HHS will likely be
paying hospitals over the coming weeks.

$3 Billion Round Two Safety Net Payments
On July 10, HHS announced $3 billion in Round Two distribution of Safety Net payments. In this
Second Round, HHS acknowledged shortcomings of qualifying hospitals for safety net payments in
Round One. HHS accounts for recognizing an additional 215 hospitals as safety nets in Round Two by
expanding safety net criteria as follows:

  • Like Round One, providers must have an Uncompensated Care Cost per Bed measurement at
    or over $25,000. In Round Two, HHS corrected this measurement, “annualizing” this data, so
    hospitals with short cost reporting periods are properly evaluated.
  • Like Round One, providers must also have a profitability margin of 3% or less to qualify for
    safety net payments. In Round Two, HHS expanded this measurement by evaluating 5 years of financial data reported on the Medicare cost report Worksheet G-3 (as opposed to Round One whereby HHS evaluated one year of financial data). Hospitals qualified in Round Two with a
    “profit margin threshold of less than or equal to 3% averaged consecutively over two or more of
    the last five cost reporting periods.”
  • In Round Two, providers still must have a DSH percentage equal to or greater than 20.2% to
    qualify for safety net funds (no change from Round One).

$1 Billion in Round Two Rural Payments
On July 10, HHS also announced $1 billion in Round Two distributions for rural providers. In Round Two, sole community hospitals (SCH), Medicare dependent hospitals (MDH), and hospitals in small metro areas with fewer than 250,000 people qualified for payment. Hospitals are eligible for funds of 1% of operating expenses with a minimum payment of $100,000, a supplement of $50 for each “rural inpatient day,” and a maximum payment of $4.5 million. HHS also made payments to rural inpatient psychiatric facilities, inpatient rehabilitation facilities, and long-term acute care hospitals.

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