In what may have been a largely unnoticed rule interpretation affecting hospitals that treat a high percentage of children in the Medicaid program, CMS, in January 2010, issued a response to a Frequently Asked Question (FAQ) regarding the December 19, 2008, Medicaid disproportionate share hospital (DSH) audit rule (DSH Final Rule). Specifically, the CMS FAQ response addressed the reimbursement formula for computing the Medicaid Inpatient Utilization Rate (MIUR) and its impact on qualifying for and obtaining DSH payment in the determination of the hospital specific limit (HSL).

At issue is whether patients with both Medicaid and private insurance coverage should be included in the calculation of the MIUR in the same way dual eligible patients are included in the MIUR calculation. To that end, CMS provided the following interpretation:

Days, costs, and revenues associated with patients that are dually eligible for Medicaid and private insurance should be included in the calculation of the MIUR for the purposes of determining a hospital eligible to receive DSH payments. Section 1923(g)(1) does not contain an exclusion for individuals eligible for Medicaid and also enrolled in private health insurance. Therefore, days, costs, and revenues associated with patients that are eligible for Medicaid and also have private insurance should be included in the calculation of the hospital-specific DSH limit. As Medicaid should be the payer of last resort, hospitals should also offset both Medicaid and third-party revenue associated with the Medicaid eligible day against the costs for that day to determine any uncompensated amount.

CMS FAQ at pp. 15-16 (emphasis added).

CMS, in implementing this interpretation, instructed DSH auditors to take commercial, third party payments made to hospitals for patients who qualify for both private insurance and Medicaid into account in the DSH HSL calculation. However, CMS did not limit its instruction to DSH auditors solely to instances in which both Medicaid and private insurance, in fact, may have paid to a hospital on an account for an inpatient or outpatient stay (which is extremely rare), but also in circumstances where hospital revenues were received solely from a private insurer (i.e., no bills are transmitted with expectation of payment nor revenues received from the Medicaid program). Historically, the term “dual eligible” has not been defined by CMS as patients that qualify for both Medicaid and private health insurance and no similar definition exists in any federal or state law.

The CMS interpretation, as set out in the January 2010 FAQ, means that, for purposes of determining a hospital’s DSH HSL, commercial payments (made at the commercially negotiated contracted rate) are being applied to reduce the hospital’s calculated Medicaid shortfall, as though equivalent to Medicaid payments, when the hospital did not identify or include the patient, by day, cost or revenue in its Medicaid cost report. The resulting impact on children’s hospitals, especially in Texas and Washington, has been the elimination of their DSH payments for current years. This little known CMS policy change, which also is the subject of legal action in Texas and a court-ordered stay, has not been resolved and remains a cautionary tale for other institutions that may be similarly impacted.