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Long-Awaited Disproportionate Share Instructions in the 2014 IPPS Proposed Rule

The Centers for Medicare & Medicaid Services (CMS) released the 2014 IPPS Proposed Rule on April 26, 2013, proposing several payment revisions as a result of the Patient Protection and Affordable Care Act (PPACA). Perhaps the most highly anticipated issue within the proposed rule is the revision to the disproportionate share hospital (DSH) calculation. PPACA required an adjustment to DSH payments as a result of the anticipated reduction in uninsured as well as distribution of payments based on hospital comparison of uncompensated care costs. The proposed rule discusses these changes in detail—and provides a curve ball along the way.

As a result of the proposed new payment methodology, some hospitals will receive increased DSH payments while others will see their payments decrease. While reductions were expected, few believed hospitals might actually receive more DSH payments under the new calculation. However, given information released within the proposed rule, hospitals can reasonably estimate their federal fiscal year 2014 DSH payments, and several hospitals may actually receive more DSH payments under the new method than the historic method. This means less-fortunate hospitals could face drastic reductions.

Here is the proposed DSH payment formula for FFY 2014:


Determining Eligibility for Uncompensated Care Payment

This article focuses on the most common criteria to qualify for DSH payments, such as geographic designation, bed size and the hospital’s disproportionate patient percentage, which comprises Medicaid and Medicare SSI volumes. The historical DSH formula remains unchanged in FFY 2014 and beyond. However, reimbursement under the historical formula, referred to by CMS as the empirically justified Medicare DSH payment, is reduced to 25 percent of current payments. CMS will continue to pay this portion of the DSH payment as an add-on to the Medicare DRG payments.

The existing DSH formula also determines eligibility for the new payment methodology taking effect in FFY 2014. This portion of the formula is referred to as the uncompensated care payment. PPACA applies the new payment methodology to “subsection (d) hospitals” otherwise receiving a “disproportionate share payment … made under subsection (d)(5)(F).” Therefore, only hospitals receiving DSH using the empirical formula will receive the uncompensated care payment for the specific year as determined by the hospital’s cost report.

Reviewing the New Payment Methodology – “Uncompensated Care Payment”

In addition to receiving 25 percent of empirically justified Medicare DSH payments, PPACA requires payments be distributed based on uncompensated care costs incurred by hospitals. CMS will make interim payments for the uncompensated care portion on a periodic basis rather than as an add-on to the DRG payment. CMS revealed several key estimates in the proposed rule specific to this payment methodology, including the following:

  • Factor 1:  75 percent of the estimated DSH payments otherwise made under the old DSH methodology (section (d)(5)(F) of the Social Security Act)
  • Factor 2:  One minus the percent change in the percent of individuals under the age of 65 who are uninsured (minus 0.1 percentage points for FFY 2014, and minus 0.2 percentage points for FFY 2015 through FFY 2017)
  • Factor 3:  A hospital’s amount of uncompensated care relative to the amount of uncompensated care for all DSH hospitals expressed as a percentage

Factor 1

PPACA grants CMS authority to make various estimates within the uncompensated portion of the formula. The first estimate CMS proposes relates to the 75 percent of DSH payments otherwise made in FFY 2014 using the old DSH methodology. The Office of the Actuary projects Medicare DSH payments twice per year based on the most recently filed Medicare cost reports. The office’s February 2013 estimate is the most recent FFY 2014 DSH estimate available. If the proposed rule for Factor 1 is finalized, CMS will use the July 2013 Medicare DSH estimate to determine Factor 1 in the FFY 2014 Final Rule.

The Office of the Actuary’s FFY 2014 DSH payment estimate is $12.338 billion. Therefore, Factor 1, representing 75 percent of DSH payments made under the historical formula, equates to $9.2535 billion. This estimate cannot be reviewed or appealed. In addition, this factor will be annually adjusted based upon the office’s estimates.

Factor 2

Based upon estimates from the Congressional Budget Office (CBO), the percentage of all nonelderly residents who are insured in FFY 2013 is 82 percent. Therefore, the uninsured population for FFY 2013 is 18 percent. According to the formula, the FFY 2013 uninsured percentage will be used as the baseline for FFY 2014 through FFY 2017. CMS proposes using the same source for FFY 2014, which estimates the uninsured population at 16 percent. As a result, Factor 2 is as follows:

Percent of individuals without insurance for 2013:  18 percent

Percent of individuals without insurance for 2014:  16 percent

1 – [(0.16 - 0.18)/0.18] = 1 – 0.111 = 0.889 (88.9 percent)

0.889 (88.9 percent) – 0.001 (0.1 percentage points) = 0.888 (88.8 percent)

Factor 2 = 0.888

This factor will be adjusted for FFY 2015 based upon CBO estimates of the uninsured population in 2015 and will be reduced by 0.2 percentage points rather than 0.1 percentage points.

By multiplying Factors 1 and 2, the uncompensated care portion of the DSH pool is $8.217 billion.

Factor 3

Finally, CMS must allocate payments based upon uncompensated care cost incurred by hospitals. Worksheet S-10 of the Medicare cost report might appear to be the logical choice to allocate payments. This worksheet includes hospital information for both charity and non-Medicare bad debts, which typically define “uncompensated care.” However, CMS stated its concern about the accuracy of the data reported on S-10. Furthermore, hospitals with high cost-to-charge ratios would reap benefits in uncompensated care DSH payments over more efficiently performing peer hospitals. CMS expressed concern about creating a policy using S-10 uncompensated care amounts that could create incentive for states to avoid Medicaid expansion. For these reasons and others, CMS proposed to not use Worksheet S-10 for FFY 2014 payments. However, CMS may adopt a revised methodology using Worksheet S-10 in future periods after it establishes the accuracy and reliability of the data.

As an alternative and surprising twist to using Worksheet S-10, CMS proposes using the “utilization of insured low-income patients” as a proxy for uncompensated care costs, with low-income patients defined as “inpatient Medicaid days plus days of Medicare SSI patients … ”—in other words, the same criteria in place for the current DSH payment methodology. As a result, Factor 3 is:

Individual Hospital Medicaid Days + Medicare SSI Days
All DSH Hospital Medicaid Days + Medicare SSI Days

CMS computed this ratio for expected DSH qualifying hospitals using Medicaid Days from the 2010/2011 Medicare Cost Reports and the FFY 2010 SSI database. The table including this ratio is available on the CMS website; the file is titled “Medicare DSH Supplemental Data File.” CMS has proposed using the 2010/2011 Medicare Cost Reports to allow time for audits to occur and has proposed using the 2011 SSI File if it becomes available by the final rule publication.


Factors 1 and 2 of the proposed methodology appear logical and consistent from year to year. Many feared the reduction estimate of the uninsured from FFY 2013 to FFY 2014 would be overstated and ultimately reduce the DSH pool. However, a reduction from 18 percent to 16 percent is modest; one could assume the inability to mandate Medicaid expansion is partially responsible.

Factor 3, on the other hand, will be cause for much discussion in the coming months. While there is no perfect data source for standardizing uncompensated care reporting, CMS’ chosen method doesn’t account for uncompensated care occurring on an outpatient basis. An alarming number of uninsured patients seek care in hospital emergency departments, which is not considered when using an inpatient proxy.

Secondly, the redistribution of funds creates winners and losers. Unfortunately, some of the hardest hit will be smaller hospitals that rely on the safety net of DSH payments. Hospitals with greater-than-average Medicare utilization are, in general, more negatively affected than those hospitals with below-average Medicare utilization.

How Should Hospitals Prepare?

  1. It is critical to continue to perform Medicaid eligibility reviews and document-eligible days in accordance with Medicare cost report filing regulations. Medicaid volume will remain a factor for determining 25 percent of DSH payments and will affect the uncompensated care formula in FFY 2014 and potential future years.
  1. Hospitals must proactively educate and enroll Medicare beneficiaries into SSI where eligible. Publicly available information suggests SSI enrollment is significantly lower than SSI-eligible persons. Education should occur within communities and health settings to assist the low-income, elderly population. The proposed rule also included a section dedicated to Medicare Advantage (MA) days and the Allina case. CMS reaffirms its position that MA days should be included in the SSI fraction and not the Medicaid fraction of the historical DSH formula.
  1. Hospitals should review their charity policies and accurately report information on Worksheet S-10. CMS could adopt a new methodology to compute uncompensated care costs using Worksheet S-10. We recommend hospitals become more familiar with the instructions and develop reporting mechanisms to accordingly track and record charity and bad debt charges.
  1. Given information in the IPPS proposed rule, hospitals can reasonably estimate their FFY 2014 DSH payments. We recommend using information within this article as well as the table for Factor 3 referenced above to determine future DSH payments. If a hospital is not included in CMS’ table and ultimately qualifies for DSH, CMS will make the payments at cost report settlement.

BKD has developed a tool to help estimate the DSH reimbursement impact to your hospital as a result of the newly proposed DSH payments.

For more information on how the disproportionate share instructions could affect your organization, contact your BKD advisor.

This post was written by:

Michael has more than seven years of experience assisting health care providers with reimbursement consulting and revenue cycle solutions. His experience includes Medicare cost report preparation, revenue cycle operations, disproportionate share and bad debt analysis.

One Response to “Long-Awaited Disproportionate Share Instructions in the 2014 IPPS Proposed Rule”

  1. avatar Joe Wright says:


    How you seen any information on how CMS would calculate the DSH payments if they decided to use Worksheet S-10 for the source? We would like to calculate the difference between the two methods.


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