Proposed 2018 Uncompensated Care Payment Methodology—Implications for Hospitals

Health Highlights

Hospitals qualifying for the Medicare Disproportionate Share Hospital (DSH) program that receive uncompensated care payments should be aware that the Centers for Medicare and Medicaid Services (CMS) has resurrected its proposal to begin phasing in the use of uncompensated care data reported in Worksheet S-10 to calculate such payments beginning in 2018. This could result in significant changes to the distribution of uncompensated care payments.


The Affordable Care Act (ACA) contained numerous provisions intended to reduce and redirect overall Medicare DSH payments as more individuals obtain health coverage through the ACA’s coverage expansion provisions. These Medicare DSH reform provisions included the establishment of the uncompensated care payment. This payment takes 75% of the former Medicare DSH payment amount, reduces that amount according to the change in the national uninsured rate and redirects the remainder to hospitals that continue to deliver high levels of uncompensated care.

Proposed Changes to the Calculation of Uncompensated Care Payments

In the recently published 2018 Medicare Inpatient Prospective Payment System (IPPS) Proposed Rule (82 Fed. Reg. 19807 (Apr. 28, 2017)), CMS proposes to jump-start its earlier plan to begin using data from Worksheet S-10 of a hospital’s Medicare cost report to calculate uncompensated care payments.

Specifically, CMS is now proposing to compute Factor 3 (i.e., the hospital-specific factor of uncompensated care payment calculations) for each hospital for FY 2018 using a 2012-2014 three-year average consisting of:

  1. Medicaid patient days (from FY 2012 cost report data) and Medicare Supplemental Security Income (SSI) patient days (from the FY 2014 SSI ratio);
  2. Medicaid patient days (from FY 2013 cost report data) and Medicare SSI patient days (from the FY 2015 SSI ratio); and
  3. FY 2014 Worksheet S-10 data.1

If this proposed rule is finalized, CMS expects Factor 3 to be calculated entirely based upon S-10 data by FY 2020. FY 2019’s three-year average would contain two years’ worth of S-10 data (FY 2014 and 2015) along with one year of Medicaid and Medicare SSI patient days (Medicaid days from FY 2013 cost report data, Medicare SSI days from the FY 2015 SSI ratio) and in FY 2020, the Factor 3 calculation would be based entirely on S-10 data (from FY 2014-2016).

With respect to the exact S-10 data that would be counted in the FY 2018 uncompensated care payment calculations, CMS is proposing that uncompensated care would be defined as the amount on line 30 of Worksheet S-10, which is the combined cost of charity care (from Line 23) and the cost of non-Medicare bad debt (from Line 29). CMS had previously considered including Medicaid shortfalls in the uncompensated care payment calculations, but is not currently proposing to do so.

CMS has also updated the cost-reporting instructions associated with Worksheet S-10 and is revising its internal standardized instructions that tell Medicare Administrative Contractors when and how often a hospital’s Worksheet S-10 should be reviewed. CMS believes that FY 2017 Worksheet S-10 data would be the earliest S-10 data subject to a desk review.

This Is the Plan and CMS Is (Probably) Sticking to It

Though CMS has backed away from similar plans to use Worksheet S-10 data in the past, this time it is less likely that CMS will do so. In the 2017 Medicare IPPS Final Rule, CMS had scrapped its plans to use S-10 data for 2018 in light of public comments relating to quality control concerns with S-10 data and had stated that S-10 data would be used “no later than FY 2021.”

However, this time around, to bolster its decision to use Worksheet S-10 data to calculate uncompensated care payment, CMS made two main observations:

  1. 2014 was the “tipping point” for S-10 data improvement. CMS noted that the S-10 data were becoming good measures of the amount of uncompensated care a hospital delivers, and had reached a “tipping point” in 2014 when S-10 data produced better measures of Factor 3 than the proxy methodology based on Medicaid and Medicare SSI patient days. CMS cited several studies showing that the correlation between the amounts for Factor 3 calculated from the IRS Form 990, Schedule H, and Worksheet S-10 had increased over time and that the correlation was expected to be significantly greater between Schedule H and Worksheet S-10 Factor 3 calculations for 2014, when compared with Factor 3 amounts derived from Medicaid and Medicare SSI days.
  2. Use of 2014 Medicaid patient days to calculate Factor 3 would unfairly penalize hospitals in states not expanding Medicaid. 2014 was the first year of Medicaid expansion under the ACA and hospitals operating in states which had expanded Medicaid eligibility then would likely experience a decrease in their uncompensated care burden for 2014, as many of the hospitals’ previously uninsured patients would have been able to pay for services with their newly gained Medicaid coverage. Paradoxically, basing uncompensated care payments on Medicaid days would simultaneously give these hospitals a larger share of the uncompensated care payment pool (due to the hospitals’ increased number of Medicaid days) than would be available to hospitals in states that did not expand Medicaid.

What Hospitals Should Do Now

As a threshold matter, hospitals that have concerns with this proposal should submit a comment letter to CMS stating the concerns and proposing alternative policies. Comments regarding the 2018 Medicare IPPS Proposed Rule are due by 5 p.m. ET on June 13, 2017.

Assuming that this proposed rule is finalized as written, hospitals should review the uncompensated care data they reported in their 2014–2016 cost reports via the Worksheet S-10. If that data is not accurate (or nonexistent), hospitals should determine whether they can amend or adjust such data.

A further step that hospitals should take is to re-examine their financial assistance policies and revenue cycle operations. CMS’s comments make clear that the ultimate goal is to align the uncompensated care values that a hospital reports via its Form 990, Schedule H, with the uncompensated care values that a hospital reports via Worksheet S-10 of its Medicare cost report. Both of these reporting obligations require a hospital to report its amounts of charity care and bad debt. The amount of reportable charity care and bad debt depends, in turn, on the terms of a hospital’s financial assistance policies and the hospital’s revenue cycle operations (including collections and accounting practices).

Even longer-term actions that hospitals can undertake in this area would involve re-examining their community health needs assessments and any other community benefit and charity care obligations they may have (e.g., to maintain tax-exempt status, via consent agreements with their state attorneys general). The task may be daunting, but the benefits of aligning a hospital’s community health strategy, financial assistance policies, revenue cycle operations, tax accounting and Medicare cost reporting are immense—for both hospitals and the communities they serve.

1Puerto Rico and IHS/Tribal hospitals and new hospitals would be subject to a different Factor 3 calculation methodology, and different methodologies would apply to hospitals that have data not lining up with the periods specified above.



pursuant to New York DR 2-101(f)

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