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2018 IPPS Proposed Rule: Cost Report Worksheet S-10 to determine Medicare DSH/Uncompensated Care Payment

Posted by Jamie Pennington on May 18, 2017 1:54:40 PM

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2016_IPPS_comments_proposed_rule.jpgThe 2018 IPPS Proposed Rule was published in the Federal Register on April 28, 2017. If finalized, these changes will go into effect October 1, 2017. The published version can be viewed HERE. Public comments will be accepted until 5 p.m. EDT on June 13, 2017.  Below is SCA’s brief, yet comprehensive summary on the Medicare DSH/Uncompensated Care payment portion of the proposed rule as it will affect DSH hospitals.


Quick Review of the DSH Payment Under ACA

As a result of the ACA, the amount of total DSH reimbursement a provider may receive for discharges beginning in FY 2014, is now based upon two components:

  • Empirically Justified Medicare DSH Payment

  • Uncompensated Care (UC) Payment

The Empirically Justified Medicare DSH Payment is 25% of what Medicare DSH would have been under the pre-ACA formula.  More on that HERE!


The UC payment is a product of 3 factors (Factor 1 x Factor 2 x Factor 3):

Factor 1:  75% fixed pool of what DSH would have been as estimated by CMS for all hospitals combined under the pre-ACA formula

Factor 2:  Estimated % change in the national uninsured rate

Factor 3:  Provider’s % of uncompensated care relative to all hospitals eligible for DSH

2018 Proposed Rule Highlights

  1. Updated estimates for Factors 1 and 2

  2. New source for national uninsured data used for Factor 2

  3. Change in allowable age group for Factor 2

  4. Inclusion of Worksheet S-10 data in Factor 3 to calculate and distribute UC payments

  5. A scaling factor for ALL hospitals, annualized cost reports and CCR trim where applicable

  6. Definition of uncompensated care costs

In this post, we will touch on each of the highlights above beginning with Factor 1.

Factor 1

Factor 1 establishes the gross uncompensated care pool. CMS estimates the difference between what would have been paid to qualifying hospitals under the historical DSH formula and the 25% empirically justified amount. The source of this estimate is the most recently available projections of Medicare DSH reimbursement as calculated by the CMS Office of the Actuary, most recently filed cost reports and the most recent DSH information provided in the IPPS impact file. For 2018, the estimate generally begins with cost reporting periods beginning in FFY 2014 with some exceptions and modifications described in the proposed rule. The net result is Factor 1.


CMS Office of the Actuary estimates FY18 DSH at $16.003 billion. This is $1.606 billion more than the FY17 final rule DSH estimate of $14.397 billion. After removing the empirically justified DSH amount (25%), the final Factor 1 as proposed is:

2018 Factor 1 ≈ $12.002 billion ($16.003 * 75%)

For reference, Factor 1 for FY 2017 as estimated by CMS was $10.797B.

Note regarding the increase:

Part of the increase is the result of an upward adjustment in the trending factors used in 2018 versus the values used in 2017. Another part of the increase is due to the starting point is higher as CMS used FY 2014 cost report data in this proposed rule and used FY 2013 cost report data for the 2017 estimates.


Factor 2

Factor 2 reduces the Uncompensated Care Pool (Factor 1), established above, by the change in the national uninsured rate.

For FY 2014 through FY 2017, Factor 2 equaled 1 minus the percentage change in individuals under 65 years old that were uninsured. The change in the number of uninsured was between the payment year and 2013, which was the last year before the ACA became effective. The data source for this information, until now, was the Congressional Budget Office (CBO) reports. The CBO projected an uninsured rate of 10% in FY 2017, which yielded a Factor 2 of 55.36% and a UC Pool of $5.977 billion (≈ $10.797B * 55.36%).  

Beginning FY 2018, CMS is proposing to change the source of the data that it is using to derive the uninsured factor. The proposed source is now the CMS Office of the Actuary report as part of the National Health Expenditures account. This new source is a complicated configuration of data sets and sources seen in the table HERE.

Also, starting in FY 2018, Factor 2 will be calculated using all age groups rather than the under 65 age group used in previous years. With the change in age group, the pre-ACA baseline (2013) of uninsured has been reduced from 18% in the 2017 final rule to 14%.

Per the new source and data sets, the uninsured rate for 2017 is projected to be 8.3% (was 10% in the 2017 final rule) and the projected uninsured rate for 2018 is 8.1%. After blending to convert the raw data from a calendar year basis to a federal year basis and then running it through the statutory formula, the resulting adjustment factor is .5801, thus resulting in a UC Pool value of $6.962 billion.

CY 2017 uninsured:  8.3%

CY 2018 uninsured:  8.1%

FY 2018 weighted uninsured:  (8.3% * .25) + (8.1% * .75) = 8.15%


FY 2013 uninsured:  14%

FY 2018 ACA reduction:  0.2%


1- ((8.15% - 14%) / 14%) - 0.2% = 58.01%


$12.002B * 58.01% = $6.962B distributed to 2,418 hospitals

projected to qualify for DSH in 2018


For more information on the Factor 2 formula and FY 2017 comparison, click HERE.


Factor 3

For FY 2017, CMS did not utilize its proposal to transition to S-10 in the calculation, stating that:

  • S-10 instructions lacked clarity,

  • Even though the distribution of the pool is a zero sum game, large swings among individual hospitals would occur, and

  • The agency needed to continue with its quality control efforts with regard to S-10 data until it was ready for use.

Therefore, for FY 2017, CMS elected to use the average of low income days over three cost reporting periods for Factor 3.  

For 2018, CMS has again proposed introducing S-10 into the Factor 3 calculation. CMS concluded we have reached a tipping point with respect to the use of S-10 data. Specifically, we can no longer conclude that the alternate data are available…that are a better proxy for costs of subsection (d) hospitals for treating individuals who are uninsured than the data on uncompensated care costs reported on worksheet S-10.”

CMS is also proposing to continue to use the average of three cost reports instead of just one and indicated that if finalized, a similar methodology would be proposed for future years. So, for FY 2018, CMS is proposing the following combination to calculate a provider’s average Factor 3:

  • 1st Factor 3:  FY 2012 cost report low-income days and FY 2014 SSI days

  • 2nd Factor 3:  FY 2013 cost report low-income days and FY 2015 SSI days

  • 3rd Factor 3:  FY 2014 Uncompensated care cost per Worksheet S-10

Other items to note:

  • CMS will “annualize” Medicaid and uncompensated care cost data if the hospital’s cost report does not equal 12 months of data.

  • CMS will also use a “scaling factor” to normalize data for all hospitals

  • CMS will implement a trim methodology for cost-to-charge ratios that fall outside three standard deviations from the national mean.

  • Worksheet S-10, Line 30 will be used as the data metric for uncompensated care costs (more on this below).

Worksheet S-10 Uncompensated Care Definition, Instructions & Audits

In the FY 2018 proposed rule, CMS defines uncompensated care costs for purposes of calculating Factor 3. They establish that uncompensated care costs would best be defined by Line 30 from cost report Worksheet S-10 which includes the sum of cost of charity care from Line 23 and the cost of non-Medicare bad debt expense from line 29. Please note that Medicaid shortfalls are not included in the proposed definition for uncompensated care costs.

Additionally, CMS includes in the proposed rule that for quality control and data improvement measures, the cost report instructions were revised and they are working on the development of an audit process to submit to the MACs.  Please refer to Transmittal 10 issued on November 18, 2016, which clarifies the reporting of charges for charity care.  For cost reports beginning on or after October 1, 2016, charity discounts should be reported based on write-off date.  CMS also goes on to state, “cost reports beginning in FY 2017 will be the first cost reports for which the Worksheet S-10 data will be subject to a desk review.  We do not anticipate making any further modifications to the Worksheet S-10 instructions at this time so that hospitals can begin to review and conform to the current instructions in Transmittal 10.”

Again, public comments will be accepted until 5 p.m. EDT on June 13, 2017. We will continue to post more in-depth analysis on each Factor and cost report worksheet S-10 in the coming weeks.   As in past years, SCA will make available for download our 2018 IPPS proposed rule comment letter once submitted to CMS.  Be on the lookout…


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Topics: DSH Reimbursement, Medicare DSH Reimbursement, uncompensated care, Compliance, Industry Updates, S-10, regulations, proposed rule, healthcare finance, worksheet s-10

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The climate of provider reimbursement is ever-changing and this blog is intended to keep you up-to-date on the latest information regarding:

  • DSH Reimbursement
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