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Uncompensated Care Reimbursement: Factor 1 (THE POOL)

Posted by Cory Aubuchon on Oct 20, 2014 12:33:00 PM

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Under the Affordable Care Act, Medicare disproportionate share hospitals (DSH) will be paid under an uncompensated care (UC) model.  The amount of uncompensated care reimbursement received by a qualifying DSH is determined by 3 factors.



Factor 1 establishes the uncompensated care pool.  CMS will estimate the total amount of Medicare DSH reimbursement for all qualifying hospitals (under the pre-ACA/traditional DSH formula) in a given federal fiscal year.  That estimate is reduced by 25%, which represents the empirically justified Medicare DSH reimbursement that is payable directly to a qualifying DSH ultimately through the settlement of the cost report.  The net result is Factor 1.


2015 DSH Estimate


- 25% Empirically Justified DSH

<$  3,345,865,549>

2015 Factor 1



For reference, Factor 1 for FY 2014 as estimated by CMS was $9,593,192,093.


The Medicare DSH estimate is calculated by CMS’ Office of the Actuary based on data from the Medicare Hospital Cost Reporting Information System (HCRIS).  The DSH estimates are typically derived from Q1 HCRIS data.  Sole Community Hospitals (SCH), Maryland hospitals and hospitals participating in the Rural Community Hospital Demonstration are excluded from the DSH estimate as these hospitals do not receive DSH reimbursement under the traditional formula.


For FY 2015, CMS is using reported FY 2011 DSH payments as the baseline.  Medicare payment rate adjustments (case-mix, discharge, market basket, documentation and coding, etc.) are applied to forecast DSH to a future year.  Estimate/projections are not subject to revision or updates when final Medicare DSH payments are eventually known.



Factor 1 should increase as Medicaid expansion is fully implemented.  CMS has estimated a 4.9% and 3.4% increase in DSH reimbursement due to Medicaid expansion in FY 2014 and FY 2015, respectively.  However, enrollment in Medicaid is expected to increase by 17.19% and 27.58% in those respective years.  The moderate DSH increase is based on:

“the actuarial assumption that the new enrollees are healthier than the average Medicaid recipient and, therefore, use fewer hospital services.” - CMS-1607-F

While CMS’ actuarial assumption will certainly be the subject of much debate, only time will tell if this statement actually plays out in reality.  Regardless, Factor 1 of the uncompensated care reimbursement model will not be updated.  Any variances to actual reported FY 2015 DSH will not be reflected and any associated reimbursement with such a variance will not be reconciled as the final published Factor 1 is precluded from administrative and judicial review.


There are too many moving parts and “unknowns” to accurately predict Factor 1.  Medicaid expansion and on-going DSH litigation should have a profound effect on the DSH estimate, and ultimately, to payments made to hospitals.  One challenge for hospitals is identifying what assumptions should be made in intermediate and long term financial planning. Annual operating budgets aside, decisions regarding major capital projects (whether building or equipment) and the launching of new services depend on solid financial projections and assumptions regarding future DSH/UC payments has a material effect on those projections for most hospitals.  For more detailed information and analysis on Factor 1, read SCA’s comments to the 2015 IPPS proposed rule.

Uncompensated Care Payment Factor 1 Southwest Consulting Associates


Topics: Medicare DSH Reimbursement, uncompensated care

About This Blog

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
  • 340B Pharmacy Drug Discount Program
  • Compliance Issues
  • Litigation Surrounding Provider Reimbursement

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