Tale of Caution for Children s Hospitals What You Don t Know About DSH Can Hurt You AUTHOR. Susan Feigin Harris Baker & Hostetler LLP Houston, TX

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1 FEBRUARY 2014 EXECUTIVE SUMMARY CHILDREN S HOSPITAL AFFINITY GROUP OF THE IN-HOUSE COUNSEL AND TEACHING HOSPITALS AND ACADEMIC MEDICAL CENTERS PRACTICE GROUPS Tale of Caution for Children s Hospitals What You Don t Know About DSH Can Hurt You AUTHOR Susan Feigin Harris Baker & Hostetler LLP Houston, TX EDITOR Lance A. Lightfoot Texas Children s Hospital Houston, TX In January 2010, the Centers for Medicare & Medicaid Services (CMS) issued an answer to a frequently asked question (FAQ) relating to the Medicaid disproportionate share hospital (DSH) audit rules, originally published in final form on December 19, 2008 (DSH Final Rule). The CMS FAQ may have gone largely unnoticed by many hospital facilities, particularly children s hospitals that treat a large percentage of children in the Medicaid program. FAQ #33 dealt with a very-specific issue associated with the reimbursement formula for determining the Medicaid inpatient utilization rate (MIUR) and its impact on qualifying for and obtaining DSH payment in the determination of a hospital s hospital-specific limit (HSL). The question concerns 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. CMS answer is quoted below: 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

2 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 (emphasis added). As a result of this FAQ answer, DSH auditors have received instructions from CMS to include private health insurance payments made to hospitals for patients that qualify for both private insurance and Medicaid in the DSH HSL calculation. The instruction is not limited solely to instances in which both Medicaid and private insurance have made payments to a hospital for an inpatient or outpatient stay (which is extremely rare), but also applies to circumstances in which only private insurance made payments and no bills were sent to Medicaid for reimbursement purposes. The term dual eligible patients has not been defined as patients that qualify for Medicaid and private health insurance ever before and no similar definition exists in any federal or state law. Application of this policy interpretation means that private insurance payments (made at the commercially negotiated contracted rate) are treated equivalent to Medicaid payments when calculating the hospital s HSL and ultimate Medicaid shortfall, even though the hospital did not bill Medicaid for services or identify or include the patient, by day, cost, or revenue in its Medicaid cost report. The impact of this policy change has been felt prominently among the children s hospitals in Texas and Washington state, so much so that their entire DSH payments in current years are eliminated, and the threat of recoupment for prior DSH years looms large as this informal interpretation is allowed to move forward unchallenged. In fact, Texas Children s Hospital and Seattle Children s Hospital have had significant reductions in their DSH supplemental payments due to the application of this interpretation. For Seattle Children s Hospital, their DSH supplemental payment was 2

3 reduced in its entirety. Because of the manner in which Washington state law DSH payments are determined, the failure of Seattle Children s to have participated in the DSH program due to this application has also resulted in its complete elimination from future participation in the Washington state DSH program. In Texas, where there are seven freestanding children s hospitals, the application of the DSH HSL interpretation by the state has had an estimated impact of approximately $70 million of reduced DSH payments to children s hospitals in Additionally, the ongoing impact in potential recoupments due to DSH audits and in calculations of future Medicaid waiver uncompensated-care program payments is problematic. Why does the interpretation particularly impact children s hospitals? The answer lies in the population primarily cared for in children s hospitals and the manner in which the DSH HSL formula is calculated in these states. First, the population cared for in children s hospitals, particularly the ones impacted in this instance, treat a large percentage of children who have chronic and complex conditions, including neonates. These children can be eligible for Medicaid solely by virtue of their illness alone, regardless of their parent s economic status. For example, children under 1,200 grams or that have significant lengths of stay may qualify for Medicaid even though they have primary insurance coverage by a private insurer. However, the fact that Medicaid coverage exists for this population does not mean that the hospital ever turns to or bills the program for any portion of the inpatient or outpatient stay, nor does it count the child as a Medicaid program patient for purposes of its Medicaid cost report. Second, children s hospitals that receive DSH in these states obtain their HSL primarily from the Medicaid shortfall component of the calculation, because they do not treat a large portion of uninsured individuals, given the manner in which the population in this country is covered. One in three children in the country qualify for Medicaid and that is not true for the adult population they remain largely uninsured and so adult acute hospitals, logically, end up with a larger proportion of individuals who are uninsured in the DSH HSL calculation. 3

4 Children s hospitals in Texas and Washington state have challenged their states and CMS with some limited success. Applicable Medicaid law does not support the FAQ answer in its plain language. 1 States such as Washington and Texas that have adopted a method to determine and pay DSH payments by calculating the Medicaid shortfall and number of uninsured have submitted and had approved state plan amendments that were not amended to reflect this new CMS interpretation and do not define dual-eligible patients to include patients that qualify for private insurance and Medicaid coverage. In addition, CMS and state law acknowledge Medicaid secondary payer rules that expressly prohibit the transmission and payment of claims by the Medicaid program if private insurance is available. In the instant cases, it is private insurance that is billed and that fully reimburses the hospital for all inpatient and outpatient care rendered to children in the hospital. The Medicaid program does not reimburse the hospital for any part of the inpatient or outpatient care, nor is the Medicaid program billed, in the cases at hand. Further, the policy implications of eliminating a provider s DSH HSL without any notice and comment are significant under the Administrative Procedure Act. Texas Children s Hospital has led the fight to change or clarify the interpretation as to the Medicaid shortfall in the state of Texas. Texas Children s Hospital filed a lawsuit seeking a temporary restraining order to protect its 2013 DSH payment, since such payment was about to be redistributed among the remaining Texas hospitals. The hospital argued that the application of the CMS interpretation by the Texas agency violated state law and regulation, arguing that its application would cause imminent and irreparable harm. On November 15, 2013, the judge in the case ruled in favor of Texas Children s Hospital staying the state in its distribution of 2013 DSH HSL funds. 2 The Texas and Washington Congressional delegations are concerned about the adverse impact upon the institutions in their state that care for the lion s share of Medicaid children. Therefore, Texas and Washington hospitals have also led a policy 1 SSA 1923(g)(1); 42 U.S.C. 1396r-4(g)(1). 2 Texas Children s Hosp. v. Texas Health and Human Servs. Comm n, No. D-1-GN (200 th Dist. Ct., Travis County, Tex.). 4

5 advocacy effort to educate CMS concerning their interpretation s fundamental flaws and harmful effects on children s hospitals. The hospitals have worked with their state Medicaid agencies to ensure that they fully understand the reimbursement consequence of the formula. Children s hospitals have fought what appears to be a disconnect, both at the state and CMS level, in understanding that the children s hospitals were not opposing the few instances in which the Medicaid program might have been billed after a third-party payer may have paid. The child may qualify for Medicaid based on their illness, but the hospital does not count the child in its cost report, or turn to the Medicaid program in any way, for payment. Thus far, few children s hospitals have identified this issue. This may be due to several factors: (1) not every state uses the same formula to participate in the DSH HSL Medicaid supplemental payment program. In fact, many states use alternative mechanisms, such as a bed tax, and as a result, the calculation of a Medicaid shortfall does not impact children s hospitals in all states in the same manner; (2) since the auditors and CMS did not provide any notice of this change in interpretation, children s hospital reimbursement professionals would only notice the impact of the change in the formula by closely monitoring their DSH HSL and noticing a significant change in DSH payment as a result. In the two instances identified above, the impact was hidden and was very difficult to find; and (3) if a hospital does not have a high percentage of vulnerable and sick children who would qualify for Medicaid by virtue of their illness alone, the impact might be very small. Only large institutions that have large neonatal intensive-care units and high-acuity centers would treat enough of these children where the impact of the private insurance issue would be felt. Our reliance on children s hospitals to continue to provide cutting-edge research, teaching, clinical care, and expertise, as well as access to all children is already at risk, and little-known CMS interpretations that fundamentally impact these institutions ability to invest in their vision will remain a problem into the future. This issue has not been resolved and it is a cautionary tale for other institutions that may be similarly impacted. 5

6 Tale of Caution for Children s Hospitals What You Don t Know about DHS Can Hurt You 2014 is published by the American Health Lawyers Association. All rights reserved. No part of this publication may be reproduced in any form except by prior written permission from the publisher. Printed in the United States of America. Any views or advice offered in this publication are those of its authors and should not be construed as the position of the American Health Lawyers Association. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal or other professional services. If legal advice or other expert assistance is required, the services of a competent professional person should be sought from a declaration of the American Bar Association. 6