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January 28, 2022

Uncompensated Care and DSH (Medicare disproportionate share hospitals)


This article is written for education purposes and should not be considered accounting, consulting or legal advice regarding hospital charity care bad debt and disproportionate share hospitals aka DSH. For more information on filing compliance cost reports, attend the Medicare Cost Report Camp in March 2022 presented by KraftCPAs and sponsored by the American Institute of Healthcare Compliance.

Medicare Uncompensated Care Payments & DSH

Hospitals' charity care and bad debt, together known as uncompensated care, is used to calculate disproportionate-share hospital payments. The Centers for Medicare and Medicaid Services (CMS) distributes a prospectively determined amount of uncompensated care payments to “Medicare disproportionate share hospitals” or better known as “DSH.” This is calculated based on the hospital’s relative share of uncompensated care nationally.


As required under law, this amount is equal to an estimate of 75 percent of what otherwise would have been paid as Medicare disproportionate share hospital payments, adjusted for the change in the rate of uninsured people. In this rule, CMS will distribute roughly $8.3 billion in uncompensated care payments for FY 2021, a decrease of approximately $60 million from FY 2020. This estimate of total uncompensated care payments reflects CMS Office of the Actuary’s projections that incorporate the estimated impact of the COVID-19 pandemic.

For FY 2021, CMS will use a single year of data on uncompensated care costs from Worksheet S-10 of hospitals’ FY 2017 cost reports to distribute these funds, in part because CMS has conducted audits of this data. Mindful of the unique challenges facing Indian Health Service and Tribal hospitals and Puerto Rico hospitals, CMS will continue to use data regarding low-income insured days (Medicaid days for FY 2013 and FY 2018 SSI days) to determine the amount of uncompensated care payments for Puerto Rico hospitals and Indian Health Service and Tribal hospitals for FY 2021, similar to the FY 2020 methodology.

Background on the IPPS and LTCH PPS

CMS pays acute care hospitals (with a few exceptions specified in the law) for inpatient stays under the Inpatient Prospective Payment System (IPPS). LTCHs are paid under the Long-Term Care Hospital Prospective Payment System (LTCH PPS). Under these two payment systems, CMS sets base payment rates prospectively for inpatient stays based on the patient’s diagnosis and severity of illness. Subject to certain adjustments, a hospital receives a single payment for the case based on the payment classification assigned at discharge. The classification systems are:

  • IPPS: Medicare Severity Diagnosis-Related Groups (MS-DRGs)
  • LTCH PPS: Medicare Severity Long-Term Care Diagnosis-Related Groups (MS‑LTC‑DRGs).

The law requires CMS to update payment rates for IPPS hospitals annually, and to account for changes in the prices of goods and services used by these hospitals in treating Medicare patients, as well as for other factors. This is known as the hospital “market basket.” The IPPS pays hospitals for services provided to Medicare beneficiaries using a national base payment rate, adjusted for a number of factors that affect hospitals’ costs, including the patient’s condition and the cost of hospital labor in the hospital’s geographic area. Payment rates to LTCHs are typically updated annually according to a separate market basket based on LTCH-specific goods and services.

In 2020, CMS issued a final rule for acute care and long-term care hospitals that ensures access to potentially life-saving diagnostics and therapies by unleashing innovation in medical technology and removing barriers to competition.

On August 2, 2021, the CMS issued the final rule for fiscal year (FY) 2022 Medicare Hospital Inpatient Prospective Payment System (IPPS) and Long-Term Care Hospital (LTCH) Prospective Payment System (PPS). The FY 2022 IPPS and LTCH PPS final rule will be issued in multiple parts. 

The final rule updates Medicare payment policies and rates for operating and capital-related costs of acute care hospitals and for certain hospitals and hospital units excluded from the IPPS for FY 2022. The policies in this IPPS and LTCH PPS final rule build on key priorities to close health care equity gaps and support greater access to life-saving diagnostics and therapies during the COVID-19 public health emergency (PHE) and beyond.

The rule’s provisions seek to:

Sustain hospital readiness to respond to future public health threats;

Enhance the health care workforce in rural and underserved communities; and

Revise scoring, payment and public quality data reporting methods to lessen the adverse impacts of the pandemic and future unplanned events. 

The final rule updates Medicare fee-for-service payment rates and policies for inpatient hospitals and long-term care hospitals for FY 2022. In this final rule, CMS approved 13 technologies that applied for new technology add-on payments for FY 2021. This includes two technologies under the alternative pathway for new medical devices that are part of the FDA Breakthrough Devices Program and five technologies approved under the alternative pathway for products that received FDA Qualified Infectious Disease Product (QIDP) designation. 

Additionally, CMS conditionally approved one technology designated as a QIDP that otherwise meets the alternative pathway criteria but has not yet received FDA approval. After consideration of public comments, CMS also approved six technologies submitted under the traditional new technology add-on payment pathway criteria.

CMS is continuing the new technology add-on payments for 10 of the 18 technologies currently receiving the add-on payment (the remaining 8 technologies will no longer be within their newness period in FY 2021, which includes the Chimeric Antigen Receptor (CAR) T-cell therapies approved for the new technology add-on payment in FY 2019).

In total, 24 technologies are eligible to receive add-on payments for FY 2021. CMS estimates that FY 2021 Medicare spending on new technology add-on payments will be approximately $874 million, nearly a 120% increase over the FY 2020 spending.

CMS is adopting some changes regarding new technology add-on payments for certain antimicrobials for FY 2021:

  • Expansion of alternative new technology add-on payment pathway for antimicrobial products designated by FDA as QIDPs to include products approved under FDA’s Limited Population Pathway for Antibacterial and Antifungal Drugs (LPAD pathway).

o The LPAD pathway encourages the development of safe and effective drug products that address unmet needs of patients with serious bacterial and fungal infections. As is the case for QIDPs, under this policy an antimicrobial drug approved under FDA’s LPAD pathway will be considered new and not substantially similar to an existing technology and will not need to demonstrate that it meets the substantial clinical improvement criterion (the technology will need to meet the cost criterion).

  • CMS is adopting a policy to provide for conditional approval for antimicrobial products that otherwise meet the NTAP alternative pathway criteria but do not receive FDA approval in time for consideration in the final rule. This is to allow eligible antimicrobial products to begin receiving the new technology add-on payment sooner.

o Under this policy, those antimicrobial products that otherwise meet the applicable addon payment criteria will begin receiving the new technology add-on payment, effective for discharges the quarter after the date of FDA marketing authorization instead of waiting until the next fiscal year, provided FDA marketing authorization is received by July 1 of the year for which the applicant applied for new technology add-on payments


CMS estimates total Medicare spending on acute care inpatient hospital services will increase by about $3.5 billion in FY 2021, or 2.7 percent. The Office of Inspector General (OIG) has added reviews of MAC cost report oversight for 2022. This project is described in the OIG January 2022 Work Plan ItemFiling accurate and compliant cost reports should be part of your institution’s risk mitigation program. 

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