For the second time in less than one year, CMS has updated its instructions for completing Worksheet S-10 of the Medicare cost report for hospitals. The new instructions expand the definition of charity care, as reported in column 1 of Line 20, to include discounts given to uninsured patients who meet the hospital’s charity care policy or “financial assistance policy.”  Commenters to the FY 2018 inpatient prospective payment system (IPPS) rulemaking specifically requested this change “for consistency with the terminology used in the regulations implementing section 501(r) of the Internal Revenue Code.”  82 Fed. Reg. 37990, 38217 (Aug. 14, 2017). In addition, the new instructions provide that certain items are no longer subject to the cost-to-charge ratio, such as deductibles and co-insurance amounts for uninsured patients (Line 20, column 2) and non-reimbursable Medical bad debt. The new instructions create Line 27.01 for hospitals to report Medicare allowable bad debts, which are subtracted from a hospital’s total bad debts (Line 26) and multiplied by the CCR to calculate non-Medicare bad debt costs. Finally, the new instructions clarify that charges for non-covered insured patients for days exceeding a length-of-stay limit can now be reported as charity care charges in column 2 of Line 20. In light of the new instructions for completing Worksheet S-10, CMS has given hospitals until October 31, 2017 to submit an updated Worksheet S-10 for their cost reporting periods beginning in FYs 2014 and 2015.

These new instructions apply to cost reporting periods beginning on or after October 1, 2013 (FY 2014). This latest revision comes in the wake of CMS’ announcement in the Fiscal Year (FY) 2018 IPPS rulemaking that the agency will use Worksheet S-10 data to determine how the uncompensated care component of the disproportionate share hospital (DSH) payment will be distributed among eligible hospitals. That data will be used to calculate uncompensated care payments starting in FY 2019.

Section 3133 of the Affordable Care Act (ACA), which went into effect in FY 2014, significantly altered the Medicare DSH payment. Hospitals now receive 25 percent (as estimated by CMS) of the DSH payment they would have received under the payment methodology that existed prior to FY 2014. The remaining 75 percent (Factor 1) is reduced by the change in national uninsured rates (Factor 2) and divided among eligible hospitals based on their proportionate share of uncompensated care (Factor 3). When the ACA changes were first implemented, CMS determined that Medicaid and Medicare/SSI days were the best available proxy for calculating uncompensated care. Therefore, between FYs 2014 and 2017, CMS calculated Factor 3 based on a hospital’s number of Medicaid and Medicare/SSI days.

In the FY 2018 IPPS final rule, CMS announced that it is phasing out the use of Medicaid and Medicare/SSI days and will begin incorporating data from Worksheet S-10 to calculate Factor 3. CMS reasoned that “we have reached a tipping point with respect to the use of S-10 data. Specifically, we can no longer conclude that alternative data are available…that are a better proxy for the costs of…treating individuals who are uninsured than the data on uncompensated care costs reported on the Worksheet S-10.”  82 Fed. Reg. at 38202. In FY 2018, Worksheet S-10 data will be used to calculate one-third of Factor 3. By FY 2020, all of Factor 3 will be based on Worksheet S-10 data.

CMS intends to use Line 30 of Worksheet S-10 as the data metric for uncompensated care. Line 30 represents the sum of a hospital’s costs of charity care (Line 23) and non-Medicare bad debt (Line 29). Over the past year, CMS has twice revised the instructions for Worksheet S-10 to clarify what costs qualify as charity care and non-Medicare bad debt. In Transmittal 10, issued on November 18, 2016, CMS clarified that charity care does include discounts given to uninsured patients who meet the hospital’s charity care criteria, but does not include amounts of unpaid deductibles and co-insurance for which the hospital has received reimbursement from Medicare. On September 29, 2017, CMS issued Transmittal 11, which contains the new instructions for completing Worksheet S-10 detailed above.

CMS is giving hospitals until October 31, 2017 to amend Worksheet S-10 for their cost reports beginning in FYs 2014 and 2015 consistent with the new instructions in Transmittal 11. Hospitals are not required to submit amended Worksheet S-10s, but they may choose to resubmit if they have additional data in light of the new instructions. The Worksheet S-10 data from the FY 2014 and 2015 cost reports will be used to calculate two-thirds of a hospital’s Factor 3 in FY 2019. Given the significant amount of reimbursement at stake, hospitals should investigate whether they stand to benefit from this opportunity to amend their cost reports consistent with the new instructions.