Audit Findings: Overstated DSH Payments in Missouri Medicaid due to Calculation Error, Lecture notes of Auditing

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Social Services, Division of Medical Services is the single State agency responsible for the administration of the approved Medicaid State plan. The Omnibus Budget Reconciliation Act (OBRA) of 1981 established the DSH program by adding section 1923 to the Social Security Act (the Act). Section 1923 required State Medicaid agencies to make additional payments to hospitals serving disproportionate numbers of low-income patients with special needs and allowed the States considerable flexibility to establish their DSH programs.

The OBRA 1993 established additional inpatient DSH parameters by amending section 1923 of the Act to limit DSH payments to a hospital’s incurred uncompensated care costs. Under section 1923(g) of the Act, the uncompensated care costs were limited to costs of medical services provided to Medicaid and uninsured patients less payments received for those patients excluding Medicaid DSH payments. Section 1923(g)(1) states:

“Section 1923... (g) Limit on Amount of Payment to Hospital.-- (1) Amount of adjustment subject to uncompensated costs.-- (A) IN GENERAL,---A payment adjustment during a fiscal year shall not be considered to be consistent with…respect to a hospital if the payment adjustment exceeds the costs incurred during the year of furnishing hospital services (as determined by the Secretary and net of payments under this title, other than under this section, and by uninsured patients) by the hospital to individuals who either are eligible for medical assistance under the State plan or have no health insurance (or other source of third party coverage) for services provided during the year.”

For State Fiscal Years beginning between July 1, 1994 and January 1, 1995, payments to public hospitals were limited to 100 percent of uncompensated care cost with a special provision that allowed payments up to 200 percent to those public hospitals qualifying as high DSH hospitals. For State Fiscal Years beginning on or after January 1, 1995, payments to all hospitals were limited to 100 percent of uncompensated care costs.

According to the approved Missouri Medicaid State plan (State plan), uncompensated care cost is defined as:

“Inpatient days estimated to be reimbursed by Missouri Medicaid multiplied by the Medicaid inpatient rate PLUS base year Medicaid outpatient payments divided by eighty percent (80%) LESS base year general plan payments PLUS base year charity care and bad debts charges multiplied by the base year cost-to-charge ratio.”

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The Missouri DSH payment and uncompensated care cost for a hospital for any given year is based on the fourth prior year cost report, trended for hospital market basket and anticipated growth indices. For example, the State’s 1999 DSH payments (the year under review) were based on 1995 Medicare/Medicaid cost reports.

Objective, Scope, and Methodology

Our audit was performed in accordance with generally accepted government auditing standards and included calculations for amounts claimed for State Fiscal Year 1999 DSH payments. For the Fiscal Year ending June 30, 1999, Missouri reported $671 million ($406 million FFP) for 147 hospitals.

The objective of the review was to verify that DSH payment calculations were in accordance with the approved Medicaid State plan. To accomplish the objective, we reviewed the State Division of Medical Service’s (State agency) policies and procedures for calculating uncompensated care costs and DSH payments. We reviewed Federal Medicaid statutes, Code of Federal Regulations, CMS guidance, and the State plan pertaining to the DSH program. We selected three hospitals whose DSH payments for 1999 totaled about $100 million, collectively. The $100 million is about 16 percent of the total DSH payments in Missouri. We performed an on-site review of the books and records at each of the three hospitals to ascertain whether uncompensated care costs were supported, accurately calculated, and reported.

We reviewed books and records at the Department of Mental Health to the extent necessary to verify supporting documentation for certain DSH amounts claimed on behalf of State mental hospitals. Our review at the Department of Mental Health included all community mental health center (CMHC) costs included in the computation of uncompensated care costs. We did not trace payments of DSH monies from the State agency to the respective hospitals.

Our internal control review included interviewing State agency, Department of Mental Health, and hospital personnel to the extent necessary to obtain an understanding of the internal controls relevant to the calculation of the uncompensated care costs and DSH payments.

Fieldwork was performed at the State agency, the Department of Mental Health, and three hospitals.

FINDING AND RECOMMENDATIONS

The Fiscal Year 1999 amounts claimed for DSH were overstated because the calculations included a simple error in accumulation of costs. The Federal share of the resulting overpayments was $1.3 million.