Medicare Cost Reports – Not in MY Job Description!

The Back Story
You are a Pharmacist. You did not go to school to study accounting. You did not go to school to study socio-economics. Nor did you go to school to study marketing. But, if your hospital participates in the 340B program, these subjects should now be important to you.

Many hospitals enjoy significant financial benefits from 340B participation. These benefits are typically in the form of lower drug costs. You are a superhero since the Pharmacy department is saving the hospital a ton of money. But your Superman status can be lost, faster than a speeding bullet, due to factors beyond your control.

An integral factor for 340B participation is the DSH Adjustment Factor. DSH is the acronym for “Disproportionate Share Hospital”. The DSH Adjustment Factor is an indication of the level of low-income inpatients served by the hospital. The magic numbers for 340B eligibility are 11.75% and 8.0%. Based on how your hospital qualifies for participation in the 340B program, the hospital can lose 340B eligibility if your hospital has a DSH Adjustment Factor lower than these numbers. However, if your hospital is granted Medicare Critical Access Hospital status (hospital must have fewer than 25 beds), there is no DSH requirement.

It’s All in the Numbers
The DSH Adjustment Factor calculation is complex. Part of the calculation is dependent upon the location, size, and Medicare status of the hospital and usually does not change from year to year. We will not focus on this part. However, another part of the calculation, the DSH Patient Percentage, does change annually and can make or break 340B eligibility.

The DSH Patient Percentage, is determined as follows:
DSH Patient Percentage = (Medicaid, Non-Medicare Days/Total Patient Days) + (Medicare SSI Days/Total Medicare Days)

There are two moving parts to the DSH Patient Percentage. First is the percentage of total patient days for which Medicaid is (or is eligible to be) the primary payer. Second is the percentage of all Medicare days that are attributable to beneficiaries of Supplemental Security Income (SSI). These percentages change annually. A drop in either of these percentages can spell disaster for 340B eligibility.

Let’s first look at the Medicaid percentage. Medicaid is the State health program for low-income patients. Medicaid patients come and go, sometimes due to State eligibility requirements, or sometimes due to internal decisions by hospital management.

For instance, Medicaid covers a significant number of hospital deliveries. What happens if the hospital closes its obstetrical services? You might experience a decrease in the number of Medicaid inpatients. That is bad for 340B eligibility.

What if the governor decides to expand the State Medicaid program under the Affordable Care Act? You might experience an increase in the number of Medicaid inpatients. That is good for 340B eligibility.

What if you live in a community that has a low Medicaid population? That may be good for net patient revenues. That may be bad for the 340B program.

The second part of the DSH Patient Percentage is called the SSI ratio. SSI is a cash benefit program for aged and disabled people.   The SSI ratio represents the proportion of all Medicare inpatients that also are receiving SSI payments.

The SSI ratio also changes each year and is influenced by your community’s socio-economic makeup. For instance, your hospital may be located in a poor rural area with a significant older population. In this case, there may be a high ratio of Medicare/SSI patients. What if your hospital is located in a resort area where wealthy people retire? As this population ages, you may see decreases in the SSI ratio. The Revenue Cycle staff are happy to have a wealthy aging population in the area. However, declining SSI ratios are not good for continued 340B eligibility.

The SSI ratio is clouded in mystery. It is calculated by the government, with only the results reported. The underlying factors used in this calculation are not provided. For this reason, it is often difficult for the Finance staff to predict the hospital’s future SSI ratios or when they will even be made available.

The More Things Change . . . The More Things Change
The DSH Patient Percentage and related DSH Adjustment Factor are calculated annually for the hospital’s Medicare cost report. Most often, the DSH Adjustment Factor reported is not known until the cost report is prepared (five months after the hospital’s fiscal year end). The DSH Adjustment Factor reported on the cost report can make or break your hospital’s 340B eligibility.

The DSH amounts fluctuate from year to year as a hospital’s Medicaid and SSI percentages change. A hospital may have a DSH factor high enough for 340B eligibility in Year 1. However, in Year 2 the factor reported on the cost report may decrease below the eligibility amount. Guess what, you are out of the 340B program and no longer a superhero. And, the Pharmacy had no control over the numbers.

Be aware that HRSA/OPA (Health Resources and Services Administration / Office of Pharmacy Affairs) monitors annual cost report filings. It is the hospital’s responsibility to notify HRSA immediately if the DSH Adjustment Factor reported on the latest filed cost report falls below the required percentage for 340B eligibility.

There’s More Than One Way to Skin a Cat
The required 340B DSH Adjustment Factor is dependent upon a hospital’s Medicare payment status. Common types of status include DSH (disproportionate share hospital), SCH (sole community hospital), and RRC (rural referral center). Some fortunate hospitals have a dual Medicare payment status. At the time of 340B registration, the hospital must choose which status it will use for 340B registration purposes

Consider a hospital that has both DSH and RRC status types. The hospital is registered for 340B as a DSH type. In a subsequent reporting period, the hospital’s DSH Adjustment Factor falls below the 11.75% 340B DSH requirement. In this case, the hospital may re-register as a RRC type and meet the lower 8.0% 340B DSH requirement. This is where, once again, it is essential to have an open means of communication with your facility’s accounting and cost report team. Knowing if there are registration options in advance allows you time to prepare a back-up plan.

There are downsides to using a RRC or SCH status type. You must have an understanding of the pros and cons of each. For instance, when qualifying as a SCH or RRC status, the hospital may no longer be eligible to purchase orphan drugs at 340B pricing.

Look Before You Leap
There have been many recent mergers and acquisitions of hospitals. As part of the due diligence for these transactions, hospitals should consider the potential impacts on the DSH factor. For instance, if Hospital A has a DSH Adjustment Factor of 13.0% and merges with Hospital B with a DSH Adjustment Factor of 8.0%, the combined factor may be less than 11.75% and result in a loss of 340B eligibility.

Keep Your Eyes on the Ball
There are many aspects of the 340B program that are under the control of the Pharmacy staff. However, meeting the DSH requirement is NOT one of them. You can’t control how many Medicaid patients or Medicare/SSI patients are served by your hospital. You may not be invited to participate in the due diligence surrounding an impending merger or acquisition.

However, it is your responsibility to be aware of the threats to 340B program eligibility and to keep yourself educated and informed. Become proactive and communicate with the Finance managers regarding the DSH factors. Ask the following questions:

  • How is the DSH Patient Percentage tracking?
  • Is the hospital’s SSI and Medicaid percentage trending up or down?
  • Has 340B eligibility been considered in a future merger or acquisition?

It’s easy to point fingers AFTER 340B eligibility is lost. However, with an understanding of the DSH factors and the “numbers game”, you can turn those fingers right back around!

This article is authored by Cynthia R. DuPree. Cindy is a Partner with Draffin & Tucker, LLP. Cindy is in charge of the firm’s 340B Consulting Practice. She is a published author on 340B matters and is a frequent speaker to National and State industry associations.

Cindy can be contacted at: