Published May 5, 2022

MAO Plans and the Mechanics of Uncompensated Care Payments to Hospitals

Administrators of Medicare Advantage Organization (MAO) plans may be challenged to understand their obligations to hospitals regarding the uncompensated care cost (UCC) pool payment. To address the issue, it is important to evaluate both the regulatory and economic perspectives of the hospital and the MAO. Currently, however, only limited guidance exists, leaving many to seek answers from knowledgeable sources.

We found several such questions and responses from last year posted to an American Health Law Association (AHLA) community forum:[1]

“A few questions regarding the mechanics of [Disproportionate Share Hospital (DSH)]/UCC payments from a MAO to a hospital:

1. Q: How does the MAO access the $8.3 billion uncompensated care pool allocated to DSH hospitals for FY 2021 allocation?

A: The distribution of the $8.3B is based on the level of charity care and non-Medicare bad debts reported on hospitals’ Medicare cost reports. The reported charity and bad debt amounts are reduced to cost based on a hospital-specific cost/charge ratio. To qualify for any part of the distribution, the hospital must first meet the requirements as a DSH hospital (minimum Medicaid plus [Supplemental Security Income (SSI)] >15% [in simplest terms]). The distribution of the uncompensated care pool dollars is not an adjustment to the base [diagnosis-related group (DRG)] payments like [indirect medical education (IME)] and traditional DSH. Accordingly, there is not really a connection to the amounts attributable to MAO activity, and therefore it may not be appropriate for the MAOs to participate in these funds. This is especially true since the calculation of charity care and bad debts excludes amounts considered to be contractual allowances.

2. Q: What are the mechanics of the claims by the DSH hospital to the MAO, the MAO paying, and the MAO getting reimbursed by Medicare (i.e., is it a simple pass through or other)?

A: Based on the first point, the MAO should not be included in the process. The distribution of the uncompensated care payments is made to the qualifying hospitals based on a 3-year average of the count of Medicare [fee-for-service (FFS)] discharges. This amount is not case mix adjusted. If the hospital’s actual number of discharges is different than the estimate used in the calculation, the remaining distribution is finalized through the Medicare cost report settlement process. For example, for cost reporting periods ending in 2020, since many hospitals experienced a significant decline in Medicare discharges, they had large cost report receivables attributable to the difference in what they received and what they should have received based on the actual formulaic distribution. It is a receivable because they need to receive the full calculated amount through the cost reporting process. The prior year estimate of discharges is based on a larger number of discharges, so amount per claim is less.

3. Q:  If the DSH hospital in question is an extreme outlier in terms of their total uncompensated care payment demand, what basis would there be to challenge from the perspective of the MAO to preserve the integrity of the Medicare program?

A: As noted above, the calculation is based on calculated [UCC]. Hospitals with a larger percent of the total reported [UCC] receive a larger distribution. The [Centers for Medicaid & Medicare Services (CMS)] has established an annual audit process of the reported uncompensated care data to preserve the data integrity.”

In this Insight, we’ll examine both the question and response. Central to this entire discussion are two important considerations. The first is the applicable guidance to address the situation. The final inpatient rule establishing the uncompensated care payment pool (UCP) distribution contemplates that MAOs would pay hospitals something related to the UCP. As of the date of this article, there have been no implementing regulations specifically describing how MAOs should pay in-network (IN) or out-of-network (OON) hospitals for this amount. Additionally, the limited guidance does not address situations where the hospital’s UCP amount could potentially result in the hospital receiving payments more than billed charges. The lack of definitive guidance creates ambiguity regarding the hospital’s claim for reimbursement as well as the MAO’s obligation.

Second, the status of the obligation is tied to whether the definition of “original Medicare” includes the payment of UCCs. The answer to that question, or the definition of original Medicare, should control both the MAOs’ and the hospitals’ obligations regarding the UCP amount.

There are several factors related to the questions outlined above to consider:

  1. Comparing Medicare Payments Between Medicare FFS and MAOs
    1. The following chart summarizes the Inpatient Prospective Payment System (IPPS) payment to providers and highlights potential differences between FFS and MAO IN and OON payments.
    2. Contracting and rate updates
      1. FFS rate updates are effective with the start of the federal fiscal year (10/01/xx-09/30/xy), regardless of the hospital’s fiscal year-end. Hospital-specific rate components may be updated throughout the year based on Medicare Administrative Contractor (MAC) rate adjustments. The prospective payment amount due to the hospital is based on the payment rates in effect as of the discharge date. DRG calculators (pricers) reflect the latest available CMS-published information.
      2. MAO IN provider arrangements may follow the MAO (plan) year, hospital-specific year-end, calendar year, or federal fiscal year time frame. Contracts between the hospital and the MAO will specify rates and terms when services are provided to MAO IN members receiving covered services at the particular IN hospital. Rates paid for MAO IN services may be different from Medicare FFS rates for the same clinical services provided during the same time frames.
      3. MAO OON provider arrangements, in general, will be based at the Medicare FFS rate effective for the hospital based on the patient’s discharge date. The amount due to the hospital may be established by using CMS (or other publicly available) inpatient pricing tools. MAOs may seek to limit payments to an amount that would have been paid to similar MAO IN facilities. Negotiations between the OON hospital and MAO are likely required to resolve the final payment amount.
      4. Contractual arrangements between MAOs and IN hospitals will often establish an upper limit of billed (or covered) charges for the payment amount. This would generally be acceptable to hospitals, because in most cases, the billed charges would be significantly greater than the prospective payment amount for the same services.
  1. Determination of Uncompensated Care Payments to Hospitals for FFS Claims

Based on the previous table, the most subjective payment component is the amount attributable to the UCC pool payments.

    1. Hospitals report uncompensated care amounts in annual cost reports. UCCs only include charity care and bad debt amounts for covered hospital services. They exclude contractual adjustments and discounts to patients.
    2. The UCC is computed by applying a hospital-specific cost-to-charge ratio to the allowable charity and bad debt amounts. The sum of these cost-adjusted amounts constitutes UCCs included in the CMS calculation.
    3. CMS combines the UCCs attributable to those hospitals likely to qualify for the empirically justified (traditional) DSH. A hospital’s individual share (percentage) of the reported UCCs is the basis of the distribution of the pool amount.
    4. Separately, CMS determines the amount available for distribution based on a complicated formula that considers the aggregate empirically justified DSH amount, then reduces that amount to 75% and further reduces it by the inverse of the portion of the change in the percentage of uninsured patients.
    5. The current payment formula for the uncompensated care pool (UCP) distribution is not based on either the hospital’s SSI percentage or the Medicaid fraction (based on Medicaid-eligible days), which are data elements used to establish a hospital’s ability to receive the empirically justified (traditional) DSH payment.
    6. The only requirement that must be met between the DSH amount and the UCP amount is that a hospital must meet the DSH threshold to receive the UCP amount.
    7. While the total amount of empirically justified DSH is determinable through publicly available cost report information, the change in the percent of uninsured patients is determined and provided by the CMS Office of the Actuary.
    8. Once the amount to be distributed is established, each hospital qualifying for the empirically justified DSH amount receives its portion of the pool based on the relationship of its reported uncompensated care to the total for all the hospitals included in the calculation.
    9. UCC pool payments are distributed to each hospital on a per-claim basis, using the average number of Medicare FFS claims in the previous two cost reporting periods.
    10. Payments to hospitals are included as part of remittances for FFS claims as adjudicated by the hospital’s MAC. Generally, the MAC will pay this flat (non-case-mix adjusted) amount for all claims within a facility’s fiscal year. If the fiscal year straddles multiple federal fiscal years, the UCC amount will be updated, reflecting the most recent final IPPS rule tables.
    11. The hospital will receive the full UCC amount based on the applicable tables, regardless of the amounts paid on an interim basis through the claims adjudication process. The amounts are subject to a cost report settlement if the actual number of Medicare FFS claims differ from the estimate used by CMS. The hospital is made “whole” based entirely on the FFS activity (claims and cost report settlement). In an extreme scenario, even if a hospital had no FFS DRG payments, it would still receive its entire UCP payment if it qualified for traditional DSH.
    12. Under this payment methodology, the hospital is made “whole” through the cost reporting process. The hospital is not entitled to receive additional reimbursement beyond the statutorily determined amount. The following table demonstrates how the pool distribution is determined and paid to hospitals on an interim basis.

  1. MAO Obligations to IN Hospitals Regarding UCC Pool Payments:
    1. As noted previously, the amounts payable to a hospital are based on specific contract terms. The MAO would be obligated to pay IN hospitals according to the contract terms. The hospital would be obligated to accept the agreed-upon payment as payment in full. The contract would also specify the mechanism for payment and the amount of payment attributable to the UCC pool. Since the contract defines all the payment terms, there should be no dispute regarding the amount payable, assuming the claim otherwise complies with the contractual terms established between the payer (MAO) and the provider (hospital).
    2. The FFY 2014 Medicare IPPS proposed and final rules indicate CMS’ intention for MAOs to pay hospitals the UCP amounts. As of the date of this article, there is minimal guidance related to the way this should be handled in the claims adjudication process.
    3. The UCP payment is often characterized as representing another element of the DSH payment to hospitals. This infers that the UCP amount should be treated in the same manner as the “traditional” or “empirically justified” DSH. Hospitals are not reimbursed for the DSH adjustment attributable to MAO enrollees through the annual cost report settlement process. Hospitals are entitled to seek the traditional DSH amount from the MAO. This methodology has been in place since the inception of MAOs, well before the separate payment for UCP amounts was contemplated or enacted. By extension, hospitals assert the UCP amount should be handled in a similar fashion and paid by the MAO.
  2. MAO Obligations to OON Hospitals Regarding UCC Pool Payments
      1. The instructions for OON claims indicate MAOs are to pay them based on amounts due to hospitals under original Medicare (MA Payment Guide for Out of Network Payments 4/15/2015 Update). Note that the OON guide has not been updated since 2015.
      2. The same OON Guide offers this direction regarding what is included in the payment:
        1. DRG-based payments for a discharge consist of operating and capital costs including IME, DSH, outliers, and the new technology add-on. A separate payment is made for hemophilia clotting factors.
        2. Submitted charges are used for the calculation of outlier payments. Otherwise, original Medicare generally pays the IPPS amount even if the submitted charge is lower.
        3. Non-PPS payments include:
          1. Direct graduate medical education payment (DGME).
          2. Capital for the first two years of a new hospital (generally 85% of Medicare allowed capital costs).
          3. Organ acquisition costs (excludes bone marrow transplants).
          4. Certified Registered Nurse Anesthetist (CRNA)- for small rural hospitals.
          5. Nursing and allied health education costs.
          6. Bad debt.
            Note that for items 1 through 5, the provider can seek appropriate reimbursement through the cost reporting process, and may not need to pursue payment through the MAO.
      3. The guidance is silent on the UCP payment amount. Although by 2015 the new UCP methodology was in place, this is the only guidance provided in the OON guide:
        1. Changes to the Medicare DSH Payment: Effective for discharges occurring on or after FY 2014, hospitals will receive 25% of the amount they previously would have received under the current statutory formula for Medicare DSH.
        2. Additional Payment for Uncompensated Care: The remainder, equal to 75% of what otherwise would have been paid as Medicare DSH will become available for an uncompensated care payment after the amount is reduced for changes in the percentage of individuals who are uninsured, and an additional subtraction which in FY 2014 is 0.1%.
        3. Uncompensated Care Payment: As mentioned above, a new [UCP] is paid to DSH hospitals starting in FY 2014. The CMS policy for the methodology of plan payments for UCP to non-network hospitals is being determined and should be available soon.
  1. Special Consideration of MAO Payments for OON Providers

OON providers must accept as full payments amounts applicable in original Medicare. The OON providers are reimbursed for IME and direct medical education through the providers’ cost reports. Payment is limited to the original Medicare amount and beneficiary cost-sharing amounts.

The OON provider is prohibited from balance billing the beneficiary. In the case of declared disaster or emergency, payment would likely be made at in-network rates. Generally, a non-contracting (OON) hospital will render care under an emergency and urgently needed situation. Emergency and urgently needed services are defined here.

  1. Original Medicare
    1. Original Medicare is an FFS health plan that has two parts: Part A (Hospital Insurance) and Part B (Medical Insurance). Medicare pays its share of the Medicare-approved amount after the beneficiary’s part (coinsurance and deductibles). (
    2. The Medicare-approved amount in original Medicare is the amount a doctor or supplier that accepts assignment can be paid. It may be less than the actual amount a doctor or supplier charges. Medicare pays part of this amount, and the beneficiary is responsible for the difference. (
    3. Original Medicare also refers to Medicare FFS (Part A and Part B) as compared to Medicare Advantage (Medicare Part C).
      1. Prior to the establishment of Medicare Part C, original Medicare (Part A) payments to providers (hospitals) included the amounts for base DRG, outliers, indirect medical education, and disproportionate share adjustments.
      2. These payments replaced the prior cost-based reimbursement system used by Medicare between 1966 and 1982.
      3. Payment for UCCs did not become part of the Medicare payments until 2014.
      4. Since these UCP payments were not included or contemplated in what was known as original Medicare, any payments to hospitals tied to original Medicare should exclude these amounts.
  1. Payment Scenarios

Due to the payment formula used to distribute the uncompensated care amount (facility-level distribution/average Medicare FFS discharges), there can be a wide disparity between two similar hospitals in the same Core-Based Statistical Area (CBSA) or geographic area. This disparity can complicate payments the MAOs owe IN hospitals. Consider the following example that shows the disparity related to the variance in FFS cases (amounts rounded to not identify hospitals):

Although there is only a 6.06% difference in the reported UCCs between these two similar hospitals, there is a 7.14% increase in the pool distribution, and more importantly, a 70% increase in the per-claim amount due to the significantly fewer Medicare FFS claims included in the distribution calculation. MAO payments to either IN or OON providers are not included in the distribution calculation, likely resulting in higher per-claim payments.

It is also noteworthy that the uncompensated care amount per claim can vary widely within a particular CBSA. The CBSA-level analysis is selected because, for Medicare prospective payment systems, payments will vary within each CBSA due to reported wage variations. With uncompensated care amounts varying within a particular CBSA, MAOs may be challenged to establish an appropriate and equitable pricing structure across a given region. Further, there is wide variation at the national level. Consider the following example:

The previous variances can impact amounts payable on an individual claim and distort claim-based margin calculations. Consider the following example:

In general, hospitals can, at minimum, break even if they can achieve reimbursement at least equal to the cost of providing the care. Anything above that amount potentially results in a positive margin. Conversely, MAOs would not consider acceptable a payment that exceeds billed charges. Usual contract language would limit the MAO’s exposure to billed or covered charges for the case. These examples demonstrate why hospitals would always seek reimbursement based on full Medicare PPS amounts and why MAOs would seek to limit their exposure by establishing specific payment terms for each element for which they may be responsible. When a request for MAO payment to the hospitals differs from the contract terms, there is an expectation that differences would be resolved through a formal payment dispute resolution process.


Hospitals can expect to receive, and MAOs can expect to pay, different amounts for the same items or services depending on the ultimate payer, contractual obligations, and controlling regulations. One element where differences likely could occur is the amount payable for the UCC cost pool distribution. PPS hospitals receiving empirically justified DSH payments will receive a calculated payment amount based on applicable fiscal year data. Hospitals and MAOs may have differing opinions about the amounts payable. Resolving these differences can be achieved by effective contracting between hospitals and MAOs. Further, OON situations can be resolved through the publication of definitive CMS guidance that addresses them. The contracting measures and regulatory guidance will result in fair and predictable payments, without the potential for any overpayment.

If you would like assistance with calculating uncompensated care costs, or any matter involving strategy and integration, compliance, or valuation, one of our executive contacts would be happy to assist. You may email them below, or call (800) 270-9629.

[1] American Health Law Association (July 30, 2021)

Executive Contacts

Interested in Learning More?

Sign Up for Our Insights, Including COVID-19 Bulletins!

    Select Your Subscriptions