Audit of California's Medicaid Inpatient Disproportionate Share Hospital Payments for State Fiscal Year 1998

This final report points out that the California Department of Health Services (state) made disproportionate share hospital (DSH) payments to 21 hospitals that exceeded the hospitals' uncompensated care costs (UCC) limits for state fiscal year 1998.  The UCC limits as determined by the state did not comply with the purpose of the Omnibus Budget Reconciliation Act of 1993 and the Centers for Medicare & Medicaid Services requirements and implementing guidance.  The excess DSH payments for the 21 hospitals totaled over $252 million ($126.5 million federal share).  The UCC limits were overstated because the state; (1) used projected amounts instead of actual incurred costs and payments for the year in which hospital services were rendered, (2) did not limit total operating expenses to amounts that would be allowable under Medicare cost principles, and (3) inappropriately included bad debts as an additional operating expense.  Among other things, and in addition to financial adjustments, we recommended that the state establish an adequate system of internal controls for DSH operations that meet federal and state requirements.