New Proportional Hospice Cap Calculation


In 2011, following decisions throughout the country and including two Federal Courts of Appeals cases (Lion Health / Haven Hospice), CMS suspended use of its prior cap regulation and adopted a new cap calculation rule, phasing in a proportional calculation method.

Although the new regulation became effective October 1, 2011, CMS instructed contractors to hold off on further cap calculations pending efforts to settle outstanding litigation.  With the litigation close to resolution, CMS has instructed the contractors to renew calculation and issuance of cap demands to hospices.

In mid-May, the contractors gave notice of their intent to begin issuing cap demands again.  Because the new regulation phases in the correct proportional method only in FY 2012, hospices that have not challenged prior demands need to consider their options for prior years that remain outstanding (FY 2010 and 2011).

(Any hospice provider that has already appealed a cap demand will receive the proportional method going forward.  This covers more than 100 providers.)

Hospices can elect the proportional method by sending a short letter to their contractor indicating their preference for the proportional method.   (Click here for sample letter.)

There has some been debate about the value of the proportional method.

But, here are the facts:

  • Fundamentally, the proportional method more accurately matches allowances to revenue by ensuring that, as to each patient under service, the provider receives allowances according to the days of service for each patient in each year, rather than entirely in an initial year of service.
  • Under the old (euphemistically called “streamlined”) method, cap allowances are given in the initial year of service.  This method tends to overstate allowances in earlier years, resulting in understated allowances and overstated demands in later years.  When a hospice has surplus allowances in one year, those surplus allowances are not carried forward to the next year.
  • Because the value of allowances increases each year with inflation, allowances that are moved from an earlier year to a later year are worth more to hospices.
  • Spreadsheets filed in Federal Court for about 10 providers, by the hospices and even CMS, show material reductions of cap liability under the proportional method.
  • Cap demands calculated under the proportional method may be restated over time (as patients receive additional days of care).

Although a hospice that fails to act may later file an appeal if it receives a demand, such a provider will in the interim face the task of beginning to repay what is, in all likelihood, an overstated demand.

Hospices should not miss the opportunity to elect the proportional method.


Brian M. Daucher is a Partner at Sheppard Mullin in Costa Mesa, California and is counsel to more than 80 hospice providers, including Lion Health and LA Haven Hospice.

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