New rule on Medicaid DSH payments will impose stricter limits on many hospitals

Numerous hospitals that receive Medicaid disproportionate share hospital (DSH) payments face a tighter cap on their payment amounts after the Feb. 23 publication of a CMS final rule.

The regulations were spawned by 2020 year-end legislation that made changes to the DSH hospital-specific limit (HSL), including with respect to how third-party payments factor into the sum.

Namely, a hospital’s Medicaid shortfall can be counted toward its HSL only based on costs and payments associated with patients whose primary payer is Medicaid. Thus, patients who also have Medicare or other coverage for the services they receive no longer will factor into the DSH payment determination.

An exception is available for hospitals in the 97^th percentile in either the total number or the percentage of inpatient days for patients who are eligible for both Medicare Part A and Supplemental Security Income benefits. Those hospitals can maintain the old methodology if it yields a more favorable number.

The regulations are retroactive to Oct. 1, 2021, and will affect hospitals’ DSH payments as allotted in their state’s first plan-rate year that begins after that date. For plan-rate years that begin on or after Oct. 1, 2024, CMS says hospitals’ placement relative to the 97^th percentile will be published ahead of time, along with underlying data.

All sections from last year’s proposed rule were finalized, aside from minor tweaks to wording and details, CMS noted. The provisions include expanded authority for auditors to estimate the financial impact of pertinent data that’s missing from a hospital’s Medicare cost report, potentially making the hospital subject to DSH payment recoupment processes.

Hospital trepidation about the impact

In 2023 comments on the proposed rule, the American Hospital Association (AHA) expressed concern about the prospects of reduced HSLs “at a time when hospitals can least afford it.”

The statutory rationale for the change is flawed, the AHA wrote, in part because Medicaid programs tend to pay the lesser of the state’s Medicaid rate and the Medicare rate.

“That means that many hospitals are not paid the full payment for care provided to patients dually eligible for Medicare and Medicaid,” the AHA wrote.

In the final rule, CMS acknowledged that “there could be uncompensated care costs after all applicable Medicare and Medicaid payments” for coverage of dually eligible beneficiaries, and “such uncompensated care costs would not be included in the hospital-specific DSH limit to the extent that Medicare, not Medicaid, is the primary payer of such services.”

But the agency said it’s bound by the 2020 legislation to implement the changes.

Commenters also raised the issue that many Medicaid-eligible patients with disabilities become eligible for Medicare after a two-year waiting period, at which point their care would not be included in the Medicaid DSH formula under the new rule.

States retain flexibility in setting DSH payment formulas, CMS noted in the final rule, adding that it will monitor the hospital impact of the regulatory changes and provide insights to Congress.

In its comments on the proposed rule, the Federation of American Hospitals (FAH) said such monitoring will be vital.

“We believe these changes could have a profoundly detrimental impact on the ability of hospitals to continue to appropriately care for members of their communities and will complicate if not hinder ongoing efforts to improve health equity,” FAH wrote.

Some hospitals will benefit

The Children’s Hospital Association (CHA) was far more supportive of the rule when it was proposed, given that CHA member hospitals generally care for more patients who are Medicaid-eligible but also have commercial insurance. Their Medicaid shortfall thus tends to skew lower under the current methodology because commercial payments shrink the gap between costs and revenues linked to Medicaid-eligible patients.

“Including [only] the costs and payments for services provided to those for whom Medicaid is the primary payer in the HSL calculation ensures that children’s hospitals would receive DSH payments that coincide with the services being provided to their Medicaid patients,” the CHA stated in its 2023 comments.

The legislative language that serves as the foundation for the new rule was inspired in part by litigation brought by children’s hospitals challenging CMS’s prior version of the rule. In one of several cases, the hospitals prevailed in district court in 2018 but lost an appellate decision a year later.

In its comments, the Medicaid and CHIP Payment and Access Commission (MACPAC) also backed most parts of the new rule as proposed. The regulations largely align with some of MACPAC’s previous recommendations.

“The commission has found little meaningful relationship between DSH allotments and measures of need,” such as a hospital’s number of uninsured patients and amount of uncompensated care, MACPAC stated.

The looming $32 billion cut

Separately, Medicaid DSH payments have been set to decrease by $8 billion per year over four years starting in FY24. Congress passed short-term delays as part of federal-funding extensions in September, November and January.

Following the most recent delay, the cut would begin March 8 in the unlikely event it is not postponed again in some manner as the parties negotiate funding for the remainder of the federal fiscal year.

The Lower Costs, More Transparency Act includes a provision reducing the $32 billion cut to $16 billion over two years beginning in 2026. That bill easily passed the House but has not made headway in getting to the Senate floor. House committee leaders continue to hope the upper chamber will take up some form of the bill as part of the ongoing appropriations process.

The newly published regulations include a technical update on how the cut would be applied to each state’s Medicaid DSH funding pool. The factors generally remain the same as first established when the reduction was scheduled to be implemented in 2014 as a pay-for in the Affordable Care Act.

States face the prospect of a larger cut, relative to other states, if they:

• Have a lower uninsured rate
• Do not target DSH payments to hospitals with high Medicaid volumes
• Do not target DSH payments to hospitals with high levels of uncompensated care

The new regulations clarify how a state’s funding pool would be affected if it has diverted some or all of its Medicaid DSH allotment as part of a Section 1115 demonstration.