A sub-regulatory version of the new rules previously cost one children’s hospital all $7 million in DSH payments it was slated to receive in one year.


March 31—The Centers for Medicare & Medicaid Services (CMS) charged ahead this week with changes to its calculations of payments to Medicaid disproportionate share hospitals (DSH), despite multiple cases challenging the agency’s authority to make such changes.

The final rule changes how third-party payments are treated when calculating hospital-specific payment limits under the DSH rules. Medicaid DSH payments are provided under a statutory formula to hospitals with larger shares of Medicaid-eligible and uninsured patients.

The final rule requires subtracting all third-party payments from the amount of a hospital’s uncompensated care, regardless of the incurred costs of treating Medicaid-eligible patients. Hospitals are worried that the new limits could have major financial impacts, especially for children’s hospitals and safety-net hospitals.

"This rule is bad for patients and our hospitals, and we're disappointed the administration decided to finalize it, especially with pending legal challenges in which courts have said the policy is or likely would be found inconsistent with federal law,” Beth Feldpush, a senior vice president at America’s Essential Hospitals (AEH), said in a written statement. “We also continue to disagree with the agency’s assertion that safety-net and children’s hospitals will not be disproportionally impacted—they will be.”

The final rule is little changed from a proposed rule issued in August 2016.

The changes come on top of $45 billion in scheduled cuts to hospitals’ Medicaid DSH payments from 2018 to 2026, as required by the Affordable Care Act.

Legal Challenges

The new rules appeared to address one of two central arguments in seven pending court cases, according to attorneys following the cases. Two judges in those cases have issued injunctions against CMS regarding the DSH rules, citing the previous lack of formal rulemaking on the issue. The DSH changes were previously issued through sub-regulatory guidance.

“The whole purpose of this rule is about those cases,” said Charles Luband, a partner at Dentons.

One reason the sub-regulatory guidance had a big impact on hospital payments is that when calculating maximum payments, states previously had disregarded patients who were dually eligible for Medicare and Medicaid but whose care was not paid for by Medicaid, according to Luband.

“If Medicare or a private insurer is paying more than cost, it reduces the limit,” Luband said.

The rule did not address the second central issue in the lawsuits: that CMS lacks the statutory authority to reduce DSH payments based in part on the Medicare or commercial insurance coverage of Medicaid-eligible patients.

“Including those claims serves to offset the true underpayments that [hospitals] get when they are relying on Medicaid for payment or when they have uninsured patients,” said Barbara Eyman, a Washington, D.C., attorney who specializes in hospital payment issues.

Financial Implications

It’s unclear whether the rule change will reduce what the federal government pays through the DSH program or instead will lead to a greater shift of DSH payments from hospitals that hit their limit under the rules to other hospitals within the same state, according to attorneys.

Eyman said the rule could lead states to send the money not provided to hospitals due to the new limits back to the federal government. The federal government provided $11.9 billion in Medicaid DSH payment in FY16, according to tabulations by the Kaiser Family Foundation.

Some hospitals think the new rules could cost them millions of dollars annually. For instance, auditors using the new CMS calculations found that all $7 million in DSH funding received by Seattle Children’s Hospital in 2011 exceeded the new limits.

Children’s hospitals are vulnerable to the changes because many of their patients have commercial insurance for some care but rely on Medicaid as a secondary insurer for other needed care. If a patient receives a service that is fully insured by a commercial plan—and no Medicaid claim is even submitted—the new rules assume hospitals have been paid and reduce DSH payment accordingly.

“Even if someone who is eligible is enrolled, Medicaid might not pay anything if they have another source of insurance,” Luband said.

Luband said children’s hospitals would be more likely to face adverse impacts from the rule because they more often hit the per hospital limits, owing to the higher insurance rates among children compared with the general population.

“There are definitely swings of millions of dollars involved for many of these institutions,” Luband said.

Safety-net hospitals also are especially vulnerable because much larger shares of their patients are Medicaid enrollees or uninsured.

“Cuts in DSH payments go right to their bottom lines, and they already have really narrow margins and less of an ability to cross-subsidize those losses from other payers,” Eyman said in an interview.

For instance, the 275 safety-net hospitals in AEH have a 0 percent aggregate operating margin, compared with 8.3 percent for hospitals nationwide.

The potential impact of the lower limits varies by hospital depending on patient mix, and there are no calculations of its cumulative financial impact nationally. CMS concluded that the rule changes would have an annual impact of less than $100 million.

Next Steps

The final rule has likely ended deliberation of the issue at the regulatory level, sending it back to the courts to consider, legal experts said.

The rule could lead courts to consider the as-yet-unaddressed issue of whether CMS has statutory authority to make such changes to DSH payment limits.

The rule “doesn’t resolve the statutory-interpretation issue and raises another issue about retroactive applicability of this regulation,” Luband said.

Further changes to DSH payments could occur if multiple courts rule against CMS’s policy, according to Eyman.

“If the plaintiffs start winning on the statutory argument, that the policy is inconsistent with the statute, then they would have to pull back on the rule prospectively as well as retrospectively,” Eyman said.


Rich Daly is a senior writer/editor in HFMA’s Washington, D.C., office. Follow Rich on Twitter: @rdalyhealthcare

Publication Date: Friday, March 31, 2017