Federal court vacates Medicare DSH rule affecting 2005-2013 payments

In a decision with implications for a larger case, a federal court on Aug. 28 vacated a 2023 rule that affected the calculation of Medicare disproportionate share hospital (DSH) payments retroactively over a nine-year period.

As stated in a September 2025 ruling on the merits, the court found the rule to be unlawfully retroactive, as well as procedurally deficient under the Administrative Procedure Act (APA).

Nearly a year later, in the recent decision on remedies, a judge with the U.S. District Court for Washington, D.C., vacated the rule. However, the court did not order HHS to recalculate the payment determined under the disputed methodology for the plaintiff hospital, Montefiore Medical Center. The Bronx, N.Y.-based facility argued that application of the rule retroactively reduced its FY 2006 DSH payment by nearly $11 million.

By requiring Medicare Advantage (MA) patients to be included in the DSH formula’s Medicare fraction and excluded from the numerator of the Medicaid fraction for the years 2005-2013, the 2023 rule was seen as likely to reduce DSH payments for safety-net hospitals across the time frame. In a filing to the Supreme Court concerning a case decided in 2019, CMS said the amount at stake during the nine-year window was between $3 billion and $4 billion.

MA patients have been included in the Medicare fraction since 2014, as required by regulations issued that year.

Latest decision on Medicare DSH rule leaves reimbursement unresolved

A key aspect of the remedy question remains uncertain for Montefiore and other hospitals in the same situation. The court did not give HHS specific instructions for recalculating Montefiore’s affected DSH payments.

Instead, the vacated rule was remanded to HHS for reconsideration. In contesting Montefiore’s petition for prescribed relief, HHS said the provisions of the 2023 rule potentially can be readopted in a way that does not violate the APA, and Judge Loren Alikhan (a Biden appointee) agreed.

Possible options for reissuing the regulations include relying on a 2022 Supreme Court decision, Becerra v. Empire Health Foundation, to support inclusion of MA patient days in the Medicare fraction of the DSH formula. In the 2025 decision in the Montefiore Medical Center v. Kennedy case, Alikhan said Empire backs HHS’s view that MA patients meet the statutory definition for inclusion in the fraction.

HHS also may have leeway to implement a new rule retroactively, the judge said, although the department would need to better justify the necessity. The Medicare statute allows for a rule to be applied retroactively if necessary either to comply with statutory requirements or if not issuing the regulations would be “contrary to the public interest.”

130 hospitals are pursuing a similar DSH challenge

In April 2026, roughly 130 hospitals filed a similar case, Bay Area Healthcare Group, Ltd., et al. v. Kennedy, in the same court that heard the Montefiore litigation The case also was assigned to the same judge, Alikhan.

The 2026 complaint repeatedly cites the 2025 ruling on the Montefiore case and makes largely the same arguments about procedural concerns. As with Montefiore, the Bay Area plaintiffs, many of whom are affiliated with HCA Healthcare, seek to have their pertinent DSH payments redetermined and paid with interest.

The latter case also seeks to overturn the Provider Reimbursement Review Board’s (PRRB’s) dismissals of hospitals’ requests for merit review of the payments. A favorable ruling could result in the opportunity to have DSH reimbursements addressed on a case-by-case basis by the PRRB.

Hospitals have won two recent challenges to Medicare DSH rules

The Montefiore case was the second in a month in which hospitals won vacatur of federal regulations affecting DSH payments.

A July 27 decision by a Texas federal court canceled another 2023 rule, which had excluded patients from the Medicaid fraction if payment for their care was funded by a Section 1115 uncompensated-care pool waiver.

Whereas the regulations in the Texas case, Covenant Medical Center v. Kennedy were deemed to be substantively flawed, the judge in the Montefiore case focused on procedural concerns when she vacated the applicable regulations.

Specifically, in addition to the concerns with retroactivity, the rule was deemed to be “arbitrary and capricious because the [HHS] Secretary had failed to adequately consider commenters’ arguments about the financial impact of the retroactive policy,” Alikhan wrote.

That’s a reference to stakeholder feedback received in the runup to finalization of the 2023 rule. The APA requires federal agencies to publish a proposed version of most regulations, solicit industry comments and substantively respond to those comments.