Coming soon: A change in the Medicare DSH formula related to how Medicare Advantage patients are included. Understanding the court case behind the change may help hospitals identify increased reimbursement opportunities.

The U.S. District Court recently ruled that the formula for calculating Medicare disproportionate share hospital (DSH) payments is flawed. Below is a brief summary of the court case, its history, and how it could affect hospitals. 


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Case Topic

The legality of including Medicare Advantage days in the Medicare DSH formula.  


Medicare Advantage—also known as Medicare Part C—was established by Congress as part of the Balanced Budget Act of 1997. For a Medicare beneficiary to enroll in Medicare Advantage, he or she must be “entitled to benefits under Part A and enrolled in Part B.” Once the beneficiary elects Medicare Advantage, that beneficiary’s benefits are no longer administered under Part A.

In 2003, in a notice of proposed rulemaking, the Secretary of the Department of Health and Human Services (HHS) stated that “once a beneficiary elects Medicare Part C, those patient days attributable to the beneficiary should not be included in the Medicare fraction of the DSH patient percentage. These patient days should be included in the count of total patient days in the Medicaid fraction (the denominator), and the patient’s days for the [Medicare Advantage] beneficiary who is also eligible for Medicaid would be included in the numerator of the Medicaid fraction.”

However, in the 2004 final rule, the Secretary reversed course and announced that Medicare Advantage beneficiaries should not be included in the Medicaid fraction but instead in the Medicare fraction. The Secretary codified the change in FY07.

In 2009, Allina Health and 26 other hospitals filed suit with the U.S. District Court asking that the final rule—as codified in 2007—be vacated. 

Current Status

On November 15, 2012, the U.S. District Court issued a summary judgment on behalf of the 27 hospitals requiring that the Secretary’s final rule of 2004, codified in 2007 and further modified in 2010, be vacated and the case remanded back to the Secretary for further action. The court found that the reasoning for the change was “brief and unconvincing,” and held that the rulemaking was arbitrary and capricious. 

In early January 2013, the U.S. District Court ordered HHS to recalculate certain Medicare DSH payments for more than 100 hospitals and pay interest on any additional amounts owed. 

Impact to Hospitals

It is anticipated there will be a rule change/clarification issued related to the inclusion of Medicare Advantage in the Medicaid fraction and the reversal of the inclusion in the Medicare fraction. 

It is possible that the lower Supplemental Security Income (SSI) percentages released in FY12 were, in part, related to the inclusion of the Medicare Advantage days in the Medicare fraction. Organizations can expect the HHS Secretary to republish the SSI percentages, removing the Medicare Advantage from the calculation and, in turn, pushing up the eventual SSI percentages for FY07-FY10. 

Hospitals—especially urban hospitals that received Medicare DSH payments from FY07 forward and were not subject to a capped DSH percentage of 12 percent—may want to evaluate the significance of identifying dual-eligible Medicare Advantage days to be included in the Medicaid fraction. The following tool, which includes two case examples, can help hospitals with this evaluation.   

Access tool: Recalculating DSH Payments to Account for Medicare Advantage Change

In the two case examples (see the two spreadsheets), you can see what the impact might be to two different acute care hospitals with different payer mixes located in urban areas.

This article was adapted from materials provided by David A. Williams, CPA, MPH, FHFMA, partner at Horne LLP, Ridgeland, Miss., and a member of HFMA’s Mississippi Chapter ( 

Publication Date: Monday, January 28, 2013