May 14—The Centers for Medicare & Medicaid Services (CMS) issued a proposed rule that outlines the methodology for cutting state Medicaid disproportionate share hospitals (DSH) allotments by $500 million in FY14 and $600 million in FY15, as required under the Affordable Care Act (ACA). DSH payments partially reimburse certain hospitals that provide uncompensated care to low-income patients.

The ACA requires aggregate reductions to state Medicaid DSH allotments annually from FY14 through FY20, as federal and state insurance marketplaces and Medicaid provide increased coverage options that will likely reduce uncompensated care levels for hospitals. As outlined by the statute, the annual aggregate reductions will expand increasingly as follows: FY16, $600 million; FY17, $1.8 billion; FY18, $5 billion; FY19, $5.6 billion; FY20, $4 billion. 

This proposed rule includes a reduction methodology for FY14 and FY15 only. The two-year methodology accommodates data refinement and methodology improvement before larger reductions begin in FY17, according to the fact sheet issued by CMS. The reduction methodology could go into effect Oct. 1, 2013, unless legislators move to delay the cuts.

The proposed rule establishes separate DSH reduction pools for low-DSH states and other states. The rule then creates a formula for distributing the reductions in each pool that gives one-third weight to the uninsured percentage factor. Another one-third is given to each of the two DSH payment targeting factors: high level of uncompensated care and high volume of Medicaid inpatients. 

The rule also contains a procedure for protecting allotments that support section 1115 demonstration coverage increases. The proposed methodology encourages states to target Medicaid DSH payments to high-Medicaid-volume hospitals and hospitals with high levels of uncompensated care. 

CMS later will revisit the methodology and promulgate new rules to govern DSH reductions in FY16 and beyond. The rule will be published in the Federal Register on May 15, 2013. Public comments are due July 12, 2013.

Publication Date: Tuesday, May 14, 2013