Many disproportionate share hospitals face lower Medicaid payments under new final rule

Medicaid disproportionate share hospital (DSH) payments are being cut by $8 billion annually during the current and next four federal fiscal years under a new Centers for Medicare & Medicaid Services (CMS) final rule that aims to reduce overpayments.

Finalized Tuesday, the rule (PDF) stems from provisions in the Consolidated Appropriations Act, 2021 and is set to go into effect April 27.

It includes changes to the hospital-specific limit on Medicaid DSH payments, clarifications for definitions and other language “that could be subject to misinterpretation,” bringing states’ administrative procedures into compliance with federal regulations and removing some difficult-to-administer requirements.

The most immediate impact is a new methodology that limits the calculation of a hospital’s Medicaid shortfall (the difference between Medicaid costs and Medicaid payments) to only include services furnished to beneficiaries for whom Medicaid is the primary payer. Previously, hospitals could include those with other forms of coverage including Medicare or commercial insurance.

The changes come with an exception for outlier hospitals with the highest portion of low-income patients—specifically, those in the 97th percentile of inpatient day comprised of patients who qualify for Medicare Part A as well as supplemental security income benefits.

Still, the final rule means pay cuts for many DSH hospitals that benefited from the prior methodology.

Though DSH cuts have been more than a decade in the making, Congress has repeatedly bumped back the start of the $8 billion per year reductions. The final rule currently slates the cuts to begin in fiscal year 2024 (which began oOct. 1, 2023) and run through fiscal year 2027, according to the final rule, though legislators’ most recent stopgap funding bill bumped the start to March 8.

DSH overpayments have been a concern for CMS and government watchdogs, all of which have said that a lack of transparency makes it difficult to oversee the program. Under the new final rule, any overpayments that are identified through an audit either must be returned to the federal government or, if allowed under a state plan, redistributed to other qualifying hospitals in the state.

In comments submitted on the rule last year, the American Hospital Association wrote that the policy change would “lower the hospital-specific DSH limit at a time when hospitals can least afford it;” however, the industry group acknowledged that the cut was a statutory requirement and beyond the scope of CMS’ authority to address.