Hospitals fear DSH funding loss after court ruling on third-party payments

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Trine K. Tsouderos HRI Regulatory Center Leader, PwC US August 23, 2019


A US Court of Appeals ruled last week that CMS can require hospitals serving high numbers of Medicaid and uninsured patients to count payments from Medicare and private insurers when calculating their Medicaid disproportionate share hospital payments, which some hospitals fear could reduce the federal funding they receive.

Disproportionate share hospital payments cover unpaid costs for treating uninsured individuals and Medicaid-eligible patients, but federal law says hospital-specific payments cannot exceed the cost of furnishing hospital services to those groups.

In 2010, CMS specified in an FAQ document on its website that when calculating what they are owed in disproportionate share hospital funding, hospitals should deduct third-party payments that they may receive for those services from Medicare or patients’ private insurers.

Hospitals sued, arguing the agency didn’t provide proper notice or allow commenting before making the change, which led to CMS more officially introducing a new rule in 2017 requiring the inclusion of the third-party payments.

Four children’s hospitals in Minnesota, Virginia and Washington joined with a coalition of eight children’s hospitals in Texas to challenge the rule, arguing it was contrary to the Medicaid Act and “arbitrary and capricious.”

A district court agreed and vacated the rule in 2018, stating that it was “inconsistent with the plain language of the Medicaid Act.” HHS appealed and an appeals court panel reinstated the rule last week.

US Circuit Judge Karen LeCraft Henderson wrote in the new opinion that “by requiring the inclusion of payments by Medicare and private insurers, the 2017 rule ensures that DSH payments will go to hospitals that have been compensated least and are thus most in need.”

HRI impact analysis

The plaintiffs did not indicate if they will challenge the ruling. Children’s Hospital Association of Texas, said in a statement to Courthouse News that the decision will reduce Medicaid funding to safety-net providers like children’s hospitals.

“These hospitals are heavily reliant on Medicaid payments because between 50 percent and 80 percent of their inpatient days are covered by Medicaid,” said Children’s Hospital Association of Texas President Stacy Wilson. Sixty-four percent of hospitals responding to a 2018 HRI survey said they considered DSH funding cuts to be one of the greatest funding or revenue threats to their organization.

The policy is not expected to affect the overall federal allotment of DSH funds to states, but it is expected to shift those dollars around within the state to different hospitals while reducing the amount some hospitals can claim they are owed.

In 2017, 27 percent of Medicaid enrollees—or 18.4 million—had third-party coverage as well, mostly through Medicare or private health insurance, according to the Medicaid and CHIP Payment and Access Commission (MACPAC).

Contact us

Trine K. Tsouderos

HRI Regulatory Center Leader, PwC US

Tel: +1 (312) 241 3824

Alexander Gaffney

Senior Manager, Health Research Institute, PwC US

Tel: +1 (202) 836 1604

Ingrid Stiver

Senior Manager, Health Research Institute, PwC US

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