Rule cuts Medicaid DSH pay for some safety-net hospitals

By Alex Kacik / February 20, 2024

Some safety-net hospitals will receive lower Medicaid disproportionate share hospital payments under a final rule the Centers for Medicare and Medicaid Services published Tuesday.

The regulation sets new restrictions on how Medicaid DSH payments are calculated and distributed, carrying out a congressional directive from the Consolidated Appropriations Act of 2021. Under the previous policy, hospitals determined their Medicaid shortfalls—the gaps between reimbursements and costs—by estimating annual treatment costs for patients with Medicaid alone and those with other additional forms of coverage, such as Medicare or private health insurance.

CMS has put a stop to that. Hospitals will only be able to account for patients with Medicaid as their primary payer under the final rule. Safety-net hospitals with the highest concentrations of low-income patients—defined as those in the 97th percentile of inpatient days treating patients who qualify for Medicare Part A and Supplemental Security Income benefits—are exempt.

The regulation is designed, in part, to rein in Medicaid DSH overpayments.

In 2018, 422 safety-net hospitals received $1 billion in excess of their DSH limits, amounting to 6.1% of the national total, according to the Medicaid and Children's Health Insurance Program Payment and Access Commission. Under the final rule, CMS would redistribute overpayments to other hospitals within the same state. The CMS regulation aligns with recommendations MACPAC made in 2019.

The American Hospital Association, the Federation of American Hospitals and America's Essential Hospitals, which represents safety-net providers, did not immediately respond to requests for comment.

But the AHA and the Federation offered critical assessments after CMS issued the proposed rule last February. “For many hospitals and health systems, this policy has or will lower the hospital-specific DSH limit at a time when hospitals can least afford it,” the AHA wrote in a comment letter delivered April 25, 2023.

Hospitals got a temporary reprieve from $8 billion in Medicaid DSH cuts this year and next year under a stopgap government funding bill Congress approved last month. But that measure expires March 8.