The rules governing how to treat costs and revenues for hospital services provided to dually-eligible Medicaid patients for purposes of calculating the limit on Medicaid disproportionate share hospital (DSH) payments to a particular hospital have been repeatedly modified in the last decade based on CMS policies, the outcome of court battles, and most recently, Congressional action—with new rules effective October 1, 2021.  Yet, many states have not considered these changes when continuing to make Medicaid DSH payments to hospitals.  As a result, hospitals could face unexpected recoupments when audits are due three years later.

We encourage our clients to review the impact of the changing rules on your DSH limit calculations for rate years that include periods after October 1, 2021 to understand potential liability upon audit, as well as to better understand future DSH resources available to you.  In combination with the impact of COVID-19 and related policies, such as the maintenance of effort on Medicaid eligibility under the Public Health Emergency and its eventual lapse, projecting hospital DSH limits will be especially challenging.

The changing rules stem from a debate as to: whether and when payments from Medicare and commercial payers should be included, sometimes offsetting not only uncompensated costs of dually-eligible Medicaid patients but also of uninsured patients; and, whether the uncompensated costs of dually-eligible patients for whom Medicaid is not primary and sometimes does not make any payments (as payer of last resort) should be eligible for DSH reimbursement.  The rules have vacillated from:

  • Pre-2017 CMS policy of allowing inclusion of the uncompensated costs of dual eligibles, while excluding any offsetting third party revenues, to
  • CMS regulation finalized in 2017, requiring that both the costs and third-party revenues associated with dually-eligible individuals be included, to
  • Congressional change to the DSH statute effective October 1, 2021, requiring that, for most hospitals, both the costs and third-party payments be excluded.

More specifically, the current rule, referred to as Section 203 for its placement in the Consolidated Appropriations Act of 2021 (CAA), requires the majority of hospitals to exclude costs and payments associated with Medicaid beneficiaries for whom Medicaid is not the primary payer.  A small number of hospitals will qualify for an exception and be permitted to include both costs and payments associated with beneficiaries with third-party coverage if doing so produces a higher limit.  Congress defined excepted hospitals as those in the 97th percentile or above of all hospitals with regard to the number or percentage of Medicare supplemental security income (SSI) days to total inpatient days. However, in a December 2021 State Medicaid Director’s Letter, CMS acknowledged that there is no current data source that captures the SSI data needed to apply the exception. This leaves hospitals unclear as to their eligibility for the exception as CMS develops a new data source and engages in future rulemaking as needed.

The new rule under Section 203 of the CAA will impact hospitals differently, depending on the rules previously applied by their state, the particulars of the services provided to Medicaid duals, and the nature of duals’ third-party coverage.  Eyman Associates is available to help clients think through the complexities of applying the rules to your organization, as well as the potential DSH impact of other developing policy issues such as expansion of Medicaid managed care directed payments, state allotment changes as a result of enhanced federal matching rates during the public health emergency (“PHE”), increases in Medicaid enrollees during the PHE, etc.