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December 27, 2020

Congress Delays and Reduces DSH Allotment Cuts, Alters Treatment of Patients with Third-Party Coverage in Calculating the Hospital-Specific DSH Limit

The Consolidated Appropriations Act of 2021 (CAA) contains two important changes impacting Medicaid disproportionate share hospital (DSH) payments. First, the CAA once again delays Medicaid DSH cuts mandated by the Affordable Care Act, extending $8 billion in annual cuts until FY 2024-2028 and, for the first time, eliminating $4 billion in cuts, which were set to occur in FY 2021 (. Second, effective October 1, 2021, the CAA alters the treatment of Medicaid patients with third-party coverage in calculating the hospital-specific DSH limit. Recall that this issue had been heavily litigated in recent years after CMS finalized a rule in 2017 requiring the inclusion of both the costs of and third-party payments for patients with third-party coverage. In the CAA, Congress revised the DSH statute to require the exclusion of both costs and payments unless Medicaid, not the third-party payer, is the primary source of coverage. There is a narrow exception, however, for certain hospitals serving a large low-income Medicare population. For excepted hospitals, states must apply whichever methodology (CAA’s policy to exclude both costs and payments or CMS’ prior policy to include both costs and payments) results in a higher DSH cap.