December 14, 2018

Medicaid DSH Third-Party Payer Policy for Periods Prior to 2017 Withdrawn by CMS; Final Rule Adopted in 2017 Still Under Dispute and Awaiting Appellate Court Decisions

As of December 30, 2018, CMS will no longer be enforcing FAQs 33 & 34 and has withdrawn them from its 2010 Medicaid DSH guidance.

Over the last several years, courts in various jurisdictions have issued rulings in lawsuits challenging the Centers for Medicare & Medicaid Services’ (CMS’) policy requiring the inclusion of Medicare and commercial payments in the calculation of the Medicaid disproportionate share hospital (DSH) limit. A final rule implementing this policy was permanently enjoined on a nationwide basis in March 2018, but litigation is still ongoing across the country.

Initially, providers and hospital associations in numerous states challenged CMS’ policy as issued in 2010 through a set of Frequently Asked Questions (FAQs), applicable to DSH payment years dating back to 2011. Hospitals argued that one or both of FAQs 33 (commercial) and 34 (Medicare) are unlawful because they were not issued through notice and comment rulemaking (a procedural argument), and because they conflict with the Medicaid DSH statute (a substantive argument). After seven district courts and four appellate courts (the 1st, 4th, 6th, and 8th Circuits) issued decisions in favor of hospitals on the FAQs, holding them invalid primarily on procedural grounds, CMS formally withdrew the FAQs on December 30, 2018. This means that hospitals that faced disallowances for past periods prior to 2017 should be entitled to the DSH funding amounts they initially received. States are now in the process of finalizing DSH payments for past years without the application of the third-party payer policy, though doing so has presented unique challenges in each state.

More recently, CMS attempted to adopt the same third-party payer policies in a Final Rule issued in April 2017, which would have impacted DSH payments for 2017 and beyond. The Final Rule lacked the procedural deficiencies of the FAQs. Nonetheless, three federal district courts have now vacated the Final Rule, finding that it is contrary to the plain meaning of the federal DSH statute. The District Court in the D.C. Circuit expressly stated that its decision to vacate the Final Rule applies nationwide. CMS has appealed all final rule decisions. Hearings were held in the Eighth and DC Circuits in April 2019, and decisions are now pending.

Details of the cases vary and are summarized in the graphic that follows, which will be updated as new decisions are issued.  If you have questions regarding the ongoing DSH litigation, or Medicaid DSH more generally, contact Eyman Associates attorneys.

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