Appeals Court Reinstates Changes to Medicaid DSH Payments Formula
A federal appeals court ruled in a favor of a 2017 rule that included third-party payments when calculating hospital-specific caps on Medicaid DSH payments.
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By - Hospitals that treat a large proportion of low-income and uninsured patients could face lower Medicaid disproportionate share hospital (DSH) payments following a recent appeals court decision.
Earlier this week, the US Court of Appeals for the District of Columbia Circuit reversed a lower court’s decision to throw out a 2017 final rule from CMS that changed how the federal government calculated hospital-specific limits on Medicaid DSH rule.
The appeal court’s decision allows CMS to subtract third-party payments, including Medicare and private payer reimbursements, as well as Medicaid payments, from the costs incurred for treating Medicaid beneficiaries and uninsured patients. The resulting difference is the hospital’s cap on Medicaid DSH payments.
In 2017, four children’s hospitals in Minnesota, Virginia and Washington and an association representing eight children’s hospitals in Texas challenged the Medicaid DSH payment formula, which was first included in an official FAQ document in 2010 and formalized in a 2017 final rule from the Trump Administration.
In the lawsuit, the children’s hospitals expressed concerns over uncompensated care costs incurred for treating Medicaid beneficiaries.
Specifically, the hospitals pointed to the Medicaid shortfall, which is the difference between actual hospital costs for treating Medicaid beneficiaries and Medicare reimbursement. The American Hospital Association (AHA) found that the Medicaid shortfall was about $22.9 billion in 2017, the most recent year for which the AHA had data.
The children’s hospitals also argued in the lawsuit that the change to how Medicaid determines hospital-specific limits on DSH payments violates the Medicaid Act and the decision to alter the formula was “of arbitrary and capricious reasoning.”
The lawsuit successfully convinced a federal court to void the new Medicaid DSH payment formula.
But the appeals court disagreed with the children’s hospitals, ruling that the Medicaid Act does not explicitly forbid CMS from using third-party payments and the formula change actually helps the agency appropriate funds to hospitals that deserve the supplemental Medicaid payments.
“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,” the circuit judges wrote in their opinion.
Some Medicaid beneficiaries have third-party coverage through Medicare or private payers, and the updated Medicaid DSH payment formula accounts for additional payments made on behalf of Medicaid beneficiaries to hospitals. Therefore, it is reasonable for CMS to include third-party payments when calculating hospital-specific caps on Medicaid DSH payments, the court explained.
The new payment formula prevents the federal government from paying for uncompensated care costs that have already been funded from other programs or insurance plans, they continued.
Following the decision, the Children’s Hospital Association of Texas said it will continue to explore its options.
"We are disappointed with the result because it will reduce critical Medicaid funding to safety net provides like children’s hospitals,” Stacy E. Wilson, JD, president of the Children’s Hospital Association of Texas, told RevCycleIntelligence.com in a statement. “These hospitals are heavily reliant on Medicaid payments because between 50 percent and 80 percent of their inpatient days are covered by Medicaid. Children’s hospitals care for all children, and are, in fact, often the only place that children with complex conditions can get life-saving care.”
