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Judge Voids CMS Rule Altering Medicaid DSH Payment Calculations

CMS overstepped its authority by including third-party payments when calculating Medicaid DSH payments and the 2017 final rule is vacated nationwide, a US District Judge in DC stated.

Medicaid Disproportionate Share Hospital (DSH) payments and Medicaid reimbursement

Source: Thinkstock

By Jacqueline LaPointe

- A US District Court for Washington DC recently vacated a CMS final rule from 2017 that required third-party payments, including those from Medicare, to be used when calculating hospital-specific limits on Medicaid Disproportionate Share Hospital (DSH) payments.

Judge Emmet Sullivan concluded that CMS exceeded its statutory authority under the Medicaid Act by releasing a final rule that changed the formula for determining supplemental payments to hospitals treating greater numbers of Medicaid and uninsured individuals.

His decision echoed a recent court order in Missouri that prohibited CMS from enforcing the 2017 final rule in the state. The district judge in the Missouri case also concluded that the final rule and two supporting FAQ answers were inconsistent with the Medicaid Act’s formula for determining hospital-specific limits for Medicaid DSH payments.

Several other states, including New Hampshire and Tennessee, have also enjoined CMS from enforcing the FAQ answers in their states.

CMS released the FAQ answers in 2010 to clarify the formula for determining Medicaid DSH payments and ensure only hospitals that serve a disproportionate number of Medicaid-eligible patients receive the supplemental reimbursements.

READ MORE: The Difference Between Medicare and Medicaid Reimbursement

The 2017 final rule codified the FAQ’s policy that included third-party and Medicare reimbursement when calculating hospital-specific limits for Medicaid DSH payments to hospitals.

The Medicaid DSH initiative aims to offset uncompensated care costs at hospitals serving more Medicaid-eligible patients than their peers.

Medicaid reimbursement does not typically cover the total costs of care for enrolled patients. The American Hospital Association (AHA) recently reported that Medicaid reimbursement was $20 billion short of actual hospital costs, meaning Medicaid reimbursed hospitals 88 cents for every dollar spent to care for Medicaid patients.

Medicaid DSH payments supplement the healthcare program’s shortfall by providing additional payments to hospitals based on their uncompensated care costs for Medicaid-eligible patients.

But eligible organizations face hospital-specific limits to ensure hospitals do not receive Medicaid DSH payments that exceed the net costs of operating their facilities and no payments are made to hospitals that do not provide inpatient services to Medicaid patients.

READ MORE: Medicaid Reimbursement Woes Key Concern for Healthcare CEOs

To guarantee supplemental Medicaid reimbursements go to the right hospitals, the amended Medicaid Act states that DSH payment cannot be greater than the:

“[C]osts incurred during the year of furnishing hospital services (as determined by the Secretary and net of payments under this subchapter, other than under this section, and by uninsured patients) by the hospital to individuals who either are eligible for medical assistance under the State plan or have no health insurance (or other source of third party coverage) for services provided during the year.”

Plaintiffs in the Washington DC court case contended that this section “unambiguously specifies” that Medicaid reimbursement and payments made by or on behalf of uninsured individuals are to be used to calculate hospital-specific limits.

READ MORE: Do Medicaid Reimbursement, Admissions Produce Hospital Profit?

However, the two FAQ answers from 2010 and the 2017 final rule included third-party and Medicare reimbursements as part of the “costs” definition.

The federal agency explained that the rule was intended to “make clearer . . . an existing interpretation” that “uncompensated care costs include only those costs for Medicaid eligible individuals that remain after accounting for payments received by hospitals by or on behalf of Medicaid eligible individuals, including Medicare and other third-party payments that compensate the hospitals for care furnished to such individuals.”

CMS made the decision to clarify the payments definition through the final rule because the Medicaid Act states that the HHS Secretary can define “costs.”

But Judge Sullivan pointed out that the Medicaid Act only allows the HHS Secretary to redefine “costs,” not “payments,” to determine hospital-specific limits.

“That text, after all, indicates that only payments made by Medicaid and by uninsured patients may be netted out from ‘costs’ to arrive at the hospital-specific limit,” he wrote. “To allow the Secretary to redefine ‘costs’ to net out a third category of payments – i.e., ‘third-party payments, including but not limited to, payments by Medicare and private insurance,’ 82 Fed. Reg. 16114-02, 16117 – would ‘render the Congressional definition of ‘payments’ in the very same clause superfluous.’”

Furthermore, the context and legislative history of the Medicaid DSH payment initiative supported Judge Sullivan’s interpretation of the law. He pointed out that Congress explicitly included third-party reimbursements in another section of the Medicaid Act that defines “health services” for state-owned hospitals that must demonstrate that additional payments are used for health services.

Since Congress included the language in one section, but explicitly omitted it in another section, which shows that policymakers acted intentionally and purposefully when not including third-party payments as part of the formula for hospital-specific limits.

“Based on the language of the statute, its context, and its legislative history, the court concluded that, ‘[w]hile the Secretary may be authorized to define “costs,” under the statute, the Secretary’s authority stops short of defining “payments,”’” he stated.

Based on his determination that the final rule violated the Medicaid Act, Judge Sullivan prohibited the rule from being applied nationwide, whereas other rulings only banned the rule’s enforcement in specific states.

He banned the rule nationwide because the rule’s deficiency was not just procedural. Rather, CMS acted outside the scope of its statutory authority. Vacating the final rule also would not have “disruptive consequences” because it only went into effect in June 2017.


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