DSH Alert 2024
Client Alert: Medicaid Program- Disproportionate Share Hospital Third-Party Payer Rule (Final)

Medicaid Disproportionate Share Hospital (DSH)

January 2019

On February 23, 2024, the Medicaid disproportionate share hospital (DSH) Third-Party Payer Rule was finalized and published in the Federal Register by the Centers for Medicare & Medicaid Services (CMS). The final rule addresses changes as a result of the Consolidated Appropriations Act (CAA) of 2021 (Pub. L. 116-260, December 27, 2020). The CAA changed the calculation of Medicaid hospital-specific DSH limits due to treatment of third-party payments. The final rule focuses specifically on section 203 of the CAA, Sec. 203. Medicaid Shortfall and Third-Party Payments. Additionally the rule addresses other administrative inefficiencies and DSH program clarifications. CMS finalized the effective date of October 1, 2021, for CAA-related provisions with remaining provisions effective 60 days after final rule publication. Myers and Stauffer is providing this client alert to ensure states are aware of several notable and impactful provisions.

For the full final rule text, see https://www.govinfo.gov/content/pkg/FR-2024-02-23/pdf/2024-03542.pdf.

In summary, the final rule includes the following topics discussed in more detail in this alert:

  • CAA DSH Requirements:
    • Provides clarification on the data sources and calculations for the 97th percentile exception under 1923(g)(2)(B) of the Act.
    • Clarifies that the CAA DSH provisions will apply to state plan rate years (SPRY) beginning on or after October 1, 2021. For most states, that means DSH years beginning October 1, 2021, or July 1, 2022, depending on the state’s DSH SPRY.
  • Annual DSH Audits and Overpayments:
    • Codifies CAA provisions to remove “Medicaid eligible” and replace wording with “Medicaid” so that services with third-party payers are no longer included in the DSH uncompensated care costs (UCC) unless the hospital meets the 97th percentile exception and it benefits them.
    • Adds a new element to the DSH annual reporting requirements submitted with the DSH audit report. The new element is titled “financial impact of audit findings” and is intended to provide CMS with an estimate of the financial impact of audit findings/data caveats not included in the other data elements (not included already in the calculated DSH UCC).
    • Codifies CMS-64 process and timeframe states have to recoup and report redistribution of DSH overpayments.
  • DSH Health Reform Reduction Methodology:
    • Codifies how DSH allotments diverted for 1115 demonstration waivers will be handled when DSH allotment reductions are calculated in fiscal year (FY) 2024.
    • Since all 1115 waivers in effect on July 31, 2009, will have expired or been renewed/extended by FY 2024, all DSH allotment diverted to 1115 waivers will now result in a reduction to the high Medicaid and high uncompensated care factors as part of the DSH allotment reduction calculation.
  • Modernizing the Publication of DSH and Children’s Health Insurance Program (CHIP) Allotments:
    • CMS has eliminated the requirement to publish the annual DSH and CHIP allotments in the Federal Register. They will post the preliminary and final DSH and CHIP allotments in the Medicaid Budget and Expenditure System/State Children’s Health Insurance Program Budget and Expenditure System (MBES/CBES) and at Medicaid.gov.
    • CMS has eliminated the April 1 date to publish the final DSH allotments.


Beginning with the adoption of the 2008 DSH audit rule, the cost of services related to dually-enrolled (Medicare or other third-party and Medicaid coverage) individuals has been included in the DSH calculation of UCC. However, the inclusion of the associated Medicare and other third-party payments as a reduction to dually eligible costs has been the center of numerous court cases nationwide. The treatment of these payments has undergone several iterations over the years, ranging from offsetting all the payments, to offsetting none of the payments, to only offsetting payments for services on or after June 2, 2017.

The CAA changed the DSH audit rule to only allow the inclusion of costs and payments for services for which the Medicaid state plan or waiver is the primary payer for such services. Therefore, the DSH audit beginning with Medicaid state-plan rate year beginning on or after October 1, 2021, excludes both the costs and payments for services related to Medicaid individuals who have Medicare or third-party coverage for those services from UCC. Some hospitals may still qualify for an exception to continue to include all Medicaid eligible individuals (costs and payments/revenues) in their UCC, as is done currently under the Medicaid DSH limit calculations (methodology as of January 1, 2020), if it results in a higher DSH limit.

CAA DSH Requirements

Removal of Medicaid-Eligible

Section 203 of the CAA changes the hospital-specific DSH limit calculation. The change addresses the exclusion of Medicaid eligible claims that have Medicare or third-party payers unless the hospital meets the 97th percentile exception and it benefits them. The final language for Section 447.295(d)(2) is as follows:

(2) For each State’s first Medicaid State plan rate year beginning on or after October 1, 2021, and thereafter, subject to paragraph (d)(3) of this section, only costs incurred in providing inpatient hospital and outpatient hospital services to Medicaid individuals when Medicaid is the primary payer for such services, and revenues received with respect to those services, and costs incurred in providing inpatient hospital and outpatient hospital services, and revenues received with respect to those services, for which a determination has been made in accordance with paragraph (c) of this section that the services were furnished to individuals who have no source of third-party coverage for the specific inpatient hospital or outpatient hospital service are included when calculating the costs and revenues for Medicaid individuals and individuals who have no health insurance or other source of third-party coverage for purposes of section 1923(g)(1) of the Act.

  • This definition includes the costs and payments of two populations: Medicaid individuals with no source of third-party coverage for the specific inpatient hospital or outpatient hospital services.
  • Uninsured individuals (no health insurance or other source of third-party coverage for the specific inpatient hospital or outpatient hospital services).

Due to the removal of Medicaid individuals with third-party payers, the language for several sections of the 42 CFR has been changed to remove references to “Medicaid eligible individuals.” DSH audit reports will require an update to the new language.

In comment and response, CMS clarifies questions related to which Medicaid claims are considered Medicaid primary for purposes of the new UCC definitions and what changes may need to be made to Medicaid Management Information System (MMIS) paid claims reports used in the DSH payment and audit calculations. Clarifications include:

  • Reference to the December 2014 Uninsured Rule for using a single, service-specific determination of third-party coverage.
  • In reference to dually-eligible patients, CMS provides an example of the single, service-specific determination and says that if an individual had Medicare or private insurance that only provided coverage for the first five of 10 days of a hospital inpatient stay, they would not be considered Medicaid primary for any portion of the stay, even if it is an institution for mental disease (IMD).

Myers and Stauffer Note: States need to review how a service is defined for IMDs, since many patients could be excluded from DSH due to having coverage for any portion of the stay. IMD inpatient services are different than acute-care hospitals because an IMD patient may be in the hospital for years. Most IMDs may interpret a service period as their monthly billing cycle, so that no more than a month would ever be excluded from their DSH UCC.

  • Medicaid primary beneficiaries who have reached coverage limits, exhausted benefits, limited benefits, etc. with no other coverage are now to be captured in uninsured rather than as Medicaid eligible.
  • Primary coverage is based on the existence of coverage for a service, not on receiving an actual payment.
  • While CMS points out based on section 1902(a)(25)(A) of the Act and §§ 433.135 through 433.154, Medicaid is generally the payer of last resort, examples of possible exceptions were provided:
    1. Medicaid can be considered primary for a hospital inpatient with Medicaid and Medicare Part B only; however, the associated payments for the Part B services should be offset if the costs are included in the UCC. CMS indicates that Medicaid would normally be primary in this example to prevent anomalous situations where a relatively small Part B ancillary payment would make the entire inpatient stay Medicare primary. This coverage determination should be decided by the state.
    2. Medicaid may be also be considered Medicaid primary for a hospital inpatient where third-party coverage only covers ancillary services and not routine services. CMS will defer to the state to reasonably determine whether the third-party would be considered coverage for the inpatient hospital services and therefore be primary over Medicaid.
    3. CMS provides an example of the Ryan White Fund being secondary to Medicaid. Those claims may be included in Medicaid, but the Ryan White Fund payments must be offset against the UCC.
  • Confirmation that states are expected to use MMIS data to be compliant. CMS believes most states have MMIS systems able to support compliance with the changes in this rule. If a state has to change the data to be compliant, CMS says they will work with states. States may have to change the current MMIS reports or supplement the MMIS data with other auditable data.
  • Allows inclusion of Section 1115 demonstration individuals with no other coverage if the 1115 demonstration paid 100% percent of their health insurance premium or directly provides for health insurance.

97th Percentile Exception

The final rule establishes the 97th percentile exception to the new definition of the hospital-specific DSH limit. The exception to the exclusion of Medicaid services with third-party coverage can be applied to the 97th percentile hospitals, if it is beneficial for the hospital to do so. Section 447.295(d)(3) reads:
(3) Effective for each State’s first Medicaid State plan rate year beginning on or after October 1, 2021, and thereafter, the hospital-specific DSH limit for a  97th percentile hospital defined in paragraph (b) of this section is the higher of the values from the calculations described in paragraphs (d)(1) and (2) of this section.

The final rule includes the following clarifications to the 97th percentile exception:

  • The 97th percentile list will be published by CMS annually prior to October 1 of each year. No commitment as to an exact date except for after March 31 and before October 1.
  • The calculation is prospective. The October 1 list will be published for use in the subsequent year’s DSH payment calculation (state plan rate year beginning on or after October 1).
  • CMS will soon release the retroactive 97th percentile lists for state plan DSH years beginning on or after October 1, 2021 through September 30, 2024.
  • The exception will apply to hospitals that are at or above the 97th percentile of all hospitals nationwide with respect to the number of Medicare supplemental security income (SSI) days or the percentage of Medicare SSI days to total inpatient days.
  • Healthcare Cost Report Information System (HCRIS), Medicare Provider Analysis and Review, and SSI data from the Social Security Administration will be the primary sources of data for the 97th percentile calculation.
  • The most recent cost report data available in HCRIS as of March 31st (prior to October 1st) will be used regardless of audit status. If the most recent cost report available is older than three years from the prior September 30th, the hospital will be excluded.
  • Hospitals that do not submit Medicare cost reports will not be included.
  • Cost reports will include acute-care hospitals paid under the inpatient prospective payment system, critical access hospitals, inpatient-rehabilitation hospitals, and psychiatric hospitals.
  • Cost reports will include “low- or no-Medicare utilization” cost reports as long as they are included in HCRIS. If there is no total inpatient days, CMS will use a zero value for the percentage of total inpatient days that are Medicare Part A SSI for the 97th percentile ranking.
  • Medicare Part A days will include both covered and non-covered.
  • Days will include all days in distinct part units (psychiatric and rehabilitation units).
  • Medicare SSI days will be on discharges occurring during the cost-report period.
  • Hospitals that file one cost report for Medicare under a single CMS Certification Number but file separate cost reports for Medicaid would all be considered to meet the 97th percentile if the provider was on the 97th percentile exception list.
  • No retrospective calculation of the list will be completed; however, CMS will allow one year from the publish date to find any CMS mathematical or technical errors to be corrected. There will not be corrections to cost reports or hospital data allowed.
  • If a revised exception list is created due to mathematical or technical errors and a hospital that was previously determined eligible for the exception no longer qualifies subsequent to the corrections, the hospital would lose its eligibility for the exception for that year.

CMS did not require the identification or reporting of any separate information on hospitals that meet the 97th percentile exception or that benefit from the exception. However, CMS suggests that auditors provide this information as part of their independent certified audit.

October 1, 2021 Effective Date

The final rule clarifies the October 1, 2021 effective date. Section 203 is to be effective starting with each state’s SPRY beginning on or after October 1, 2021. Additionally, the application of the rule will be retroactive to the SPRY beginning on or after October 1, 2021. For SPRY beginning prior to October 1, 2021, the Medicaid DSH limit calculations (methodology as of January 1, 2020) will be in effect through the end of that SPRY.

Annual DSH Audits and Overpayments

The final rule introduces a new data element and includes clarification on reporting DSH overpayments. The old data element (21) will be changed to (22) and replaced with a new data element (21) financial impact of audit findings. The new data element is an attempt to identify actual or estimated financial impacts of audit findings.

The definition states this reporting requirement should only include the actual or estimated audit finding if not otherwise reflected in the other data elements. For example, the reported annual UCC data component (one of the existing other data elements) should not include the amounts reported in the financial impact of audit findings data element.

Estimated Financial Impact of an Audit Finding

CMS is requiring that auditors estimate financial impacts of audit findings when the actual amount cannot be determined due to incomplete or missing data, lack of documentation, non-compliance with federal statutes or regulations, or other deficiencies. These are findings that cannot be determined using the documentation sources in 42 CFR §455.304(c) and therefore were not included in the other data elements. The rule includes several suggestions and examples of estimating the impacts of data findings and/or caveats. CMS is encouraging states and their independent auditors to quantify either the actual or estimated financial impact to gain a better understanding of the data deficiencies’ effect on the DSH limit. CMS says that auditors may also provide an estimated range of the financial impact on audit findings. CMS stated the estimates would not represent a quantified overpayment.

Myers and Stauffer Note: States and hospitals may be concerned about how auditors will determine “estimated financial impacts” when the actual impact is unknown. When documentation is missing, it may be necessary for auditors to use state-wide averages or the provider’s historical averages to estimate amounts for the final report. It is uncertain, if a range is reported as opposed to a single estimate, whether that range can be entered in the CMS data elements template for Medicaid and CHIP Financial. Given that CMS says they do not plan to use the estimated financial impact in determination of the overpayments, it is unclear why that data needs to be quantified.

Actual Financial Impact of an Audit Finding

An actual financial impact of an audit finding is defined as a finding calculated using documentation sources in 42 CFR §455.304(c). The rule says the new data element would require auditors to quantify the financial impact of any finding, including non-compliance with federal statutes or regulations. CMS stated that actual financial impacts should be included in an overpayment determination. CMS does allow for qualitative disclosures where an amount cannot be quantified. In that case, no amount would be required in the new data element.

Myers and Stauffer Note: The only actual financial impacts that are normally not already reported in the other data elements are related to audit disclosures presented in the DSH examination “data caveats.” These disclosures are typically due to inconsistencies in the DSH guidance or legal interpretations of DSH rules that have not been formally ruled upon by the courts or CMS. It is unclear if CMS views these disclosures as non-compliant with federal statutes or regulations. We believe these disclosures are qualitative in nature, even if they can be quantified, and they are already included in the other data elements.

CMS is clear in the rule as well as in the comment and response that this new data element is an attempt to quantify the financial impact of findings; however, they further clarify the independent auditor should include a recommended corrective action for any findings that are not quantifiable. CMS expects the state to submit a corrective action plan as a part of the final audit report submission to CMS. CMS-64 Processes and Timing A deadline to report DSH overpayments has been clarified under the final rule. The DSH overpayment will be considered discovered on the earliest of the following:

  • The date the state submits the independent DSH audit report to CMS.
  • The date the state notifies a provider in writing, including the dollar amount.
  • The date a provider acknowledges an overpayment amount in writing to the state.
  • The date the state takes action to recoup the overpayment amount.

The rule adds two new sections under 447.299 (f and g). The language clarifies that overpayments should be reported on CMS-64 as a decreasing adjustment for the overpayments (and as an increasing adjustment for redistributions) corresponding to the DSH allotment and SPRY of the originally-claimed expenditure.

Overpayments to be returned to the Federal government must be done in accordance with the requirements of 42 CFR part 433, subpart F. States have one year from the date of discovery to recover or attempt to recover the overpayment before an adjustment is made to federal financial participation to account for the overpayment. Overpayment redistribution adjustments must be reported on Form CMS-64 within two years of the date of discovery outlined above. It appears that most of the overpayment guidance is simply codifying what CMS was already following. However, some states may not have completed redistributions within the two-year requirement. A CMS response notes any state not in compliance with the two-year requirement should make every effort to do so as expeditiously as possible.

A comment was submitted regarding potential underpayment situations; however, CMS responds that the option to make additional DSH payments should be outlined in the state plan and addressed during the interim. States may want to review their state plans to determine if changes should be made related to a process for claiming additional DSH payments.

DSH Health Reform Reduction Methodology 

The final DSH health reform methodology was published in the Final Rule, 84 FR 50308 on September 25, 2019. The methodology is intended to outline the DSH allotment reductions that had been previously delayed. The CAA modified the reductions to occur beginning in FY 2024 through FY 2027 at $8 billion per year.

The final rule removes any indication that DSH funds diverted under section 1115 demonstrations after July 31, 2009, would be excluded from the reductions starting in FY 2024. The rule says that all 1115 demonstrations approved as of July 31, 2009, have expired and the protection does not apply to renewals or extensions. Therefore, no amounts related to coverage expansion will be excluded from future DSH allotment reductions scheduled to begin in FY 2024 (currently delayed to March 9, 2024).

For reductions calculated in FY 2024, all DSH allotments diverted for section 1115 demonstrations will be reduced by the mean high uncompensated care factor and the mean high Medicaid volume factor reduction percentages.The calculated DSH allotment diverted under the 1115 demonstration will align with the associated State plan rate year DSH audit utilized in the DSH allotment reductions.

Modernizing the Publication of DSH and Chip Allotments

Currently, 42 CFR §447.297 outlines when and how CMS is to publish preliminary and final allotments in the Federal Register. The final rule continues to require CMS to publish preliminary DSH allotments by October 1 of each year. However, the final rule revises the requirement for CMS to publish final DSH allotments by April 1 and replaces it with “as soon as practicable.” In addition, the final rule eliminates the requirement to publish the DSH and CHIP preliminary and final allotments in the Federal Register. Instead, it requires the information be posted on the MBES/CBES and at Medicaid.gov.

Next Steps

This rule impacts the way states and hospitals report Medicaid data for both DSH payment and DSH examination purposes. Myers and Stauffer has already begun working with several hospitals and states on the potential impact of this rule. States and hospitals should work toward updating query logic and data reports to properly separate Medicaid claims that have Medicare or third-party coverage for Medicaid inpatient and outpatient hospital services. States also need to review their previous DSH examination data caveats and determine how the potential impact of those data caveats could affect their future DSH examinations and overpayments now that CMS is requesting an estimated fiscal impact of all audit findings. Additionally, CMS is already contacting states that have not completed overpayment redistributions for older DSH years. The rule suggests that states make every effort to complete recoupments and redistributions as quickly as possible. Myers and Stauffer is currently helping several states navigate this requirement to come into compliance.

For More Information

Myers and Stauffer is available for meetings to discuss any impact of the final rule. If you have any questions about the material presented in this client alert, please contact the following members of our DSH practice group: