DSH Alert 1

Recent Court Decision
Impacts Medicaid DSH

August 2019

Medicaid Disproportionate Share Hospital (DSH)

January 2019


On August 13, 2019, the United States Court of Appeals for the District of Columbia Circuit overturned the District Court ruling in Children’s Hosp. Ass’n of Texas v. Azar (https://www.cadc.uscourts.gov/internet/opinions.nsf/48CE86E8510F330585258455004EE247/$file/18-5135.pdf) and reinstated the April 3, 2017, DSH Final Rule (“2017 Rule”)(refer tohttps://federalregister.gov/d/2017-06538). 

Relevant Rule Background and Court Decisions

The December 19, 2008, Disproportionate Share Hospital (DSH) audit rule (73 Fed. Reg. 77904) indicated all Medicare payments must be included in the DSH audits for Medicaid/Medicare dual-eligible patients. The Centers for Medicare & Medicaid Services (CMS) issued “Additional Information on the DSH Reporting and Audit Requirements” in February 2010 (commonly referred to as the “FAQ”). In that document, FAQ #33 requires DSH audits to include private insurance payments for individuals eligible for Medicaid and also enrolled in private health insurance, and FAQ #34 requires the DSH audits to include Medicare payments for individuals dually-eligible for Medicare and Medicaid.

In recent years, several hospitals and hospital associations filed legal actions challenging the CMS guidance on including the Medicare and private insurance payments in the DSH audits. Several court decisions have been issued affecting CMS’ regulatory treatment of DSH overpayments for those hospitals.

Following multiple court decisions, CMS issued a Final Rule on April 3, 2017, clarifying that, effective with services furnished on or after June 2, 2017, Medicare payments and private insurance payments must be included in the DSH audits for Medicaid dual-eligible patients (82 Fed. Reg. 16114-02, 16117).

Several hospitals and hospital associations filed legal actions challenging the 2017 Rule. On March 6, 2018 the United States District Court for the District of Columbia sided with the 12 plaintiff hospitals in Children’s Hosp. Ass’n of Texas v. Azar and vacated the 2017 Rule stating that the 2017 Rule was inconsistent with the Medicaid Act.

Impact on Medicaid DSH

The August 13, 2019, court decision reinstates the 2017 Rule that requires uncompensated care cost (UCC), for the purposes of calculating each individual hospital’s DSH limit, to include the impact of payments from private insurance and Medicare for dually-eligible individuals. The result is a lower UCC limit for the majority of hospitals included in the DSH audit.

Medicaid DSH Payment and Audit Reporting Considerations

Children’s Hosp. Ass’n of Texas v. Azar was brought to the District of Columbia court by 12 hospitals from the states of Minnesota, Texas, Virginia, and Washington. For at least these four states, if not all states, consideration must be given to the inclusion of Medicare and other third-party payments in the calculation of the UCC for hospital services provided on or after June 2, 2017. This applies to all future DSH examination reports that include hospital services provided on or after June 2, 2017. This may also impact a state’s interim DSH payments in current years if the state’s DSH payment rules are tied to the federal UCC definitions or the DSH audit rules.
At a minimum, Myers and Stauffer encourages all states to ensure hospitals are reporting Medicare and other third-party payments for Medicaid-eligible individuals in their DSH payment and DSH examination data collection processes.
We understand every state is unique and has legal counsel advice and other issues to consider. We will work with each state to understand their specific circumstances, and propose any needed changes to the DSH examination report. In view of the foregoing, state agencies should consult with their legal counsel and consider potential risks before making final decisions. State agencies may also want to consult with their regional CMS officials.