CMS Publishes Formula Cutting Disproportionate Share Hospital Reimbursement

Last week’s the Obama administration made noises about postponing cuts to disproportionate share hospitals, but when the regulations came out, the cuts were there in black and white.

The new regulations, however, do not penalize states that have elected not to expand Medicaid. Based on the formulas, these states may actually receive more DSH funds.

Providers and others have until July 12 to submit comments on the proposed rules.

When the U.S. Supreme Court last year ruled that states would not be required to expand Medicaid it unraveled a significant concession made by healthcare providers who agreed to a cut in DSH payments because more patients who currently contribute to bad debt would now be covered by Medicaid. Under the Patient Protection and Affordable Care Act, cuts to DSH have already been put into law to take effect over the next seven years. Beginning Oct. 1, the cut will be $500 million.

While the half-trillion dollar cut is still in effect, the Centers for Medicare and Medicaid Services (CMS) has come up with a formula that, at least for the next two years, may actually provide higher subsidies to DSH hospitals in states that don’t expand Medicaid coverage. CMS will distribute DSH dollars to states based on a percentage of uninsured residents (meaning those states with a smaller percentage covered by Medicaid will receive a higher percentage).

What the formula does not do, however, is eliminate the mandated cuts to the program which this year has a budget of $11 billion. Future cuts will be much higher than 2014′s $500 million. The cuts in fiscal years 2015 and 2016 increase to $600 million each year, and then $1.8 billion in 2017, $5 billion in 2018, $5.6 billion in 2019, and $4 billion in 2020.

Effects on Providers

What follows is text from the proposed rule related to impact of the formula and cuts on healthcare providers:

We anticipate that the final rule would affect certain providers through the reduction of state DSH payments.

We cannot, however, estimate the impact on individual providers or groups of providers. This proposed rule would not affect the considerable flexibility afforded states in setting DSH state plan payment methodologies to the extent that these methodologies are consistent with section 1923(c) of the Act and all other applicable statute and regulations. States would retain the ability to preserve existing DSH payment methodologies or to propose modified methodologies by submitting state plan amendments to us. Some states may determine that implementing a proportional reduction in DSH payments for all qualifying hospitals is the preferred method to account for the reduced allotment. Alternatively, states could determine that it the best action is to propose a methodology that would direct DSH payments reductions to hospitals that do not have high Medicaid volume and do not have high levels of uncompensated care.

Regardless, the rule incentivizes states to target DSH payments to hospitals that are most in need of Medicaid DSH funding based on their serving a high volume of Medicaid inpatient and having a high level of uncompensated care.

This proposed rule also does not affect the calculation of the hospital-specific DSH limit established at section 1923(g) of the Act. This hospital-specific limit requires that Medicaid DSH payments to a qualifying hospital not exceed the costs incurred by that hospital for providing inpatient and outpatient hospital services furnished during the year to Medicaid patients and individuals who have no health insurance or other source of third party coverage for the services provided during the year, less applicable revenues for those services.

Although this rule would reduce state DSH allotments, the management of the reduced allotments still largely remains with the states. Given that states would retain the same flexibility to design DSH payment methodologies under the state plan and that individual hospital DSH payment limits would not be reduced, we cannot predict whether and how states would exercise their flexibility in setting DSH payments to account for their reduced DSH allotment and how this would affect individual providers or specific groups of providers.

The Centers for Medicare & Medicaid Services (CMS) published May 15 a proposed rule (78 Fed. Reg. 28551) for reducing Medicaid disproportionate share hospital (DSH) payments as required under the Affordable Care Act (ACA).