During the Covid-19 pandemic, Congress passed significant legislation directed at supporting the healthcare industry including the Consolidated Appropriations Act, 2021 (CAA 2021). Section 203 of the CAA 2021 may have gone unnoticed by the healthcare industry for the important changes in Medicaid disproportionate share hospital (DSH) payments that it contained. Recently, the Centers for Medicare and Medicaid Services (CMS) finalized a rule implementing the DSH-related provisions of the CAA 2021, Section 203 concerning the treatment of third-party payments for purposes of calculating Medicaid hospital-specific DSH limits.

Effective October 1, 2021, CAA 2021, Section 203 results from years of litigation and requests for millions of dollars in Medicaid DSH recoupments made by states that primarily impacted children’s hospitals due to the significant number of neonates treated by those hospitals. Essentially, the change would prevent states and CMS from counting insurance payments made by private payors to hospitals as though they were Medicaid payments, resulting in the reduction in the Medicaid shortfall calculation that many hospitals rely upon to obtain their DSH Medicaid funding. This was happening because a number of children or very disabled individuals may qualify for Medicaid, but as a secondary payor, the hospital would not have looked to the Medicaid program for any payment whatsoever.

States are statutorily required to make DSH payments to qualifying hospitals that serve patients who are uninsured and who are enrolled in the Medicaid program, and they must also consider the situation of hospitals that serve a disproportionate number of low-income patients with special needs. DSH payments must not exceed hospital specific limits set forth under the statute, found in section 1923(g) of the Social Security Act. This limit used a formula which provided that the limit may not “exceed the costs incurred during the year of furnishing hospital services (as determined by the Secretary and net of payments from Medicaid or by the uninsured) 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.”

CMS first issued informal guidance, which when challenged by hospitals across the country in litigation as violating the Administrative Procedures Act, was retracted. CMS then promulgated a rule, in which it counted third party payments from private, commercial patients who may also have been eligible for Medicaid (but for whom the hospital never billed nor received payment from Medicaid). This calculation served to adversely impact the DSH payments that certain DSH hospitals received, in some cases completely wiping out their DSH payment altogether. Litigation ensued challenging the final rule as well. Ultimately, the circuit split on this litigation resulted in a denial of Writ of Certiorari from the Supreme Court.

Realizing the perverse nature of this application, Congress passed the CAA 2021, and specifically Section 203. which amended Section 1923(g) of the Social Security Act to ensure that only costs and payment furnished to beneficiaries for whom Medicaid is the primary payor for services can be included in the calculation of the Medicaid shortfall portion of the DSH hospital specific limit. The newly promulgated rule clarifies, “Accordingly, the limit excludes costs and payments for services provided to Medicaid beneficiaries with other sources of coverage, including Medicare and commercial insurance.”

There is one rub, however. The preamble from the regulations provides that from June 2, 2017 to the passage of the CAA 2021, payments made by all third-party payors including Medicare, insurers and beneficiary cost sharing are all included in the calculation of the hospital specific DSH limits. Thus, CMS and the states are moving forward with clawing back Medicaid DSH payments made to hospitals for a stub period that now exists between when the prior action from CMS was withdrawn and the promulgation of the final rule. Thus, DSH payments for 2017, 2018, 2019 and portions of 2020, are still at risk, since this final rule is not effective until 2021. Thus, for the stub period noted above, hospitals will still face requests for recoupment, depending upon the state and the actions of the state to date.

Because this issue was the subject of significant litigation, the specific circuit or venue may be worthy of additional legal review, depending upon the specific facts involved and the state Medicaid program. Since each state Medicaid program is different and because supplemental payments and state directed payment programs have shifted significantly since the inception of the original litigation, the DSH hospital specific limit calculation may not have the same impact that it had when the issue began in 2010.

Norton Rose Fulbright healthcare team is closely following this and other regulatory updates. For more information please reach out to one of our team members.


Co-Head of Healthcare, United States

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