As soon as the Supreme Court released its decision regarding the optional nature of the Affordable Care Act's (ACA) Medicaid expansion provision in June 2012, the hospital industry became concerned over the law's imposed reductions to the disproportionate share hospital (DSH) allotment. The ACA mandated DSH allotment reductions based on the assumption that the number of uninsured individuals would fall sharply beginning 2014 as a result of Medicaid expansion and enrollment in the Health Insurance Exchanges. However, in the new post-Supreme Court decision world, states are making differing choices over whether to opt in or out of Medicaid expansion. The mandatory reductions in DSH allotments to states are a cause for concern to hospitals that rely on DSH funding to help offset the significant costs associated with providing healthcare services to the uninsured and to Medicaid program patients.

On May 15, 2013, the Centers for Medicare and Medicaid Services (CMS) published a proposed rule to implement the State DSH Allotment Reductions that provides a mechanism for calculating the statutory DSH allotment reductions. The ACA established certain factors for consideration in establishing a methodology for such reductions, including:

1. A smaller percentage reduction for low DSH states;
2. Larger percentage reductions for states having the lowest percentage of uninsured during the most recent year for which the data is available;
3. Larger percentage reductions for states that do not target their DSH payments on hospitals with high volumes of Medicaid inpatients;
4. Larger percentage reductions for states that do not target their DSH payments on hospitals with high levels of uncompensated care; and
5. Taking into account the extent to which the DSH allotment for a state was included in the budget neutrality calculation for a coverage expansion approved under a section 1115 waiver as of July, 2009.

While the ACA requires the Secretary of the U.S. Department of Health and Human Services (HHS) to implement the DSH reductions over seven years beginning in 2014, the proposed rule, citing the need for better data, addresses reductions only for the initial two years. To that end, the proposed rule provides for aggregate annual reduction amounts of $500 million in 2014 and $600 million in 2015. A two-year methodology was proposed to allow continued refinement and improvement before the larger reductions are slated to begin in 2017, and CMS is seeking comment on readily available data sources that may be useful to the agency's review.

The DSH allotment reduction formula is described by CMS as accomplishing the statutory goals of the ACA by:

1. Separating states into two-state groups -- non-low DSH states and low DSH states;
2. Proportionately allocating aggregate DSH funding reductions to each of the two-state groups based on each group's total unreduced DSH allotment amount;
3. Allowing a low DSH state percentage reduction factor to adjust each group's DSH funding reduction amount while maintaining the combined aggregate DSH funding reduction; and
4. Dividing each state group's DSH allotment reduction amount among three statutory identified factors: (a) the Uninsured Percentage Factor (UPF), (b) the High Level of Uncompensated Care Factor (HUF), and (c) the High Volume of Medicaid Inpatients Factor (HMF). Each factor is then weighted, with the UPF having a proposed factor of 33 1/3 percent, and the HUF and HMF assigned a 66 2/3 percent factor.

The proposed rule contains a chart identifying the impact of the proposed formula on each state.

For providers, the proposed rule identifies a new methodology in which their state's uncompensated care amounts will be evaluated. It also offers insights into the continued availability of DSH funding as a viable supplemental payment for offsetting the costs of providing hospital care to the state's uninsured and Medicaid populations.

Comments to the proposed rule are due to CMS by July 12, 2013. As clearly stated in the rule's preamble, CMS is looking for additional data sources and feedback with respect to how the DSH reduction allotments will be imposed across the states. The proposed rule should be reviewed by states and providers that may be able to influence the outcome of the current reduction formula.