CMS Issues Final Rule Changing Medicaid DSH Third-Party Payor Rule

King & Spalding

On February 23, 2024, CMS published a final rule updating the regulatory requirements of the Medicaid disproportionate share hospital (DSH) program in response to the Consolidated Appropriations Act (CAA) of 2021. The final rule implements DSH-related provisions of the CAA concerning the treatment of third-party payments for purposes of calculating Medicaid hospital-specific DSH limits. The final rule also enhances the ability of CMS and state auditors to understand how the hospital-specific DSH limits will be calculated as well as identify and recover Medicaid DSH overpayments. CMS published the final rule as proposed, with only minor phrasing changes.

Background on DSH Payments

The Medicaid statute requires states to make DSH payments to Medicaid-enrolled hospitals that serve patients who are uninsured. DSH payments are not considered part of base payments or supplemental payments to providers. Section 1923 of the Social Security Act contains specific requirements related to DSH payments, including aggregate annual state-specific DSH allotments that limit federal financial participation (FFP) for statewide total DSH payments under Section 1923(f) of the act, and hospital-specific limits on DSH payments under Section 1923(g) of the act. Per Section 1923(g), a hospital’s DSH payments may not exceed the costs incurred by that hospital in furnishing inpatient and outpatient hospital services during the year to certain Medicaid beneficiaries and the uninsured, less payments received for Medicaid-eligible individuals. States are required under Section 1923(a)(2)(D) of the act to provide the HHS secretary with an annual report describing the DSH payment adjustments made to each hospital.

Controversy Over Hospital-Specific Limit

In recent years, the Medicaid DSH program has seen several changes in the legal landscape, as well as changes in enforcement by CMS and state Medicaid agencies. A major issue has been the calculation of the hospital-specific limit. More specifically, controversy arose over whether hospitals must report commercial insurance payments and Medicare payments for their so-called “dually eligible” patients (i.e., patients eligible for Medicaid and either Medicare or commercial insurance) as an offset to their uncompensated care costs for purposes of calculating the hospital-specific limit. This calculation is known as the Medicaid shortfall.

Ultimately, Congress resolved the issue with Section 203 of the CAA, which allows hospitals to include only the costs of Medicaid-eligible (including waivers) patients for whom Medicaid is the primary payer. However, under Section 1923(g)(2)(B) of the Social Security Act, hospitals in the 97th percentile of all hospitals with respect to inpatient days made up of patients who, for such days, were entitled to Medicare Part A benefits and to Supplemental Security Income (SSI) benefits are excepted from this provision of the CAA and are entitled to a higher hospital-specific limit.

The Proposed Medicaid Shortfall Calculation

In the final rule, CMS is revising the data elements identified in its regulations at 42 C.F.R. § 447.299(c)(6), (7), (10) and (16) to reflect the statutory changes made by Section 203 of the CAA to update the methodology for calculating the Medicaid shortfall portion (Medicaid costs less Medicaid payments) of the hospital-specific DSH limit. The Medicaid shortfall calculation will only include costs and payments for hospital services furnished to beneficiaries for whom Medicaid is the primary payer (excluding hospitals that fall under the 97th percentile statutory exception).

The final rule also includes an additional data-reporting element that would allow state auditors discretion to quantify the financial impact of any missing data or documentation. According to CMS, current audit reports may include a caveat noting the auditor’s finding that the hospital’s total uncompensated care cost may be misstated as a result of missing data, with an unknown impact on the hospital-specific DSH limit. Under the final rule, for example, auditors will be able to use “alternative source documentation, utilize a methodology to estimate the financial impact in terms of the dollar amount at risk, or provide an estimated range of financial impact if a determination of an exact dollar amount is not possible.” Importantly, the new data element—and the discretion it affords to auditors—will likely expand auditors’ ability to identify and recover DSH overpayments in excess of the hospital-specific limit. Providers should take note of this change.

Additional Changes to the Final Rule

In addition to the Medicaid shortfall calculation, the final rule includes several other changes. For instance, the final rule clarifies the calculation of the one-year period by when a state must recover and identify overpayments. Based on this change, the one-year period will begin at the earliest date of either:

(a) when the state submitted its DSH independent certified audit to the HHS secretary, or
(b) any of the dates specified in 42 C.F.R. § 433.316(c):

    1. paragraph (c)(1) (the date on which any Medicaid agency official or other state official first notifies a provider in writing of an overpayment and specifies a dollar amount that is subject to recovery);
    2. paragraph (c)(2) (the date on which a provider initially acknowledges a specific overpaid amount in writing to the Medicaid agency); and
    3. paragraph (c)(3) (the date on which any state official or fiscal agent of the state initiates a formal action to recoup a specific overpaid amount from a provider without having first notified the provider in writing).

The final rule also modifies the factors by which Patient Protection and Affordable Care Act mandated state-by-state DSH allotment reduction amounts will occur beginning in fiscal year 2024 (reductions that have been repeatedly delayed). The CAA modified the law to now have these reductions be phased in beginning in fiscal year 2024 through fiscal year 2027 in the amount of $8 billion per year. Under the final rule, these mandated reductions will be calculated using the most recent state plan rate year for the state audits used in the DSH audits rather than the fiscal year subject to the reduction in states with Section 1115 waiver demonstrations.


The CAA-related provisions of the final rule will become effective retroactively as of October 1, 2021, to align with the effective date of the statute. The remaining provisions will become effective 60 days after the publication of the final rule.

A copy of the final rule is available here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© King & Spalding | Attorney Advertising

Written by:

King & Spalding

King & Spalding on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide