On February 24, 2023, CMS issued a proposed rule that would modify the Medicare Disproportionate Share Hospital (DSH) payment regulation to limit the universe of Section 1115 demonstration beneficiaries who can be “regarded as” eligible for Medicaid (the Proposed Rule). The revised regulation would state that patients not otherwise eligible for Medicaid will not be regarded as Medicaid-eligible—meaning their days will not be counted in the Medicaid fraction—if the cost of their care is covered by an uncompensated care (UC) pool authorized by a Section 1115 demonstration waiver. Section 1115 demonstration beneficiaries will be regarded as eligible for Medicaid only if they receive from the waiver (1) a health insurance product that covers inpatient hospital services, or (2) premium assistance that covers 100 percent of premium costs for such a product. If CMS finalizes its proposal, hospitals in states with Section 1115 UC payment pools (including Florida, Texas, Tennessee, Kansas and California) will not be allowed to claim the patient days of patients covered by those pools beginning with patient discharges on October 1, 2023.
This proposal comes in the wake of the recent decisions of the United States Courts of Appeals for the D.C. and Fifth Circuits in Bethesda Health v. Azar and Forrest General v. Azar, respectively. Both decisions held that patients whose care is covered in whole or in part by a Section 1115 UC payment pool are regarded as Medicaid-eligible, and their days must be counted in the Medicaid fraction. King & Spalding represented the Florida Hospital Association and more than a dozen of its member hospitals in Bethesda Health.
CMS believes it can avoid liability for Section 1115 UC payment pool days in future years by changing the Medicare DSH regulation, citing its statutory discretion to decide whether to “regard” Section 1115 beneficiaries as “Medicaid eligible” even though they are not eligible for traditional Medicaid. CMS believes that Section 1115 beneficiaries should not be regarded as Medicaid eligible unless they receive a health insurance product from the waiver. Notwithstanding the courts’ findings in Bethesda Health and Forrest General, the agency believes that Section 1115 UC payment pools are not health insurance because they do not come with the promise that payment will be made on behalf of a specific patient.
The Proposed Rule marks the third time since Bethesda Health and Forrest General that CMS has proposed to exclude Section 1115 UC payment pool days from the Medicaid fraction. CMS first proposed this change in the inpatient prospective payment system (IPPS) proposed rule for fiscal year (FY) 2022 and again in the IPPS proposed rule for FY 2023. Neither proposal was finalized.
King & Spalding and other commenters to the prior proposals responded with skepticism to the agency’s purported authority to exclude Section 1115 UC payment pool days. Bethesda Health and Forrest General held that CMS exercised its statutory discretion to include Section 1115 UC payment pool days once it decided to approve the underlying waivers. Beyond that point, as the Fifth Circuit put it, there are “no take-backs.” CMS responds in the Proposed Rule that those cases merely interpreted the regulation—not the statute—to require CMS to include days associated with Section 1115 UC payment pools.
Commenters to the prior proposals also disagreed with CMS’s rationale for not regarding Section 1115 UC payment pool beneficiaries as eligible for Medicaid. Commenters argued that there is no statutory support for distinguishing between Section 1115 waivers that directly provide coverage through health insurance and those that provide coverage through UC payment pools. As stated in Bethesda Health and Forrest General, patients are regarded as Medicaid eligible if they receive medical assistance under a waiver, regardless of the specific funding mechanism. In the Proposed Rule, CMS acknowledges but expresses its disagreement with those holdings.
While the Proposed Rule is largely the same as the prior proposals, it is different in two respects. First, CMS is jettisoning the requirement, proposed in the 2023 IPPS proposed rule, that health insurance provided under a Section 1115 waiver must provide essential health benefits (EHB). Second, CMS is now proposing that premium assistance must cover 100 percent of the cost of insurance. This is a change from the 2023 IPPS proposed rule, which would have required premium assistance to cover 90 percent of the cost of insurance.
A copy of the Proposed Rule is available here. Comments to the proposed rule will be due 60 days after it is published in the Federal Register. The Proposed Rule is currently scheduled to be published in the Federal Register on February 28, 2023. Comments are due by April 29, 2023.
