CMS recently released the final rule confirming its methodology for carrying out reductions to Medicaid disproportionate share hospital (DSH) payments for fiscal year (FY) 2014 and FY 2015. DSH payments, which go to hospitals that serve a disproportionate share of low-income patients and have high uncompensated care costs, will be reduced by $500 million and $600 million, respectively, for FY 2014 and FY 2015.

The Affordable Care Act, anticipating reductions to the levels of uncompensated care as a result of Medicaid expansion and the health insurance exchanges, mandated CMS establish a methodology on which it would carry out the reductions, including consideration of the following factors:

  • Low-DSH states receive smaller reductions;
  • States with lowest percentages of uninsured individuals receive larger reductions;
  • States that do not target their DSH payments to hospitals with high volumes of Medicaid beneficiaries receive larger reductions;
  • States that do not target their DSH payments to hospitals with high levels of uncompensated care receive larger reductions; and
  • States that have increased coverage under section 1115 demonstrations as of July 31, 2009, and adjusted their DSH allotments will have these adjustments taken into account.

CMS advised that "For the years covered by this rule (FY 2014 and 2015), state decisions to expand Medicaid will not affect the amount of reduction in DSH allotments." Therefore, in states such as Texas, that have indicated they will not expand Medicaid, hospitals may lose Medicaid DSH funds while not seeing an increase in individuals covered. Absent congressional action including passage of the DSH Reduction Relief Act of 2013 (H.R. 1920), which would delay DSH cuts for two years, the reductions in federal DSH funding will take effect October 1. However, CMS will revisit the methodology and promulgate new rules to govern DSH reductions in FYs 2016 and beyond.