On May 13, 2013, the US Centers for Medicare & Medicaid Services (“CMS”) released its proposed rule (“Proposed Rule”) to implement Section 2551 of the Affordable Care Act, which requires annual aggregate reductions in state Medicaid disproportionate share hospital (“DSH”) allotments from FY 2014 through FY 2020. The Affordable Care Act mandates this reduction in DSH payments based on the assumption that the number of uninsured individuals will fall sharply beginning in 2014 due to Health Insurance Exchanges/Marketplaces and Medicaid expansion and thereby, significantly reduce the levels of uncompensated care provided by hospitals.

The Affordable Care Act requires the following annual aggregate DSH allotment reductions: $500 million for FY 2014; $600 million for FY 2015; $600 million for FY 2016; $1.8 billion for FY 2017; $5 billion for FY 2018; $5.6 billion for FY 2019; and $4 billion for FY 2020.

The Proposed Rule establishes a DSH Health Reform Methodology (“DHRM”) to implement the reductions only for the first two years (FY 2014 & FY 2015). CMS plans to revisit the methodology and promulgate new rules to govern DSH allotment reductions for FY 2016 and thereafter.

The proposed DHRM is based on the following five factors required by the Affordable Care Act:

  • Low DSH Adjustment Factor - DHRM must impose a smaller percentage reduction on low DSH states;
  • Uninsured Percentage Factor - DHRM must impose larger percentage reductions on states that have the lowest percentages of uninsured individuals during the most recent year for which such data are available;
  • High Volume of Medicaid Inpatients Factor - DHRM must impose larger percentage reductions on states that do not target their DSH payments on hospitals with high volumes of Medicaid inpatients;
  • High Level of Uncompensated Care Factor - DHRM must impose larger percentage reductions on states that do not target their DSH payments on hospitals with high levels of uncompensated care; and
  • Sec. 1115 Budget Neutrality Factor - DHRM must take into account the extent to which a state’s DSH allotment was included in the budget neutrality calculation for a coverage expansion approved under section 1115 as of July 31, 2009.

The proposed DHRM applies the above factors to each state and generates a state-specific DSH allotment reduction amount for all 50 states and DC. The total of all DSH allotment reduction amounts equal the aggregate annual reduction amounts identified in the Affordable Care Act. According to the illustration of the FY 2014 DHRM, a little over $6 million of the $500 million aggregate DSH reduction will be applied to low DSH states.

Importantly, for FYs 2014 and 2015, a state decision not to expand Medicaid would not be held against it in the DSH allotment calculation. States that have used DSH to expand coverage would have the portion used for coverage expansion protected from any reduction. Based on the CMS illustration, the FY 2014 range of state DSH allotment impact would range from less than $2,500 (Wyoming) to $65.5 million (New York). Texas would lose $56 million. On a percentage basis, the range is from 0.50 percent (Wisconsin) to 7.14 percent (Arkansas).

In the proposed DHRM, CMS is proposing to utilize multiple data sources, including the US Census Bureau data, Medicaid DSH audit and reporting data, existing state DSH allotments, and Form CMS-64 Medicaid Budget and Expenditure System data. In addition, CMS will use the American Community Survey to establish the percentage of uninsured for each state.

Although the Proposed Rule does not affect the States’ flexibility in setting DSH payments to account for their reduced DSH allotment, CMS states that the Proposed Rule incentivizes states to target DSH payments to hospitals serving a high volume of Medicaid inpatient and providing a high level of uncompensated care.

The Proposed Rule is scheduled to be published in the Federal Register on May 15, 2013. Comments must be submitted by July 12, 2013. Once finalized, the rule will go into effect starting October 1, 2013.