The Centers for Medicare & Medicaid Services (CMS) issued a proposed rule to implement annual state Medicaid disproportionate share hospital (DSH) allotment reductions beginning in FY 2018.

The proposed rule describes CMS’s methodology for apportioning among states cuts to their federal allotments for payments to hospitals that serve a large number of low-income individuals. The Affordable Care Act (ACA) mandated that these reductions begin in FY 2014. But subsequent legislation increased their size and delayed them to FY 2018.

CMS is mostly proposing to allocate the reductions among states using the methodology it had originally established in 2013 for FY 2014 and 2015 reductions. In general, that approach favors states with low DSH expenditures relative to total Medicaid expenditures in the state, states with a high percentage of uninsured individuals, and states that direct DSH payments to hospitals with high Medicaid volume and high levels of uncompensated care.

The proposed rule does contain some changes to the 2013 approach. Notably, when allocating reductions among states, CMS is proposing to give relatively more weight to the number of uninsured individuals in a state. This should favor states that did not expand Medicaid under the ACA and consequentially have higher rates of uninsurance. Further, CMS is proposing that no state will have its DSH payments fully eliminated. Instead, CMS is proposing to cap an individual state’s DSH reductions at 90 percent.