In anticipation of the approval by CMS of its Medicaid reform waiver, the Texas Health and Human Services Commission (HHSC) published proposed regulations in the July 4, 2008, Texas Register dramatically changing the manner in which Medicaid will pay disproportionate share hospital (DSH) reimbursement to certain hospitals. The changes are grouped into four basic categories by HHSC (1) an attempt to more equitably distribute DSH funds, effecting a change that emphasizes each hospital's actual number of inpatient days for Medicaid and low-income patients in the DSH formula; (2) codification of administrative practices, following a CMS audit, relating to cost-to-charge ratios, the calculation of Medicaid profit in the calculation of the Medicaid shortfall, and calculation of costs associated with the uninsured; (3) the removal of conversion factors which will restore DSH funds to approximately 60 private urban hospitals; and (4) Medicaid reform initiatives associated with the creation of the Texas Health Opportunity Pool Trust Fund (HOP). A portion of savings associated with these rule changes will fund the HOP.

One of the more controversial aspects of the proposed regulations involves the changes implementing the Medicaid reform waiver and the HOP. In the event that CMS approves the 1115 waiver, funds will be transferred out of the DSH program into the HOP, and hospitals will lose their DSH funding, conceptually making up their shortfall under the HOP. The applicable proposed regulation specifically exempts several institutions, including children's hospitals, critical access hospitals, mental health institutions, and certain hospitals located in counties with less than 50,000 persons. In addition, the various weighting currently used in the calculation of DSH payments will be altered for certain public hospitals, commonly referred to as the "transferring hospitals."

HHSC anticipates that the net fiscal impact of the Medicaid reform-related amendments on each DSH hospital will be non-existent. However, many providers are less confident in such predictions, and are concerned that the HOP payments will come in far less than the current DSH reimbursement.