On May 13, 2013, the Centers for Medicare and Medicaid Services (CMS) issued a proposed rule (CMS-2367-P) outlining a process for reducing federal Medicaid Disproportionate Share Hospital (DSH) allotments for Fiscal Years (FYs) 2014 and 2015 as required by the Affordable Care Act (ACA). Comments to the rule are due July 12, 2013.

Unless Congress enacts President Barack Obama’s budget proposal — which calls for a delay of 2014 Medicaid DSH cuts — a final rule would take effect on October 1, 2013. The proposed rule does not take into account states’ decisions to expand Medicaid over the next two years in determining Medicaid DSH reductions. Regardless, states and the hospitals that rely on these critical DSH dollars will feel the impact.

Disproportionate Share Hospital payments were first established as part of the Omnibus Budget Reconciliation Act of 1981 (PL 97-35) in an attempt to provide federal support for hospitals caring for a disproportionate number of low-income and Medicaid patients. The federal government requires two basic requirements for hospitals wishing to qualify for Medicaid DSH funds. A hospital must have two obstetricians with staff privileges that agree to provide services to Medicaid patients and a Medicaid utilization rate of at least one percent. A hospital can be deemed as qualifying for DSH payments if it has a low-income utilization rate of at least 25 percent. Over the years, the federal government has limited DSH payments to psychiatric facilities referred to as Institutions for Mental Disease (IMDs). Once a state receives its DSH allotment, it sets forth its own process allocating Medicaid DSH funds directly to hospitals.

The Affordable Care Act provides for $18.1 million in Medicaid DSH cuts between FYs 2014 and 2020. A $500 million cut will be implemented nationally for FY 2014 and a $600 million cut will go into effect in FY 2015. The healthcare reform law assumes that the increase in commercial health insurance and expanded Medicaid coverage for low-income adults will increase access to health insurance for 30 million people and reduce levels of uncompensated care provided by hospitals. Since the healthcare law was passed, the US Supreme Court ruled that states would not be required to expand Medicaid coverage. CMS has outlined a process for FY 2014 and FY 2015 — but not beyond — to allow the Agency to consider new data after the ACA coverage expansions have been fully implemented.

The proposed rule takes five factors into account for allocating new state DSH allotments for FY 2014 and FY 2015:  

  1. Low DSH states would receive the smallest reductions based on the fact that these states have DSH programs that fall within three percent of their total Medicaid expenditures;
  2. States that have the lowest percentages of uninsured individuals during the most recent year in which data is available would receive larger percentage reductions;
  3. States that do not target DSH payments to hospitals with high volumes of Medicaid patients would receive larger percentage reductions;
  4. Larger percentage reductions would be imposed on states that do not target DSH payments on hospitals with high levels of uncompensated care; and
  5. CMS would take into account states that have rolled their DSH allotment into a 1115 Waiver coverage expansion and included it as part of their budget neutrality calculation as of July 31, 2009.

The proposed rule would take aggregate annual reductions from each state in the following manner:  

  • Proportionately allocating aggregate DSH funding reductions to Low DSH and non-Low DSH states;
  • Proportionately allocating aggregate DSH funding reductions to each of these groups based on each state group’s total unreduced DSH allotment amount;
  • Applying a “Low DSH State Percentage Factor” to adjust each state group’s DSH funding reduction amount while maintaining the combined aggregate DSH funding reduction;
  • Dividing each state group’s DSH allotment reduction amount among three statutorily defined factors, including a “Uninsured Percentage Factor,” a “High Level of Uncompensated Care Factor” and a “High Volume of Medicaid Inpatients Factor;”

CMS proposes assigning a 33 ½ percent weighting factor for the Uninsured Percentage Factor and a combined 66 2/3 percent weighting factor for the Uncompensated Care and Medicaid Inpatient targeting factors.

  • Determining state-specific DSH allotment reduction amounts relating to the Uninsured Percentage Factor as determined by the Census Bureau American Community Survey (ACS) for the most recent year;
  • Determining state-specific DSH allotment reduction amounts relating to the High Level of Uncompensated Care Factor which CMS intends to collect from states annually as a result of this proposed rule;
  • Determining state-specific DSH allotment reduction amounts relating to the High Volume of Medicaid Inpatients Factor which will be determined using data reported by states as part of mandated DSH audit and reporting data and taking into account each state’s own methodology for computing hospital-specific limits for DSH;
  • Applying a Section 1115 Waiver — Budget Neutrality Factor for qualifying states;

Any amount of DSH funding diverted for other purposes under a Medicaid demonstration would be subject to an “Average Percentage Reduction” amount for factors that the state does not have complete and/or relevant DSH payment data to support.

  • Identifying the state-specific DSH allotment reduction amount; and
  • Subtracting the reduction from each state’s current FY 2014 and FY 2015 allotments.

It is possible that a hospital may not be considered to have a high level of uncompensated care even though it provides a higher percentage of services to Medicaid and uninsured individuals and has greater total qualifying compensated care costs than other hospitals that qualify as having a high level of uncompensated care. It is important to note that CMS is proposing to modify DSH reporting requirements to collect total hospital cost from Medicare cost report data for all DSH hospitals. Since this data is unavailable to CMS at this time, the Agency is seeking comments on alternatives to the use of total uncompensated care costs. CMS is also seeking stakeholder input about how the weighting factors should be assigned.

In the three decades since the Medicaid DSH program was first established, Medicaid Disproportionate Share Hospital funding has attracted a great deal of Congressional attention. While the proposed rule is expected to be adopted, Members of Congress — with input from constituent hospitals and state Medicaid programs — will question the decision to implement deep cuts to hospitals before the healthcare expansion has had a chance to take effect.