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Hospital Court Victories Cause CMS to Walk-Back Rule Lowering Caps on Medicaid DSH Payments

The Centers for Medicare and Medicaid Services (CMS) has withdrawn a controversial policy, first introduced in 2010, which changes how much a Medicaid disproportionate share hospital (DSH) may receive annually in supplemental DSH payments. CMS took this action in response to several court rulings invalidating the agency’s policy. Despite the agency’s walk-back of its policy, hospitals should review their historical Medicaid DSH payments to ensure that they were calculated correctly.

Medicaid DSH payment caps

Congress established the Medicaid DSH program to help relieve the financial burden on hospitals that treat a disproportionate share of low-income Medicaid and uninsured patients. The Medicaid statute caps a hospital’s annual DSH payments at the amount of the hospital’s annual uncompensated care costs. The statute specifically defines uncompensated care costs as the total costs of providing treatment to Medicaid or uninsured patients minus the total Medicaid payments (or payments from the uninsured patients) received.

CMS’s revised Medicaid payment cap policy places hospitals at risk

CMS adopted a policy that broadens the definition of what payments must be subtracted from the sum of uncompensated care costs. Specifically, in addition to the two categories of payments the statute identifies, CMS’s revised policy also requires subtracting any payments received on behalf of Medicaid patients from third-party sources—these would include payments from Medicare (some patients are dually eligible) or from insurers. CMS’s policy has the direct effect of reducing a hospital’s annual Medicaid DSH payment cap to the extent of any such third-party payments.

CMS had originally introduced this Medicaid DSH policy in 2010, by way of answers to hypothetical Frequently Asked Questions (FAQs) (specifically, “FAQs 33 & 34”) on its website. In 2017, HHS formally adopted the same policy through an amendment to its regulations. The impact of CMS’s policy is that numerous hospitals’ Medicaid DSH payment limits have potentially been subject to being significantly reduced (in some cases in the amount of $10 million or more), thus placing hospitals at risk for demands for recoupment by state Medicaid agencies.

Hospital litigation defeats CMS’s policy

Hospitals and hospital associations throughout the country have filed several lawsuits challenging the legality of CMS’s policy. See, e.g.New Hampshire Hosp. Ass’n v. Azar, 887 F.3d 62 (1st Cir. Apr. 4, 2018); Tenn. Hosp. Ass’n v. Azar, 908 F.3d 1029 (6th Cir. Nov. 14, 2018); Children’s Health Care v. Price, 900 F.3d 1022 (8th Cir. Aug. 20, 2018); Children’s Hosp. of the King’s Daughters, Inc. v. Azar, 896 F.3d 615 (4th Cir. July 23, 2018). Several courts, starting with the U.S. District Court for the District of Columbia, have enjoined HHS from enforcing the policy. Seee.g., Tex. Children’s Hosp. v. Burwell, 76 F. Supp. 3d 224 (D.D.C. 2014). The Texas Children’s Hospital case is currently on appeal before the D.C. Circuit. No. 18-5135 (D.C. Cir. May 9, 2018).

CMS capitulates and withdraws policy

As of December 30, 2018—and expressly “in light of [the] recent appellate court decisions”—CMS has withdrawn the policy set forth in FAQs 33 & 34. Furthermore, CMS will accept revised Medicaid DSH-limit calculations covering services prior to June 2, 2017 (which is when CMS’s regulation went into effect). Those revisions will take the form of revised audits by states of prior annual DSH payments. Lastly, and importantly, CMS stated it “will not be enforcing” its 2017 amended regulation, covering services provided after June 2, 2017, as long at the Texas Children’s Hospital“decision remains operative in its current form.”

Practical tip

Medicaid DSH hospitals should proactively determine whether, as a result of CMS’s now-withdrawn policy on counting third-party payments, they have either received a demand for recoupment and/or repaid any alleged overpayments. If so, hospitals should contact counsel to assist with protecting their rights, including taking steps necessary to remedy any invalid claim for recoupment.

© Copyright 2019 Squire Patton Boggs (US) LLP


About this Author

Mimi H. Brouillette, Medicare coverage, Squire PB, regulatory attorney
Senior Associate

Mimi Brouillette has broad experience in various healthcare and finance related issues. She routinely represents clients in Medicare and Medicaid coverage and reimbursement litigation in agency appeals and in federal courts. She also advises hospitals and other healthcare organizations in operational, regulatory and transactional matters.

Mimi is a native Mandarin speaker and assists with negotiations and development of projects with Chinese and other international clients, with a focus on healthcare.

Michi Tsuda, Hospital Advisory Attorney, Health maintenance, Squire Patton Boggs
Senior Associate

Michi Tsuda focuses his practice on advising hospitals, physician groups, health maintenance organizations, management services organizations, private-equity funds, sovereign governments and health-related joint ventures in operational, regulatory, transactional and litigation matters.

He has represented clients in connection with a broad range of corporate, governance, reimbursement, fraud and abuse, and other regulatory compliance matters.

Sven Collins, Squire PB, Healthcare attorney

Sven Collins focuses his practice on Medicare and Medicaid reimbursement litigation, as well as on litigation and risk-management guidance in areas of employment and labor, trade secrets, unfair competition and other commercial disputes.

Sven litigates and tries cases before courts, arbitrators and government agencies and  regularly represents hospitals and healthcare providers in innovative reimbursement appeals seeking additional payment under Medicare.  

He also counsels and represents employers in disputes in a variety of employment and labor-related...