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Volume XIII, Number 35

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February 01, 2023

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Hospital Reimbursement Opportunity Remains After CMS Decides Not to Finalize DSH Payment Calculations Changes

On December 17, 2021, the Centers for Medicare & Medicaid Services (CMS) released the fiscal year (FY) 2022 inpatient prospective payment system (IPPS) final rule. In light of the significant volume of comments, CMS declined to adopt any modifications to the current disproportionate share hospital (DSH) payment regulations. In the FY 2022 IPPS proposed rule and in response to several recent court cases, CMS had proposed modifications to its regulations that would explicitly exclude Medicaid patient days associated with state section 1115 waiver programs from the Medicare DSH payment calculation. This change, in effect, would reduce the number of patient days that are utilized in the DSH payment calculation. CMS’s decision not to finalize the changes to its current regulations may open the door for hospitals to include patient days associated with approved state Medicaid section 1115 waiver programs on their Medicare cost reports. This in turn may qualify hospitals for a DSH payment adjustment or increase a hospital’s Medicare DSH payment adjustment.



Hospitals that serve a disproportionate number of low-income patients are eligible for increased Medicare reimbursement. There are several methods by which a hospital may qualify for the Medicare DSH adjustment. The most common method for a hospital to qualify for a DSH adjustment is through a complex statutory formula that is based on the hospital’s disproportionate patient percentage, calculated using two separate fractions: the Medicare fraction and the Medicaid fraction.

The DSH Medicaid fraction is calculated by dividing the hospital’s patient days furnished to patients eligible for Medicaid but not entitled to Medicare Part A by the total number of patient days in the same period. For purposes of the Medicaid DSH fraction calculation, the patient must be “eligible for inpatient hospital services” under either an approved state Medicaid plan or under a section 1115 waiver.

States may choose to extend medical coverage benefits to populations that are not eligible for medical assistance under the state’s Medicaid plan through section 1115(a) demonstration projects (referred to as section 1115 waivers). In the past several years, states have used section 1115 waivers to establish uncompensated care pools that provide funding to hospitals to offset the burden of treating uninsured patients. The uncompensated care pools do not provide inpatient health coverage directly to patients, but rather provide funding directly to hospitals to compensate the providers for furnishing care to uninsured and underinsured patients. Similarly, CMS has approved other section 1115 waivers that enable states to provide premium assistance to individuals that can be used to purchase private health insurance.


CMS has historically taken the position that it is authorized by statute to include patient days associated with patients who receive benefits through a section 1115 demonstration project that are comparable to traditional Medicaid benefits. Accordingly, CMS interpreted its regulations to prevent hospitals from including patient days associated with section 1115 waivers in their Medicaid fraction for DSH payment purposes unless the section 1115 waiver authorizes health coverage that is comparable to an approved state Medicaid plan that furnishes inpatient hospital services coverage to patients on a particular day.

In several recent court cases, hospitals have challenged CMS’s interpretation of its regulations for the DSH payment calculation. CMS is authorized by statute to include patient days of patients who are eligible to receive benefits under a section 1115 waiver by the Social Security Act. In several recent cases, courts have ruled that hospitals are permitted by the clear language of the regulation, which specifies only that the patients must be eligible for “inpatient hospital services,” to include patient days associated with section 1115 waivers in the Medicaid fraction for purposes of the DSH payment adjustment. Recent court cases have extended this reasoning to encompass section 1115 waivers that provide for both (1) uncompensated care pools that provide compensation to providers for under- or uninsured patients, and (2) premium assistance for individuals who are not eligible for either Medicare or Medicaid.

In Forrest General Hospital v. Azar, the US Court of Appeals for the Fifth Circuit held that Mississippi hospitals were entitled to include in the Medicaid fraction for DSH calculation purposes patient days associated with inpatient services furnished to Hurricane Katrina evacuees and reimbursed through an uncompensated care pool authorized under an approved section 1115 waiver. Forrest General Hospital v. Azar, 926 F.3d 221 (5th Cir. 2019). Similarly, in Bethesda Health v. Azar, the US Court of Appeals for the District of Columbia Circuit agreed with the Fifth Circuit’s reasoning and concluded that hospitals that received reimbursement for days of care from Florida’s section 1115 waiver (a low income pool that reimbursed providers for care provided to uninsured and underinsured patients) were permitted to include the patient days in the hospitals’ Medicaid fraction. Bethesda Health v. Azar, 980 F.3d 121, 123 (D.C. Cir. 2020). Finally, the court held in HealthAlliance Hospitals, Inc. v. Azar that Massachusetts hospitals were entitled to include patient days associated with patients who received health insurance premium assistance through a Massachusetts program partially funded by the federal government through a section 1115 waiver in the DSH payment calculation.

In light of these rulings, CMS proposed to revise the regulatory language to clarify that only section 1115 waiver days associated with inpatient hospital insurance coverage benefits furnished directly to patients may be included in hospitals’ Medicaid fraction for purposes of the Medicare DSH payment adjustment. The proposed regulatory language, included in the IPPS proposed rule, would have clarified that patients are deemed eligible for Medicaid, for purposes of the DSH calculation, only if the patient is eligible for inpatient hospital services under a state Medicaid program that either includes coverage for inpatient hospital care on that patient day or directly receives inpatient hospital insurance on that patient day under a section 1115 waiver.

CMS ultimately declined to finalize the proposed changes to the DSH payment calculation related to the Medicaid fraction. CMS indicated that its decision was due to the volume of comments received on the subject, and that CMS will revisit the issue of how to count section 1115 waiver days in future rulemaking. CMS also invited stakeholders to submit comments on the proposed changes.

Practical Implications

Because of the recent litigation and CMS’s decision not to modify the current regulatory language, hospitals that receive reimbursement for under- or uninsured patients through state Medicaid demonstration projects authorized under section 1115 waivers may be permitted by the current regulation to include patient days associated with these programs on the hospital’s Medicare cost report. Inclusion of these patient days will improve hospitals’ DSH percentage. Because a hospital’s DSH eligibility has implications for 340B program eligibility, this may be an important consideration. Inclusion of additional patient days in the Medicaid fraction also may ultimately improve a hospital’s Medicare DSH payment adjustment.

© 2023 McDermott Will & EmeryNational Law Review, Volume XI, Number 364

About this Author

Emily J. Cook, McDermott Will Emery Law Firm, Health Care Attorney

Emily J. Cook is an associate in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Los Angeles office.  She focuses her practice on Medicare provider certification, reimbursement and regulatory compliance.

Caroline Reignley Healthcare Attorney McDermott Will & Emery Washington, DC

Caroline Reignley provides valuable counsel on healthcare regulatory and reimbursement law to her clients, including for-profit and nonprofit hospitals, health systems and physician groups.

She is particularly focused on advising clients on Medicare and Medicaid fee-for-service reimbursement, billing and coding, licensure, accreditation and healthcare compliance matters.

Caroline also advises on internal and government investigations related to the False Claims Act, Stark Law and Anti-Kickback Statue. Her experience...