Appeals court revives changes to Medicaid DSH payment rules

A federal appeals court on Aug. 13 overturned a ruling that rolled back a rule adopted by HHS that changed how Medicaid payments to hospitals that serve large numbers of low-income patients are calculated.

Federal law requires state Medicaid programs to make Disproportionate Share Hospital payments to hospitals that serve large Medicaid and uninsured populations. Under the hospital-specific DSH limit, federal financial participation is limited to the amount a hospital spends to care for people who are either eligible for Medicaid or are uninsured, according to Courthouse News Service.

In a FAQ document issued in 2010, CMS said the DSH payments cap formula should also subtract third-party payments, such as payments from private insurers and Medicare. CMS formalized the position in a rule issued in 2017.

A group of children's hospitals filed a lawsuit claiming CMS overstepped its authority. A federal judge ruled in favor of the hospitals, finding that the rule is inconsistent with the plain language of the Medicaid Act.

CMS appealed the ruling, and the U.S. District Court of Appeals for the D.C. Circuit overturned the lower court's ruling. In an opinion filed Aug. 13, U.S. Circuit Judge Karen LeCraft Henderson wrote that the rule does not violate the intent of the Medicaid Act, according to Courthouse News Service.

"By requiring the inclusion of payments by Medicare and private insurers, the 2017 rule ensures that DSH payments will go to hospitals that have been compensated least and are thus most in need," Ms. Henderson wrote on behalf of a three-judge panel.

After the opinion was issued, the Children's Hospital Association of Texas, the lead plaintiff in the case, said it was exploring its options.

"We are disappointed with the result because it will reduce critical Medicaid funding to safety net providers like children's hospitals," Stacy Wilson, president of the Children's Hospital Association of Texas, said in a statement to Courthouse News Service. "These hospitals are heavily reliant on Medicaid payments because between 50 percent and 80 percent of their inpatient days are covered by Medicaid."

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