Hospitals will soon see federal regulators take a new approach to calculating their Medicaid DSH payments.

Specifically, their Medicaid disproportionate share hospital-specific payment limit.

And this change could affect many community safety-net hospitals.

A new CMS regulation changes how third-party payments are factored into the calculation of hospitals’ Medicaid disproportionate share hospital-specific payment limit.  That limit, in turn, affects hospitals’ Medicaid DSH payments.

This final rule implements changes CMS proposed last year to comply with a congressional mandate to include in the calculation of hospitals’ Medicaid disproportionate share hospital-specific payment limits only costs and payments for services furnished to beneficiaries for whom Medicaid is the primary payer; this means excluding costs and payments for services provided to Medicaid beneficiaries with other sources of coverage.

Under this rule’s exclusion of dual-eligible costs and payments, most hospitals will see their Medicaid DSH hospital-specific payment limit reduced because most individuals with Medicaid as a secondary payer have Medicare as the primary payer and Medicare typically pays less than cost for dually eligible patients.  For the minority of hospitals that have a high proportion of private-pay dually eligible patients, the change will likely result in an increase of the hospital’s Medicaid DSH payment limit.

Under the revised calculation, hospitals at or near their caps will see their Medicaid DSH payments decrease because of that loss of DSH room.  States, in turn, will recoup any payments made in excess of the hospitals’ DSH limit.  Other DSH hospitals with room remaining even after the implementation of the new policy could see their payments increase modestly.

There is an exception to this policy for hospitals in the 97th percentile of all hospitals based on inpatient days for patients who were entitled to Medicare Part A benefits and to supplemental security income (SSI) benefits.  Their DSH limit will not be reduced.  Some community safety-net hospitals could be spared DSH cuts under this exception.

This change will be implemented for state Medicaid years beginning on or after October 1, 2021.

Learn more from this CMS regulatory notice, which offers a detailed explanation of the new policy and includes a link to final, official version of the regulation as published in the Federal Register.