The U.S. District Court for the District of Columbia recently vacated a Centers for Medicare and Medicaid Services (CMS) final rule. That rule would have limited hospitals’ Medicaid disproportionate share hospital (DSH) payments based on Medicare or private insurer payments they received. This decision follows a Missouri court that likewise found CMS exceeded its Medicaid Act authority.

The DSH payment system requires states to account for hospitals serving a disproportionate number of low-income Medicaid patients. Funding adjustments exist for hospitals with Medicaid inpatient utilization rates at least one standard deviation above the mean rate in their state, or with rates over 25%.

In 2010, CMS published on its website two frequently asked questions regarding auditing and reporting requirements. They indicated that states needed to subtract payments hospitals received from Medicare (for “dual-eligibles”) or private health insurers from costs incurred providing hospital services to Medicaid patients.

This would effectively reduce hospitals’ DSH payments. CMS contended that its rule would help to more accurately reflect hospitals’ Medicaid costs.

But the FAQ requirements, imposed by CMS without notice, sparked legal challenges from hospitals faced with possibly having to repay Medicaid millions of dollars. Six district courts found the requirements violated the Administrative Procedure Act (APA), which governs how federal agencies may establish regulations.

Responding to those district court opinions, CMS issued a final rule in April 2017 essentially restating the FAQ information. Hospitals again sued, arguing the payment calculations still violated the Medicaid Act and the APA.

Ultimately, the D.C. District Court agreed with the hospitals, stating that the DSH statute nowhere mentions subtracting third-party payments “from the ‘cost’ side of the equation.” CMS’s final rule was vacated because the agency had, according to the court, acted outside the scope of its authority.
 

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