Federal appeals court limits hospitals’ DSH funding

Hospitals that care for a large share of Medicaid, low-income and uninsured patients stand to receive less funding from the federal government after the D.C. Circuit reconsidered how Medicaid disproportionate-share hospital reimbursement is calculated.

The three-judge panel reversed a lower court and reinstated a 2017 rule establishing that payments by Medicare and private insurers are to be included in calculating a hospital’s DSH limit, ultimately lowering their maximum reimbursement.

In Tuesday’s ruling, U.S. Circuit Judge Karen LeCraft Henderson opined that the rule aligns with the intent of the Medicaid Act.

“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,” Henderson wrote.

The case, brought by four children’s hospitals in Minnesota, Virginia and Washington and an association representing eight children’s hospitals in Texas, concerns the calculation of the uncompensated costs of treating Medicaid beneficiaries known as the “Medicaid shortfall.”

For instance, if a hospital spends $1 million on treating Medicaid patients who have no other healthcare coverage and Medicaid pays $600,000, then the Medicaid shortfall is $400,000. In some instances, Medicaid patients have additional third-party coverage such as Medicare or private insurance.

Hospitals cannot receive more money in Medicaid DSH payments than they spent to treat Medicaid beneficiaries or the uninsured. Part of the motivation behind that stipulation was to prevent hospitals from double dipping by collecting DSH payments to cover costs that had already been reimbursed. Previous cases also revealed that some states have made DSH payments to state psychiatric or university hospitals that exceed the net costs, or even total costs, of operating the facilities.

A federal judge sided with the hospitals that claimed the CMS overstepped its authority, and essentially ignored payments by commercial insurers and Medicare.

The Children’s Hospital Association of Texas said in a statement that it is exploring its options.

“We are disappointed with the result because it will reduce critical Medicaid funding to safety net providers like children’s hospitals,” the association said. “These hospitals are heavily reliant on Medicaid payments because between 50% and 80% of their inpatient days are covered by Medicaid. Children’s hospitals care for all children, and are, in fact, often the only place that children with complex conditions can get life-saving care. “

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