On February 28, 2023, the Centers for Medicare and Medicaid Services (CMS) released a proposed rule that would change how Medicare disproportionate share hospital (DSH) payments are calculated with respect to the counting of days associated with Section 1115 demonstrations in the Medicaid fraction of the DSH calculation. This proposed rule is a follow-up to the FY 2022 and FY 2023 Inpatient Prospective Payment System (IPPS) proposed rules, which initially included similar proposed revisions to the treatment of certain Section 1115 waiver days for purposes of the Medicare DSH adjustment.

The proposed change would effectively reduce the number of patient days that are utilized in the DSH payment calculation. CMS previously proposed similar modifications to regulations related to the calculation of the Medicare DSH adjustment in response to a series of court cases that interpreted the current regulatory language as requiring CMS to count patient days associated with CMS-approved Section 1115 demonstration projects for uncompensated care pools and patient premium assistance programs in the Medicaid DSH calculation. This interpretation has essentially permitted hospitals in certain states, pursuant to these court rulings, to count patient days associated with approved Section 1115 waiver programs on the hospital’s cost reports for purposes of the Medicare DSH adjustment.

Under the most recent proposal, CMS would define patients who are “regarded as eligible” for Medicaid to include only certain patients who receive health insurance or premium assistance that meets certain additional requirements under a Section 1115 waiver. For purposes of the Medicare DSH calculations, CMS proposes to include in the fraction only those patients who receive health insurance or buy health insurance with premium assistance provided under a Section 1115 demonstration where states receive matching funds for such programs. The patient days proposed to be included in the Medicaid fraction numerator would include only patient days associated with patients covered under a Section 1115 demonstration who receive health insurance that covers inpatient hospital services or receive premium assistance that covers 100% of the patient’s premium cost that includes coverage for inpatient services. This is a change from the most recent CMS proposal in the IPPS FY 2023 proposed rule, which would have permitted the inclusion of patient days associated with patients who receive premium assistance covering 90% of the patient’s premium cost.

CMS also proposes to clarify its interpretation that patient days associated with care funded through a Section 1115 demonstration uncompensated care pool are not viewed as patient days for patients who are “regarded as” Medicaid-eligible. Therefore, hospitals in Florida, Kansas, Massachusetts, New Mexico, Tennessee and Texas would no longer be permitted to report patient days in the DSH calculation associated with payments from these states’ Section 1115 demonstration projects for uncompensated or undercompensated care pools. CMS estimates that this change would result in a decrease of approximately $345 million in DSH funding across these states.

Based on the proposed rule language, CMS appears to be sending a signal to states that have not expanded Medicaid. This proposal would negatively impact hospitals in non-expansion states that utilize uncompensated care pools and premium assistance programs through 1115 waivers. In addition to decreasing the amounts paid by Medicare to these hospitals, the proposed change in counting patient days could cause hospitals that participate in the 340B Program to lose their program eligibility because of the decreased DSH adjustment percentage. Some hospitals in affected states also would face a decrease in DSH adjustments, which likely would have negative financial implications on these facilities.

This proposal, if finalized, would limit the types of Section 1115 waiver days that can be included in the Medicaid fraction of the DSH adjustment. CMS proposes that the regulation would be effective for patient discharges occurring on or after October 1, 2023. Comments on the proposed rule are due May 1, 2023.