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CMS Rule Addresses Medicare DSH Payment Calculation

In a proposed rule, the Centers for Medicare & Medicaid Services (CMS) announced that Medicare Part C enrollee days, otherwise known as Medicare Advantage (MA) days, would be included in the calculation of the Medicare fraction used to determine Medicare disproportionate share hospital (DSH) payments for years prior to fiscal year (FY) 2014. Because CMS is reaffirming its standing policy through retroactive rulemaking, its decision will not change what hospitals have already been paid for years prior to FY 2014. Counting MA days in the calculation substantially reduces Medicare DSH payments for hospitals in the aggregate, since fewer MA beneficiaries tend to be dually eligible for Medicaid compared with Medicare fee-for-service beneficiaries.

The controversy about CMS’ Medicare DSH policy began with the FY 2004 Inpatient Prospective Payment System (IPPS) proposed rule, through which CMS proposed to codify its existing policy of excluding MA days from the Medicare fraction. CMS did not finalize this proposal in the FY 2004 IPPS final rule but instead reversed its stance in the following year’s FY 2005 IPPS final rule by deciding to include MA days in the Medicare fraction. Following the FY 2005 IPPS final rule, hospitals challenged this policy in a series of lawsuits, which eventually resulted in the policy being vacated on grounds that the final rule policy differed too substantially from the proposed rule and thus violated the Administrative Procedure Act. Although the policy was vacated, due to the timeline of the cases and technical details of the court’s decision, CMS has continued to include MA days. Following the decision vacating its FY 2005 IPPS final rule, CMS re-instituted the same policy of including MA days prospectively for FY 2014 onward through the FY 2014 IPPS final rule, this time being sure to follow appropriate notice-and-comment rulemaking procedures to avoid the procedural deficiencies of its FY 2005 IPPS rule. The FY 2014 IPPS final rule policy is under separate litigation at this time.

After finalizing the FY 2014 policy, CMS posted the Medicare DSH percentages for FY 2012, using the Medicare fractions counting MA days, on its website (due to data lag, the final DSH percentages are calculated retrospectively). Given that courts already invalidated the FY 2005 policy, hospitals brought suit against CMS for its FY 2012 policy, and this case made its way to the Supreme Court. The new proposed rule for 2020 comes after the Supreme Court’s 2019 ruling in that case that CMS acted unlawfully when deciding to count MA days in the Medicare calculation for FY 2012 without providing notice and opportunity for public comment.

After the Supreme Court’s decision, hospitals hoped CMS would comply with invalidation of the FY 2005 rule by reversing its position on DSH calculations for FY 2012 and instead issue revised notices of program reimbursement with new DSH amounts based on exclusion of MA days from the Medicare fraction of the DSH calculation. Instead, CMS interpreted the Supreme Court’s instructions to go through rulemaking by adopting a retroactive proposed rule re-instituting its previously invalidated policy for all years from 2005 to 2013. This does not have any practical effect on hospital payments, since CMS has stayed the course in its position of including MA days for 2005 to 2013. CMS is accepting comments on the proposed rule until Oct. 5.

Contact Senior Director of Policy Erin O’Malley at or 202.585.0127 with questions.


About the Author

Abigail Painchaud is a policy associate at America's Essential Hospitals.

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