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Appeals Court Reinstates Medicaid Third-Party Payer Final Rule

The United States Court of Appeals for the District of Columbia Circuit (D.C. Circuit) issued a decision in Children’s Hospital Association of Texas (CHAT) v. Azar with potentially far-reaching implications for Medicaid disproportionate share hospital (DSH) payments.

The Aug. 13 ruling reinstates a 2017 final rule issued by the Centers for Medicare & Medicaid Services (CMS), which required that Medicaid DSH audits account for payments from Medicare and commercial payers when calculating the hospital-specific DSH limit. The rule was set to take effect June 2, 2017. However, a lower court in 2018 sided with the plaintiff hospitals, concluding that the 2017 final rule conflicted with the federal Medicaid statute. That ruling invalidated enforcement of the rule nationwide.

In its Aug. 13 decision, the D.C. Circuit reversed the lower court ruling, finding the 2017 final rule consistent with both the federal statute and the purpose of the Medicaid DSH program. As a result, the D.C. Circuit reinstated the 2017 final rule, allowing the third-party payer DSH policy to take effect as of 2017 in most states across the country.

Two other district court decisions invalidating the 2017 final rule — in Mississippi and Missouri — remain in effect. Appeals in these cases in the Fifth and Eighth Circuit Courts, respectively, are still pending.

The CHAT plaintiffs have 45 days from the date of decision to request a rehearing or a rehearing en banc (before the entire D.C. Circuit judge panel), which could delay the implementation of the 2017 final rule.

Importantly, the CHAT decision does not impact a series of legal victories won by hospitals challenging CMS’ third-party payer policy prior to 2017, which CMS implemented through a set of informal frequently asked questions (FAQs) in 2010. CMS since has formally withdrawn the FAQs, so the CHAT decision affects only DSH payments made in 2017 and in subsequent years.

Contact Senior Director of Policy Erin O’Malley at eomalley@essentialhospitals.org or 202.585.0127 with questions.

This article was prepared for America’s Essential Hospitals by Eyman Associates and does not constitute legal advice.

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About the Author

Gontscharow is a senior policy analyst for America's Essential Hospitals.

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