August 16, 2019

A federal appeals court on Tuesday reversed a lower court's ruling and reinstated a 2017 rule that changed how CMS calculates Medicaid disproportionate-share hospital (DSH) payments to ensure providers are not doubly compensated for care costs covered by third-party insurers.

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Background

CMS in April 2017 issued a final rule clarifying how the agency takes third-party payments into account when calculating DSH payments. The agency in the final rule said it would deduct payments from Medicare and private insurers from DSH payments. CMS had said the policy would ensure DSH payments do not "double pay" hospitals "for costs that have already been compensated" by Medicare or private payers.

Hospitals across the country filed lawsuits to halt the final the rule, arguing that the rule could cause some hospitals to lose millions of dollars in DSH payments.

The Children's Hospital Association of Texas and four children's hospitals in Minnesota, Virginia, and Washington filed one of those suits. A federal district court judge in March 2018 sided with the Texas association and children's hospitals, citing statutory language that the judge said explicitly states DSH calculations could account for Medicaid payments and payments by the uninsured, but does not mention third-party payments.

Appeals court ruling

On Tuesday, the U.S. Court of Appeals for the District of Columbia Circuit reversed the lower court's opinion.

In the appeals court ruling, Circuit Judge Karen LeCraft Henderson disagreed with the lower court's interpretation of the existing statute. "Although the statute establishes that payments by Medicaid and the uninsured must be considered, it nowhere states that those are the only payments that may be considered," she wrote.

The appeals court also disagreed with hospitals' arguments that CMS did not provide an adequate reasoning for the changes. Henderson wrote, "CMS explained why the statute's purposes are better fulfilled by a policy that requires consideration of payments by Medicare and private insurers."

What the ruling means

According to CQ News, many of the other lawsuits filed against the final rule were placed on hold pending the D.C. Circuit Court's ruling. However, there are two similar appeals pending before appeals courts in the 5th and 8th circuit courts. As a result of the D.C. Circuit Court's ruling, CQ News reports that the payment rules are likely to go into effect everywhere except in Mississippi and Missouri, where those other two cases originated.

According to CQ News, the plaintiffs could appeal the decision to the Supreme Court, and if the pending appeals result in conflicting decisions the Supreme Court may be likely to hear the case.

Reaction

Children's Hospital Association of Texas President Stacy Wilson said the association is considering next steps. "We are disappointed with the result because it will reduce critical Medicaid funding to safety net providers like children's hospitals." She added, "These hospitals are heavily reliant on Medicaid payments because between 50% and 80% of their inpatient days are covered by Medicaid."

Eva Johnson, a senior adviser at Eyman Associates, who is advising plaintiffs in the Missouri suit, warned that the change places some children's hospitals at risk of losing all of their Medicaid DSH payments to offset uncompensated care costs (Kacik, "Transformation Hub," Modern Healthcare, 8/14; Stein, Insider Health Policy, 8/13 [subscription required]; Siddons, CQ News, 8/13 [subscription required]).

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