CMS has proposed regulatory changes to specify that the hospital-specific limitation on Medicaid disproportionate share hospital (DSH) payments is based on uncompensated care costs net of third-party payments received. Under the proposed rule – which is intended to align with CMS’s existing interpretation – a hospital’s uncompensated care costs would not include care provided to Medicaid-eligible individuals for which the hospital received third party payments, such as payments from Medicare or private insurance. Therefore the hospital-specific limit calculation would reflect only the costs for Medicaid eligible individuals for which the hospital has not received payment from any source (other than state or local governmental payments for indigent patients).

CMS notes that at least one court has questioned whether it is a permissible interpretation of the statute to take third party payments into account when calculating Medicaid uncompensated care costs. CMS believes that its interpretation (that is, all third party payments should be taken into account) “better reflects the real economic burden of hospitals that treat a disproportionate share of low-income patients” and conforms to the statute. In light of the court’s opinion, however, CMS requests comments on this issue.  Because CMS does not consider the proposed rule to be a change in policy, it does not anticipate that the regulation would have significant financial effects on state Medicaid programs or providers.

CMS will accept comments on the proposed rule until September 14, 2016.