Since 1986, the Medicare program has made higher payments to hospitals that treat large numbers of low-income patients. The hospitals receiving the payments are classified as part of the Disproportionate Share Hospital (DSH) program. Eligibility for the DSH payments is determined by a series of complex formulas that consider the ratio of Medicaid patient days to total patient days and the ratio of patient days for Medicare beneficiaries receiving Supplemental Security Income (SSI) to total Medicare patient days.
The DSH payments were originally intended to compensate the hospitals for what was believed to be the higher cost associated with treating low-income patients. In the years since, the DSH payments have become a way to reimburse hospitals for costs related to uncompensated care. In its March 2007 report to Congress, the Medicare Payment Advisory Commission (MedPAC) suggested that DSH payments should not be seen as a mechanism for funding uncompensated care and that costs associated with uncompensated care have little relationship to the cost of treating Medicare patients.
Congress incorporated MedPAC’s findings into both the House and Senate Finance Committee health care reform proposals. In addition, the outcome of two federal district court cases in New Jersey and Washington state suggest that hospitals should be prepared for closer scrutiny of their eligibility and possible reductions in DSH payments.
Health Reform Proposals
The Senate Finance Committee bill would require the Centers for Medicare & Medicaid Services (CMS) to reduce DSH payments beginning in 2015, and create a separate payment to reflect hospitals’ costs related to uncompensated care. Aggregate DSH payments would be reduced to 25 percent of current levels, the amount that the MedPAC report indicated was the actual amount of DSH payments that related to costs associated with care of low-income patients. The remaining 75 percent of the current DSH expenditures would be redirected to a new uncompensated care fund, which would then be allocated to hospitals as a new supplemental payment for providing uncompensated care. However, the amount of funds available in the uncompensated care fund would be reduced each year to correspond with the percentage reduction in the rate of uninsured individuals. The result of this plan would be to reallocate the DSH funds from hospitals with high rates of low-income patients to those with high rates of uncompensated care. In addition, the total amount of funds available for Medicare DSH payments would decrease as the rates of insurance coverage increases.
The current version of the House health care reform bill takes a less dramatic approach. Unlike the Senate Finance Committee bill, the House would not necessarily require that CMS make revisions to the current DSH system. Rather, the House bill directs the Secretary of Health and Human Services to conduct a study of the impact of health reform on Medicare DSH and submit a report to Congress. Only if the report shows that the rate of uninsurance drops at least 8 percent between 2012 and 2014 would CMS be required to adjust the DSH payments in a manner similar to that proposed by the Senate Finance Committee.
Cooper University Hospital v. Sebelius
In a September 28, 2009, opinion, the U.S. District Court for the District of New Jersey sided with the CMS Administrator in limiting the types of low-income patients that a hospital can count toward the eligibility requirements for DSH payments. Hospitals in New Jersey cannot refuse to treat a patient based on the patient’s ability to pay. The state compensates hospitals for costs associated with treating low-income patients through its Health Care Subsidy Fund. The Fund is supported, in part, by state Medicaid funds. Although the federal Provider Reimbursement Review Board (PRRB) determined that the hospital could include fund-supported patient care days in the total Medicaid days for its DSH calculation, the CMS Administrator did not agree.
On appeal, the federal district court held that even if the fund-supported patients were considered Medicaid beneficiaries under New Jersey’s approved Medicaid State Plan, they were not Medicaid patients for purposes of Medicare DSH payments. Only those Medicaid patients that meet the eligibility criteria under Title XIX could be appropriately considered Medicaid patients by the Medicare DSH program.
University of Washington Medical Center v. Sebelius
Two days after the New Jersey decision, the U.S. District Court for the Western District of Washington reached a similar conclusion. After their Fiscal Intermediary (FI) refused to count patients eligible for Medicaid under Washington’s Medicaid state plan when calculating Medicare DSH payments, a group of 18 Washington hospitals appealed to the PRRB. As in the New Jersey case, the PRRB sided with the hospitals but the CMS Administrator did not. Using the same reasoning as the New Jersey court, the Washington court held that only those patients who are eligible for Medicaid under Title XIX are counted in determining the total Medicaid days for purposes of Medicare DSH.
As the court in the New Jersey case noted, the outcome in this case is likely to result in millions of dollars less in Medicare payments to the hospital. The Washington hospitals estimated that the inability to count patients eligible for Medicaid under the state plan when determining DSH payments resulted in $31 million in lost reimbursement.
In light of these two cases, other hospitals in states with similar Medicaid-funded charity care and eligibility expansion programs are likely to see increased scrutiny and possible loss of DSH payments.