News & Insights


February 27, 2023

Health Headlines – February 27, 2023


CMS Proposes for the Third Time to Exclude Section 1115 Uncompensated Care Pool Days from Medicare DSH

On February 24, 2023, CMS issued a proposed rule that would modify the Medicare Disproportionate Share Hospital (DSH) payment regulation to limit the universe of Section 1115 demonstration beneficiaries who can be “regarded as” eligible for Medicaid (the Proposed Rule). The revised regulation would state that patients not otherwise eligible for Medicaid will not be regarded as Medicaid-eligible—meaning their days will not be counted in the Medicaid fraction—if the cost of their care is covered by an uncompensated care (UC) pool authorized by a Section 1115 demonstration waiver. Section 1115 demonstration beneficiaries will be regarded as eligible for Medicaid only if they receive from the waiver (1) a health insurance product that covers inpatient hospital services, or (2) premium assistance that covers 100 percent of premium costs for such a product. If CMS finalizes its proposal, hospitals in states with Section 1115 UC payment pools (including Florida, Texas, Tennessee, Kansas and California) will not be allowed to claim the patient days of patients covered by those pools beginning with patient discharges on October 1, 2023.

This proposal comes in the wake of the recent decisions of the United States Courts of Appeals for the D.C. and Fifth Circuits in Bethesda Health v. Azar and Forrest General v. Azar, respectively. Both decisions held that patients whose care is covered in whole or in part by a Section 1115 UC payment pool are regarded as Medicaid-eligible, and their days must be counted in the Medicaid fraction. King & Spalding represented the Florida Hospital Association and more than a dozen of its member hospitals in Bethesda Health.

CMS believes it can avoid liability for Section 1115 UC payment pool days in future years by changing the Medicare DSH regulation, citing its statutory discretion to decide whether to “regard” Section 1115 beneficiaries as “Medicaid eligible” even though they are not eligible for traditional Medicaid. CMS believes that Section 1115 beneficiaries should not be regarded as Medicaid eligible unless they receive a health insurance product from the waiver. Notwithstanding the courts’ findings in Bethesda Health and Forrest General, the agency believes that Section 1115 UC payment pools are not health insurance because they do not come with the promise that payment will be made on behalf of a specific patient. 

The Proposed Rule marks the third time since Bethesda Health and Forrest General that CMS has proposed to exclude Section 1115 UC payment pool days from the Medicaid fraction. CMS first proposed this change in the inpatient prospective payment system (IPPS) proposed rule for fiscal year (FY) 2022 and again in the IPPS proposed rule for FY 2023. Neither proposal was finalized. 

King & Spalding and other commenters to the prior proposals responded with skepticism to the agency’s purported authority to exclude Section 1115 UC payment pool days. Bethesda Health and Forrest General held that CMS exercised its statutory discretion to include Section 1115 UC payment pool days once it decided to approve the underlying waivers. Beyond that point, as the Fifth Circuit put it, there are “no take-backs.” CMS responds in the Proposed Rule that those cases merely interpreted the regulation—not the statute—to require CMS to include days associated with Section 1115 UC payment pools. 

Commenters to the prior proposals also disagreed with CMS’s rationale for not regarding Section 1115 UC payment pool beneficiaries as eligible for Medicaid. Commenters argued that there is no statutory support for distinguishing between Section 1115 waivers that directly provide coverage through health insurance and those that provide coverage through UC payment pools. As stated in Bethesda Health and Forrest General, patients are regarded as Medicaid eligible if they receive medical assistance under a waiver, regardless of the specific funding mechanism. In the Proposed Rule, CMS acknowledges but expresses its disagreement with those holdings. 

While the Proposed Rule is largely the same as the prior proposals, it is different in two respects. First, CMS is jettisoning the requirement, proposed in the 2023 IPPS proposed rule, that health insurance provided under a Section 1115 waiver must provide essential health benefits (EHB). Second, CMS is now proposing that premium assistance must cover 100 percent of the cost of insurance. This is a change from the 2023 IPPS proposed rule, which would have required premium assistance to cover 90 percent of the cost of insurance. 

A copy of the Proposed Rule is available here. Comments to the proposed rule will be due 60 days after it is published in the Federal Register. The Proposed Rule is currently scheduled to be published in the Federal Register on February 28, 2023. Comments are due by April 29, 2023. 

Reporters, Christopher Kenny, Washington D.C., +1 202 626 9253, ckenny@kslaw.comMark Polston, Washington D.C., +1 202 626 5540, mpolston@kslaw.comAlek Pivec, Washington D.C., +1 202 626 2914,

CMS Proposes Changes to Medicaid DSH Third-Party Payer Rule

On February 24, 2023, CMS issued a proposed rule updating its Medicaid Disproportionate Share Hospital (DSH) program regulations as a result of legislative changes made by the Consolidated Appropriations Act (CAA) of 2021. Specifically, the proposed rule implements the DSH-related provisions of the CAA concerning the treatment of third-party payments for purposes of calculating Medicaid hospital-specific DSH limits. Among other changes, the proposed rule strengthens the ability of CMS and state auditors to identify and recover Medicaid DSH overpayments. 

As background, the federal Medicaid statute requires states to make DSH payments to Medicaid-enrolled hospitals that serve patients who are uninsured as described in section 1923(d) of the Social Security Act (the Act). Section 1923 of the Act contains specific requirements related to DSH payments, including aggregate annual State-specific DSH allotments that limit Federal financial participation (FFP) for Statewide total DSH payments under section 1923(f) of the Act, and hospital-specific limits on DSH payments under section 1923(g) of the Act. Under the statutory hospital-specific limits, a hospital’s DSH payments may not exceed the costs incurred by that hospital in furnishing inpatient and outpatient hospital services during the year to certain Medicaid beneficiaries and the uninsured, less payments received for Medicaid eligible individuals. In addition, section 1923(a)(2)(D) of the Act requires States to provide an annual report to the Secretary describing the DSH payment adjustments made to each hospital.

In recent years, the Medicaid DSH program has seen several changes in the legal landscape, as well as changes in enforcement by CMS and state agencies. A major issue has been the calculation of the hospital-specific limit. Specifically, must hospitals report commercial insurance payments and Medicare payments for their so-called “dually eligible” patients (i.e., patients eligible for Medicaid and either Medicare or commercial insurance) as an offset to their uncompensated care costs for purposes of calculating the limit? This calculation is known as the “Medicaid shortfall,” and limits the amount a hospital can receive in Medicaid DSH payments.

For years, CMS sought to reduce hospitals’ overall DSH payments by including commercial insurance and Medicare payments in the hospital-specific limit for dual-eligible patients. Federal courts repeatedly blocked CMS’s attempts to enforce this policy both through formal rulemaking and informal policy guidance. While CMS’s informal policy guidance was withdrawn, CMS’s formal policy, adopted through rulemaking in a 2017 Final Rule, was initially vacated but then reinstated on appeal in Children’s Hosp. Ass’n of Texas v. Azar

Congress, however, ultimately had the last word with Section 203 of the CAA, which now only allows hospitals to include the costs of Medicaid-eligible (including waivers) patients for whom Medicaid is the primary payor. Hospitals in the 97th percentile of all hospitals with respect to inpatient days made up of patients who, for such days, were entitled to Medicare Part A benefits and to supplemental security income (SSI) benefits are excepted from this provision of the CAA and are entitled to a higher hospital-specific limit. 

CMS now proposes to revise the data elements identified in its regulations at 42 C.F.R.§ 447.299(c)(6), (7), (10), and (16) to reflect the statutory changes made by section 203 of the CAA to update the methodology for calculating the Medicaid shortfall portion (Medicaid costs less Medicaid payments) of the hospital-specific DSH limit. Under CMS’s proposal, the calculation will only include costs and payments for hospital services furnished to beneficiaries for whom Medicaid is the primary payer. CMS has also proposed to include the statutory exception for 97th percentile hospitals. 

CMS also proposes an additional data reporting element that would allow state auditors discretion to quantify the financial impact of any missing data or documentation. According to CMS, current audit reports may include a caveat noting the auditor’s finding that the hospital’s total uncompensated care cost may be misstated as a result of missing data, with an unknown impact on the hospital-specific DSH limit. Under CMS’s proposal, for example, auditors would be able to use “alternative source documentation, utilize a methodology to estimate the financial impact in terms of the dollar amount at risk, or provide an estimated range of financial impact if a determination of an exact dollar amount is not possible.” If finalized, the new data element could expand auditors’ ability to identify and recover DSH overpayments in excess of the hospital-specific limit.

CMS’s proposed rule also includes several other changes including clarifying the calculation of the 1-year period by when a state has to recover and identify overpayments; clarifying the criteria in determining which hospitals qualify for the 97th percentile exception; and modifying the factors by which Affordable Care Act-mandated state-by-state DSH allotment reduction amounts will occur beginning in FY 2024. 

The proposed rule is available here. Comments on the proposed rule are due by April 25, 2023.

Reporter Michael L. LaBattaglia, Washington, D.C., +1 202 626 5579,

District Court Holds that Preclusion of Review Provision Applies to Hospitals’ Procedural Challenge to Uncompensated Care Payment Calculations

On February 16, 2023, the U.S. District Court for the Northern District of Indiana rejected certain hospitals’ challenge to CMS’s calculation of uncompensated care (UCC) payments eligible to hospitals that treat low-income patients for fiscal year (FY) 2021. The court held that the statute’s preclusion of review provision encompassed challenges to the procedure under which those estimates were established. 

For FY 2021, CMS decided that it would calculate each hospital’s UCC payment based on the uncompensated care reported in Worksheet S-10 from FY 2017 cost reports. Despite repeated requests, CMS refused to make its audit protocols public or subject those audit protocols to notice and comment rulemaking. Certain hospitals challenged this for violation of the notice-and-comment rulemaking requirements arguing that “insufficient rulemaking took place because the review protocols implemented changes in policy regarding what was included under uncompensated care costs.” The court held that this challenge was barred by the preclusion of review provision since “[t]o challenge the audit protocols is to challenge the validity of the ‘underlying data’ that the Secretary selected to determine Factor 3.” The court endorsed the view that “when a party seeks the invalidation of a policy as relief for a procedural violation, then the challenge is a substantive challenge and not a procedural one.”

This decision joins a series of decisions from other courts denying review of various challenges to CMS’s UCC calculations based on the statute’s preclusion of review language. 

The Northern District of Indiana opinion is available here.

Reporter, Christopher C. Jew, Los Angeles, + 1 213 443 4336,

Also in the News

North Carolina Bill Would Increase Hospital Merger Scrutiny

North Carolina Senate Bill S.B. 16, the Preserving Competition in Health Care Act, contains multiple provisions that would increase the review of proposed hospital mergers in North Carolina. If enacted into law, the bill would require North Carolina Attorney General notice and approval for transactions involving control of hospital entities, as well as public hearings that must address the impact on healthcare services and provide information regarding the process for reaching a sales price. Additional information is available on the North Carolina General Assembly website here.

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Join us Monday, March 20, 2023, for our annual forum focusing on the foremost legal and political developments impacting the healthcare industry. The event will be hosted at the St. Regis Atlanta Hotel.


  • Secretary Kathleen Sebelius speaking on the future of health policy
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