• Issue Brief
  • October 1, 2013

Medicaid Disproportionate Share Hospital Cuts CMS Final Rule Summary

On September 18, 2013, the Centers for Medicare and Medicaid Services (CMS) released its final rule, Medicaid Program; State Disproportionate Share Hospital Allotment Reductions, implementing the Affordable Care Act’s (ACA) cuts to the Medicaid Disproportionate Share Hospital (DSH) payment program. The final rule establishes a DSH health reform methodology to determine how the cuts will be distributed among the states for fiscal years 2014 and 2015. CMS will determine how scheduled cuts will be distributed in fiscal years 2016 and beyond in future rulemaking. 

The Association submitted comments to the related proposed rule. In its comments, the Association:

  • Reiterated the importance of DSH payments in addressing Medicaid underpayment for children’s hospitals
  • Supported the concept of targeting DSH funds to hospitals with high Medicaid volumes and high levels of uncompensated care
  • Urged CMS to include unpaid copayments and deductibles in the rule’s uncompensated care calculation
  • Requested that CMS use alternative data sources instead of Medicare cost report data for children’s hospitals
  • Raised concerns with a CMS interpretation of DSH policy that applies commercial third party payments in the Medicaid shortfall part of the DSH hospital specific limit (HSL) calculation
The final rule does not make substantive changes from the proposed rule and maintains a methodology that is intended to incentivize states to target their DSH allotments to hospitals with high volumes of Medicaid patients and high volumes of uncompensated care. In addition, the final rule:

  • Excludes unpaid copayments and deductibles from hospital uncompensated care costs
  • Comments on the use of Medicare cost report data to obtain total hospital costs for children’s hospitals
  • Acknowledges comments were submitted about the interpretation of DSH policy related to the HSL calculation but does not provide additional guidance. CMS asserts this issue falls outside the scope of the final rule.


The final rule puts into place a DSH health reform methodology that will be used to implement DSH cuts in fiscal years 2014 and 2015. CMS will calculate the unreduced DSH allotments for each fiscal year as it does now and then apply the rule’s DSH health reform methodology to calculate state specific cuts. The methodology does not take into account whether a state takes up the ACA’s Medicaid expansion for adults. 

Specifically, the methodology will:

  • Split states into two groups: low DSH states and non-low DSH states. The amount of scheduled cuts will be proportionately divided between the two groups based on the percentage of each group’s unreduced DSH dollar amounts.
  • Divide the total amount of reductions for the low DSH states and non-low DSH states into thirds to apply three weighted factors: 
    • Uninsured Percentage Factor (UPF): This factor distributes DSH cuts based on state uninsured rates. 
    • Uncompensated Care Factor (HUF): This factor imposes larger cuts to states that do not target DSH funds to hospitals with high levels of uncompensated care.
      • Hospitals with high levels of uncompensated care are those that exceed the mean ratio of uncompensated care costs to total Medicaid and uninsured inpatient and outpatient hospital service costs within their state
      • Unpaid copayments and deductibles are excluded from the uncompensated care calculation
    • High Volume of Medicaid Inpatients Factor (HMF): This factor imposes larger cuts to states that do not target their DSH payments to hospitals with high volumes of Medicaid inpatients.
  • Calculate reductions for each state based on the UPF, HUF and HMF factors. Each factor is assigned a 33 1/3 percent weight so that one-third of the cuts are based on state uninsured rates and two-thirds of the cuts are based on the targeting of payments by states.
  • Take into account the extent to which the DSH allotment for a state was included in the budget neutrality calculation for a coverage expansion approved under a Section 1115 waiver as of July 31, 2009.  
  • Add up the total amount of reductions for each state and subtract its reductions from its unreduced DSH allotment. 
The final rule also addresses the data sources used in the DSH health reform methodology. The rule clarifies that CMS will use data from the most recent year available for all data sources. CMS also acknowledges that the final rule’s uncompensated care calculation will have some inconsistencies due to current data limitations. The rule requires hospital specific uncompensated care costs to be calculated as a percentage of the total of its Medicaid costs and uninsured costs rather than as a percentage of total hospital costs. However, the final rule requires states to begin reporting total hospital costs from Medicare cost report data in fiscal years 2014 and 2015, and CMS intends to modify the uncompensated care calculation to use total hospital costs beginning in fiscal year 2016. The rule clarifies that states will determine how to collect total hospital costs from children’s hospitals that do not submit Medicare cost reports or submit partial reports.

CMS intends to issue a DSH health reform methodology technical guide which will include additional information about the data sources for the methodology.

Implications for Children’s Hospitals

The impact of the DSH cuts methodology on individual children’s hospitals is unknown. The final rule determines how CMS will distribute cuts among state DSH allotments, but states will continue to have the flexibility to determine the amount of DSH funds it will allocate to each hospital, including individual children’s hospitals. 

It is unclear if states will begin targeting their payments as a result of the final rule since CMS will revisit its methodology after two years. In addition, it will take several years before data becomes available to use for the methodology that reflect changes in state behavior as a result of this rule.

The final rule clarifies that it is the states’ responsibility to report total hospital costs for each hospital based on data provided through Medicare cost reports. While the rule does not require children’s hospitals to file Medicare cost reports, states may require children’s hospitals to provide the same data as if they were filing the Medicare cost report form.

Association Contact: Shannon Lovejoy, (202) 742-5385