CMS Section 1115 waiver final rule impacts Medicare DSH calculations

The Centers for Medicare & Medicaid Services (CMS) revised their regulations on the counting of Medicaid days in the disproportionate share hospital (DSH) calculation associated with certain section 1115 demonstrations.

These changes, made Aug. 1, 2023, are effective for patients discharged on or after Oct. 1, 2023.

As a result of the changes, providers in select states will no longer be able to claim certain days associated with section 1115 waiver demonstrations. The rule will reduce Medicare DSH payments for certain hospitals and could impact a hospital’s Medicare DSH and uncompensated care qualification or 340B program qualification.

Impact on hospitals

Economic impact

CMS estimates that excluding these days may result in a $348 million annual reduction in the Medicare DSH payments to those impacted providers. CMS also acknowledges that the estimate is uncertain and the actual impact may be higher or lower.

Future monitoring

Hospitals in all states will also need to monitor any revisions or new Section 1115 waivers that are approved in their state to ensure the Medicaid days claimed in the provider’s Medicare DSH calculation are compliant with this new rule.

340B program and DSH uncompensated care qualification

These changes will have drastic implications for some providers, as the reduction in days can impact a hospital’s 340B qualification, and in some cases even place their DSH and uncompensated care qualification at risk.

Background

In both the federal 2022 and 2023 rulemaking cycles, CMS proposed to revise the DSH regulation to limit the inclusion of days in the DSH calculation associated with certain 1115 waivers. Each iteration had slight modifications in the proposal, but ultimately in both instances CMS did not finalize the change.

On Feb. 24, 2023, CMS published a new proposed rule, now it’s third attempt, on the treatment of Section 1115 waiver days in the DSH calculation. The adoption of this policy was included in the rule for the federal fiscal year