Drastic Scheduled Cuts to Disproportionate Share Hospital Funding Would Increase Financial Distress for Safety Net Hospitals

Unless US Congress acts, however, $8 billion in annual DSH payment cuts will take effect October 1, 2023.

For safety net hospitals, their lenders, and financial advisors, these scheduled DSH cuts should be closely monitored and evaluated. Given the current widespread financial distress in the hospital sector related to COVID-19, supply chain issues, work force expense, and declines in inpatient volume, and with more instability looming upon the expected expiration of the federal public health emergency on May 11, 2023, these DSH payment cuts could have dire consequences for the nation’s most vulnerable hospitals.

DSH Payments

DSH payments began in 1981 and have gone through numerous adjustments in methodology and oversight in the ensuing years. Notoriously technical in calculation and application, these payments are subject to: (1) state-wide DSH payment allotments to which each state is entitled (generally, these allotments are tied to historical state DSH spending); and (2) hospital specific DSH payment caps (generally, a hospital’s DSH payment cannot exceed its uncompensated care to Medicaid beneficiaries and uninsured patients). Many of the modifications to the DSH program were intended to close loopholes or perceived misapplication of the DSH program by hospitals and states.

Scheduled DSH Cuts

The Affordable Care Act of 2010 (ACA) called for significant DSH payment cuts beginning in 2014, on the assumption the ACA’s insurance coverage expansion would dramatically reduce the uncompensated care burden on safety net hospitals. However, to date, these cuts have been delayed several times due to Congressional intervention. The most recent of these actions, via the Congressional Appropriations Act (2021), delayed implementation of the reductions until FY 2024 (commencing October 1, 2023). Recent Centers for Medicare & Medicaid Services (CMS) guidance and proposed rulemaking makes clear that absent another statutory deferral by Congress, CMS intends to implement these cuts.

Hospital Sector Response

The $8 billion in scheduled annual DSH cuts should be understood in the context of total annual federal and state DSH payments of approximately $19 billion. According to a report just issued by the Medicaid and CHIP and Access Commission (MACPAC), the federal commission charged with monitoring and analyzing the DSH program, these FY 2024 cuts, which would be replicated in subsequent years, would represent an annual aggregate DSH payment reduction of about 54% from current levels. Indeed, the MACPAC report expresses concern that the magnitude of these cuts “may disrupt the financial viability of some safety-net hospitals.”

Advocates for the hospital sector are understandably alarmed. The American Hospital Association (AHA), for example, recently submitted a letter to Congressional leadership, imploring a delay to these DSH cuts. The AHA letter notes that the safety net hospital cost savings originally projected in the ACA have not yet come to fruition, and that the COVID-19 pandemic and its aftermath has placed unprecedented strain on hospitals that could not have been anticipated when the ACA was enacted.

Recommended Action

Hospitals, their lenders, and their advisors should closely monitor these scheduled DSH payment cuts and should evaluate how each hospital is likely to be affected. Supporting existing government advocacy efforts by the AHA and others may be advisable, and in some instances a customized advocacy effort may be recommended for a safety net hospital.

ArentFox Schiff is tracking these DSH developments and is poised to assist clients in navigating these issues.