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CMS Issues Medicaid DSH Final Rule

September 20, 2013The Centers for Medicare and Medicaid Services (CMS) Sept. 13 released a final rule implementing reductions to state Medicaid Disproportionate Share Hospital (DSH) allotments required under the Affordable Care Act (ACA, P.L. 111-148 and P.L. 111-152).

In anticipation of expanded insurance coverage, the ACA requires annual reductions to state Medicaid DSH allotments from FY 2014 through FY 2020 (the annual reductions were extended through 2022 by later legislation). The rule finalizes the methodology CMS will use to reduce FY 2014 allotments by $500 million and FY 2015 allotments by $600 million. At a later date, CMS will promulgate rules to implement DSH reductions in FY 2016 and beyond to allow the agency to modify the methodology based on experience and data gained in FY 2014 and FY 2015.

The methodology CMS finalized to distribute the ACA-required DSH reductions among the states for FYs 2014 and 2015, called the DSH Health Reform Methodology (DHRM), will not factor in state government decisions regarding Medicaid expansion.  The DHRM is based on several principles outlined in the ACA.  First, the largest percentage of DSH allotment reductions will be imposed on states that have the lowest percentage of uninsured and do not target their DSH payments on hospitals with high volumes of Medicaid beneficiaries nor on hospitals with high levels of uncompensated care. Second, “low-DSH states” will receive a smaller percentage reduction than all other non low-DSH states.  Finally, the DHRM takes into account whether DSH allotments were included in budget neutrality calculations for coverage expansions approved under section 1115 waivers as of July 31, 2009.

The methodology adopted in the final rule uses a series of calculations to:

  1. Estimate the unreduced DSH allotment for each state without regard to ACA reductions;
  2. Divide states into groups (low-DHS states and non low-DSH states); and
  3. Use a formula applying reduction factors to each state pool to determine each state’s reduced DSH allotment. 

Under the DHRM, reductions to individual state DSH allotments within the low-DSH and non-low-DSH groups will be adjusted equally (weighted at 33.3 percent each) for:

  • The state’s level of uninsured individuals (the Uninsured Percentage Factor or UPF);
  • Whether the state targets DSH payments to hospitals with high levels of uncompensated care (the High Level of Uncompensated Care Factor or HUF); and
  • Hospitals with high Medicaid inpatient volumes (the High Volume of Medicaid Inpatients Factor or HMF). 

States maintain flexibility to set DSH eligibility and payment methodologies, and therefore, can decide how to apply the reductions in federal DSH funds.  The final rule does not set actual state allotments for FY 2014, nor does it include a state-by-state impact analysis or provide illustrative state allotments like those in a table in the proposed rule.  CMS anticipates calculating DSH allotments and state specific reductions for FY 2014, but no deadlines are provided for publishing the allotments. 


Christiane Mitchell
Senior Director Health Care Affairs
Telephone: 202-828-0461

Allison M. Cohen, J.D., LL.M.
Senior Policy and Regulatory Specialist
Telephone: 202-862-6085


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Washington Highlights, a weekly electronic newsletter, features brief updates on the latest legislative and regulatory activities affecting medical schools and teaching hospitals.

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Jason Kleinman
Sr. Legislative Analyst, Govt. Relations
Telephone: 202-903-0806