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What are DSH Payments?

DSH payments are statutorily required payments intended to offset hospitals’ uncompensated care costs to improve patient access to Medicare and Medicaid. The payments also serve to help the financial stability of safety-net hospitals that oftentimes treat uninsured or underinsured patients. The U.S. Department of Health and Human Services’ (HHS) specifically makes DSH payments to hospitals that serve a high number of low-income patients. The Medicare DSH adjustment is calculated based on two factors: the hospital’s Medicare patients with low incomes and those with low incomes, but not on Medicare. 

HHS issued a rule in 2004 that said if patients meet the basic criteria for Medicare—for example, they meet age or disability thresholds—then they count in calculating the Medicare DSH payment, regardless of whether Medicare is the primary payer for hospital care. Because the rule includes all patients entitled to Medicare benefits, hospitals argue that it dilutes the Medicare DSH adjustment.

A Breakdown of the Ruling

In a 5-4 decision, the Supreme Court of the United States recently upheld the HHS interpretation of a formula that decides how to calculate the Medicare and Medicaid fractions of a hospital’s Disproportionate Share Hospital (DSH) adjustment. The case, Becerra v. Empire Health Foundation, validates the current procedure HHS uses to calculate Medicare DSH payments.

Medicare’s DSH adjustment is an additional payment made to hospitals that treat a significant share of low-income patients. The specific question at issue in the case was how to count patients who qualify for Medicare Part A when Medicare is not paying for their hospital treatment. In 2004, HHS issued a regulation interpreting the Medicare statute to count these patients, resulting in lower DSH payments for most hospitals. 

In this case, Empire Health Foundation challenged the calculation of its 2008 Medicare DSH payments based on HHS’ longstanding procedure. Empire argued that the methodology results in lower payments than the hospitals should receive.

Previously, the Ninth Circuit Court of Appeals voided the HHS rule and sided with Empire. However, the Supreme Court reversed course and sided with HHS. According to Justice Kagan, tasked with drafting the opinion:

Text, context, and structure all support calculating the Medicare fraction HHS’s way. In that fraction, individuals ‘entitled to [Medicare Part A] benefits’ are all those qualifying for the program, regardless of whether they are receiving Medicare payments for part or all of a hospital stay. That reading gives the ‘entitled’ phrase the same meaning it has throughout the Medicare statute. And it best implements the statute’s bifurcated framework by capturing low-income individuals in each of two distinct populations a hospital serves.

Justice Kagan also clarified the statute’s purpose: to compensate safety-net hospitals for serving a disproportionate share of low-income patients; not to pay hospitals the most money possible.

What this Ruling Means for Safety-Net Hospitals

Going forward, safety-net hospitals are still required to follow HHS' interpretation of the formula for the Medicare DSH adjustments hospitals receive in exchange for serving low-income patients. According to hospitals like Empire Health, the practical impact of this ruling is reduced Medicare DSH payments to safety-net hospitals.

For more information, please reach out to your local BMD Healthcare Attorney, Daphne L. Kackloudis at dlkackloudis@bmdllc.com or Ashley Watson at abwatson@bmdllc.com.