A second federal appeals court last week reversed a lower court's ruling and upheld a 2017 rule that changed how CMS calculates Medicaid disproportionate-share hospital (DSH) payments to ensure providers are not doubly compensated for care costs covered by third-party insurers.

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The decision came after the U.S. Court of Appeals for the District of Columbia Circuit in August reversed a separate lower court's ruling invalidating the 2017 rule in a case brought by the Children's Hospital Association of Texas and four children's hospitals in Minnesota, Virginia, and Washington. The association and children's hospital had asked the D.C. Circuit court to reconsider the ruling, but the court last week declined to do so.

Other appeals in similar lawsuits currently are pending in separate courts, according to AHA News.

Background on the latest case

CMS in April 2017 issued a final rule clarifying how the agency takes third-party payments into account when calculating DSH payments. The agency in the final rule said it would deduct payments from Medicare and private insurers from DSH payments. CMS had said the policy would ensure DSH payments do not "double pay" hospitals "for costs that have already been compensated" by Medicare or private payers.

Hospitals across the country filed lawsuits seeking to halt the final rule, arguing that the rule could cause some hospitals to lose millions of dollars in DSH payments. The Missouri Hospital Association in one such lawsuit argued the final rule undermines a Medicaid Act provision establishing how CMS must use hospital costs to calculate the so-called "Medicaid shortfall," which is used to determine the maximum Medicaid DSH payments hospitals can receive. A district court ruled in favor of the Missouri Hospital Association and barred CMS from enforcing the final rule.

Appeals court reverses lower court's decision

However, a three-judge panel for the U.S. Court of Appeals for the Eighth Circuit last week unanimously ruled to reverse the district court's ruling and uphold the final rule, allowing the final rule to take effect.

U.S. Circuit Judge James Loken in the court's opinion wrote that the 2017 rule does not contradict the language in the Medicaid Act, and the federal government "did exactly as instructed by 'determin[ing]' which payments to deduct" when calculating DSH payments.

Jane Drummond, the Missouri Hospital Association's general counsel, told Becker's Hospital Review the association does not intend to appeal the court's decision. Drummond said the final "rule adopted through the traditional rulemaking process is now in place and will be effective for 2017 DSH audits." She added, "At this time, we don't believe the rule will have a substantial impact because we don't believe Missouri had DSH longfalls for 2017 that would require returning funds to the federal government" (Romoser, Inside Health Policy, 11/8 [subscription required]; Gooch, Becker's Hospital CFO Report, 11/8; AHA News, 11/7).