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Treatment of Third-Party Payments in the Definition of Medicaid Shortfall

Medicaid disproportionate share hospital (DSH) payments help to pay for Medicaid shortfall—the difference between a hospital’s cost of care for Medicaid-eligible patients and payment the hospital receives for these services. In March 2018, a federal district court decision vacated guidance from the Centers for Medicare & Medicaid Services (CMS) about how shortfall should be calculated for Medicaid-eligible patients with third-party coverage.

In the Commission’s view, the court ruling distorts DSH policy because it allows hospitals to receive DSH payments for costs that have already been paid for by other payers. The Commission recommends that Congress change the statutory definition of Medicaid shortfall to exclude costs and payments for all Medicaid-eligible patients for whom Medicaid is not the primary payer—a change that is both administratively simple and consistent with the way many states counted Medicaid shortfall in the past. Changes to the DSH definition of Medicaid shortfall do not affect the total amount of federal DSH allotments available to states.

From: June 2019 Report to Congress on Medicaid and CHIP