Several California hospitals recently filed a lawsuit against the U.S. Department of Health and Human Services (Department) alleging undercalculation of disproportionate share hospital (DSH) payments. DSH is a federal program that provides additional funding to hospitals that treat more low-income patients than the average hospital. The California lawsuit is the latest in a slew of cases brought by hospitals around the country alleging that many providers treating an outsized number of indigent patients are being underpaid. According to the hospitals, the policy of underpayment flies in the face of the goals of DSH and the Affordable Care Act.

According to the complaint in Central California Foundation For Health et al. v. Becerra, the Department persists in using an outdated 2004 policy to deny Medicare DSH payments to the affected hospitals, despite the fact that multiple federal courts of appeal decisions have ruled against application of the policy. In fact, a D.C. Circuit opinion regarding the policy was affirmed by the Supreme Court in 2019. That opinion held that the 2004 rule was vacated and that the Department was forbidden from relying on that rule without engaging in notice and comment rulemaking procedure.

As explained in the complaint, hospitals that treat a disproportionate percentage of low-income patients can receive an upwards adjustment of their Medicare payments based on their “disproportionate patient percentage.” The disproportionate patient percentage is used both to determine a hospital’s eligibility for DSH payments and the amount of those payments.

The dispute raised by the California hospitals hinges on the calculation of that percentage. A 2004 Department rule changed the calculation by altering how certain Medicare enrollees were treated. That change undercut the calculation of payments to DSH recipient hospitals. Hospitals brought several successful lawsuits challenging the rule. In 2017, the Supreme Court ruled that the 2004 rule had been passed without proper notice and comment in violation of the Medicare Act. Had they been given the chance to offer their thoughts, hospitals around the country would have had much to say about the proposed 2004 rule change.

Not every challenge to the Department’s practices regarding DSH payments has been successful, however. A district court recently granted summary judgment in favor of the Department against a challenge to the Department’s “use of an undisclosed audit protocol to estimate the relevant factors and determine the amounts of reimbursements.” The court found that federal law prohibited both administrative and judicial review of the DSH payment methodology. The court also noted that the particular practice at issue in that matter had, in fact, been approved through the notice and comment process.

Regardless, the challenges raise an important public policy matter. The entire purpose of the DSH program is to offset the cost of care to hospitals that are uncompensated when treating low-income patients, improving access for Medicaid patients and uninsured patients. The program is meant to provide a safety net for low-income individuals and ensure that they can receive medical care without causing the hospitals providing that care to go underwater.

According to the hospitals’ allegations, the Department’s insistence on using an administratively invalid method for calculating these payments is leaving well-meaning hospitals underpaid despite their service to the community. DSH payments are already restricted to the cost of providing uncompensated care, rather than a bonus or incentive; with the current policy, hospitals are not able to recoup those costs. Continuing to use a disfavored method to undercalculate payments will serve to discourage hospitals from treating low-income payments, contrary to the purpose of the program.