Over the next 10 years, Medicaid enrollment is projected to decline by 7.5 million1 individuals as a result of provisions in the One Big Beautiful Bill Act (OB3). The reduction in enrollment, along with changes in provider taxes and state-directed payments, is projected to reduce federal Medicaid funding by $911 million through 2034.2
The margin impact on hospitals and health systems from these cuts will be significant. According to our Mindsets 2026 Healthcare Executive Leadership Report, 55% of hospital and health system executives expect the effects of OB3 to reduce their organization’s operating margins by at least 3%.
How Does Reduced Medicaid Enrollment Affect Medicare DSH Eligibility?
Medicare disproportionate share hospital (DSH) payments are a key area of financial exposure for hospitals. Fewer Medicaid enrollees often means fewer Medicaid inpatient days, a crucial component of the disproportionate patient percentage (DPP) calculation. Already, many organizations have seen reductions in their DPP because of post-COVID Medicaid redeterminations. This has reduced their traditional DSH payments, and in some cases, jeopardized their eligibility for DSH and other key programs, such as 340B.
Given the potential for Medicaid work requirements and more frequent eligibility redeterminations to further reduce a hospital’s DPP, organizations should consider an integrated, strategic approach to maintaining Medicare DSH eligibility and capturing allowable Medicare reimbursement. Such an approach not only focuses on the reimbursement function but also considers how facility configuration and operational changes could impact a hospital’s DPP.
What Are Reimbursement Strategies for Maintaining Medicare DSH Eligibility?
A strategic approach to maintaining Medicare DSH eligibility starts with the reimbursement function. Key strategies include:
- Monthly DPP Trending: Trending and monitoring the components of your DPP ratio on a monthly basis helps reduce blind spots and identify downward trends early, allowing more time to deploy strategies to address the shortfall.
- DSH Medicaid Eligibility Scrub: Reviewing inpatient days to identify patients who were eligible for Medicaid at the time of service, even if Medicaid did not pay the claim, helps improve the accuracy of Medicaid day counts used in the DPP calculation by validating eligibility status through state data, retroactive determinations, and coverage nuances.
- Supplemental Security Income (SSI) Eligibility Scrub: It’s also important to review Medicare inpatient stays to identify beneficiaries who may be eligible for SSI benefits but are not currently enrolled, focusing on indicators of financial need, disability, or age-based eligibility during or following the hospitalization period. This process supports the patient financial services team’s outreach and enrollment efforts, helping individuals obtain SSI benefits while strengthening data alignment for Medicare DSH purposes.
What Are Facility Configuration Strategies for Maintaining Medicare DSH Eligibility?
Facility status designations and service line closures can also affect DPP calculations. Healthcare providers should consider the following in their efforts to maintain Medicare DSH eligibility.
- Provider Consolidation Analysis: Health systems with hospitals in close proximity to each other should review utilization data to understand the potential impact of combining campuses under one provider number on DSH payments. Depending on the facilities, there may be ancillary benefits to doing so.
- Exempt Unit Analysis: Decades ago, many organizations obtained distinct part status for psychiatric units. However, due to changes in Medicare payment systems for both psychiatric and general acute care over the intervening years, maintaining distinct part status may no longer be beneficial. Organizations should consider whether revisiting the status of these units could increase the facility’s DPP. In doing so, they should also factor in the potential impact of terminating distinct part status for psychiatric units on Medicare reimbursement for medical education.
- Service Line Closure: Some hospitals are considering closing labor and delivery, psychiatric, or other units that are disproportionately used by Medicaid beneficiaries, as they can no longer afford to cross-subsidize the losses associated with payors that do not cover the cost to deliver care. However, before making any service line closure decisions, hospitals should consider the potential impact on eligibility for Medicare DSH and other federal programs that support access to care for economically disadvantaged populations by stretching scarce resources.
What Are Operations & Revenue Cycle Strategies for Maintaining Medicare DSH Eligibility?
The actions of revenue cycle and clinical teams also influence DPP calculations and Medicare DSH eligibility. Two often overlooked areas of focus are observation days and avoidable inpatient days.
- Observation Day Analysis: While many organizations’ first instinct is to aggressively challenge cases that a payor downgrades from inpatient to observation, those who are close to the Medicare DSH qualifying threshold should be aware of the potential impact on DPP ratios. Successfully contested observation cases will increase the total patient days count in the denominator, which could put eligibility at risk.
- Avoidable Days Analysis: Organizations should evaluate inpatient days when patients were medically ready for discharge but remained hospitalized due to nonclinical barriers, as excess days can affect a hospital’s DPP. To help reduce operational inefficiencies and improve throughput, hospitals should look for common drivers of discharge delays, including:
- Medicare Advantage (MA) post-acute care network friction, such as prior authorization delays, limited MA-contracted skilled nursing facility (SNF) or inpatient rehabilitation facility (IRF) availability, and coverage disputes
- Case management capacity gaps
- Late discharge decisions
- Documentation delays
- Weekend or after-hours process breakdowns
How Forvis Mazars Can Help With Medicare DSH Eligibility & Reimbursement
Our professionals draw on diverse backgrounds and areas of experience, from strategic reimbursement to performance improvement, to help your organization identify and implement Medicare DSH strategies that apply to your unique situation. We are committed to helping you develop core capabilities, including regulatory excellence and financial discipline, that support your pursuit of achieving health in the communities you serve. Please reach out to our team if you have any questions or need assistance.