CMS Section 1115 Waiver Final Rule Impacts Medicare DSH Calculations

The Centers for Medicare & Medicaid Services (CMS) revised their regulations on the counting of Medicaid days in the disproportionate share hospital (DSH) calculation associated with certain section 1115 demonstrations.

These changes, made August 1, 2023, are effective for patients discharged on or after October 1, 2023.

As a result of the changes, providers in select states will no longer be able to claim certain days associated with section 1115 waiver demonstrations. The rule will reduce Medicare DSH payments for certain hospitals and could impact a hospital’s Medicare DSH and uncompensated care qualification or 340B program qualification.

Impact on Hospitals

Economic Impact

CMS estimates that excluding these days may result in a $348 million annual reduction in the Medicare DSH payments to those impacted providers. CMS also acknowledges that the estimate is uncertain and the actual impact may be higher or lower.

Future Monitoring

Hospitals in all states will also need to monitor any revisions or new section 1115 waivers that are approved in their state to ensure the Medicaid days claimed in the provider’s Medicare DSH calculation are compliant with this new rule.

340B Program and DSH Uncompensated Care Qualification

These changes will have drastic implications for some providers, as the reduction in days can impact a hospital’s 340B qualification, and in some cases even place their DSH and uncompensated care qualification at risk.


In both the federal 2022 and 2023 rulemaking cycles, CMS proposed to revise the DSH regulation to limit the inclusion of days in the DSH calculation associated with certain 1115 waivers. Each iteration had slight modifications in the proposal, but ultimately in both instances CMS did not finalize the change.

On February 24, 2023, CMS published a new proposed rule, now it’s third attempt, on the treatment of section 1115 waiver days in the DSH calculation. The adoption of this policy was included in the rule for the federal fiscal year 2024 inpatient prospective payment system.

Revisions to the Policy

The finalized policy allows hospitals to include section 1115 waiver days in the Medicaid fraction who either:

  • Receive health insurance that covers inpatient hospitals services through a section 1115 waiver
  • Receive premium assistance that covers 100% of the premium cost to the patient, which the patient then uses to purchase health insurance that covers inpatient hospital services

CMS references the following eight states that have section 1115 waivers that include premium assistance that covers 100% of the premium cost:

  • Arkansas
  • Connecticut
  • Massachusetts
  • Oklahoma
  • Rhode Island
  • Tennessee
  • Utah
  • Vermont


The current Massachusetts section 1115 demonstration also provides a sliding scale of premium assistance to residents not eligible for Medicaid whose income levels are above 150% of the federal poverty level. Providers in Massachusetts will need to identify individuals who received premium assistance and determine if that assistance was at 100% to be claimed in the DSH calculation. CMS acknowledges the increased burden on providers in the state, however, they do not believe the burden involved is unreasonable.

Exclusions from DSH Calculation

The rule explicitly excludes patients whose inpatient hospital costs are paid for with funds from an uncompensated or undercompensated care pool authorized by a section 1115 demonstration.

These patients won’t be regarded as eligible for Medicaid, and the days of such patients may not be included the DSH calculation.

There are currently six states with these uncompensated or undercompensated care pools:

  • Florida
  • Kansas
  • Massachusetts
  • New Mexico
  • Tennessee
  • Texas

We’re Here to Help

To learn more about how this rule will impact your hospital and affect your cost reporting process, contact your Moss Adams professional.

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