In late July, a federal district court in Texas vacated a Medicare disproportionate share hospital (DSH) rule that excluded low-income individuals whose care is paid for through a Medicaid-funded uncompensated care (UC) pool in calculating a hospital's DSH percentage.

The court's ruling could significantly affect hospital DSH adjustments and 340B eligibility in states with Medicaid-funded UC pools, such as Florida and Texas. Such hospitals may be able to amend cost reports to add patients receiving care through a UC pool to their Medicare DSH calculations.

The court previously vacated the rule in 2024; however, the Fifth Circuit Court of Appeals reversed the ruling in 2025, finding that the hospitals challenging the rule had not properly raised the issue before the Provider Reimbursement Review Board (PRRB). Having exhausted the PRRB process, the plaintiff hospitals in Covenant Med. Ctr. v. Kennedy newly challenged the legality of CMS' 2023 rule. The court found that CMS' rule conflicts with the "clear wording" of the Medicare DSH statute, which includes these days in calculating the Medicaid fraction.

America's Essential Hospitals will continue to track this case, including any appeals filed by CMS.

Contact Director of Policy Rob Nelb, MPH, at [email protected] or 202.585.0127 with questions.