The community engagement requirements announced in the One Big Beautiful Bill Act are likely to decrease Medicaid volume at hospitals in certain states, affecting the hospitals’ Medicare Disproportionate Share Hospital (DSH) percentage. PYA explains how hospitals could be financially impacted and shares strategies to optimize their Medicare DSH percentage as they prepare for the potential decrease in Medicaid volume.
What are the Medicaid community engagement requirements?
Effective January 1, 2027, adults ages 19–64 enrolled through the Affordable Care Act Medicaid expansion or equivalent coverage must complete at least 80 hours per month of paid employment, job training, education, and/or community service unless an individual meets a specific statutory exception. At enrollment, a state must verify the individual met this requirement (or an exception) during the month prior to application; although, some states may require compliance for up to three months prior to enrollment. Thereafter, a beneficiary’s compliance must be verified every six months, but some states may require more frequent verification.
In December 2025, the Centers for Medicare & Medicaid Services (CMS) issued initial guidance to states regarding implementation of the community engagement requirements. A comprehensive interim final rule will be published by June 1, 2026. Shortly thereafter, states will be required to inform beneficiaries of these new requirements. A state may request an extension of the January 1, 2027, compliance date, but the request will not be granted unless the state demonstrates it is making a good faith effort to meet statutory requirements.
How will the community engagement requirements impact hospitals?
The new community engagement requirements are likely to decrease Medicaid volume at hospitals in states that expanded Medicaid. This could affect hospitals’ Medicare Disproportionate Share Hospital percentage because one of the main components of the DSH percentage is the Medicaid Ratio, which is the percentage of total patient days attributable to patients eligible for Medicaid but not entitled to Medicare Part A coverage (Medicaid, non-Medicare days divided by total patient days).
A hospital’s Medicare DSH percentage impacts it in two ways:
- The percentage affects the add-on payment that a hospital receives on each Medicare inpatient claim. The higher the hospital’s DSH percentage, the higher its add-on payment.
- The percentage affects qualification for 340B Drug Program discounts. The standard 340B qualification threshold is a DSH percentage of 11.75%, but Sole Community Hospitals or Rural Referral Centers qualify with a DSH percentage of 8.00% (though qualification at the lower threshold results in a loss of discounts for orphan drugs).
How should a hospital prepare for a potential decrease in Medicaid volume?
To optimize their Medicare DSH percentage, hospitals should consider the following strategies:
1. Utilize the Most Up-to-Date Medicaid Eligibility Data: The Health Resources and Services Administration (HRSA) determines a hospital’s 340B eligibility based on its most recent Medicare Cost Report filing. A hospital will become ineligible for the 340B program on the day it files a cost report with a DSH percentage below the applicable eligibility threshold.
A hospital’s Medicare Cost Report is due five months after its fiscal year-end. Some hospitals run their patients’ Medicaid eligibility checks soon after fiscal year-end; however, waiting longer to run these checks usually results in more accurate data (i.e., more patients qualifying for Medicaid), which may result in an increased DSH percentage.
2. Check Eligibility and Classification of Out-of-State Medicaid Patients: Patients who are treated at a hospital outside of their home state may be classified by that hospital as a self-pay patient because the patient’s Medicaid program in their home state may not pay for treatment outside of their state. For Medicare DSH purposes, however, it matters only if a patient is eligible for Medicaid in a state, not whether Medicaid paid for a claim.
Hospitals should check the Medicaid eligibility of their out-of-state patient population to ensure they are accounting for all Medicaid-eligible days. If a patient is eligible for Medicaid in their home state, the hospital can claim them as eligible for the DSH calculation.
3. Use Quality Demographic Data for Medicaid Eligibility Lookups: To determine Medicaid eligibility, a hospital must submit patient demographic information, e.g., Social Security number, Medicaid ID, date of birth. Providers should make every effort to ensure this information is accurate and complete to increase the number of patients who are identified as Medicaid-eligible.
4. Evaluate Obstetrics/Psychiatric/Rehabilitation Considerations: When considering opening or closing departments, a hospital should evaluate the impact such action could have on the Medicare DSH percentage. For example, obstetrics and psychiatric departments typically have high Medicaid utilization. Hospitals should keep in mind, however, that Medicare-eligible days from distinct part psychiatric units are not included in the DSH calculation.
5. Consider Increased Marketing to Medicaid Population: While generally not a preferred strategy given Medicaid’s low payment rates, hospitals that are close to either the DSH or 340B qualification threshold may consider targeted marketing campaigns.
6. Report Accurate Medicare Supplemental Security Income (SSI) Percentage: A hospital’s Medicare SSI percentage (i.e., the fraction of patient days for patients entitled to both Medicare Part A and SSI) is also used in its DSH calculation. CMS publishes the SSI percentage for each hospital based on the federal fiscal year, but the data lags several years behind. Hospitals should ensure they are reporting the most accurate SSI percentage possible.
For more than 40 years, PYA’s Managed Care and Reimbursement team has helped hospitals manage reimbursement, strategy, and cost reporting in support of our clients’ financial sustainability goals.
