Impact of Fifth Circuit Ruling on Hospital Payments and 340B Eligibility
On December 9, 2025, the US Court of Appeals for the Fifth Circuit overturned a decision by the US District Court for the Northern District of Texas concerning a federal regulation from 2023. This regulation impacts supplemental payments to disproportionate share hospitals (DSH) and their qualification for the 340B drug discount program, highlighting key challenges in regulatory compliance within the insurance industry.
Impact on Administrative Procedure and Regulatory Compliance
The ruling identified two major effects: administrative procedure and substantive regulatory compliance. The court determined it lacks jurisdiction over Medicare-related claims until hospitals complete a series of steps, including submitting cost reports, receiving final payment determinations from a Medicare administrative contractor, and appealing to the Provider Reimbursement Review Board (PRRB). This process can be time-consuming, potentially hindering immediate legal challenges.
Additionally, the appellate decision means that the Centers for Medicare and Medicaid Services (CMS) can enforce the 2023 regulation which affects hospitals in states utilizing Medicaid uncompensated care pools instead of expanding Medicaid. DSH payments, crucial for hospitals with high proportions of low-income patients, rely on complex calculations based on Medicaid-eligible patient days.
CMS Regulation and Implications for DSH Payments
In 2023, CMS enacted a rule excluding certain patient days from the Medicaid fraction if they are under uncompensated care pools approved by CMS section 1115 demonstration projects. CMS argued these payments benefit the providers directly and should not count towards Medicaid fractions for DSH calculations. This exclusion could reduce hospitals' DSH payments and ultimately affect their eligibility for the 340B program, with lower Medicaid fractions leading to disqualification from existing drug discount schemes.
Legal Challenges and Considerations for Providers
A group of Texas hospitals contested the 2023 rule, citing a precedent in Forrest General Hospital v. Azar, which allowed certain patient days under the Medicaid fraction. Initially, the district court sided with the hospitals, but the Fifth Circuit emphasized the need for exhaustion of administrative channels before seeking judicial intervention, affecting the case’s progress.
The Fifth Circuit determined that hospitals must complete necessary administrative processes before challenging reimbursement rulings. Although hospitals argued their claim related to the 340B program, the court maintained their case involved Medicare statutes. The court acknowledged concerns about delays affecting 340B eligibility but insisted on procedural adherence unless Congress legislates an alternative path.
Strategies for Navigating Regulatory Challenges
Hospitals in Medicaid 1115 demonstration project states and those challenging CMS regulations must understand substantial regulatory compliance obligations as enforced by this ruling. They must prepare to file cost reports accurately and await Notices of Program Reimbursement before engaging the PRRB. Furthermore, rigorous risk management requires that hospitals weigh decisions affecting 340B status, noting that existing laws do not support the restoration of lost eligibility post-decision.
This ruling underscores the importance of regulatory compliance monitoring and thorough navigation of administrative processes to secure future rights and benefits within the US healthcare payment landscape.