The ACA’s Medicaid DSH cut finally hit hospitals. What to know

Modern Healthcare – Wednesday, October 15, 2025
By Bridget Early

Hospitals that treat large numbers of low-income uninsured patients at long last are confronting a Medicaid cut that had been kicked down the road for more than a decade.

The government shut down Oct. 1 when Congress failed to enact fiscal 2026 appropriations bills to finance federal operations. Simultaneously, a number of key healthcare policies expired because of the deadlock, including a provision to delay a reduction in Medicaid disproportionate share hospital, or DSH, payments.

The Medicaid DSH cut is part of the Affordable Care Act of 2010, which called for reducing this funding based on the expectation that the uninsured rate would fall under the law, which it did. The cut was supposed to take effect in fiscal 2014 but Congress had repeatedly postponed it until now.

Now, the hospital sector faces an $8 billion annual cut over the next three fiscal years unless lawmakers once again undo them, and possibly offer back payments for the money lost since the beginning of October. Hospitals are projected to collect $1.77 trillion for patient care this year, according to a report the Centers for Medicare and Medicaid Services Office of the Actuary published in June.

Hospitals rely on Medicare DSH and Medicaid DSH funds to cover the cost of treating patients who can’t pay for their care. Federal and state Medicaid DSH spending totaled $20 billion in fiscal 2022, the Medicaid and Children’s Health Insurance Plan Payment Advisory Commission, which counsels Congress, reported last year.

“I don’t know how you could plan for this, from a hospital’s perspective,” said Beth Feldpush, senior vice president of advocacy and policy for America’s Essential Hospitals, which represents safety-net facilities. “You have no idea of what sort of stability you will have moving forward. The only thing you can count on is serious cuts and serious financial challenges.”

Here’s what to know about the ACA’s Medicaid DSH cut.

How do DSH payments work?

The federal government and the states jointly finance and administer Medicaid DSH payments, as they do the underlying program. The federal government distributes money to states, which match those dollars and disburse funds to qualifying hospitals.

State allotments are set annually and usually amount to the prior year’s allotment plus an inflation adjustment. States cannot offer more DSH dollars to a hospital than the total amount of uncompensated care it provides, but otherwise have considerable flexibility.

The DSH cut reduced the federal match available to states, meaning less money flowing to hospitals.

The hospital industry had successfully lobbied to get the Medicaid DSH cut postponed but never got it repealed. Congress often takes short-term actions to minimize the immediate effect of the costs on the federal budget.

What are states doing?

States are taking varying approaches to the Medicaid DSH cut, Feldpush said. Some have already reduced DSH payments while others are waiting to see if Congress delays the cut again as part of a deal to reopen the government and restore other health policies that ran out this month, she said.

Texas hospitals are already feeling the pain, Anna Stelter, vice president of policy at the Texas Hospital Association, wrote in an email.

Texas would have allotted $2.3 billion for Medicaid DSH payments this fiscal year, but it will be $800 million less annually if the federal cut remains in effect, according to Stelter. The state’s DSH advance payment to hospitals this month was $311 million lower than it would have been, she wrote.

“Federal DSH irregularities create immediate strain because we have a large DSH allotment paid in installments starting in October,” Stelter wrote. “Texas pays DSH in three installments per fiscal year: October, March and July. The state Medicaid agency proportionally reduces each installment according to the total federal reduction.”

Texas hospitals expect the state would make up for the lost funding if Congress again postpones the DSH cut, Stelter wrote.

Some states may choose to support hospitals through other funding sources in the meantime, said Travis Jackson, a partner with the law and lobbying firm McDermott Will & Schulte.

What does this mean for hospitals?

The Medicaid DSH cut has only been technically in force for two weeks, and CMS still needs to write a regulation to implement it. Even though states such as Texas have begun adapting to the new federal policy, the full consequences have yet to ensue.

Still, hospitals are already rethinking major capital projects, making budget adjustments, reducing services and scaling back staffing, Jackson said.

Moreover, this latest blow to hospital finances comes just ahead of the $1.1 trillion in cuts to federal healthcare programs — including $960 billion from Medicaid — at the heart of President Donald Trump’s tax law. Providers also are bracing for the looming expiration of enhanced health insurance exchange subsidies at the end of the year.

Taken together, these policies promise to increase the ranks of the uninsured and spike spending on uncompensated care.

“More than 40% of hospitals already operate in the red, and with the anticipated increase in the number of uninsured — many of whom will still seek care in emergency rooms — uncompensated care costs will go up, exacerbating the challenges facing hospitals,” a spokesperson for the Federation of American Hospitals, which represents for-profit health systems, wrote in an email.

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