On December 9, 2025, the Fifth Circuit (Case 24-10934) overturned the Northern District of Texas decision in Baylor All Saints Medical Center v. Becerra, reinstating CMS’s “Exclusion Rule” at 42 CFR §412.106(b)(4)(iii).
The key point:
The District Court lacked authority to vacate the rule because the hospitals had not first stated their claim through the administrative process. Without an adverse agency decision, judicial review was premature.
The District Court lacked authority to vacate the rule because the hospitals had not first stated their claim through the administrative process. Without an adverse agency decision, judicial review was premature.
What this means for hospitals
- The “Exclusion Rule” is back in effect.
- Hospitals objecting to the exclusion of Section 1115 waiver days from the Medicare DSH fraction must now route challenges through the PRRB.
- The Fifth Circuit reaffirmed that disputes over this rule arise under the Medicare statute, not the Public Health Service Act—even where 340B impacts are alleged.
Why this matters
The Exclusion Rule represents HHS’s regulatory response to prior hospital wins (Forrest General Hospital v. Azar and Bethesda Health v. Azar), which recognized hospitals’ ability to count certain 1115 waiver days. Rather than seeking Supreme Court review, HHS chose rulemaking.
Bottom line
Hospitals should carefully evaluate and preserve protests related to 1115 waiver-based Medicaid days that stem from Secretary-approved waivers—with legal guidance.
Hospitals should carefully evaluate and preserve protests related to 1115 waiver-based Medicaid days that stem from Secretary-approved waivers—with legal guidance.
If you have questions regarding Medicare DSH, feel free to contact me:
📩 adamblackwell@govdataservices.com
📩 adamblackwell@govdataservices.com
