On February 24, GDS noted that hospital executives should be watching Covenant Medical Center v. Kennedy (N.D. Tex. 2026) and flagged that the Section 1115 waiver days issue was moving through the PRRB.
This likely sends the case back to the
Northern District of Texas, which previously ruled
in favor of providers on the merits.The
Fifth Circuit’s decision in Forrest General Hospital v. Azar (2019) remains the key precedent. In that case, the court held that once CMS approves a
Section 1115 demonstration project, patient days associated with those benefits must be
“regarded as eligible for Medicaid” for purposes of the Medicare DSH Medicaid fraction.
While the Fifth Circuit previously vacated and remanded the Northern District of Texas ruling, it did so
on PRRB jurisdictional grounds—not because it rejected the substance of the providers’ argument.If the district court again rules for providers, CMS will likely appeal to the
Fifth Circuit, where Forrest General remains controlling precedent unless overturned en banc or by the Supreme Court.
It also remains possible that
Covenant Medical Center v. Kennedy and
Baylor All Saints Medical Center, et al. v. Becerra could be consolidated during the next phase of litigation.
If the courts reaffirm the earlier reasoning, providers would
have strong legal support for including Section 1115 waiver days in the Medicare DSH calculation, subject only to further appeal.
For hospitals with significant Section 1115 waiver populations,
DSH percentage changes can materially impact reimbursement.
The strategic questions now:
- Should Section 1115 waiver days be included in current Medicare DSH filings?
- How should organizations respond to negative audit adjustments tied to prior filings?
- What level of litigation risk is acceptable while the law continues to evolve?
This is not a
compliance footnote — it is a reimbursement strategy decision.
Finance and reimbursement leaders should be
modeling exposure, evaluating upside, and engaging counsel now — not after the next ruling lands.
If you have questions regarding Medicare DSH, feel free to contact me:
adamblackwell@govdataservices.com