Congress should revisit how hospitals qualify for 340B drug discounts. H.R. 1’s Medicaid changes and court decisions affecting the Supplemental Security Income (SSI) fraction expose a weakness in the eligibility formula: a hospital can serve more financially vulnerable patients while its qualifying percentage falls.
The program’s safety-net purpose remains relevant, but its measure of need deserves reconsideration.
What the Current Thresholds Measure
Hospitals qualifying through the Disproportionate Share Hospital (DSH) category generally need a Medicare DSH adjustment percentage above 11.75 percent. Rural referral centers and rural sole community hospitals need at least 8 percent; Critical Access Hospitals (CAHs) have no DSH percentage threshold. Governmental status or qualifying nonprofit relationships and other requirements also apply. HRSA generally applies these thresholds to the most recently filed Medicare cost report, so changes in coverage and utilization may affect eligibility after a delay.
These thresholds concern the DSH payment adjustment, not simply the underlying patient percentage. That patient percentage combines the Medicare SSI fraction with the share of total inpatient days attributable to Medicaid-eligible patients without Medicare Part A entitlement. Uninsured care does not increase either numerator merely because patients cannot pay.
How Medicaid Changes Increase the Risk
H.R. 1, enacted as Public Law 119-21 on July 4, 2025, establishes work or community engagement requirements for certain Medicaid adults, generally beginning January 2027. It also requires six-month eligibility renewals for most expansion adults and restricts provider taxes and state-directed payments. Implementation schedules vary, but the combined effect can reduce coverage and hospital financial support.
The 340B consequence is indirect. When a patient loses Medicaid eligibility but continues receiving hospital care, formerly qualifying days may become uninsured days. The Medicaid fraction can decline even as uncompensated care increases.
Financing restrictions create additional pressure without necessarily changing the day count. H.R. 1 did not replace the hospital DSH eligibility thresholds.
Why the SSI Fraction Matters
In April 2025, the U.S. Supreme Court’s Advocate Christ Medical Center v. Kennedy decision upheld counting Medicare patients in the SSI numerator only when entitled to an SSI cash payment for the hospitalization month. The decision affirmed the existing interpretation; it did not create a new, uniform percentage reduction.
Continued Medicaid coverage or previous SSI enrollment alone does not establish qualifying SSI entitlement.
Separately, the 2022 Empire Health decision and CMS Ruling 1498-R3 require counting Medicare-entitled days even when Part A does not pay, including exhausted-benefit days. Such days enter the Medicare denominator; they enter its SSI numerator only when SSI requirements are met. The resulting fraction can therefore understate the broader population experiencing financial hardship.
Reconsidering the Measure of Need
Consider a hospital whose DSH adjustment falls from 12.0 to 11.5 percent while charity care rises. Assuming no alternative eligibility category, it falls below the standard 340B threshold, despite greater need. An inpatient insurance measure determines access to outpatient drug discounts, although coverage changes can move that measure independently of community poverty.
DSH provides a standardized benchmark for identifying hospitals serving public assistance beneficiaries. Its weakness becomes more consequential when coverage restrictions change the numerator without relieving the hospital’s responsibility to its community.
Congress should consider supplementing DSH with audited uncompensated-care information, including Worksheet S-10 data and measures of outpatient care for low-income patients. Any alternative needs consistent definitions, verification, and transparent reporting of how savings support patient access. A transition period could prevent abrupt losses caused by coverage changes.
These are proposed reforms, not options hospitals may substitute under current law.
Meanwhile, hospital leaders should validate Medicaid days, review applicable Centers for Medicare & Medicaid Services (CMS) SSI ratios, and forecast their distance from the relevant threshold. They should model lost 340B savings alongside Medicaid revenue reductions and rising charity care.
Eligibility rules remain legally binding. Their continued usefulness as a measure of safety-net responsibility warrants congressional review.
