Medicaid Disproportionate Share Payments

Publication Date: January 2005

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Health

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Abstract:

The Medicaid statute requires that states make disproportionate share (DSH) adjustments to the payment rates of certain hospitals treating large numbers of low income and Medicaid patients — recognizing the disadvantaged situation of those hospitals. Although the requirement was established in 1981, DSH payments did not become a significant part of the program until after 1989 when they grew from just under $1 billion to almost $17 billion by 1992. During that time states’ Medicaid budgets were facing a number of upward pressures while states were learning about financing techniques that made it easier to collect increased DSH payments from the federal government.

In 1991 Congress intervened to control the growth of DSH payments by limiting the amounts available to each state and setting national limits. The new law was successful. After 1992 DSH payment growth slowed considerably, although the level of national DSH payments remains high — just over $15.9 billion in 2002.

Today, as a result of amendments contained in the Balanced Budget Act of 1997 (BBA-1997) and further changes in the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA 2000), a state’s DSH payments may not exceed an allotment amount set in the law for that state. States must define, in their state Medicaid plan, hospitals qualifying as DSH hospitals and DSH payment formulas. DSH hospitals must include at least all hospitals meeting minimum criteria and may not include hospitals that have a Medicaid utilization rate below 1%. The DSH payment formula also must meet minimum criteria and DSH payments for any specific hospital cannot exceed a hospital-specific cap based on the unreimbursed costs of providing hospital services to Medicaid and uninsured patients. DSH payments for mental hospitals cannot exceed a facility-specific cap based on a percentage of such payments in 1995. However, within these broad guidelines states also have a great deal of discretion in designating DSH hospitals and calculating adjustments for them. For this reason, Congress has required states to report the methods used to identify and pay DSH hospitals and the payments made to each of the identified hospitals.

Congress provided relief to states from the 1997 DSH cuts. The reductions in states’ allotments that were to take place in 2000, 2001, and 2002 were eliminated but the temporary reprieve did not extend beyond 2002. In 2003 states faced significant reductions in their DSH allotments. In P.L. 108-173, Congress again stepped in to raise DSH payments. Beginning in FY2004 and for certain subsequent fiscal years, states will be allotted 16% more than the amounts previously available. In addition, the number of states able to qualify for low DSH payments and the allotments for those low DSH states were raised.