The federal government provides special funding to hospitals that treat a disproportionate number of indigent patients through the Disproportionate Share Hospital (“DSH”) programs. The DSH program seeks to encourage these hospitals to continue to provide quality services to vulnerable patients by providing funding for uncompensated care. There are DSH programs for both Medicare and Medicaid.
The Medicare program reimburses qualifying hospitals for the services they provide to eligible elderly and disabled patients. The operating costs of inpatient hospital services are reimbursed under a prospective payment system that is based on standardized rates but subject to hospital-specific adjustments. One such adjustment is the DSH adjustment, which requires the Secretary of the Department of Health and Human Services to provide an additional payment to hospitals that serve a significantly disproportionate share of low income patients. (42 U.S.C. § 1395ww(d)(5)(F)(i)(I)). Whether a hospital qualifies for the DSH adjustment, and the amount of the adjustment it receives, depends on the disproportionate patient percentage (“DDP”) determined by the Secretary under a statutory formula. (42 U.S.C. § 1395ww(d)(5)(F)(v)-(vii)). The DPP is the sum of two fractions
- the Medicaid Fraction (often called the Medicaid Low Income Proxy) and the Social Security Income (SSI) Fraction (often called the Medicare Low Income Proxy). (42 U.S.C. § 1395ww(d)(5)(F)(vi)).
- The Medicaid Fraction is the number of hospital patient days for patients eligible for medical assistance under a State Medical plan but who are not entitled to Medicare Part I, divided by the total number of hospital patient days. (42 U.S.C. § 1395ww(d)(5)(F)(vi)(II)).
- The SSI Fraction is the number of hospital patient days for patients entitled to benefits under both Medicare Part A and the SSI program divided by the total number of hospital patient days for patients entitled to Medicare Part A. (42 U.S.C. § 1395ww(d)(5)(F)(vi)(I)).
- Hospitals whose DPP exceeds 15% are eligible for a DSH payment adjustment.
A hospital may also qualify for a Medicare DSH payment adjustment if it is a large urban hospital that can demonstrate that more than 30% of its total net inpatient care revenues come from state and local governments for indigent care (other than Medicare or Medicaid).
Medicare DSH payment adjustments are a percentage increase to the hospital payment rate depending on the hospital’s size, urban/rural location, and status as a rural referral center or sale community hospital. Medicare payments are initially determined by a “fiscal intermediary.” The provider must file an annual cost report with an assigned Intermediary. The Intermediary issues an initial “notice of program reimbursement” (NPR) after conducting an audit and accounting for interim payments to the provider. The provider may appeal the initial NPR to the Provider Reimbursement Board within 180 days if at least $10,000 is at issue.
Medicaid DSH payments provide financial assistance to hospitals that serve a large number of low-income patients, such as people with Medicaid and the uninsured. Medicaid DSH payments are the largest source of federal funding for uncompensated federal care. The federal government distributes the DSH funds or allotments to each state based on a statutory formula and the states, in turn, distribute their portion of the DSH funding among qualifying hospitals. States are to use their federal DSH allotments to help cover the costs of hospitals that provide care to low-income patients when those costs are not covered by other payers. Each state’s federal allotment is capped at 12% of the state’s total Medicaid benefits payments for the allotment year and states have up to two years to claim their DSH allotments.
Each state is unique in how it structures its DSH program because each state has discretion to determine which hospitals in that state get DSH payments and how much each hospital receives. Each state must include in its Medical State Plan a description of the criteria used to designate hospitals as DSH hospitals and a definition of the formulas used to calculate the DSH payments.
A state’s definition of a qualifying DSH hospital must include all hospitals meeting one of the statutory minimum criteria:
(1) a Medicaid inpatient utilization rate in excess of one standard deviation or more above the mean for all hospitals in the state; or
(2) a low-income utilization rate exceeding 25%.
States are free to include other hospitals in their designation of DSH hospitals.
States must pay DSH hospitals at least an amount calculated using the Medicare DSH payment methodology or an amount calculated using a payment methodology that increases proportionally with the hospital’s low-income utilization rate.
The DSH program has its roots in the development of the Boren Amendment as established in the Omnibus Budget Reconciliation Acts of 1980 and 1981. This legislation mandated that states consider special payment needs for hospitals that serve a large portion of Medicaid and uninsured patients. The rationale behind these payments was that hospitals providing high volumes of care to low income individuals often lose money as a result of low Medicaid reimbursement rates. These hospitals also lost money through uncompensated care because they provided high volumes of care to indigent patients. Moreover, the hospitals did not make money because of the low amount of private caseloads.
In 1981, Congress established the Medicaid disproportionate share hospital program and authorized DSH payments to help guarantee that states provide ample financial support to hospitals that serve a significant number of low income patients. Additionally, Congress established DSH payments for hospitals under Medicare’s prospective payment system.
The Medicaid DSH program was intended to improve the financial stability of hospitals which serve a disproportionate share of low-income patients with special needs and preserve access to quality health services for low-income patients.
The Center for Medicare & Medicaid Services is the agency in charge of DSH designations and adjustments. The website, http://www.cms.gov, contains information about requirements and procedures.
Federal officials are concerned about whether states actually use the funds to support hospital uncompensated care. The DSH program is complex and lacks good reporting systems and financial controls. The federal government does not require hospital specific information about payments back to states through provider taxes and intergovernmental transfers. Therefore, it is difficult to verify whether DSH payments represent real additional dollars to cover hospitals’ uncompensated care. States that engage in questionable practices are often overlooked because there is no reliable data.
There is also concern regarding the inequity across states. States with large DSH allotments receive substantially more DSH funding. However, state allotments are not based on need. Rather, they are based on historical program spending levels at the time when the federal government established state DSH allotments. Therefore, states that were most effective in maximizing DSH funding back then have continued to benefit since.
Since Medicaid is jointly financed by the federal and state governments, state officials have sought to offset state expenditures by maximizing federal contributions. DSH payments are the largest source of federal funding for uncompensated hospital care.
While the federal government has been critical of some states’ “abuse” of the DSH program, states assert that the DSH program is essential to maintaining the health care safety net for vulnerable population. Hospitals argue that DSH payments are critical to their survival. The DSH program continues to be a highly important and controversial policy issue.
By: Virginia Welch