Understanding Disproportionate Share Hospital Payments: How Are They Made?

Disproportionate Share Hospital (DSH) payments are statutorily required payments intended to offset hospitals' uncompensated care costs to improve access for Medicaid and uninsured patients. Federal law requires that state Medicaid programs make DSH payments to qualifying hospitals that serve a large number of Medicaid and uninsured individuals. The Medicaid DSH program provides financial assistance to hospitals that care for the nation's most vulnerable populations, including children, the disabled, and the elderly. These hospitals also provide critical community services, such as trauma and burn care, maternal and child health, high-risk neonatal care, and disaster preparedness resources.

Hospitals serving a disproportionate number of low-income patients

Disproportionate Share Hospitals (DSH) are hospitals that serve a disproportionate number of low-income patients. These hospitals receive payments to cover the costs of care for uninsured patients. Federal law requires that state Medicaid programs make DSH payments to qualifying hospitals that serve a large number of Medicaid and uninsured individuals. The purpose of these payments is to offset hospitals' uncompensated care costs, thereby improving access for Medicaid and uninsured patients and enhancing the financial stability of safety-net hospitals.

The Medicaid DSH program provides financial assistance to hospitals that care for vulnerable populations, including children, the disabled, and the elderly. These hospitals also offer critical community services, such as trauma and burn care, maternal and child health, high-risk neonatal care, and disaster preparedness resources. In the fiscal year 2021, Medicaid made a total of $18.9 billion in DSH payments, with $8.1 billion coming from state funds and $10.8 billion from federal funds.

The calculation of DSH payments involves several factors, including the uninsured factor, Medicaid volume factor, uncompensated care factor, low DSH state factor, and budget neutrality factor. The uncompensated care factor takes into account the percentage of insured low-income days, which is the sum of Medicaid days and Medicare Supplemental Security Income (SSI) days. Hospitals with a disproportionate share adjustment percentage greater than 11.75% in their cost reports are also considered for DSH payments.

The Medicare DSH adjustment, enacted in 1985, provides another avenue for hospitals to receive DSH payments. This adjustment offers two methods for hospitals to qualify, primarily based on a statutory formula resulting in the DSH patient percentage. Additionally, certain hospitals in the 97th percentile or above regarding Medicare SSI days or the percentage of Medicare SSI days to total inpatient days may calculate their DSH limits using higher values.

While there have been efforts to reduce Medicaid DSH payments, such as through the Affordable Care Act, the need for continued and enhanced funding remains critical. Many hospitals face financial hardship, and the number of uninsured individuals is expected to rise over the next decade. As such, DSH payments play a vital role in ensuring that hospitals can continue to provide care to all patients, regardless of their ability to pay.

Medicaid DSH payments and the Affordable Care Act

The Medicaid Disproportionate Share Hospital (DSH) program provides financial assistance to hospitals that care for vulnerable populations, including children, the disabled, and the elderly. These hospitals also provide critical community services such as trauma and burn care, maternal and child health, high-risk neonatal care, and disaster preparedness resources.

Medicaid DSH payments are statutorily required payments intended to offset hospitals' uncompensated care costs to improve access for Medicaid and uninsured patients and enhance the financial stability of safety-net hospitals. Federal law requires state Medicaid programs to make DSH payments to qualifying hospitals that serve a large number of Medicaid and uninsured individuals.

The Affordable Care Act (ACA) of 2010 aimed to reduce federal DSH allotments to account for the anticipated decrease in uncompensated care due to expanded health insurance coverage. Congress reduced Medicaid DSH payments under the ACA, reasoning that hospitals would care for fewer uninsured patients as health coverage expanded. However, coverage increases have not been fully realized, and hospitals continue to face financial instability.

The methodology for calculating DSH allotment reductions includes factors such as the uninsured factor (UPF), Medicaid volume factor (HMF), uncompensated care factor (HUF), low DSH state factor (LDF), and budget neutrality factor (BNF). CMS calculates individual state DSH reductions using each respective year's preliminary DSH allotment.

The Consolidated Appropriations Act (CAA) of 2021 further changed the methodology for calculating hospital-specific DSH limits, excluding costs and payments associated with Medicaid-eligible individuals when Medicaid is not the primary payer. CMS has released guidance and rules to address these changes, enhancing administrative efficiency and clarifying how hospital-specific DSH limits will be calculated.

Medicare DSH adjustment

The Medicare DSH adjustment provision under section 1886(d) (5) (F) of the Act was enacted by section 9105 of the Consolidated Omnibus Budget Reconciliation Act (COBRA) in 1985. It became effective for discharges occurring on or after May 1, 1986. According to section 1886(d) (5) (F) of the Act, there are two methods for a hospital to qualify for the Medicare DSH adjustment.

The primary method for a hospital to qualify is based on a statutory formula that results in the DSH patient percentage. The DSH patient percentage is equal to the sum of the percentage of Medicare inpatient days attributable to patients eligible for both Medicare Part A and Supplemental Security Income (SSI). It also includes the percentage of total inpatient days attributable to patients eligible for Medicaid but not Medicare Part A. The DSH patient percentage is defined as: The alternate special exception method is for large urban hospitals that can demonstrate that more than 30% of their total net inpatient care revenue comes from patients who are eligible for both Medicare Part A and SSI.

Under the primary method to qualify for DSH adjustments, the first computation includes the number of hospital patient days used by patients who, for those days, were entitled to both Medicare Part A and SSI (excluding State supplementation). This number is then divided by the number of patient days used by patients under Medicare Part A for that same period. The second computation includes hospital patient days used by patients who, for those days, were eligible for medical assistance under a state plan approved under title XIX (Medicaid) but were not entitled to Medicare Part A. This number is then divided by the total number of hospital patient days for that same period. Hospitals whose DSH patient percentage exceeds 15% are eligible for a DSH payment adjustment based on another statutory formula. This formula varies for urban hospitals with 100 or more beds and rural hospitals with 500 or more beds.

For FY 2014 and FY 2015, a hospital's amount of uncompensated care was determined based on a Medicare DSH hospital's share of insured low-income days, or the sum of a hospital's Medicare SSI days and Medicaid days. The additional payment for uncompensated care and the data used in the calculation is provided in a table.

Uncompensated care costs

The Medicaid DSH program was established to offer financial assistance to hospitals catering to vulnerable populations, including children, the disabled, and the elderly. These hospitals also provide critical community services such as trauma care, maternal and child health services, and disaster preparedness resources. DSH payments are made to qualifying hospitals that serve a large number of Medicaid and uninsured individuals, helping to improve access for these patients and enhance the financial stability of safety-net hospitals.

The calculation of uncompensated care costs is complex and involves various factors. For instance, in FY 2014 and FY 2015, the uncompensated care amount for a hospital was determined based on its share of insured low-income days, specifically the sum of its Medicare Supplemental Security Income (SSI) days and Medicaid days. This calculation considers the percentage of individuals under the age of 65 who are uninsured, with adjustments made for each fiscal year.

The Medicare DSH Adjustment, enacted in 1985, also plays a role in addressing uncompensated care costs. Hospitals can qualify for this adjustment through a statutory formula that results in a DSH patient percentage. Additionally, the Consolidated Appropriations Act, 2021, introduced changes to the calculation of hospital-specific DSH limits, providing an exception for hospitals in the 97th percentile or above regarding Medicare SSI days or their percentage of total inpatient days.

The need for DSH payments remains critical, as highlighted by the Congressional Budget Office's projection of a rising uninsured rate over the next decade. Tens of millions of Americans currently lack health insurance, and hospitals continue to face financial challenges while upholding their mission to treat all patients, regardless of their ability to pay.

Federal law and annual DSH allotment

Federal law requires that state Medicaid programs make Disproportionate Share Hospital (DSH) payments to qualifying hospitals that serve a large number of Medicaid and uninsured individuals. Federal law establishes an annual DSH allotment for each state that limits Federal Financial Participation (FFP) for total statewide DSH payments made to hospitals. Federal law also limits FFP for DSH payments through the hospital-specific DSH limit.

Under the hospital-specific DSH limit, FFP is not available for state DSH payments that are more than the hospital's eligible uncompensated care cost, which is the cost of providing inpatient hospital and outpatient hospital services to Medicaid patients and the uninsured, minus payments received by the hospital on behalf of those patients. For states to receive FFP for DSH payments, federal law requires states to submit an independent certified audit and an annual report to the Secretary describing DSH payments made to each DSH hospital. The report must identify each disproportionate share hospital that received a DSH payment adjustment and provide any other information the Secretary needs to ensure the appropriateness of the payment.

The annual certified independent audit includes specific verifications to ensure that all DSH payments are appropriate. The Centers for Medicare & Medicaid Services (CMS) developed additional guidance, including the General DSH Audit and Reporting Protocol and the DSH Report Format, to help states meet statutory and regulatory requirements.

The CMS has released rules to implement statutorily required DSH allotment reductions. These rules outline a methodology to calculate the annual reductions for FY2020 through FY2025, including five factors: the uninsured factor (UPF), Medicaid volume factor (HMF), uncompensated care factor (HUF), low DSH state factor (LDF), and budget neutrality factor (BNF).

The aggregate DSH allotment reduction amounts are provided in section 1923(f)(7)(A)(ii) of the Act. States are required to submit the mean MIUR, determined in accordance with section 1923(b)(1)(A) of the Act, for all hospitals receiving Medicaid payments in the state, as well as the value of one standard deviation above this mean. This data must be provided to CMS by June 30 of each year.

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