Disproportionate-Share Hospital Payment Reductions Threaten Safety-Net Hospitals’ Finances

October 13, 2017 Phil C. Solomon

Safety-net hospitals rely on disproportionate-share hospital (DSH) payments to help cover uncompensated care costs and underpayments by Medicaid. The Affordable Care Act (ACA) anticipated that insurance expansion would increase safety-net hospitals’ revenues and planned to reduce DSH payments accordingly.

However, decreases in uncompensated care costs resulting from the ACA insurance expansion may not offset the Act’s DSH reductions after all due to the high number of people who will remain uninsured, low Medicaid reimbursement rates, and medical cost inflation.

The DSH payment program was established in 1981 and provides over $20 billion each year in special Medicare and Medicaid funding to hospitals that treat a disproportionate share of indigent patients. Over 3,000 hospitals nationwide currently receive DSH payments.

The ACA originally called for reductions to DSH payments between 2014 and 2020, assuming that ACA coverage expansions would reduce the need for the funding of uncompensated care. Ensuing legislation delayed DSH payments cuts until the fiscal year 2018, which began October 1, 2017. Under the current structure, the DSH program funding will be cut by a total of $43 billion between fiscal years 2018 and 2025.

DSH Payments to Provider Hospitals

DSH payments are statutorily required to offset hospitals’ uncompensated care costs in order to improve access for Medicaid and uninsured patients and improve the financial stability of safety-net hospitals.

States began making Medicaid DSH payments in 1981. As states had broader discretion over hospital payment, Congress became concerned that this shift might threaten hospitals serving large numbers of Medicaid beneficiaries and the uninsured. In response, in 1981 Congress required states to “take into account” the situation of hospitals serving a disproportionate share of low-income patients when designing payment systems (§1902(a)(13)(A)(iv) of the Social Security Act).

Limits on DSH Allotments and Payments

When Congress first required states to make DSH payments, states had discretion as to how the funds were paid, and in turn, states were slow to make payments. In the Omnibus Budget Reconciliation Act (OBRA) of 1986, Congress clarified that Medicaid’s hospital payment limitations did not apply to DSH, and then in 1987 required states to submit state plan amendments authorizing DSH payments. At about the same time, a 1985 federal regulation permitted states to use both public and private donations as sources of non-federal Medicaid financing. The 1987 policy guidance indicated that taxes imposed on only Medicaid providers could also be used to finance Medicaid (National Health Policy Forum 2002). This combination of unlimited DSH payments and financing flexibility generated significant growth in DSH spending. From 1990 to 1992, the total amount of DSH payments increased from $1.3 billion to $17.7 billion (Urban Institute 1998).

As DSH spending increased, Congress grew concerned over the level of DSH spending and the possibility that some states were misusing DSH funds by making large DSH payments to state-run hospitals.  Congress addressed these concerns by enacting national and state-specific caps on the DSH funds and creating hospital-specific limits equal to the actual cost of uncompensated care for hospital services provided to Medicaid enrollees and uninsured individuals.

State DSH Payment Requirements

States have flexibility in determining which hospitals receive DSH payments and how those payments are calculated. States may make DSH payments to DSH hospitals if they meet one of two criteria specified in federal statute:

  • The hospital has a Medicaid utilization at least one standard deviation above the mean for hospitals in the state that receive Medicaid payments, or
  • The hospital has a low-income inpatient utilization more than 25 percent.

States’ DSH payment practices must be outlined within their Medicaid state plans. Federal statute requires that minimum payments to DSH hospitals must be determined using one of the following methodologies:

  • The Medicare DSH adjustment methodology,
  • A methodology that increases DSH payments in proportion to the extent that a hospital’s Medicaid utilization exceeds one standard deviation above the mean, and
  • A methodology that varies by hospital type and that applies equally to all hospitals of each type and is reasonably related to Medicaid and low-income utilization.

ACA Medicaid DSH Allotment Reductions

Under the ACA, federal DSH allotments were to begin reductions beginning in 2014 to account for the decrease in uncompensated care anticipated under health insurance coverage expansion. However, since 2010, several pieces of legislation have been enacted, thus delaying the ACA’s Medicaid DSH reduction schedule:

  • The Middle-Class Tax Relief and Job Creation Act of 2012 (P.L. 112-96), enacted on February 22, 2012, extended the reductions to FY 2021.
  • The American Taxpayer Relief Act of 2012 (P.L. 112-240), enacted on January 2, 2013, extended the reductions to FY 2022.
  • The Bipartisan Budget Act of 2013 (P.L. 113-67), enacted on December 26, 2013, delayed the onset of reductions until FY 2016 by eliminating the FY 2014 reduction and adding the FY 2015 reduction to that for FY 2016; also extended the reductions to FY 2023.
  • The Protecting Access to Medicare Act of 2014 (P.L. 113-93), enacted April 1, 2014, eliminated the FY 2016 reduction, thus delaying the reductions until FY 2017; also adjusted amounts of reductions in future years and extended them to FY 2024.
  • The Medicare Access and CHIP Reauthorization Act of 2015 (P.L. 114-10), enacted on April 16, 2015, eliminated the FY 2017 reduction, which delayed the reductions until FY 2018, adjusted amounts of reductions in future years, and extended them to FY 2025.

As a result, the schedule below reflects the pending amounts for the Medicaid DSH reductions:

  • $2.0 billion in FY 2018;
  • $3.0 billion in FY 2019;
  • $4.0 billion in FY 2020;
  • $5.0 billion in FY 2021;
  • $6.0 billion in FY 2022;
  • $7.0 billion in FY 2023;
  • $8.0 billion in FY 2024; and
  • $8.0 billion in FY 2025.

The Centers for Medicare and Medicaid Services (CMS) published its final rule describing its methodology for implementing the Medicaid DSH allotment reductions beginning in 2014 and 2015. The reductions were authorized by meeting the following:

  • One-third on its relative level of uninsurance;
  • One-third on the extent to which it targets DSH payments to hospitals with high Medicaid utilization; and
  • One-third on the extent to which it targets DSH payments to hospitals with high levels of uncompensated care.

Since there have been delays in the onset of the DSH reductions, the payment methodology necessary to implement them has not been rolled out. The current payment methodologies are no longer valid, creating a conundrum for CMS. They must now scurry to create a new payment methodology before the DSH payment reductions go into effect in 2018.


Phil C. Solomon is the publisher of Revenue Cycle News, a healthcare business information blog and serves as the Vice President of Marketing Strategy for MiraMed, a healthcare revenue cycle outsourcing company.  As an executive leader, he is responsible for creating and executing sales and marketing strategies which drive new business development and client engagement. Phil has over 25 years’ experience consulting on a broad range of healthcare initiatives for clinical and revenue cycle performance improvement.  He has worked with industry’s largest health systems developing executable strategies for revenue enhancement, expense reduction, and clinical transformation. He can be reached at philcsolomon@gmail.com

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