Disproportionate share hospital payments

Payment and Delivery Systems

Medicaid disproportionate share hospital (DSH) payments are statutorily required payments intended to offset hospitals’ uncompensated care costs to improve access for Medicaid and uninsured patients as well as the financial stability of safety-net hospitals. In fiscal year (FY) 2014, Medicaid made a total of $18 billion in DSH payments ($8 billion in state funds and $10 billion in federal funds).

In the Protecting Access to Medicare Act of 2014 (P.L. 113-93) Congress directed MACPAC to publish an initial Report to Congress on Medicaid Disproportionate Share Hospital Payments in February 2016 and update it annually in March. Congress specifically asked MACPAC to compare the relationship of state DSH allotments to (1) changes in the number of uninsured individuals, (2) amounts and sources of hospitals’ uncompensated care costs, and (3) the number of hospitals with high levels of uncompensated care that also provide access to essential community services for low-income, uninsured, and vulnerable populations.

Read MACPAC’s first DSH report to Congress here. You also can find data on DSH and other supplemental payments by state in MACStats.

Evolution of DSH payment policy

Beginning with Medicaid’s enactment in 1965, states were required to pay hospitals’ reasonable costs, and to comply with this requirement, states mirrored Medicare’s hospital payment policies. As states were given broader discretion over hospital payment, the Congress became concerned that this shift might threaten hospitals serving large numbers of Medicaid beneficiaries and the uninsured. In response, Congress in 1981 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 (the Act)). In 1987, Congress further strengthened this requirement to ensure the financial stability of disproportionate share hospitals by requiring states to make additional payments to such hospitals for uncompensated care costs, including both the costs of care for the uninsured and Medicaid costs that are not covered by Medicaid payments (§1923 of the Act). (For further discussion of the evolution of Medicaid hospital payment policy, see Examining Medicaid Payment Policy from MACPAC’s March 2011 report.)

Limits on DSH allotments and payments

When Congress first required states to make DSH payments, the total amount of payments that states could make was left open-ended; however, states were slow to adopt DSH payment methods and make DSH 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 OBRA 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 and 1987 policy guidance indicated that taxes that were 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 was soon followed by significant growth in DSH spending and, 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, federal policymakers grew concerned over both the level of DSH spending and the possibility that some states were misusing DSH funds by making large DSH payments to hospitals operated by state or local government that were then transferred back to the state and used for other purposes. Congress acted to address these concerns by first enacting national and state-specific caps on the DSH funds that could be allocated to hospitals (Medicaid Voluntary Contribution and Provider-Specific Tax Amendments of 1991, P.L. 102-234), and then creating hospital-specific limits equal to the actual cost of uncompensated care for hospital services provided to Medicaid enrollees and uninsured individuals (OBRA 1993, P.L. 103-166).1

State-specific DSH allotment limits. Since enactment of state-specific caps, DSH allotments have been published annually in the Federal Register. Currently, each states’ allotment is based on the higher of its fiscal year (FY) 2004 allotment, or the prior fiscal year’s allotment increased by the change in the Consumer Price Index for all urban consumers from the prior year (Federal Register 2014).2 Also, each state’s allotment can be no more than the greater of the prior year’s allotment or 12 percent of its total Medicaid medical assistance expenditures during the fiscal year (Section 1923(f)(3)(B) of the Act).

In addition, federal regulations specify that aggregate DSH payments, including federal and state expenditures, should not be more than 12 percent of the total amount of Medicaid medical assistance expenditures for all 50 states and the District of Columbia (42 C.F.R. § 447.297).

A total of $11.6 billion was preliminarily allotted to states for DSH in FY 2014. State allotments ranged from about $10 million or less in four states (WY, DE, ND, and HI) to over $1 billion in three states (CA, NY, and TX) in 2014 (Federal Register 2014).

Hospital-specific DSH payment limits. Federal statute limits the amount of DSH payments that a state can make to any single hospital. In general, DSH payments may not exceed a hospital’s cost of providing uncompensated care.3 That is, DSH payments are limited to the cost of inpatient and outpatient services to Medicaid and uninsured patients minus payments received from Medicaid (including supplemental payments) and from uninsured individuals.4

State DSH Policies

States have broad flexibility in both determining which hospitals receive DSH payments and in how the payments are calculated. However, federal statute specifies that hospitals are “deemed” disproportionate share hospitals and must qualify for DSH payments if they have:

  • Medicaid utilization at least one standard deviation above the mean for hospitals in the state that receive Medicaid payments, or
  • Low-income inpatient utilization in excess of 25 percent.5

States may designate other hospitals to receive DSH payments as long as they have a Medicaid utilization rate of at least 1 percent and, with certain exceptions, at least two obstetricians with staff privileges that treat Medicaid enrollees. As a result, states may include a wide range of hospitals in their designation of DSH hospitals, as long as those meeting the specified minimum criteria are included. This results in significant variation across states, with some providing DSH payments to a minority of hospitals and others providing DSH payments to nearly all of the hospitals in a state (CRS 2013).

States’ DSH payment methodologies are specified 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.

Federal statute also limits the amount of DSH payments that each state can make to institutions of mental disease or other mental health facilities. However, states have broad flexibility within these requirements in determining the amount of DSH payments that are made to each provider.

Spending Patterns

Both the amount of DSH expenditures and the percentage of Medicaid spending that DSH payments account for vary widely among states. Ten states account for more than two-thirds of total DSH spending. Several of these states (New York, California, Texas, New Jersey, Pennsylvania, and Ohio) are among the top ten in total Medicaid service spending. Missouri, Louisiana, South Carolina, and Alabama, however, rank 15th, 22nd, 25th, and 26th respectively in Medicaid service spending. DSH spending accounted for 3.8 percent of total Medicaid service spending by states in FY 2013. DSH spending as a percentage of Medicaid service spending ranged from less than 1 percent in a number of states to 12.4 percent in New Jersey.

DSH Reporting and Audits 

In 2003, Congress added statutory requirements for states to submit annual reports and, separately, to submit an annual independent certified audit of their DSH payments (P.L. 108-173). For each DSH hospital, the annual reports are required to include, for example, the hospital-specific DSH limit, the Medicaid inpatient utilization rate, the low income utilization rate, state-defined DSH qualification criteria, and Medicaid payments (including fee-for-service, managed care, and non-DSH supplemental payments) (Section 1923(j) of the Act and 42 CFR 447.299). The annual independent audits must certify that each DSH hospital qualifies for payment, DSH payments do not exceed allowable uncompensated care costs, and that the hospital accurately reported payments, spending, and utilization for the purpose of DSH payment methodology.

The first set of DSH reports were submitted in 2010 and covered state plan rate years (SPRYs) 2005 to 2007. SPRYs 2005 to 2010 were deemed transition years to allow the Centers for Medicare & Medicaid Services (CMS), states, hospitals, and auditors time to develop and refine their procedures without financial penalties. Beginning with the reports for SPRY 2011, which will be submitted in 2014, DSH payments that exceed hospital specific limits will be considered overpayments and states will be required to return the federal share or, if specified in the state plan, redistribute it to other hospitals that are below their limits (CMS undated).

Medicaid DSH Allotment Reductions

Federal statute. Under the Patient Protection and Affordable Care Act of 2010 (ACA, P.L. 111-148, as amended), Congress reduced federal DSH allotments, which have been about $11 billion annually, to account for the decrease in uncompensated care anticipated under health insurance coverage expansion. As enacted in the ACA, the DSH allotment reductions would have ended after FY 2020 and allotments would have reverted to their pre-ACA levels. However, several pieces of legislation have been enacted since 2010 that have altered 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 current schedule and amounts for the Medicaid DSH reductions are as follows:

  • $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; and,
  • $8.0 billion in FYs 2024 and 2025.

The statute requires the Secretary of Health and Human Services to develop a methodology to implement the reductions that meets the following requirements:

  • The largest reductions are imposed on states that:
    • have the lowest percentages of uninsured individuals, or
    • do not target DSH payments on hospitals with high volumes of Medicaid inpatients or uncompensated care;
  • Smaller percentage reductions are imposed on low DSH states;6and
  • Takes into account the extent to which DSH funds were used to expand coverage through an 1115 demonstration.

Federal regulations. On September 18, 2013, CMS published a final rule describing its methodology for implementing the Medicaid DSH allotment reductions in FY 2014 and 2015. After dividing states based on whether or not they are low-DSH states, each state’s reduction was to be based 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. However, because of the subsequent delays to the onset of the DSH reductions the methodology was not implemented and, in the absence of further delays, a new methodology will be required prior to FY 2018.


1In a 1994 letter to state Medicaid Directors, CMS (then HCFA) instructed states that the cost of “hospital services” includes both inpatient and outpatient costs.

2The methodology described here applies to most states, although there are some notable exceptions. Hawaii and Tennessee each have specific methodology outlined in the Medicaid statute.

3Total annual uncompensated care costs are defined in federal regulation as “the total cost of care for furnishing inpatient hospital and outpatient hospital services to Medicaid eligible individuals and to individuals with no source of third party coverage for the hospital services they receive less the sum of regular Medicaid FFS rate payments, Medicaid managed care organization payments, supplemental or enhanced Medicaid payments, uninsured revenues, and Section 1011 payments for inpatient and outpatient hospital services” (42 CFR 447.299).

4For California public hospitals, the limit is 175 percent of uncompensated costs.

5The formulae for calculating Medicaid utilization and low income utilization are included in Section 1923(b) of the Social Security Act.

6A low-DSH state is a state that had FY 2000 DSH expenditures that were greater than 0 percent but less than 3 percent of its total Medicaid medical assistance expenditures (i.e., including federal and state expenditures and excluding expenditures for administrative activities).