Analysis of the Joint Distribution of Disproportionate Share Hospital Payments. Analytical Policy Issues


We are interested in evaluating how different measures of financially vulnerable safety net hospitals would affect 1) the set of hospitals eligible to receive federal subsidies and 2) the distribution of funds among those hospitals. The literature concerning safety net hospitals and the current policies for Medicare and Medicaid DSH payments suggest a set of analytical policy issues related to the distribution of DSH funds.

  • How sensitive is the allocation of DSH funds to different measures of vulnerable populations? Do measures that use only a subset of low-income patients, e.g. Medicaid patients, target the same hospitals as more inclusive measures?
  • Is it feasible for the allocation formula to take into account both inpatient and outpatient services? How does this affect the relative distribution of DSH funds?
  • Do measures based on the proportion of care furnished to low-income patients target a different set of hospitals than those based on the financial risk associated with serving low-income patients?
  • Does a strategy such as a minimum threshold or sliding scale strategy improve the relationship between a hospital's financial risk and the subsidy it would receive from a DSH fund?

Our analysis is within the context of using a single federal payment mechanism to distribute DSH funds. Our baseline is current law Medicare payments and the federal share of DSH payments. The simulations assume funding would be allocated to hospitals separately from program payments for patient care services. Using a separate funding stream has implications for the formula that is used for allocating the funds (e.g. whether Medicare/SSI beneficiaries need to be taken into consideration in the allocation formula). It also affects the vehicle that is used to distribute the funds (e.g. Medicare DSH payments are paid as an add-on to the DRG standard payment rate so that hospitals with a large uninsured caseload and few Medicare patients receive little support).

The simulations include:

  • the joint distribution of Medicare and the federal share of Medicaid DSH payments under current policies to the hospitals in our dataset;
  • a MedPAC-like approach that would distribute funds based on the hospital's proportion of low-income revenues and adjusted discharges (with further adjustments for differences in geographic location and case mix);
  • policies focused on the financial risk associated with serving Medicaid and self-pay patients (i.e., Medicaid shortfalls and uncompensated care costs).

In exploring the impact of alternative allocation policies, the issue of which hospitals should be eligible to receive DSH payments should be separated from the issue of how the funds should be distributed to eligible hospitals. The advantage of this approach is that it allows the possibility of basing eligibility on the patient population served by the hospital but determining how much the hospital receives in DSH payments on the financial risk it bears as a result. The risk borne by a hospital whose patients are covered by Medicare and Medicaid is less that that borne by a hospital with a substantial uninsured population.

To minimize issues related to whether higher costs are attributable to hospital inefficiency or justifiable differences in costs, the financial measures used in the eligibility and allocation policies do not measure costs directly; rather, they express financial risk associated with serving poor people as a percentage of revenues or costs. In some allocation policies, adjustments are made for cost differences attributable to case mix and hospital wage levels.

View full report


"report.pdf" (pdf, 829.97Kb)

Note: Documents in PDF format require the Adobe Acrobat Reader®. If you experience problems with PDF documents, please download the latest version of the Reader®