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


Underlying these major policy issues are empirical questions regarding the sensitivity of the allocations to different measures that could be used to define financially vulnerable safety net hospitals. These questions are important in understanding the impact the policy choices could have on the distribution of DSH funds to particular hospitals and identifying those choices where administrative preferences for readily available measures would have little effect on the distributions. In this report, we evaluated 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 analytical questions related to the distribution of DSH funds include:

  • 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 improve the relationship between a hospital’s financial risk and the subsidy it would receive from a DSH fund?

Our exploratory analyses of alternative allocation policies are within the context of using a single federal DSH funding mechanism. By assuming there would be a new funding stream to support financially vulnerable safety net hospitals, there is no need to link the funds to services provided to Medicare and Medicaid beneficiaries and there is greater flexibility to address the identified shortcomings of the current system. Our baseline is current law Medicare payments and the federal share of Medicaid DSH payments.

The simulations included:

  • a MedPAC-like approach that would distribute funds based on the hospital’s proportion of low-income revenues and adjusted discharges2;
  • policies focused on the financial risk associated with serving Medicaid and self-pay patients (i.e., Medicaid shortfalls and uncompensated care costs).

To minimize issues related to whether higher costs are attributable to hospital inefficiency or justifiable differences in costs, the financial measures used in the 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, we made adjustments for cost differences attributable to case mix and hospital wage levels.

2.  The terms adjusted days and adjusted discharges refer to adjusting inpatient volume statistics to take into account outpatient services. To do so, the inpatient statistic is increased by the ratio of total patient revenues to inpatient revenues.

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