Analysis of the Joint Distribution of Disproportionate Share Hospital Payments. Concerns with Medicare Formula


In 1997, ProPAC identified several problems with the current method for distributing Medicare DSH payments (ProPAC 1997a):

  • The DPP is a poor indicator of hospitals' care for the poor, particularly because it reflects only Medicaid and not uncompensated care. The changing role of the Medicaid program and the variations in this role across states makes Medicaid an increasingly inappropriate proxy for uncompensated care. Moreover, the omission of uncompensated care means that the leading source of financial pressure on safety net hospitals is not considered in the distribution of Medicare DSH payments.
  • Because there are multiple DSH formulae, hospitals with the same share of low-income patients can have substantially different DSH payment adjustments. In particular, there was great disparity in the formulas for urban versus rural hospitals: for example, an urban hospital with 100 beds and a DPP of 25 percent received an adjustment of 9.72 percent, while a rural hospital of the same size with the same DPP received no adjustment (The BIPA partially addressed this concern.)
  • Each DSH operating formula includes a minimum DPP threshold, below which the hospital receives no DSH payment and at which the hospital receives some minimum percentage. This sometimes creates a substantial "notch". For example, an urban hospital with 100 beds receives a 2.5 percent adjustment if its DPP is 15.0 percent, but nothing if its DPP is 14.9 percent.

ProPAC concluded that these problems prevented Medicare DSH payments from achieving their intended objectives and made several recommendations.

  • Medicare DSH payments should be aimed at protecting access to care for its beneficiaries. Payments therefore should be distributed based on each hospital's share of low-income patient care and its volume of Medicare cases.
  • The low-income share measure should reflect the costs of services provided to low-income patients in both inpatient and outpatient settings.
  • In addition to Medicare SSI and Medicaid patients, the low-income share measure should include patients sponsored by other state and local indigent care programs as well as uninsured and underinsured patients represented by uncompensated care. This would eliminate disparities caused by differences in Medicaid eligibility rules across states.
  • Medicare DSH payments should be concentrated among hospitals with the highest shares of low-income patients. Therefore, a minimum threshold should be established, but there should be no notch in the DSH formula.
  • To eliminate the disparity between the payments received by urban and rural hospitals with the same proportion of low-income patients, the same general approach for distributing Medicare DSH payments should apply to all PPS hospitals.
  • The Secretary should collect the data necessary to implement a revised Medicare DSH payment mechanism.

In succeeding years, the Medicare Payment Advisory Commission5 essentially reiterated ProPAC's recommendations (MedPAC 1998; MedPAC 1999, MedPAC 2001).

Drawing on work by ProPAC, the BBA required the Secretary of HHS to make recommendations to the Congress regarding a revised formula for DSH payments. The formula is to:

  • establish a single threshold for hospitals serving low income patients;
  • consider the costs incurred by hospitals in serving Medicare patients who are entitled to SSI; and,
  • consider the costs incurred by hospitals in serving Medicaid patients who are not entitled to Medicare.

The Secretary's report to Congress has not been released. As indicated above, the BIPA included provisions to establish a single threshold for serving low income patients; however, the different payment formulae remain.

5.  The commission was formed by merging ProPAC with the Physician Payment Review Commission in October 1997.

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