Analysis of the Joint Distribution of Disproportionate Share Hospital Payments. Conclusions


The California and New York results illustrate the importance of having information on actual IGTs in examining issues related to the current distribution of Medicaid DSH funds. Across-the-board assumptions such as those made Chapter 4 regarding the proportion of DSH funds that are "new" are not substantiated at the hospital-level. CMS should consider expanding the state DSH reports to obtain information on provider contributions to DSH pools as well as the payments from those pools to individual hospitals.

The redistributions that took place between Simulation A and Simulation B highlight the differences between allocations based solely on inpatient care and allocations that take both inpatient and outpatient care into account. While including all care is commonly endorsed as a policy objective, it is not clear from the correlation results that including all care improves the targeting of DSH funds to financially vulnerable safety net hospitals. Also, the inclusion of outpatient care raises issues regarding subsidies to other ambulatory care providers. The role that non-hospital ambulatory care providers play in the safety net for low-income populations is discussed in Appendix E. A policy that concentrates federal support for uncompensated care solely on hospitals may serve to discourage community providers from furnishing substantial amounts of care to indigent populations. It may also have implications for the relative generosity of Medicaid payments for services provided in hospital outpatient departments and clinics and in physician offices.

Allocations based on the proportion of care provided to low-income patients (e.g. revenues) result in very different distributions than an allocation based on financial risk (Medicaid shortfalls, uncompensated care and bad debt). Financial risk, however, is not the same as financial viability (i.e., total margins net of DSH payments). Some of the hospitals with substantial financial risk also have positive margins. The results across all three states highlight the need to clarify the policy goals for DSH funding. The key issue is the extent to which subsidies should be given to hospitals that serve low-income patients but do not incur financial risk or are able to cover their risk with other revenues. A closer examination of the hospitals with substantial gains or losses in moving from an allocation policy based on serving low-income patients to incurring financial risk might help clarify the issues. This examination should consider the role of other federal subsidies such as the Medicare indirect teaching adjustment in explaining why some hospitals with substantial financial risk appear to be in a strong financial position.

Neither the current DSH allocation policies nor the alternative policies examined in the simulations are strongly correlated with a hospital's net income. The factors affecting financial viability may be too complex to be measured with a single statistic. A multi-variate analysis of the factors affecting a hospital's financial risk and it overall financial status using a broader set of hospitals could also help identify additional factors that should be considered in an allocation policy.

Looking in-depth at the relationship between the financial status of hospitals and the distribution of DSH payments was a complex task. The differences in state accounting and reporting practices made it difficult to determine Medicaid shortfalls and to take "new" DSH payments into account. Knowing the DSH payments to individual hospitals is not enough; it is also important to understand how those payments are handled in reporting Medicaid contractual allowances and patient revenues. It is also important to understand how financing occurs for county-owned hospitals in terms of other intergovernmental transfers and deficit funding. An allocation based on financial measures would require uniform reporting by payer. All three states in this analysis require the type of financial information that would be needed.

The "snapshot" approach of looking at one year's data may not be sufficient for an adequate understanding of the financial implications of serving low-income patients. In California, the FY1998 payments included payments from the state's fiscal year 1997 and thus overstated the average DSH payments. The New York indigent care pool was in transition during FY1998 and additional changes were enacted in 2000. Wisconsin's uncompensated care costs have increased 60 percent since 1997. Only the first-year impacts of the Balanced Budget Amendment are reflected in the FY1998 data. These considerations suggest that a multi-year study — perhaps with periodic updating — would be appropriate.

Even more troubling than using one year's data is the lack of a national database that provides uniform information on the quantity of care provided to low-income patients and the financial risk associated with that care. Each state's Medicaid DSH program is idiosyncratic. A close examination of DSH policies in a few states highlights potential issues but a national database is needed to understand the potential re-distributions that might occur both at the market level and across states under a national allocation policy. The BBRA provision requiring the Secretary to collect through the Medicare cost report data on uncompensated costs should help. This provision is effective for cost reporting periods beginning on or after October 1, 2001.

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