Until enactment of the Social Security Amendments of 1983, Medicare payments for hospital inpatient services were based on the costs incurred by the hospital. The amendments created the hospital inpatient prospective payment system (PPS), under which acute care hospitals were paid a fixed rate for the operating costs incurred in treating patients in each diagnosis-related group (DRG). 1 Payment rates were adjusted to reflect several factors thought to affect a hospital's cost structure, including local wages and the intensity of residency training.
The PPS legislation included a provision that allowed for "such exceptions and adjustments to the payment amounts...as the Secretary (of Health and Human Services) deems appropriate to take into account the special needs of public or other hospitals that serve a significantly disproportionate number of patients who have low income." The accompanying legislative history notes that "(c)oncern has been expressed that public hospitals and other hospitals that serve such patients may...[treat patients that are] more severely ill than average and that the DRG payment system may not adequately take into account such factors" (U.S. Congress, 1983). Nevertheless, the PPS that was implemented beginning in October 1983 did not include an adjustment for serving a disproportionate share of low-income patients.
The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) established an adjustment that was based on the hospital's disproportionate patient percentage (DPP), with different formulas for urban hospitals with at least 100 beds, other urban hospitals, and rural hospitals. The DPP was defined as the sum of:
- the percentage of the hospital's total Medicare patient days attributable to Medicare patients who also are federal Supplemental Security Income (SSI) beneficiaries (excluding state supplement only beneficiaries), and
- the percentage of the hospital's total patient days attributable to Medicaid beneficiaries (excluding Medicare beneficiaries).
The construction of this variable was an attempt to balance the distribution of payments between those hospitals located in states with generous Medicaid programs and those with more restrictive eligibility criteria and benefits. There also was a separate provision for certain urban hospitals with at least 100 beds that could demonstrate that more than 30 percent of net inpatient care revenue was provided by state or local government for the inpatient care of low income patients not reimbursed by Medicare or Medicaid.2 The Medicare DSH provision went into effect on a temporary basis in May 1986, and it was extended several times until it was made permanent in the Omnibus Budget Reconciliation Act (OBRA) of 1990.
1. In fiscal years 1984 through 1991, the hospital inpatient PPS applied only to operating costs; capital costs continued to be paid on a reasonable cost basis (with reductions beginning in fiscal year 1987) until FY 1992.
2. Hospitals meeting this criterion are called "Pickle hospitals", after Congressman Pickle of Texas, who sponsored the provision.