In keeping with the federal/state partnership under Medicaid, states have considerable latitude in determining which hospitals are eligible for DSH payments and how those funds are distributed. The Medicaid law requires states to designate as disproportionate share hospitals all hospitals meeting one of the following criteria:
- a Medicaid inpatient utilization rate one standard deviation or more above the mean for all hospitals in the state, or
- a low-income utilization rate exceeding 25 percent.
In determining the amount of the DSH payment to eligible hospitals, states may use the Medicare formula or make an adjustment that increases proportionally with the hospital's low- income utilization rate. States may designate other hospitals as disproportionate share hospitals and separate formulae are allowed for different types of hospitals.
In the early 1990s, Medicaid DSH payments grew rapidly from less than $1 billion in FY 1989 to more than $17 billion in FY1992; however, the use of DSH by the states is highly uneven. A study by Ku and Coughlin (1995) found that Medicaid DSH and related programs help support uncompensated care, but that only a small share of these funds were available to cover the costs of uncompensated care because of intergovernmental transfers and the amounts retained by the states. In a later re-examination of this issue after legislation aimed at addressing this issue had taken effect, Coughlin, Ku, and Kim (2000) found that an increasing share of the DSH gains was paid to local public and private hospitals and less was retained by the states.