Analysis of the Joint Distribution of Disproportionate Share Hospital Payments. Medicaid DSH Payments


The Medicaid DSH program was intended to function as a joint effort of the states and the federal government in assisting DSH hospitals. As discussed in Chapter 1, states are required to designate certain hospitals as DSH but have considerable flexibility to tailor the program to state needs and priorities. Each state generates its own funds, which are then matched by the federal share of the total state DSH money according to a fixed percentage (FMAP). Each state has its own allotments (or caps) on the total amount of DSH money it can pay to hospitals, on the maximum federal share in this total amount (federal matching funds), and on some aspects of the distribution of state Medicaid DSH funds.4 A state's actual DSH payments cannot exceed the allotments established by statute. It is commonly recognized that the states often use the Medicaid DSH program not only to finance hospitals serving a disproportionately large share of low-income patients (the program's direct purpose), but also to secure additional federal funds for the state budget. To evaluate the effect of the program on the financial positions of hospitals, we need to understand the underlying composition of total Medicaid DSH funds. States often finance their share of Medicaid DSH funds by obtaining money from the hospitals themselves. In a simplified example, a hospital may provide $100,000 to a state to finance its DSH program. If the state's federal matching percentage is 50%, the state will then receive an additional $100,000 from the federal government in matching funds. Although the total state DSH payment back to the hospital will be $200,000, only half of this amount - the federal share - would represent new money for the hospital.

There is also a possibility that the state will pay the hospital only some share of the federal funds (for example, $60,000, or a total of $160,000). The rest of the federal funds the state may use as DSH payments to other hospitals or it may retain them for other purposes. We call any retained funds (which are gains to the state) residual funds, following the terminology used in Coughlin and Ku (2000).5 In addition, for the state facilities receiving some new DSH, the state may reduce other financial assistance (not related to the DSH program). As a result, there is a possibility that only the federal share of the DSH funds to non-state facilities may in fact represent new funds to facilities from the DSH program.

4.  One such distributional issue is the cap on DSH money that states can pay to their Institutions for Mental Disease (see discussion on Table 4.3).

5.  The retained funds are not eligible for FMAP.

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