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.
The hospital-specific Medicaid disproportionate share hospital (DSH) payments for this analysis primarily came from state reports submitted to CMS. As of May 2001, CMS had received at least one report for either FY 1998 or FY 1999 from 46 states and the District of Columbia. Two of the four states that were not included, Hawaii and Tennessee, do not have Medicaid DSH programs and therefore do not submit reports. The other two states, Georgia and Ohio, provided hospital-specific data directly to us upon request.
General Approach. To assess the validity of the hospital specific data, we compared total spending included in the CMS reports to DSH expenditure data reported by the states in the annual Financial Management Reports (HCFA-64). We also checked total expenditures from the hospital specific reports against the states' DSH payment limits established in the Balanced Budget Act (BBA) of 1997. To merge the Medicaid DSH payment data with our estimated Medicare DSH payments, we identified hospitals in the Medicaid reports using their Medicare provider numbers. Only two states, Michigan and North Carolina, put Medicare provider numbers on their hospital specific Medicaid DSH reports. We used the CMS On-line Survey and Certification Reporting System (OSCAR) and Provider of Service (POS) files, as well as AHA on-line Hospital Directory (www.ahd.com) to match hospital names in the Medicaid reports with Medicare provider numbers.
Several states included a few individual hospitals in their Medicaid DSH reports that we could not identify with sufficient confidence to match them with their Medicare provider numbers. We created dummy Medicare provider numbers for these hospitals to keep them in the data set, but they could not be linked up with Medicare DSH payment information. In addition, eight states lacked hospital specific payment information for a much larger share of their Medicaid DSH payments.6 For these states, we created one dummy variable to account for the missing DSH payments to acute care facilities and a separate dummy variable to account for missing IMD DSH payments. Appendix A provides an explanation of state-specific reporting issues and how we handled them.
Estimating New DSH Funds. Unfortunately, no data are available on the precise amounts of net gains to hospitals from the Medicaid DSH program (new funds) in FY1998. We used estimates developed by Coughlin, Ku and Kim (2000) for FY1997 to construct possible measures of this parameter on the upper and lower bounds. We looked at four scenarios:
- All funds from the DSH program are new funds to the hospitals. While this is unlikely to be a correct assumption, it gives the upper possible bound on the amount of new funds. We assumed this measure equals our estimate of total DSH payments by the state.
- Only the federal share of DSH payments represents new money to facilities. To calculate this measure, we apply federal matching percentage to the DSH payments made by the state to each hospital.
- Only the portion of the federal share that was actually paid to hospitals represents new money that they receive. This scenario takes into account the possibility that states may retain some residual funds for their own use. We applied estimates of the percentages collected by states in residual funds in FY1997 uniformly to federal shares of all hospitals in the state. We recognize that the actual redistributions at the level of individual hospitals may be more complex and some may have received higher percentages of their federal shares than others. However, we have no basis for making other than an across-the-board estimate. For those states that were not covered by the survey conducted by Coughlin, Ku and Kim (2000), we assumed zero residual funds. The assumption seems to be reasonable, because even within the sample covered by the survey only 12 states out of 40 have state residual funds.
- Only the portion of the federal share that was actually paid to non-state hospitals represents new money to health care facilities in the state. This measure is an estimate of the lower possible limit on the new funds to hospitals. It takes into account the fact that DSH money may not add new funds to state hospitals because of possible offsetting diversion of other state financial assistance.
Actual Medicaid DSH Payments vs. Receivables, by State. In some cases, states make Medicaid DSH payments to facilities located in a different state. We assessed the magnitude of such payments and found that interstate DSH transfers are very small (Appendix B Table B.1). Overall, they constitute only 0.3% of the total FY1998 DSH payments. Because the funds reported as paid to hospitals located in another state are generally small, we assumed in our analyses that the DSH amounts paid by the states and amounts received by the facilities in the same state are equivalent.
6. Alabama, Colorado, Georgia, Illinois, Indiana, Minnesota, New Jersey, and Pennsylvania.