Analysis of the Joint Distribution of Disproportionate Share Hospital Payments. Medicare DSH Policies

09/01/2002

The Medicare DSH payment is an adjustment to the DRG payment for inpatient hospital services furnished by acute care hospitals. The adjustment is based on the hospital’s disproportionate share patient percentage. This is 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 eligibility criteria and formulae for determining Medicare DSH payments have changed over time to include more hospitals and (except for the temporary reductions in the Balanced Budget Act of 1997 (BBA)) to provide more generous payment levels. As a result, the amount of these payments has grown considerably over the last decade. In fiscal year 1989, Medicare DSH payments were an estimated $1.1 billion. By 1992, payments had doubled to $2.2 billion, and they had more than doubled again by 1997.

The Centers for Medicare and Medicaid Services (CMS, formerly the Health Care Financing Administration) has generally maintained that the DSH adjustment is intended to cover only the higher costs associated with the care of Medicare beneficiaries in hospitals serving a disproportionate share of low-income patients. For example, when the prospective payment system for capital costs was implemented in FY1992, the DSH adjustment was established administratively based on the estimated effect of the disproportionate share of low- income patient percentage on total inpatient costs per case and has no minimum threshold (but is limited to urban hospitals with at least 100 beds). On the other hand, the Medicare Payment Advisory Commission (MedPAC) views the DSH adjustment as a policy adjustment independent of hospital cost that is intended to assure access to care for low-income Medicare beneficiaries and other poor people.

MedPAC has made several recommendations regarding the formula used to determine Medicare DSH payments (MedPAC 1998; MedPAC 1999, MedPAC 2001), including:

  • The low-income share measure should reflect the costs of services provided to low-income patients in both inpatient and outpatient settings.
  • In addition to Medicare SSI and Medicaid patients, the low-income share measure should include patients sponsored by other state and local indigent care programs and uninsured and underinsured patients represented by uncompensated care. This would eliminate disparities caused by differences in Medicaid eligibility rules across states.
  • Medicare DSH payments should be concentrated among hospitals with the highest shares of low-income patients. A minimum threshold should be established below which a hospital receives no DSH payment but there should be no “notch” that would provide substantially different payments to hospitals just above and below the minimum threshold.
  • To eliminate the disparity between the payments received by urban and rural hospitals with the same proportion of low-income patients, the same general approach for distributing Medicare DSH payments should apply to all PPS hospitals.
  • The Secretary should collect the data necessary to implement a revised Medicare DSH payment mechanism.

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