The Medicare and Medicaid programs distribute extra payments to hospitals that treat a disproportionate share of indigent patients. The disproportionate share hospital (DSH) payment policies differ substantially between the two programs and, under Medicaid, across states as well. Nevertheless, the general objectives of each program are the same: to support the hospitals that are crucial to the health care safety net, and to preserve access to these hospitals for the respective program's enrollees.
Medicare and Medicaid DSH payments represent an important source of hospital revenues. In federal fiscal year 1998, Medicare DSH payments totaled an estimated $4.8 billion and Medicaid DSH payments totaled $15.0 billion, of which $8.3 billion were federal funds. This represented almost seven percent of total hospital revenues from all sources in that year. Yet relatively little is known about the distribution of these payments and how well they are targeted toward financially vulnerable safety net hospitals.
The Office of the Assistant Secretary for Planning and Evaluation in the Department of Health and Human Services contracted with the Urban Institute with RAND Health as its subcontractor to: 1) examine the distribution of both Medicare and Medicaid DSH funds across hospitals, 2) assess alternative criteria that could be used to identify safety net hospitals, 3) develop measures of hospital financial vulnerability to identify those safety hospitals that are under most financial pressure, and 4) explore the extent to which alternative allocation policies to the current Medicare and Medicaid DSH payment mechanisms would improve the distribution of funds to those safety net hospitals that are most vulnerable. This report provides the results of our analyses.