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


The eligibility criteria and formulae for determining Medicare DSH payments for operating costs 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, DSH payments have grown considerably over the last decade. In fiscal year 1989, Medicare DSH payments were an estimated $1.1 billion. By 1992, these payments had doubled to $2.2 billion, and they had more than doubled again to $4.5 billion by 1997.3 Along with most other components of Medicare payments, the Balanced Budget Act of 1997 (BBA) reduced DSH payments: beginning in 1998, there was to be a progressively increasing across-the-board reduction, reaching 5 percent by 2002. These cuts were estimated to total $0.6 billion over the five years. Subsequently, the Balanced Budget Refinement Act of 1999 (BBRA) and the Benefits and Improvement Act of 2000 (BIPA) restored a portion of the BBA cuts. Under current law, there were temporary across-the-board reductions of 2 percent in FY2001 and 3 percent in FY2002.

Under the PPS for operating costs, the payment formulae vary across types of hospitals. Until BIPA, the minimum DPP or threshold for DSH payments also varied. The BIPA enhanced DSH payments to rural and small urban hospitals by establishing a uniform threshold for eligibility to receive DSH payments and making changes in the payment formulae. The policies for determining DSH payments in FY1998 and under current law are shown in Table 1.1.

Table 1.1
Medicare DSH Qualifying Criteria and Formulae

DSH Patient Percentage(DPP): Sum of the percentage of Medicare inpatients entitled to SSI (excluding those who receive only state supplementation) plus the percentage of total inpatients who are eligible for Medicaid but not Medicare

Operating DSH Payments: FY1998 Rules
Minimum DPP Type of Hospital Basic Formula
15% 1)urban with 100 or more beds; or 2) rural with 500 or more beds If DPP => 20.2%: 5.88 % plus .82.5 (DPP- 20.2%)
If DPP < 20.2 %: 2.5% plus .65 (DPP-15%)
30% RRC 4% plus .60 (DPP- 30%)
SCH 10%
rural with 100-499 beds 4%
40% urban with fewer than 100 beds 5%
45% rural with 100 or fewer beds 4%
  "Pickle" hospital: urban with 100 or more beds and 30% revenues from state and local indigent care payments 35%
Operating DSH Payments: Rules Effective 4/1/2001
15% 1) urban with 100 or more beds; or
2) rural with 500 or more beds
If DPP =>20.2%: 5.88 % plus .825(DPP-20.2%)
If DPP < 20.2 %: 2.5% plus .65(DPP -15%)
SCH If DPP=>30%: 5.25% plus .60(DPP-30%) 
If DPP < 30% and =>19.3%: 5.25% 
If DPP <19.3%: 2.5% plus .65(DPP-15%)
RRC If DPP =>30%: 10 % 
If DPP < 30% and =>19.3%: 5.25% 
If DPP <19.3%: 2.5% plus .65(DPP-15%)
1) Other rural with less than 500 beds; or
2) urban with less than 100 beds
If DPP =>19.3%: 5.25 % 
If DPP <19.3%: 2.5% plus .65(DPP-15%)
All Hospitals Temporary reductions in DSH amounts otherwise payable: 
FY 1998: 1 percent
FY 1999: 2 percent
FY 2000: 3 percent
FY 2001: 2 percent
FY 2002: 3 percent
Capital DSH Payments
None Urban with 100 or more beds [e raised to the power of (.2025 x DPP) - 1] 
Pickle hospitals are deemed to have DPP implicit in operating adjustment

3.  These estimates do not include DSH payments for capital costs but include the amounts implicit for DSH in managed care payments.

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