T H E BA SI CS Medicaid Disproportionate June 15, 2009 Share Hospital (DSH) Payments Medicaid disproportionate share hospital (DSH) payments provide financial assistance to hospitals that serve a large number of low- income patients, such as people with Medicaid and the uninsured. Medicaid DSH payments are the largest source of federal funding for uncompensated hospital care. It is expected that $11.3 billion of the projected $216 billion the federal government will spend on Medicaid in fiscal year (FY) 2009 will be for DSH payments.1 States must make supplemental payments or adjustments to the payment rates of disproportionate share hospitals. These are in addition to the regular payments hospitals receive for providing inpatient care to Medicaid beneficiaries. While DSH-funded hospitals may receive payments from other state and local government funds, Medicaid is the largest source of public funding for many of them, especially public hospitals. Although federal Medicaid DSH funds are substantial in the aggregate, there are significant variations in the amount of federal funds each state receives and the payments states make to DSH hospitals. Feder a l DSH A l lot m en t s The federal government distributes federal DSH funds or allot- ments to each state based on a statutory formula.2 (See Table 1, next page). The states, in turn, distribute their portion of the DSH funding among qualifying hospitals. States are to use their feder- al DSH allotments to help cover the costs of hospitals that provide care to low-income patients when those costs are not covered by other payers, such as Medicare, Medicaid, the Children’s Health Insurance Program, or other health insurance. Each state’s federal allotment is capped at 12 percent of the state’s total Medicaid ben- efits payments for the allotment year. States have up to two years to claim their DSH allotments. June 15, 2009 National Health Policy Forum National Health Policy Forum TA B LE 1 : F e d e ral M e di c ai d DS H A llo tm e n t s fo r F Y 20 0 9 2131 K Street, NW FY 2009 ($) FY 2009 ($) Suite 500 Washington, DC 20037 Alabama $308,756,666 Montana 11,397,164* Alaska 20,452,939* Nebraska 28,413,868* T 202/872-1390 Arizona 101,663,780 Nevada 46,439,011 F 202/862-9837 E nhpf@gwu.edu Arkansas 43,314,075* New Hampshire 160,752,800 www.nhpf.org California 1,100,730,067 New Jersey 646,380,826 Colorado 92,878,022 New Mexico 20,452,939* Connecticut 200,817,344 New York 1,612,814,294 Delaware 9,090,194* North Carolina 296,205,582 District of Columbia 61,500,312 North Dakota 9,591,017* Florida 200,817,344 Ohio 407,910,230 Georgia 269,848,306 Oklahoma 36,360,778* † Hawaii 10,000,000 Oregon 45,450,973* Idaho 16,504,676* Pennsylvania 563,543,672 Illinois 215,878,645 Rhode Island 65,265,637 Indiana 214,623,536 South Carolina 328,838,401 Iowa 39,542,079* South Dakota 11,089,783* Kansas 41,418,577 Tennessee 305,451,928† Kentucky 145,592,574 Texas 960,157,926 Louisiana 750,259,000 Utah 19,698,157* Maine 105,429,106 Vermont 22,591,951 Maryland 76,561,612 Virginia 87,965,603 Massachusetts 306,246,450 Washington 185,756,043 Michigan 266,082,981 West Virginia 67,775,854 Minnesota 74,994,108* Wisconsin 94,919,150* Mississippi 153,123,225 Wyoming 227,254* Missouri 475,686,084 TOTAL $11,337,262,543 * “Low DSH” states. The Medicare Prescription Drug, Improvement, and Modernization Act (MMA) of 2003 (P.L. 108-173) included special provisions in Title X, Section 1001, for the 16 states with DSH expendi- tures between 0 and 3 percent of total (state and federal) Medicaid spending in FY 2000, defined as low DSH states. The allotment for these states increased by 16 percent each year from FY 2004 through FY 2008, and by the Consumer Price Index-Urban (CPI-U) thereafter. † Section 404 of the Tax Relief and Health Care Act of 2006 (P.L. 109-432) contained provisions permitting Tennessee and Hawaii to collect federal matching funds for payments to certain hospitals that served a high proportion of Medicaid beneficiaries and uninsured individuals during FY 2007. Previously, both Hawaii and Tennessee did not have separate DSH allotments because they had incorporated their allotments into their The National Health Policy Forum section 1115 Medicaid waiver programs. See www.cbo.gov/ftpdocs/77xx/doc7714/hr6111pgo.pdf for more details. is a nonpartisan research and After FY 2007, their allotments returned to $0. public policy organization at The George Washington University. All Sources: HHS.gov/Recovery, “Disproportionate Share Hospital,” FY 2009, U.S. Department of Health and of its publications since 1998 are Human Services, available at www.hhs.gov/recovery/cms/dsh.html; and Kaiser Family Foundation, “Federal available online at www.nhpf.org. Medicaid DSH Allotments,” available at www.statehealthfacts.org/comparetable.jsp?ind=185&cat= 4. 2 T H E BA SI CS www.nhpf.org Medicaid DSH Payments Q ua l ifyi n g H ospi ta l s a n d H ospi ta l Paym en t s State Medicaid DSH programs and payments vary considerably. States have discretion to determine which hospitals get DSH payments and how much each of them receives. Each state must include in their Medicaid State Plan a description of the criteria used to designate hospitals as DSH hospitals and a definition of the formulas used to calculate the DSH payments. States’ definitions of a qualifying DSH hospital must include all hospitals meeting one of the statutory minimum criteria: (i) a Med- icaid inpatient utilization rate3 in excess of one standard devia- tion or more above the mean for all hospitals in the state, or (ii) a low-income utilization rate exceed- M e di c a re DS H ing 25 percent. States may include The primary method for a hospital to qualify for Medicare DSH other hospitals in their designation is based on the hospital’s DSH patient percentage (DPP) which is of DSH hospitals, as long as hospi- defined as the sum of: tals meeting the minimum criteria • The percentage of the hospital’s total Medicare patient days are included. Many states use an attributable to Medicare patients who also are federal Supplemen- expanded definition of DSH, allow- tal Security Income (SSI) beneficiaries, and ing additional hospitals to be des- ignated as DSH. Some states, such • The percentage of the hospital’s total patient days attributable to as Wisconsin, designate only those Medicaid beneficiaries (excluding Medicare beneficiaries). hospitals that meet the minimum Hospitals whose DPP exceeds 15 percent are eligible for a DSH pay- criteria, whereas others, such as ment adjustment. New York, designate all or almost Large urban hospitals that can demonstrate that more than 30 per- all hospitals. All designated DSH cent of their total net inpatient care revenues come from state and hospitals must have a Medicaid uti- local governments for indigent care (other than Medicare or Medic- lization rate of at least 1 percent. aid) also qualify for a Medicare DSH payment adjustment. The Medicaid statute requires states Medicare DSH payment adjustments are a percentage increase to to pay DSH hospitals at least an the hospital payment rate depending on the hospital’s size, urban/ amount calculated using the Medi- rural location, and status as a rural referral center or sole commu- care DSH payment methodology or nity hospital. For example, qualifying hospitals in urban areas with an amount calculated using a pay- less than 100 beds, receive a 5 percent DSH payment adjustment ment methodology that increases while certain rural area hospitals receive a 4 percent DSH adjust- proportionally with the hospital’s ment. DSH payment adjustments are specified in section 1886(d)(5) low-income utilization rate. (See (F) of the Social Security Act. text box, right). Under the second Medicare DSH payments for FY 2009 are projected to be $9.8 billion. option, a state’s formula could vary 3 June 15, 2009 National Health Policy Forum payments to different types of hospitals, as long as all hospitals of a specific type were treated equally and adjustments were related to the hospitals’ Medicaid or low-income patient volume. Most states do not use the Medicare payment methodology, and many of those that do also use another methodology for different types of hospitals. A hospital’s Medicaid DSH payments cannot exceed its total costs of providing inpatient and outpatient services to Medicaid and uninsured patients. This hospital-specific cap applies to both pub- lic and private hospitals, although Congress has raised the cap temporarily for public hospitals in the past.4 States are required to submit to the Secretary of the U.S. Department of Health and Human Services (HHS) a detailed annual report and an indepen- dent, certified audit on their DSH payments to hospitals. DSH a n d L e v er agi n g Feder a l M edic a id Fu n ds DSH spending grew from just under $1 billion in FY 1990 to $17.4 billion in FY 1992. Several factors—rising health care inflation, increasing Medicaid enrollment and shrinking state tax revenues due to a recession, and mandatory Medicaid eligibility expan- sions—strained many state Medicaid budgets in the late 1980s. As a result, many states started using special funding techniques to leverage, or maximize, federal Medicaid funds. This led to a rise in DSH payments and expansions in state DSH programs. DSH programs became the most popular mechanism to maxi- mize federal Medicaid matching funds because, at the time, DSH allotments to states and payments to hospitals were not capped and did not need to be tied to particular beneficiaries or services. Some states took advantage of this flexibility to secure federal funds to support activities unrelated to Medicaid or health care. Under these funding techniques, donations, provider-specific taxes, and intergovernmental transfers (the transfer of funds from different levels of governments or governmental entities to the state government, known as IGTs) were used as the state share of Medicaid spending. Once used as a state share of Med- icaid spending, the donated, taxed, or transferred funds would be matched with federal Medicaid dollars and then returned to the donors or taxpayers through higher DSH payments or 4 T H E BA SI CS www.nhpf.org Medicaid DSH Payments higher provider payment rates. The ability to leverage federal funds without having to rely exclusively on state general funds prompted many states to develop large DSH programs. Since 1991 Congress has enacted several laws to control federal DSH spending.5 The first congressional action was the Medicaid Voluntary Contribution and Provider-Specific Tax Amendments of 1991 (P.L. 102-234). This law established upper bounds on DSH hospital payments and limited the use of donated funds and provider taxes for the purpose of claiming federal matching pay- ments. A national limit on federal funds was set at 12 percent of Medicaid expenditures in any year, and state DSH allotments were limited to published amounts above which federal match- ing payments would not be available. The state published amount for each year would be based on 1992 payments. The upper caps on DSH payments affected DSH spending, and the rapid climb in payments stopped. However, basing state allot- ments on the 1992 payments effectively locked into place state funding differences that reflect historical DSH spending patterns— including gains achieved through maximization efforts. As a result, funding in the current Medicaid DSH program is seen by many as inequitable across states. The capping of federal allotments based on historical program spending levels and not current need have led to per capita DSH allotments favoring a handful of states. DSH payments are highly concentrated in a few states. Some states with large DSH programs, such as New York and California, also have large Medicaid programs. Other states, such as Louisiana, have DSH programs that account for a large share of their total Medicaid expenditures. “Low” DSH states, such as Utah, New Mexico, Oklahoma, Wyoming, North Dakota, and South Dakota, have DSH spending that accounts for less than 3 percent of their total Medicaid expenditures. U se o f DSH Fu n ds State reporting requirements about the uses of DSH have been limited in the past. Annual reports to the Secretary of HHS on the methods used to identify and pay DSH hospitals, including chil- dren’s hospitals, provide limited information regarding how DSH funds are ultimately spent. While the federal government requires 5 June 15, 2009 National Health Policy Forum For more information about states to report hospital-specific DSH payments to the Centers for the Medicaid DSH program, see Medicare & Medicaid Services (CMS), it does not require hospital- specific information about payments back to states through pro- Robert E. Mechanic, “Medicaid’s Dis- proportionate Share Hospital Pro- vider taxes and intergovernmental transfers, making it difficult to gram: Complex Structure, Critical Pay- verify whether DSH payments represent real additional dollars ments,” Background Paper, National to cover hospitals’ uncompensated care costs. The DSH program Health Policy Forum, September 14, is intended to support hospitals that are critical to the health care 2004, available at www.nhpf.org/library/ safety net, and to preserve access to these hospitals for Medicaid details.cfm/2463. beneficiaries and other low-income individuals. Shortcomings in reporting and reliable data, however, often lead to questions as to whether the intent of the program is appropriately being met. En dn ot es 1. This includes the 2.5 percent increase (approximately $269 million) for fis- cal years 2009 and 2010 provided in the stimulus bill, The American Recov- ery and Reinvestment Act of 2009. 2. Section 1923(f)(3) of the Social Security Act defines the calculation of state federal allotments, which are published annually in the Federal Register. 3. Medicaid inpatient utilization means the total number of Medicaid inpa- tient days (the number of days Medicaid beneficiaries spent as a hospital inpatient) in a cost reporting period, divided by the total number of the hospital’s inpatient days in the same period. 4. For mental health facilities, DSH payments to institutions for mental dis- eases and other mental health facilities can be no higher than 33 percent of DSH payments made to such facilities in 1995. 5. For more detailed information on Medicaid DSH related legislation, see Jean Hearne, Congressional Research Service, “CRS Report for Congress, Medicaid Disproportionate Share Payments,” January 10, 2005; available to congressional staff at www.crs.gov, Order Code 97-483. Prepared by Christie Provost Peters. Please direct questions to cppeters@gwu.edu. 6