Medicaid Disproportionate Share Hospital Payments

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Alison Mitchell
Analyst in Health Care Financing

TheMedicaid statute requires states to make disproportionate share hospital (DSH)payments to hospitals treating large numbers of low-income patients. Thisprovision is intended to recognize the disadvantaged financial situationof those hospitals because low-income patients are more likely to beuninsured or Medicaid enrollees. Hospitals often do not receive payment forservices rendered to uninsured patients, and Medicaid provider paymentrates are generally lower than the rates paid by Medicare and privateinsurance.

As with most Medicaid expenditures, the federal government reimburses statesfor a portion of their Medicaid DSH expenditures based on each state’sfederal medical assistance percentage (FMAP). While most federal Medicaidfunding is provided on an open-ended basis, federal Medicaid DSH fundingis capped. Each state receives an annual DSH allotment, which is the maximumamount of federal matching funds that each state is permitted to claim forMedicaid DSH payments. In FY2012, federal DSH allotments totaled $11.3billion.

The health insurance coverage provisions of the Patient Protection andAffordable Care Act (ACA, P.L. 111-148 as amended) are expected to reducethe number of uninsured individuals in the United States, which meansthere should be less need for Medicaid DSH payments. As a result, the ACAincluded a provision directing the Secretary of the Department of Health and HumanServices to make aggregate reductions in federal Medicaid DSH allotments foreach year from FY2014 to FY2020. The Middle Class Tax Relief and JobCreation Act of 2012 (P.L. 112- 96) and the American Taxpayer Relief Actof 2012 (H.R. 8) extended the DSH reductions to FY2021 and FY2022. TheSupreme Court’s decision regarding the ACA Medicaid expansion does notimpact these DSH reduction amounts, but states’ decisions about implementingthe ACA Medicaid expansion could impact the allocation of the DSHreductions across states.

While there are some federal requirements that states must follow in definingDSH hospitals and calculating DSH payments, for the most part, states areprovided significant flexibility. One way the federal government restrictsstates’ Medicaid DSH payments is that the federal statute limits theamount of DSH payments for Institutions for Mental Disease and other mentalhealth facilities.

Since Medicaid DSH allotments were implemented in FY1993, total Medicaid DSHexpenditures (i.e., including federal and state expenditures) haveremained relatively stable. Over this same period of time, total MedicaidDSH expenditures as a percentage of total Medicaid medical assistanceexpenditures (i.e., including both federal and state expenditures but excluding expendituresfor administrative activities) dropped from 13% to 4%.

This report provides an overview of Medicaid DSH. It includes a description ofthe rules delineating how state DSH allotments are calculated and theexceptions to the rules, how DSH hospitals are defined, and how DSHpayments are calculated. The DSH allotment section includes informationabout how the ACA DSH reductions may be allocated among the states, and thepossible implications of the Supreme Court’s decision regarding the ACAMedicaid expansion. The DSH expenditures section shows the trends in DSHspending and explains variation in states’ DSH expenditures. Finally, thebasic requirements for state DSH reports and independently certifiedaudits are also outlined.


Date of Report: January 3, 2012
Number of Pages: 46
Order Number: R42865
Price: $29.95

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