The Medicaid Disproportionate Share Hospital (DSH) program is an important component of the United States’ broader effort to provide healthcare to its most disadvantaged citizens. Initiated to offset the financial burdens faced by hospitals delivering care to uninsured and low-income patients, DSH payments have become a cornerstone of funding for many safety-net hospitals.
However, while well-intentioned, the DSH program has faced scrutiny over its methodologies and effectiveness. Critics have previously raised concerns about the program’s operational strategies and cost effectiveness. Now, some are even questioning if this program, upon which many essential hospitals rely, aligns with contemporary standards of health equity.
Legislative history
The origins of the DSH program can be traced to the Boren Amendment to the Omnibus Budget Reconciliation Acts (OBRA) of 1980 and 1981. Initially focused on Medicaid payments for nursing home care, the Boren Amendment was extended to inpatient hospital care under the OBRA 1981. A pivotal change in Medicaid, Boren granted states increased autonomy in determining payments for inpatient hospital care.
Before the Boren Amendment, state Medicaid plans and payment rates underwent extensive federal review before implementation and could not be initiated without approval from the Department of Health, Education, and Welfare (now the Department of Health and Human Services, HHS). Rather than undertake the burden of program development and navigate federal complexities, most states opted to adopt Medicare payment models for Medicaid reimbursement, despite the budgetary impacts associated with retrospective cost-based payments. The Boren Amendment eliminated the need for federal review of individual Medicaid plans, enabling states to self-certify the reasonableness of their rates.
Recognizing that hospitals serving a disproportionate number of low-income, uninsured, or underinsured patients would face significant financial pressures because of what was, in essence, a decoupling of Medicaid and Medicare payments, Boren also required that states must “take into account the situation of hospitals which serve a disproportionate number of low-income patients.”
While the Boren Amendment aimed to protect the financial viability of hospitals serving low-income populations, it did not specify how this goal should be accomplished. As a result, only a handful of states actively pursued this objective. To address this legislative void, Congress established the Disproportionate Share Hospital (DSH) program under the Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985. Importantly, the program included essential financial support.
To encourage state participation and compliance, Congress expanded the DSH program through additional legislative actions. Notably, the Medicare Catastrophic Coverage Act of 1988 significantly broadened the program’s scope, a movement that was further supported by subsequent amendments in the Omnibus Budget Reconciliation Acts of 1989 and 1993. These legislative steps demonstrated Congress’s ongoing commitment to reinforcing the DSH program, ensuring that hospitals providing care to underserved populations received the necessary financial backing.
States learn to game the system
States were initially hesitant to fully adopt the DSH program, but their enthusiasm grew in the early 1990s as they recognized its potential for accessing uncapped federal matching funds.
States strategically utilized a variety of financial mechanisms to bolster DSH payments in the expectation of receiving federal matching funds. These included imposing taxes on healthcare services and seeking donations from private healthcare providers. With no constraints on DSH matching, many states quickly realized substantial increases in DSH payments. According to a 1997 policy brief by the Urban Institute, DSH spending soared from $1 billion in FY1990 to over $17 billion in FY1992, at which time it constituted 15 percent of total Medicaid medical assistance expenditures.
This unsustainable growth in DSH spending prompted Congress to reassess the program. The Medicaid Voluntary Contribution and Provider-Specific Tax Amendments of 1991 imposed constraints on provider donations, restricted provider tax programs, and established a statutory aggregate cap on DSH payments for each state, referred to as DSH allotments. For FY1993, this allotment was based on FY1992 DSH spending. Subsequently, under the Balanced Budget Act of 1997, starting in 2002, increases in federal DSH expenditures were pegged to the Consumer Price Index, with a capped limit set at 12 percent of each state’s total annual Medicaid expenditures. Because these later allotment increases were based on the allotments established in FY1993, states that had higher DSH payments in FY1992 locked in relatively higher allotments.
Since the enactment of these program changes, DSH payments as a percentage of total Medicaid spending have declined. In FY2022, DSH spending was roughly $18 billion (64 percent of which was covered by the federal government), approximately 2 percent of total Medicaid medical assistance expenditures.
DSH and the ACA
Anticipating that Medicaid expansion and the establishment of health insurance marketplaces would reduce the number of uninsured patients and uncompensated care, the Patient Protection and Affordable Care Act (ACA) included provisions to reduce DSH payments.
In fact, those states which expanded their Medicaid programs under the ACA did realize reductions in uncompensated care. Louisiana’s Medicaid expansion, for example, resulted in a 33 percent decrease in uncompensated care costs as a percentage of total operating expenses.
However, after a Supreme Court ruling in 2012 made Medicaid expansion optional, not all states have expanded their programs. The ten states which have not include Texas, whose attorney general has acknowledged that the state’s hospitals face a growing burden of uncompensated care associated with undocumented immigration.
In response to the patchwork adoption of Medicaid expansion, Congress has repeatedly delayed scheduled reductions in DSH payments.
Definitions and payments
To qualify as a Medicaid DSH, a hospital must have a Medicaid utilization rate of at least 1 percent. It must also have a minimum of two obstetricians on staff who have agreed to provide obstetric services to Medicaid beneficiaries. Exceptions are made for children’s hospitals, certain rural hospitals in which physicians other than obstetricians have privileges to provide non-emergent obstetric care, and hospitals which did not offer nonemergency obstetric services to the general population when the DSH program was established.
States are required to make DSH payments to deemed hospitals. A hospital may be deemed a DSH if it has a Medicaid utilization rate at least one standard deviation above the mean for hospitals in the state that receive Medicaid payments or has a low-income inpatient utilization more than 25 percent.
There is no statutory minimum payment amount for deemed hospitals, and the Medicaid and CHIP Payment and Access Commission previously observed that DSH payments are often nominal, “sometimes as little as one dollar.”
There are upper limits on DSH payments. Hospitals may not receive more than the difference between the cost of delivering care to Medicaid patients and the payments received for this care. Similarly, there is a cap on DSH payments to prevent hospitals from receiving more than the actual cost of uncompensated care they deliver.
Just as Medicaid programs vary widely from state to state, there is also significant variation in how states allocate DSH payments. For example, in FY2022, Maine made all DSH allocations to institutions for mental diseases (IMDs, defined as “a hospital, nursing facility, or other institution of more than 16 beds, that is primarily engaged in providing diagnosis, treatment, or care of persons with mental diseases, including medical attention, nursing care and related services”). In contrast, 18 states including California, which has the country’s largest Medicaid program, allocated no DSH funds to IMDs.
The DSH program allows states to target payments to specific hospitals or hospital types. One state might prioritize payments to qualifying institutions over those deemed eligible. Another may direct funds to rural hospitals instead of urban ones. While certain states distribute funding to all qualifying hospitals, others limit their support to a few.
Controversy
Critics argue that the formulas used to calculate DSH allotments rely on outdated data. Small government advocates decry allotments as being “based on the degree to which states exploited a federal financing loophole in the late 1980s‐early 1990s.” For example, the impact of FY1992 DSH spending is still felt on state allotments more than 20 years later. Even supporters of the DSH program acknowledge that funding formulas fail to accurately represent contemporary healthcare delivery levels.
For some, the flexibility afforded to states in administering DSH programs creates too great a risk that funds will be misdirected from intended recipients. In a review of 2015 DSH payments, researchers from Weill Cornell Medicine and the University of Pennsylvania found that over “31 percent went to organizations which did not meet a given definition [of DSH hospital], and 3.2 percent went to hospitals that met none of them.” Study author Paula Chatterjee characterizes this as a co-option of the DSH program.
Dave Chokshi and Frederick Cerise make a similar argument in a recent Perspective article in the New England Journal of Medicine, contending that, although “originally designed to support the mission of the safety net,” the DSH program has been “warped to benefit other (often better-resourced) providers.”
On the other hand, supporters of the program, such as the American Hospital Association, point to its critical role in supporting hospitals that serve the most vulnerable populations. Medicaid does not fully compensate providers for their care, only covering 88 cents of every dollar spent covering Medicaid patients, and hospitals receive little to no payment for serving the tens of millions of uninsured Americans. DSH helps hospitals that serve these patients stay afloat.
In the decades since DSH’s inception, CMS has identified health equity as a key pilar of its strategic plan. While the DSH program seems a logical platform for exercising this principle, some have asked if changes to its funding model are necessary to fully realize the program’s potential to support health equity. For example, limited research suggests that, when DSH payments are based on healthcare use rather than need, they may actually perpetuate health inequities.
Debates over the merits of DSH will likely continue, as $8 billion per year cuts to Medicaid DSH payments loom in 2025.