The counterpart to Medicaid’s Disproportionate Share Hospital (DSH) program, Medicare’s DSH program was established with the shared objective of providing financial support to hospitals that serve a large number of low-income patients. Yet, despite this common purpose, the two programs differ significantly in terms of operational frameworks, eligibility criteria, and policy issues.

Background

The impetus for the establishment of the Medicare DSH program, like that of Medicaid DSH, can be traced to significant changes in the Medicare payment model undertaken in the 1980s.

Medicare’s transition from a reasonable-cost reimbursement system to a prospective payment system (PPS) required that Congress consider how the new payment model would impact the financial stability of certain hospitals, particularly those serving a high volume of low-income patients.

In the years immediately before and after the adoption of the PPS through the Social Security Amendments of 1983, Congress took several steps focused on identifying both the hospitals at greatest financial risk from the shift in payments and methods for mitigating this risk.

In the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Congress tasked the Secretary of Health and Human Services (HHS) with identifying hospitals that served a disproportionately high number of low-income patients or those entitled to benefits under Part A of the Medicare program. The Deficit Reduction Act of 1984, directed HHS to refine this directive by developing a clear definition of “hospitals that serve a significantly disproportionate number of low-income patients or are entitled to benefits under Part A,” and to compile and make available a list of such hospitals.

Perceiving HHS’s response to these directives as lacking in urgency, Congress ultimately mandated the establishment of the Medicare Disproportionate Share Hospital (DSH) program through the Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985.  Under DSH, the Medicare program is required to supplement Part A payments to eligible hospitals to account for the additional costs associated with the provision of care to a high number of low-income patients.

Importance

While Medicare DSH was originally conceived as a method for offsetting the cost of care for low-income patients, in the decades since its inception it has come to be recognized for its role in ensuring that Medicare beneficiaries have access to healthcare services.

Medicare DSH payments have become important to the sustainability of safety-net hospitals, which operate with thin margins and face significant financial pressures. By compensating these hospitals for a portion of the uncompensated care they provide, the Medicare DSH program helps to maintain access to healthcare services in communities that are most in need. This support has come to be recognized as a crucial public health measure, reducing healthcare disparities and promoting equity in healthcare access across the United States.

Methodology

The formula for determining Medicare DSH payment adjustments is statutorily defined and, in the words of Supreme Court Justice Elena Kagan, “a lot to digest.” While a detailed examination of the Medicare DSH formula exceeds the scope of this paper, an overview is essential to understanding related policy debates.

Currently, hospitals may qualify for the Medicare DSH payment adjustment through one of two methods.

The primary method involves the disproportionate patient percentage (DPP). An HHS fact sheet defines the DPP as the sum of two numbers: the Medicare fraction and the Medicaid fraction. The Medicare fraction is the sum of the percentage of Medicare inpatient days (including Medicare Advantage inpatient days) attributable to patients entitled to both Medicare Part A and Supplemental Security Income (SSI), including patient days not covered under Part A and days when patients exhaust their Part A benefits. The Medicaid fraction is the percentage of total inpatient days attributable to patients eligible for Medicaid but not entitled to Medicare Part A.

An alternative qualification method applies to hospitals located in urban areas, with more than 100 beds, that can demonstrate at least 30% of their total net inpatient care revenues during the specified cost reporting period were from state and local government sources for indigent care, excluding Medicare and Medicaid. Because this method was proposed by the late Texas Congressman James Jarrel Pickle,  hospitals qualifying under this method are typically referred to as Pickle hospitals.

Not surprisingly, as discussed below, many of the debates and much of the litigation associated with the Medicare DSH program has stemmed from adjustments to the qualifying methods.

340B eligibility

In addition to providing for enhanced payments, the Medicare DSH adjustment percentage is also used to determine hospital eligibility for the 340B Drug Pricing Program, a federal initiative designed to reduce drug costs for healthcare facilities serving high volumes of low-income patients. Established in 1992 and managed by the Health Resources and Services Administration (HRSA), the 340B Program enables eligible hospitals and other healthcare providers to purchase outpatient drugs at significantly reduced prices, thereby extending federal resources to serve more patients and provide more comprehensive services.

Eligibility for the 340B Program is partly based on a hospital’s Medicare DSH adjustment percentage, as a proxy for its service to low-income patient populations. This threshold varies, but a DSH adjustment percentage greater than 11.75% is generally needed to qualify.

Legal challenges

Hospital advocacy organizations including the American Hospital Association (AHA), the Catholic Hospital Association of the United States, and the Federation of American Hospitals have cited the importance of Medicare DSH payments in supporting vulnerable hospitals. However, their dissatisfaction with the program’s implementation has led to several legal challenges. These disputes often center on the methodologies used to calculate the Medicare and Medicaid fractions in the DPP or how decisions regarding these methodologies are communicated.

Several of these cases have found their way to the Supreme Court and at least one had implications for all federal rulemaking.

In Azar v. Allina Health Services, the Supreme Court found that HHS had failed to meet its notice and comment obligations in 2014 when it “dramatically—and retroactively—reduced” DSH payments. Writing for the 7-1 majority, Justice Gorsuch observed that, “As Medicare has grown, so has Congress’s interest in ensuring that the public has a chance to be heard before changes are made to its administration.”

In 2022, in the case of Becerra v. Empire Health, a more evenly divided Court held that HHS could define total Medicare inpatient days as including patients who are eligible for Medicare, even if they were not covered by Medicare during their hospitalization. For many DSH hospitals, the change in the Medicare fraction would mean a reduction in DSH payments.

The disputes continue.

In February, AHA, the Association of American Medical Colleges, and America’s Essential Hospitals joined with three other organizations in submitting an amicus brief in the appeal of a lower court decision in the  case of Advocate Christ Medical Center, et al. v. Becerra. In it, they contend that HHS has demonstrated a decades-long “resistance to the DSH program, to the detriment of the neediest hospitals and patients” and that the agency “has repeatedly interpreted the statute in the most restrictive manner possible.”

MSNI: An alternative model

The Medicare Payment Advisory Commission (MedPAC) has been a longstanding critic of the Medicare DSH program. Observing that “DSH payments currently increase as the share of patients insured primarily by Medicaid increases,” the Commission has stated that Medicare DSH currently “subsidizes Medicaid.”

MedPAC also contends that “Medicare’s uncompensated care payments are biased toward providing greater uncompensated care payments to hospitals with few Medicare FFS inpatient stays and more Medicare Advantage (MA) inpatient stays.”

The Commission has repeatedly recommended that Congress replace Medicare DSH with a program that would redistribute disproportionate share hospital and uncompensated care payments through the Medicare Safety-Net Index (MSNI).[1]

MedPAC modeled the impact of redistributing disproportionate share and uncompensated care payments via the MSNI in their 2023 report. It found that “hospitals with a large share of low-income Medicare patients (often rural hospitals) would have gained Medicare revenue, and hospitals with few Medicare patients but large shares of Medicaid and uninsured patients (often government hospitals) would have received less Medicare revenue.” It further reported that “the financial effects of the proposed policy are to redirect Medicare safety-net funding toward supporting Medicare patients.”

CMS appears to be actively considering MedPAC’s recommendation. In its 2024 IPPS Proposed Rule, the agency included a request for information (RFI) on whether the MSNI would serve as an “appropriate basis for identifying safety-net hospitals for Medicare purposes.”

The AHA has employed a polite skepticism in asking how the adoption of the MSNI would promote the goal of health equity. It has also questioned MedPAC’s modeling, contending that by including a cap at the 95th percentile of the MSNI, it had excluded outlier hospitals that “serve as the backbone of America’s safety net in the communities which they serve.” Similarly, America’s Essential Hospitals argues that the implementation of MSNI would negatively impact urban and teaching hospitals by “shifting resources away from hospitals that need support the most.”

MedPAC members have acknowledged that those safety-net hospitals effectively subsidized through Medicare DSH payments could face significant losses under a new model. Any shift in methodology would need to be carefully managed.

The future

Like the Medicaid DSH program, the Medicare DSH program has assumed an essential role in maintaining the financial viability of hospitals serving low-income populations. In keeping the doors of these hospitals open, DSH programs help to ensure access to care. As policy discussions place an increasing emphasis on health equity, the value of DSH is rarely disputed. However, the efforts to finetune the program can be expected to continue.

 

[1] As proposed by MedPAC, a hospital’s MSNI would be calculated based upon (1) the share of its Medicare volume associated with low-income beneficiaries, (2) the share of revenue the hospital spends on uncompensated care (bad debts and charity care), and (3) the share of total volume associated with Medicare beneficiaries.