An Unlikely Tale of the Evolution of Medicaid DSH

We have posted over the past several months about some interesting Medicaid litigation across the country involving Medicaid disproportionate share (DSH) payments.  In this post, we try to explain a bit more about disproportionate share payments, how the payments work, and how the program has evolved over the past three and a half decades. As we discuss – this evolution has often been circuitous, and anything but predictable.

DSH payments were first authorized in 1981 when Congress told state Medicaid programs that they needed to “take into account” the special needs of hospitals that treated a disproportionate share of low income individuals with special needs.  President Reagan signed this legislation into law in August of 1981.  Why did Congress and the Reagan Administration do this?

  • Many low-income patients are uninsured – and hospitals don’t receive any payment for treating uninsured patients.
  • These low-income, uninsured patients had higher health care costs. Any hospital payment system that reflected the costs of an “average” patient would not reflect the costs of hospitals treating more medically complex patients who were less likely to seek health care because they lacked insurance.
  • Hospitals treating large numbers of low income individuals were predominantly located in urban areas and consequently faced higher costs.
  • Low income patients are more likely to have chronic medical conditions such as high blood pressure, diabetes and the heart and kidney diseases that result from these medical conditions. In combination, those health care concerns are costlier to treat when patients don’t have a regular source of care.

By 1987, Congress saw that states were not abiding by the 1981 mandate, and wrote more prescriptive requirements into the law.  Congress had done the same thing two years earlier in the Medicare program, when it created the Medicare disproportionate share adjustment.  Under the 1987 Medicaid requirements, states were required to specifically describe the hospitals designated as disproportionate share and provide for an appropriate payment increase for those hospitals.  And of course, because this is Medicaid, the federal government shared the costs of those extra payments.

The 1987 amendments also required states to designate at least two types of hospitals as DSH.  States, of course, had flexibility to treat other hospitals as DSH but at the very least, hospitals had to be designated as DSH if:  (1) they had a Medicaid utilization rate greater than one standard deviation above the mean Medicaid utilization rate of hospitals in the state and (2) they had a “low-income utilization rate” in excess of 25%.  A hospital’s low-income utilization rate is the sum of the ratio of Medicaid payments to total payments and the ratio of charges for treating uninsured inpatients to charges for treating total inpatients.  Thus, the Medicaid DSH formula expressly allows States to use Medicaid dollars to compensate hospitals for the costs of treating the uninsured.

A few years later, DSH payments skyrocketed.  In 1990, total Medicaid DSH payments in the United States were $1 billion – or about 1.3% of total Medicaid spending.  Just two years later, Medicaid DSH payments were $17.4 billion, or about 15% percent of total spending – an increase of over 1000%. Why did that happen?  Did states have a post-Cold War flash of beneficence to hospitals treating poor patients?  Well … maybe.  More likely:  states had figured out that they could use creative financing techniques to increase the federal share of Medicaid spending, and they used that increased federal share to meet the statutory DSH requirements.

In 1993, Congress curtailed the most abusive of the creative financing techniques.  Congress also imposed hospital-specific DSH limits:  DSH payments to hospitals could not exceed the costs of providing care to Medicaid patients and uninsured patients.  It is this requirement – and the resulting DSH audits – that has led to the litigation we’ve written about over the past several months, so we won’t discuss it again here, other than to say that CMS doesn’t have a great track record in this litigation, so don’t be surprised to see Congress or the agency step in at some point.

In 1997, Congress clamped down even further and imposed a state-by-state cap on DSH payments.  Now, DSH payments in a state can only increase by the inflation index each year.  This locked in some degree of unfairness; some states that made enormous DSH payments in the early 1990s get locked in at a high cap (Alabama, Louisiana, Missouri, Texas, as well as California and New York) whereas states that did not use the more creative financing techniques (South Dakota, Utah, Wisconsin, New Mexico, Nebraska, Delaware) face a low cap or, in the case of Hawaii and Tennessee, no DSH payments at all.

The last major Congressional change to the DSH program happened as part of the Affordable Care Act, which President Obama signed in March, 2010.  Because Congress had expanded Medicaid in the ACA, and created a vehicle for uninsured patients to purchase health insurance, it was felt that both the Medicare and Medicaid DSH programs could be curtailed.  In Medicaid, Congress reduced the aggregate federal DSH allotments by roughly $18 billion for the period 2014 – 2020.  However, since then, Congress has stepped in six times to forestall those reductions and they have not yet taken effect.

Nearly four decades ago, Congress first took note of DSH hospitals.  The program has evolved multiple times since then and today is the subject of fierce litigation between hospitals, states, and CMS.  It’s a fascinating story because it shows how various pieces of the Medicaid financing puzzle fit together.  It’s unlikely that Congress could have envisioned where DSH would wind up today when it passed that first “take into account” requirement in the summer of 1981.

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