Medicare Disproportionate
Share (DSH) Payments
Many Medicare beneficiaries and other patients rely on hospitals
for their care, especially teaching hospitals that serve large
low-income populations. These hospitals often face substantial
financial pressure: they may provide significant amounts of
care to the poor and lack the surplus revenue needed to underwrite
the costs associated with the provision of services.
Maintaining access to hospital care has been an important
objective of the Medicare program. As the program transitioned
from cost-based reimbursement to a prospective system, Medicare
added a special payment adjustment to its prospective payment
system (PPS) for hospitals that serve large populations of
low-income patients.
Purpose of the DSH Payment
The original rationale for the Medicare Disproportionate
Share (DSH) payment adjustment was to compensate hospitals
for the higher operating costs they incur in treating a large
share of low-income patients. Low-income Medicare patients
tend to be sicker and more costly to treat than other Medicare
patients with the same diagnosis. Higher costs also result
from the need for additional staffing and services, such as
translators and social workers, to care for low-income patients.
Over time, however, a second justification for the DSH adjustment
emerged. Many policy makers now view the purpose of DSH payments
more broadly. Most agree that DSH funds preserve access to
care for Medicare and low-income populations by financially
assisting the hospitals they use.
Background
The origin of the DSH adjustment is rooted in legislation
passed in 1982. However, an explicit adjustment to the Medicare
PPS was not adopted until May 1986, two years after prospective
payment began. In the Tax Equity and Fiscal Responsibility
Act of 1982 (TEFRA), Congress directed the Secretary of Health
and Human Services to study the extent to which the TEFRA
hospital rates should be adjusted for the extra costs incurred
by hospitals in treating low-income patients. The original
legislation that created the Medicare PPS in 1983 did not
include a DSH payment adjustment, but one year later, in the
Deficit Reduction Act of 1984, Congress directed the Secretary
to define and identify DSH hospitals.
Several studies conducted by the Health Care Financing Administration
(HCFA) and others showed a relationship between higher Medicare
costs per case and the percentage of a hospital's patients
covered by Medicare or Medicaid. However, a 1985 HCFA study
found no evidence that a higher proportion of Medicare patients
contributed to higher operating costs. HCFA did find that
the proportion of Medicaid patients treated by a hospital
was significantly and positively related to higher operating
costs. Several other studies supported these results.
A study by the Congressional Budget Office in late 1984 showed
that certain groups of hospitals with relatively large shares
of Medicaid patients would be affected more adversely, on
average, under the Medicare PPS than would other hospitals.
The effect would be concentrated in big city, urban areas
and especially in hospitals with more than 100 beds. CBO did
not find evidence to support a DSH adjustment for urban hospitals
with fewer than 100 beds or for rural hospitals.
In April 1986, with the passage of the Consolidated Omnibus
Reconciliation Act of 1985 (COBRA) (P.L. 99-272), Congress
mandated an explicit adjustment for hospitals that serve a
large share of low-income patients. It was incorporated into
the PPS in May 1986 and was set to expire on October 1, 1988.
The creation of the DSH adjustment required no new money.
Funding was obtained by lowering the basic DRG rate paid to
all hospitals, and by decreasing the level of the indirect
medical education (IME) adjustment by 0.6 percentage point
(from 8.7 to 8.1 percent) in recognition that teaching hospitals
would receive a large proportion of DSH payments.
By 1990, CBO analysis of more recent 1987 data, in contrast
to the 1981 data used earlier, showed that the higher cost
differences associated with serving the poor had disappeared.
Except for urban hospitals with more than 100 beds, CBO concluded
there was little evidence of a need for a DSH adjustment.
However, CBO noted a second justification for DSH payments.
Over time, Congress had become increasingly concerned that
certain hospitals were at risk of closing and began to view
the DSH payment as a mechanism for mitigating the financial
distress that some hospitals experienced in serving the poor.
The DSH adjustment has been modified repeatedly. Each time,
Congress has added money to the adjustment for specific categories
of hospitals. Legislation passed in 1990 (P.L. 101-508) added
the most money to the adjustment, about $1 billion over a
five-year period, through changes in the DSH formulae. Congress
also repealed the sunset provision for the adjustment, making
it a permanent part of the PPS.
In recent years, DSH payments have grown rapidly, from $1.1
billion in 1989 to $4.5 billion in 1997. DSH payments accounted
for about 6 percent of total PPS operating payments to all
hospitals in 1997. In 1997, about 40 percent of all PPS hospitals
were eligible for DSH payments, but DSH payments are concentrated
in relatively few hospitals. More than 95 percent of all DSH
payments go to urban hospitals, and about 250 hospitals receive
one-half of all DSH payments. Teaching hospitals received
$3 billion in DSH payments in 1997, or about two-thirds of
all DSH payments.
The Balanced Budget Act (BBA) of 1997 (P.L. 105-33) reduced
DSH payments by 5 percent, with the reduction to be implemented
in 1 percentage point increments between fiscal years 1998
and 2002. The legislation required the Health Care Financing
Administration (HCFA) to recommend a new payment formula for
DSH that treats hospitals equitably (see methodology below).
The report, required by August 5, 1998, is overdue. The Medicare
Payment Advisory Commission (MedPAC) will comment on HCFA's
recommendations. In its March 1998 report to the Congress,
MedPAC made its own recommendations on the structure of the
adjustment. The National Bipartisan Commission on the Future
of Medicare has interpreted its mission to ensure the long-term
solvency of the Medicare program to include an examination
of the appropriate role of the Medicare in making DSH payments.
DSH Payment Methodology
The DSH payment is calculated as a percentage add-on to the
basic DRG payment. The amount of DSH payment a hospital receives
is determined by a complex formula and each hospital's DSH
percentage. The hospital's DSH percentage is derived as the
sum of two ratios: the proportion of all Medicare days that
are attributable to beneficiaries of Supplemental Security
Income (SSI), a cash benefit program for aged and disabled
people, and the proportion of all patient days for which Medicaid
is the primary payer. There are ten different formulae, depending
primarily on urban or rural location and hospital size.
A hospital must have a minimum DSH percentage, which differs
across hospital groups, to qualify for DSH payments. Urban
hospitals with more than 100 beds have a lower threshold than
hospitals in rural areas with less than 100 beds. There are
two formulae for large hospitals in urban areas. After a specified
DSH percentage threshold is exceeded, a more generous formula
is applied, targeting payments to hospitals who are at the
high end of service to low-income poor.
For some time, policy makers have been concerned about the
accuracy of the underlying measure of care to the poor and
how the payments are targeted to certain types of hospitals.
Many believe that a broader measure of care to the poor, one
that includes uncompensated care, is needed to target payments
more accurately to those hospitals most in need. In addition,
many policy makers believe DSH payments should be concentrated
in hospitals with the largest low-income shares by establishing
a single minimum threshold for the low-income share that a
hospital must have before payment is made.
The BBA of 1997 required the Secretary to submit a report
to Congress on a new formula for making DSH payments more
equitably. HHS must include Medicaid and Medicare SSI patients
in any new low-income share measure that is developed, and
the Secretary is authorized to collect any data needed to
implement the new formula. The Secretary also is required
to establish a single threshold for all hospitals.
Contacts
AAMC Government Relations
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