ACA Data Note: Hospitals, Medicaid Expansion, and Disproportionate Share Hospital (DSH) Payments
July 5, 2012: From the desk of SHADAC Director Lynn Blewett
What Are DSH Payments?
Medicaid provides special payments to hospitals that provide a disproportionate amount of care to low-income individuals. The payments are meant to make up for uncompensated care provided to the low-income uninsured and for the lower reimbursement rates paid for care provided to individuals covered through Medicaid. These special payments, called disproportionate share hospital, or “DSH,” payments, are scheduled to be reduced under the Affordable Care Act (ACA).
The premise of the ACA’s DSH reductions is that as more of the currently uninsured gain coverage through the expansion of Medicaid, hospitals should see a reduction in their uncompensated or charity care. However, with the Supreme Court ruling that states can opt out of the Medicaid expansion without penalty, the expansion of coverage to the low-income uninsured is no longer a given. The scheduled DSH reductions will still occur even if a state opts not to expand Medicaid, and this could have a severe financial impact on the state’s hospitals. Consequently, we can expect to see hospitals paying close attention to both Medicaid expansions and the implementation of DSH reductions.
A national total of Medicaid DSH money is allotted across the states each year, with a 2011 total of $11.3 billion. The ACA reduces the annual Medicaid DSH total by $500 million in 2014; $600 million in 2015; $600 million in 2016; $1.8 billion in 2017; $5 billion in 2018; $5.6 billion in 2019; and $4 billion in 2020. In implementing these reductions, the statute requires HHS to develop a “DSH Health Reform methodology” that imposes the largest percentage reduction on states with the lowest percent of uninsured or on states that currently do NOT target their DSH payments to hospitals with high volumes of Medicaid patients or high levels of uncompensated care.
Current DSH Payments
The table below provides the current Medicaid disproportionate share hospital payments to each state in 2011. States in which hospitals rely significantly on this additional revenue, such as New York at $1.6 billion, California at $1.1 billion, and Texas at close to a $1.0 billion, will need to factor this reliance into their decision to opt in or out of the Medicaid expansion.
December 2012 Update: Read about findings from a state-level simulation of DSH reductions under the ACA from SHARE Grantee John Graves of Vanderbilt University.
 Medicare also makes disproportionate share hospital payments to compensate for lower reimbursement rates, and these payments are also scheduled to be reduced under the ACA. However, Medicare DSH payments are not set at a fixed national amount with state lump sum allotments; instead they are based on Diagnosis Related Group (DRG) codes, as a result of which a state-specific analysis is less meaningful for Medicare DSH payments than it is for Medicaid. Effective fiscal year 2014, Medicare DSH payments will be reduced by 75 percent. However, hospitals will receive an additional payment again based on a formula that includes the percent of the state’s population that remain uninsured and the amount of uncompensated care provided (Effective fiscal year 2014).