Reforming the Medicaid Disproportionate Share Hospital Program

Cindy Chen, S. Lawrence Kocot,
S. Lawrence Kocot Former Brookings Expert, Principal and National Leader, Center for Healthcare Regulatory Insight - KPMG
Aaron McKethan, and Nadia Nguyen

January 21, 2010


As the Senate and House work to merge their respective health reform bills, reductions in future federal funding for the Medicaid Disproportionate Share Hospital (DSH) program are being considered as one means of financing coverage expansions. The Medicaid DSH program provides funding allotments to states to subsidize certain hospitals for the unreimbursed costs they incur treating uninsured and Medicaid patients. Under current law, the federal government is expected to spend more than $100 billion on the Medicaid DSH program over the next 10 years.

Proposed funding reductions in Medicaid DSH payments are based on the expectation that expansions in insurance coverage will lead to reductions in uncompensated care. However, even in a reformed health care environment, DSH payments will still to be necessary to support care for those who will remain uninsured — estimated to be 18-23 million — as well as to subsidize the relatively low Medicaid reimbursement rates for 15 million new Medicaid patients. Bills in the House and Senate use different policy approaches to reduce Medicaid DSH spending by different aggregrate levels. In this issue brief, we examine these approaches to consider the potential impact on safety-net care and the degree to which they can help improve some of the historical shortcomings of the Medicaid DSH program.
Building on the recent paper published in Health Affairs, we outline a specific financing approach that would initially link future state Medicaid DSH allotments to measures of Medicaid enrollment and the number of uninsured persons at the state level. In future years, state allotments would be linked to more direct measures of uncompensated care volume as they become available. This approach would produce more gradual spending reductions over time relative to current legislation and would explicitly avoid funding “cliffs” that could subject providers of safety-net care to additional financing pressures. Further, it would recognize the critical role that Medicaid will continue to play in expanding insurance coverage through health care reform and the ongoing reliance by many institutions on relatively low Medicaid reimbursements.

Additionally, we include new ideas that could help ensure federal spending on Medicaid DSH is more directly connected to the delivery of care for vulnerable populations than it is now. This includes promoting greater innovative delivery system reform approaches to better coordinate care for vulnerable populations, as well as new options to support DSH institutions when they take steps to promote greater accountability for results.