Disproportionate Share Hospital - History and Reforms

History and Reforms

In 1989, some enterprising state budget experts discovered that they could claim federal DSH funds without expending general state funds and use the DSH payment as a mechanism for mitigating hospitals’ financial distress. To earn the match, however, the state had to spend the tax or donation revenues, because the federal Medicaid match is based on expenditures, not revenues. The Medicaid DSH payment provided the mechanism to spend these revenues. The DSH payment was singled out because it was not subject to the Medicare upper payment limit. Thus, states could make virtually unlimited DSH payments and, in the process, earn federal matching dollars. As such the hospitals that were slated to receive DSH funds were asked to contribute the required state share; the state would then use this money to draw down a large federal matching payment. The hospitals would get their contributions back and perhaps a bit more, but the states often kept the lion's share of the federal payment. With the DSH system effectively serving as a money pump that pulled federal funds into state coffers, the program experienced explosive growth. Between 1990 and 1996, federal DSH payments ballooned from $1.4 billion to more than $15 billion annually.

In 1991, Congress sought to restrict states' ability to tap provider funds in order to claim federal matching funds by enacting the Voluntary Contribution and Provider-Specific Tax Amendments of 1991 (P.L. 101-234). Key provisions included (1) essentially banning provider donations; (2) limiting provider taxes so that provider tax revenues could not exceed 25 percent of the state’s share of Medicaid expenditures; (3) imposing provider tax criteria so that taxes were "broad based" and providers were not "held harmless"; and (4) capping state DSH payments at roughly 1992 levels. This law also capped the amount a state could spend on DSH payments, but it did little to slow recycling.

Congress responded in Omnibus Budget Reconciliation Act of 1993 by making the practice of recycling more costly for hospitals with provisions such as the following: (1) Only those hospitals that had a Medicaid use rate of at least 1 percent could receive DSH payments. (2) Total DSH payments to a single hospital could not exceed the unreimbursed costs of providing inpatient care to Medicaid and uninsured patients.

With DSH expenditures soaring in the 1990s and by 1996 accounting for one out of every eleven dollars spent on Medicaid, the 1997 Balanced Budget Act included several DSH provisions, including the following: (1) New state specific DSH allotments are established for each year during 1998–2002, eliminating the allotments established in the 1991 DSH law. Federal DSH expenditures are allowed to increase after 2002 by the percentage change in the Consumer Price Index, subject to a ceiling of 12 percent of each state’s total annual Medicaid expenditures. (2) Limits have been placed on how much of a state’s federal DSH allotment can be paid to IMDs. By 2002 no more than 33 percent of a state’s federal DSH allotment can be paid to IMDs. (3) DSH payments made on behalf of Medicaid clients in managed care must be paid directly to hospitals rather than plans. Through these efforts, Congress and the Clinton administration cut federal DSH payments by 5% and limited their further growth; as such, in 1998 $15 billion in Medicaid DSH payments were issued to hospitals.

Despite efforts, recycling persisted until the Centers for Medicare and Medicaid Services (CMS) began scrutinizing the practice on a state-by-state basis. By 2006, recycling had largely stopped.