Order Code 97-483
CRS Report for Congress
Received through the CRS Web
Medicaid Disproportionate Share Payments
Updated January 10, 2005
Jean Hearne
Specialist in Social Legislation
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress

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Medicaid Disproportionate Share Payments
Summary
The Medicaid statute requires that states make disproportionate share (DSH)
adjustments to the payment rates of certain hospitals treating large numbers of low-
income and Medicaid patients — recognizing the disadvantaged situation of those
hospitals. Although the requirement was established in 1981, DSH payments did not
become a significant part of the program until after 1989 when they grew from just
under $1 billion to almost $17 billion by 1992. During that time states’ Medicaid
budgets were facing a number of upward pressures while states were learning about
financing techniques that made it easier to collect increased DSH payments from the
federal government.
In 1991 Congress intervened to control the growth of DSH payments by
limiting the amounts available to each state and setting national limits. The new law
was successful. After 1992 DSH payment growth slowed considerably, although the
level of national DSH payments remains high — just over $15.9 billion in 2002.
Today, as a result of amendments contained in the Balanced Budget Act of 1997
(BBA-1997) and further changes in the Medicare, Medicaid, and SCHIP Benefits
Improvement and Protection Act of 2000 (BIPA 2000), a state’s DSH payments may
not exceed an allotment amount set in the law for that state. States must define, in
their state Medicaid plan, hospitals qualifying as DSH hospitals and DSH payment
formulas. DSH hospitals must include at least all hospitals meeting minimum
criteria and may not include hospitals that have a Medicaid utilization rate below 1%.
The DSH payment formula also must meet minimum criteria and DSH payments for
any specific hospital cannot exceed a hospital-specific cap based on the unreimbursed
costs of providing hospital services to Medicaid and uninsured patients. DSH
payments for mental hospitals cannot exceed a facility-specific cap based on a
percentage of such payments in 1995. However, within these broad guidelines states
also have a great deal of discretion in designating DSH hospitals and calculating
adjustments for them. For this reason, Congress has required states to report the
methods used to identify and pay DSH hospitals and the payments made to each of
the identified hospitals.
Congress provided relief to states from the 1997 DSH cuts. The reductions in
states’ allotments that were to take place in 2000, 2001, and 2002 were eliminated
but the temporary reprieve did not extend beyond 2002. In 2003 states faced
significant reductions in their DSH allotments. In P.L. 108-173, Congress again
stepped in to raise DSH payments. Beginning in FY2004 and for certain subsequent
fiscal years, states will be allotted 16% more than the amounts previously available.
In addition, the number of states able to qualify for low DSH payments and the
allotments for those low DSH states were raised.

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Contents
Background: The Medicaid Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Disproportionate Share Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Donations, Provider Taxes and Intergovernmental Transfers . . . . . . . . . . . . . . . . 4
Disproportionate Share Payments Today . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Designating Hospitals as Disproportionate Share and Calculating
Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Uses of Disproportionate Share Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
How Are Medicaid Disproportionate Share Adjustments Different from
Medicare Disproportionate Share Adjustments? . . . . . . . . . . . . . . . . . . . . . 16
List of Tables
Table 1. Medicaid Outlays, FY1988-FY2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Table 2. Federal and State Medicaid Disproportionate Share Payments
and Percentage Change, 1990-2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Table 3. Federal DSH Allotments for 1998-2002, Preliminary Allotments
for 2003 and 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Table 4. Disproportionate Share Payments and Payments as a Percentage
of Total Medical Assistance, FY2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

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Medicaid Disproportionate Share Payments
Background: The Medicaid Program
Medicaid is a federal-state program providing medical assistance for specified
groups of low-income persons who are aged, blind, disabled, or members of families
with children. Within federal guidelines, each state designs and administers its own
program. Thus there is substantial variation among the states in terms of persons
covered, types of benefits provided, and payment rates for covered services.
The federal government shares in the cost of Medicaid services through a
variable matching formula. After a state pays for a Medicaid-covered service, it
makes a claim for the federal share of the payment and is reimbursed at the federal
matching rate for that state. The federal matching rate, known as the federal medical
assistance percentage (FMAP), is inversely related to a state’s per capita income and
may range from 50% to 83%. In FY2004, 13 states, and all of the territories received
the minimum of 50% federal matching on Medicaid payments. Mississippi had the
highest FMAP in FY2004, 77.08%. The federal share of most state administrative
expenditures is 50% in all states; higher matching is allowed for certain
administrative activities. Overall, the federal share of Medicaid spending was
approximately 57% in FY2002.1
When Medicaid was enacted in 1965, it was targeted at persons receiving cash
welfare: Aid to Families with Dependent Children (AFDC) or Supplemental Security
Income (SSI) for the aged, blind, and disabled. Over time, the program has moved
away from its explicit link to the cash assistance programs especially for low-income
families. It now covers many pregnant women and children with no ties to the
welfare system; it pays Medicare’s cost-sharing and premiums for certain low-
income Medicare beneficiaries; and it is the major source of funding for nursing
facilities (NFs) and other long-term care needed by the elderly and other disabled
populations who are not literally poor.
In FY2002, 49.5 million people were enrolled in Medicaid, at a combined
federal and state cost of $246.3 billion2. As Table 1 indicates, Medicaid spending
growth slowed considerably after a period of sharp increases in the early 1990s. The
pattern of rapid spending growth during 1989 to 1993, followed by much slower
1 CRS tabulations of CMS-64 data available at [http://www.cms.gov/medicaid/mbes/
ofs-64.asp].
2 Enrollment figures from [http://www.cms.gov/medicaid/msis/msis99sr.asp]. Expenditure
figures are CRS tabulations of CMS-64 data summarized by CMS and downloaded at
[http://www.cms.gov/medicaid/mbes/sttotal.pdf].

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CRS-2
spending growth through 1998 is echoed in spending for Medicaid disproportionate
share (DSH) payments during the same periods.
Table 1. Medicaid Outlays, FY1988-FY2001
($ in billions)
Percentage change in
Fiscal year
Federal
Statea
Total
federal outlays
1988
30.5
23.7
54.1
-
1989
34.6
26.6
61.2
13.2%
1990
41.1
31.4
72.5
18.4%
1991
52.5
39
91.5
26.2%
1992
67.8
50.3
118.1
29.1%
1993
75.8
56.2
132
11.7%
1994
82
61.9
143.9
9.0%
1995
89.1
67.2
156.3
8.6%
1996
91.9
69.3
161.2
3.1%
1997
94.4
72.5
166.9
3.5%
1998
99.4
76.5
175.9
5.4%
1999
107.7
82.7
190.4
8.3%
2000
116.9
89.2
206.1
8.5%
2001
129.8
98.2
228.0
11.0%
2002
140.0
106.2
246.3
8.0%
Sources: Office of Management and Budget, 2000 Budget of the United States; Medicaid Statistics
HCFA pub. N. 10129; for 2000-2002 at [http://www.cms.hhs.gov/medicaid/mbes/ofs-64.asp].
Note: Totals may not add due to rounding.
a. State outlays for 1988 to 1996 are based on percentage estimates furnished by the Health Care
Financing Administration, OA. State outlays for 1997 to 2001 are equal to reported total
spending minus reported federal spending.
Disproportionate Share Adjustments
The disproportionate share hospital adjustment (DSH adjustment) was
established by Congress in 1981. The DSH provision was included in a package of
provisions referred to as the “Boren amendment” after its sponsor, David Boren, who
was a Democratic Senator from Oklahoma. Prior to 1981, state Medicaid programs
were required to follow Medicare reimbursement principles in paying for inpatient
hospital services. Under the Medicare rules in effect at that time, this meant that
every state used a reasonable cost system. The Boren amendment was intended to
give states greater flexibility to use other payment methods and, at the same time,
provide protections for hospitals, specifically hospitals with large caseloads of low-
income and uninsured patients. The protections included a requirement that states
make assurances to the Secretary that payment rates were “reasonable and adequate”
and that states “take into account the situation of hospitals which serve a
disproportionate number of low-income patients with special needs” by raising
payment rates (DSH adjustments) for those hospitals. The requirement to make DSH
adjustments implicitly recognized the disadvantaged situation of hospitals which
treated large numbers of Medicaid and other low-income patients and which had to

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CRS-3
depend on the relatively low payment rates of most Medicaid programs at the time.
The provisions did not place any upper limits on DSH adjustments and later, in the
Omnibus Budget Reconciliation Act of 1986 (P.L. 99-509), Congress clarified that
the Health Care Financing Administration (HCFA)3 had no authority to limit in any
way the amount of payment adjustments made to DSH hospitals.
Concerned by reports that many of the states were not implementing this
mandate, Congress in 1987 amended the DSH provisions to require states to submit
a Medicaid plan amendment describing their DSH policy.4 Specifically, Congress
required that each state describe the criteria used to designate hospitals as DSH
hospitals and define the formulas used to calculate the increase in the payment rate
(the DSH adjustment) for inpatient services provided by these hospitals. The law,
passed as part of the Omnibus Budget Reconciliation Act of 1987 (OBRA 87),
included minimum criteria for defining a hospital as a DSH hospital and minimum
criteria for calculating DSH adjustments.
For purposes of designating hospitals as DSH, OBRA 87 required that at least
those hospitals with (a) a Medicaid inpatient utilization rate in excess of one standard
deviation above the mean rate for the state; or (b) a low-income utilization rate of
25% be included.5 All hospitals qualifying as DSH hospitals must also retain at least
two obstetricians with staff privileges. A state plan could include other hospitals
under its definition of DSH as long as those hospitals meeting the minimum criteria
were classified as DSH hospitals.
OBRA 87 required states’ Medicaid plans specify the increase in payment to be
made to DSH hospitals and gave states two options for determining DSH payment
amounts. States were allowed to make minimum payments to DSH hospitals using
either the Medicare methodology6 or a formula providing payments that increase as
3 The former name of what is now the Centers for Medicare and Medicaid Services (CMS).
4 A state qualifies for federal matching payments for Medicaid as long as the state has
submitted and the Secretary of Health and Human Services (HHS) has approved a state plan
for medical assistance. The plan describes who is eligible for the program, what services
are covered, and how payments are made. Amendments to a state’s plan describe changes
to the program and must also be approved by the Secretary of HHS.
5 The Medicaid utilization rate is defined as the number of days of care furnished to
Medicaid beneficiaries during a given period divided by the total number of days of care
provided during the period. The “standard deviation” is a statistical measure of the
dispersion of hospitals’ utilization rates around the average; the use of this measure
identifies hospitals whose Medicaid utilization is unusually high. The low-income
utilization rate is the sum of two fractions: Medicaid payments plus state and local subsidies
divided by total patient care revenues, and inpatient charges attributable to charity care
(other than charity care subsidized by state or local government) divided by total inpatient
charges.
6 To qualify for Medicare DSH, a hospital must have a share of low-income patients that
equals or exceeds 15%. The low income share is determined by summing (a) the number
of Medicare inpatient days provided to SSI recipients divided by total Medicare patient
days, and (b) the number of inpatient days provided to Medicaid beneficiaries divided by
(continued...)

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CRS-4
the hospital’s Medicaid inpatient utilization rate increases over the state’s average.
Under the second option, a state’s formula could vary payments to different types of
hospitals, as long as all hospitals of each type were treated equally and adjustments
were reasonably related to the hospital’s Medicaid or low-income patient volume.
Again, no upper payments limits were established.
Following the passage of OBRA 87 and until 1990, total payments for DSH
adjustments remained relatively low until a combination of events occurred that
resulted in a rise in DSH adjustments from just under $1 billion in FY1990 to $17.4
billion two fiscal years later.7 In the late 1980s, states were experiencing a number
of upward pressures on their Medicaid budgets. General health care inflation was
rising at unprecedented high rates. National health spending estimated by the Centers
for Medicare and Medicaid Services (CMS), then known as HCFA, rose by over 20%
during the 1990 to 1992 period.8 The medical component of the consumer price
index, a common measure of health care prices, rose by almost 17%. At the same
time a recession was increasing the rolls of eligible Medicaid beneficiaries while
states were being required to phase in a number of mandatory eligibility expansions.
These combined factors led to an enrollment increase of over 24% or 6 million new
people on the Medicaid rolls between 1990 and 1992. In addition, the recession
shrunk the tax base from which states could fund increasing program costs. In
response to these pressures, states turned to funds donated by health care providers
or taxes paid by those providers to leverage federal matching payments. These
funding mechanisms helped drive DSH payments to their high levels.
Donations, Provider Taxes and
Intergovernmental Transfers
In response to those pressures, three special funding techniques began to spread
among the states to leverage federal Medicaid funds. The three approaches were
collecting donations, collecting provider-specific taxes, and transferring funds from
different levels of governments or governmental entities to the state government.
The funds collected through one or more of the three mechanisms were aggregated
at the state-level and used for the state share of Medicaid spending. Once used as a
state share of Medicaid spending, the donated, taxed, or transferred funds would be
matched with federal Medicaid matching dollars and then returned to the donors or
taxpayers through higher DSH adjustments or higher provider payment rates.
6 (...continued)
total inpatient days. Payment adjustments are specified by statute as a percentage increase
to the hospital payment rate depending upon the hospital’s size, urban/rural location, and
status as a rural referral center or sole community hospital.
7 Holahan, J., D. Liska, and K. Obermaier. Medicaid Expenditures and Beneficiary Trends,
1988-1993. Urban Institute, September 1994.
8 Levit, K.R., H.C. Lazenby, B.R. Braden, C.A. Cowan, P.A. McDonnell, L. Sivarajan, J.M.
Stiller, D.K. Won, C.S. Donham, A.M. Long, and M.W. Stewart. National Health
Expenditures, 1995. Health Care Financing Review, 1996.

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CRS-5
Before 1990, these techniques did not appear to be widespread and few were
aware of the potential for misuse. In 1985, for example, before HCFA became aware
of problems, it issued a regulation declaring that donated funds were a legitimate
source of state Medicaid matching payments. The regulation (42 CFR 433.45(b))
established that donated funds could be used to finance the state share of any
Medicaid service or administrative spending as long as two conditions were met: the
funds were under control of the Medicaid agency, and the funds could not revert to
the donor unless the donor was a non-profit organization and the Medicaid agency
decided on its own to use the donor’s facility. Originally, two states, Tennessee and
West Virginia, developed programs to collect donations from hospitals, claim those
funds as a state share, and collect a federal match. A portion of the donations and
their federal match were subsequently returned to the donors through higher
Medicaid hospital payments than they would have received including higher DSH
adjustments. HCFA at first approved the two state plans but later took steps to deny
federal matching for the spending funded by the programs. By 1988, HCFA
indicated that it planned to issue regulations limiting the use of donations as the
state’s share of Medicaid.
Similar issues were raised with respect to the treatment of taxes imposed by
states on health care providers. A set of instructions issued to state Medicaid
programs in 1987 distinguished between taxes of general applicability and provider-
specific taxes. Taxes of general applicability were those imposed on all kinds of
goods and services while provider specific taxes were those that applied only to
health care providers or services. The instruction allowed for states to reimburse
providers for general taxes, such as sales or excise taxes applicable to all businesses,
and to receive federal matching for those reimbursements. However no federal
matching was allowed for provider-specific taxes, such as a tax on each day of care
or each hospital bed. In HCFA’s view, provider-specific tax arrangements could
potentially work in the same way as voluntary contribution programs. A state could
impose a tax on providers, use the tax to claim federal matching, then repay the tax
to the providers along with some or all of the federal funds without having spent state
general revenue. Because HCFA instructions do not have the same legal force as
regulations and because many states’ provider payment systems did not allow for a
clear connection between the tax paid by the provider and the reimbursement
received from the state, the use of this technique began to spread among the states.
Up to this point, intergovernmental transfers had not been addressed.
Before HCFA could issue final regulations defining its position, Congress
intervened. The Technical and Miscellaneous Revenue Act of 1988 (P.L. 100-647)
included a provision prohibiting the Secretary from issuing final rules that would
change the treatment of voluntary contributions or provider-specific taxes before May
1, 1989. The prohibition was twice extended by Congress, first in the Omnibus
Budget Reconciliation Act of 1989 (OBRA 89) through the end of 1990, and then
later OBRA 90 extended it through the end of 1991 for voluntary contributions only.
OBRA 90 prohibited altogether regulation of provider-specific taxes although the law
was not clear.9
9 OBRA 90 included two provisions addressing provider specific taxes that were interpreted
(continued...)

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CRS-6
After OBRA 90 was enacted, states’ use of donations and taxes continued to
rise. By July of 1991, the Inspector General of HHS had issued three reports on the
rise in the use of provider donations and taxes, characterizing the programs as an
“uncontrollable virus” and “egregious.”10 The Inspector General asserted that the
schemes were used by states to reduce the effective state share of the program,
forcing the federal government to pay more for Medicaid.
DSH adjustments rose, coinciding with the taxes and donations. DSH had
become the most popular mechanism for returning targeted taxes or donations back
to the hospitals since DSH adjustments were uncapped and did not need to be tied to
particular beneficiaries or services. Some providers shared in the proceeds that states
generated by the federal matching payments on the donation and tax programs; states
returned DSH payments to those donors in excess of their contribution, or increased
their payment rates.11
Finally, after intense negotiations between the White House, the Governors, and
the Congress, the Medicaid Voluntary Contribution and Provider-Specific Tax
Amendments of 1991 (P.L. 102-234) was passed in November of that year. The law
established the first upper bounds on DSH payments and prohibited the use of
donated funds and health care related taxes that were not broad based for the purpose
of claiming federal matching payments. It established a cap on the portion of the
state share of Medicaid spending that could be raised through provider-specific taxes
and established aggregate national and state limits on DSH payments. The national
limit on DSH adjustments was set at 12% of Medicaid costs in any year, and
beginning in 1993, state DSH adjustments would be limited to published amounts
above which federal matching payments would not be available.
Under the law, each state would be eligible to receive the DSH adjustment
amount published in the Federal Register for that year and no more than that amount.
The published amount for each fiscal year would be based on 1992 payments. States
with 1992 DSH adjustments exceeding 12% of their 1992 Medicaid costs would
continue to receive allotments at their 1992 level until those payments became 12%
of total Medicaid spending in that state. These states were classified as “high” DSH
states. States with 1992 DSH payments below 12% could receive allotments
increasing their DSH adjustments (subject to a formula) up to a limit of 12%.
9 (...continued)
as conflicting. The first provision stated that “... nothing in this title ... shall be construed as
authorizing the Secretary to deny or limit payments to a state for expenditures ... attributable
to taxes (whether or not of general applicability) imposed with respect to the provisions of
such [health care] items or services.” A second provision excluded provider-specific taxes
from the cost base of a provider for purposes of computing Medicaid reimbursement to the
provider. Congress focused on the first provision, while the Administration focused on the
second, fueling a debate.
10 U.S. Dept. of Health and Human Services. Memoranda dated July 25, 1991, May 10,
1991, October 11, 1990. Prepared by Richard Kusserow, Inspector General. Washington.
(Hereafter cited as Inspector General memorandum)
11 Inspector General memorandum data, July 25, 1991.

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CRS-7
The Medicaid Voluntary Contribution and Provider-Specific Tax Amendments
specifically protected intergovernmental transfers while restricting the use of the
other two funding mechanisms. The law restricted the Secretary of HHS from
limiting the use, as the non-federal share of Medicaid, of funds derived from state or
local taxes or funds transferred by units of government within the state.
At the time, few states utilized intergovernmental transfers to generate federal
matching payments and the 1991 law was deemed a success. Despite the remaining
intergovernmental transfer loophole, the upper caps on DSH payments had a
significant impact on total DSH spending — the rapid climb in DSH payments had
been stopped. In the last few years, on the other hand, intergovernmental transfers
have begun to grow. In the most recent incarnation, instead of claiming DSH
payments with the intergovernmental funds, states have increasingly claimed grossly
inflated hospital charges for certain public hospitals.
Table 2. Federal and State Medicaid Disproportionate Share
Payments and Percentage Change, 1990-2001
(By fiscal year, in billions of dollars)
1990 1991 1992
1993
1994 1995
1996
1997
1998
1999
2000
2001
2002
$.96
4.7
17.4
16.6
16.9
19.0
15.1
15.9
15.0
15.5
15.6
15.9
15.9
389% 270% -4.6% 1.8% 12.4% -20.5%
5.3% -5.6%
3.3%
3.2%
1.6%
0%
Source: Payments estimated by Urban Institute for 1990-1992; data from CMS, 1993-2002. CRS
tabulations of percentage growth.
Although the growth in DSH payments stopped after 1991, complaints about the
distribution of those payments among hospitals persisted. There were anecdotal
reports that some hospitals were receiving large DSH payments, even though they
had few Medicaid patients and that other hospitals were receiving DSH payments so
large that the amount of their DSH payments exceeded the amount of uncompensated
care provided by the hospital.
In response to these concerns, Congress included in OBRA 1993 (P.L. 103-66)
a number of provisions intended to better target DSH hospital payments. The
policies in OBRA 1993 were different from earlier laws limiting DSH payments in
that the earlier laws sought only to cap total DSH payments flowing to the states.
OBRA 1993, however, set limits on the amounts of DSH payments that individual
hospitals would be allowed to receive and limited states’ flexibility to designate
hospitals as DSH hospitals. It prohibited designation of a hospital as a DSH hospital
for purposes of Medicaid reimbursement unless the hospital has a Medicaid inpatient
utilization rate of at least 1%.12 It also limited DSH adjustments to no more than the
costs of providing inpatient and outpatient services to Medicaid and uninsured
patients, less payments received from Medicaid and uninsured patients. This cap,
12 Medicaid inpatient utilization means the total number of Medicaid inpatient days in a cost
reporting period, divided by the total number of the hospital’s inpatient days in the same
period.

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CRS-8
known as the hospital-specific or facility-specific DSH cap was phased-in for certain
public hospitals and later became effective for private hospitals, too. Its provisions
became fully effective in 1995 and may have been the force behind the large drop in
total payments seen in FY1996. Later legislation raised the hospital-specific cap on
DSH payments for public hospitals in the state of California. BIPA 2000 extended
California’s higher hospital-specific cap (175% of a hospital’s uncompensated costs)
to public hospitals in the rest of the country for a period of two years, beginning with
the state fiscal year that starts after September 30, 2002.
After OBRA-93 was passed, DSH payments to hospitals continued to be a focus
of congressional attention despite the law’s success in stopping their rapid growth.
This was because DSH payments were both large and little information existed on
what precisely those payments accomplished. As a result, DSH again became the
target of congressional budget cutters. Provisions were included the Balanced
Budget Act of 1997 (BBA 97, P.L. 105-33), to reduce DSH spending and to address
other issues affecting DSH. The formula-based DSH allotments set into law in 1991
were replaced with specific DSH allotments for states for 1998 through 2002. The
federal share of DSH payments were set at $10.3 billion in 1998 (approximately $18
billion if matched by states at the 57% federal: 43% state matching rate) and were
to decline to $8.5 billion by 2002 (approximately $15 billion if matched by a state at
the 57%:43% rate). The constraints for fiscal years 2001 and 2002 were later relaxed
by Congress as part of the BIPA 2000. In that bill, the state allotments for 2001 were
raised to 2000 levels. For 2003, the allotments are to return to the BBA levels for
2002, increased by percentage growth of the consumer price index (CPI). Thereafter,
allotments will increase annually by the percentage growth of the CPI. The result of
reverting to the BBA policy in 2003 will be a significant reduction in DSH allotments
for most states for that year. This drop in allotments has been referred to as the
“DSH dip”.
The federal share of DSH allotments under current law, taking into account
amendments made by BIPA 2000 are reflected in Table 3. (DSH allotments are
different from DSH payments in that allotments reflect the maximum amount of
payments that could made to qualify for federal matching funds. Actual DSH
payments in any year could be lower than the allotments for that year or could even
be higher if some of those payments relate to claims for an earlier year. This
difference is reflected in differences in the numbers in Tables 3 and 4.)

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CRS-9
Table 3. Federal DSH Allotments for 1998-2002,
Preliminary Allotments for 2003 and 2004
(in millions of dollars)
State or District
1998
1999
2000
2001
2002
2003
2004
Alabama
293
269
248
256.7
263.4
249.7
289.6
Alaska
10
10
10
10.4
10.6
9.1
10.6
Arizona
81
81
81
83.8
86.0
82.2
95.4
Arkansas
2
2
2
18.6
19.1
19.3
22.4
California
1,085
1,068
986
1,020.5
1,047.0
890.2
1,032.6
Colorado
93
85
79
81.8
83.9
75.1
87.1
Connecticut
200
194
164
169.7
174.2
162.4
188.4
Delaware
4
4
4
4.1
4.2
4.1
4.7
District of
Columbia
23
23
32
33.1
34.0
32.5
37.7
Florida
207
203
197
203.9
209.2
162.4
188.4
Georgia
253
248
241
249.4
255.9
218.2
253.1
Hawaii*
Idaho
1
1
1
7.1
7.3
7.4
8.6
Illinois
203
199
193
199.8
204.9
174.6
202.5
Indiana
201
197
191
197.7
202.8
173.6
201.3
Iowa
8
8
8
17.0
17.4
17.7
20.5
Kansas
51
49
42
43.5
44.6
33.5
38.9
Kentucky
137
134
130
134.6
138.0
117.7
136.6
Louisiana
880
795
713
713.0
713.0
631.0
732.0
Maine
103
99
84
86.9
89.2
85.3
98.9
Maryland
72
70
68
70.4
72.2
61.9
71.8
Massachusetts
288
282
273
282.6
289.9
247.7
287.3
Michigan
249
244
237
245.3
251.7
215.2
249.6
Minnesota
16
16
33
34.2
35.0
33.5
38.9
Mississippi
143
141
136
140.8
144.4
123.8
143.6
Missouri
436
423
379
392.3
402.5
384.7
446.2
Montana
.2
.2
.2
4.9
5.0
5.1
5.9
Nebraska
5
5
5
12.2
12.5
12.7
14.7

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CRS-10
State or District
1998
1999
2000
2001
2002
2003
2004
Nevada
37
37
37
38.3
39.3
37.6
43.6
New Hampshire
140
136
130
130.0
131.8
132.0
153.1
New Jersey
600
582
515
533.0
546.9
522.7
606.4
New Mexico
5
5
9
9.3
9.6
9.1
10.6
New York
1,512
1,482
1,436
1,486.3
1,524.9
1,304.3
1513.0
North Carolina
278
272
264
273.2
280.3
239.5
277.9
North Dakota
1
1
1
4.1
4.2
4.3
5.0
Ohio
382
374
363
375.7
385.5
329.9
382.7
Oklahoma
16
16
16
16.6
17.0
16.2
18.8
Oregon
20
20
20
20.7
21.2
20.3
23.5
Pennsylvania
529
518
502
519.6
533.1
455.7
528.7
Rhode Island
62
60
58
60.0
61.6
52.8
61.2
South Carolina
313
303
262
271.2
278.2
265.9
308.5
South Dakota
1
1
1
4.8
4.9
4.9
5.7
Tennessee*
Texas
979
950
806
834.2
855.9
776.5
900.7
Utah
3
3
3
8.4
8.7
8.8
10.2
Vermont
18
18
18
18.6
19.1
18.3
21.2
Virginia
70
68
66
68.3
70.1
71.1
82.5
Washington
174
171
166
171.8
176.3
150.2
174.3
West Virginia
64
63
61
63.1
64.8
54.8
63.6
Wisconsin
7
7
7
40.7
41.8
42.4
49.2
Wyoming
.067
.095
.1
.1
.1
.1
.1
Total (in billions
$10.3
$9.9
$9.2
$9.7
$9.9
$8.7
$10.1
of dollars)
Source: Department of Health and Human Services, “Medicaid Program: Disproportionate Share
Hospital Payments,” 69 Federal Register 15850, March 26, 2004.
* Does not make DSH payments.
The BBA 1997 also imposed a hospital-specific cap on DSH payments to
mental health facilities. Beginning in 2003, DSH payments to institutions for mental
diseases and other mental health facilities can be no higher than 33% of DSH
payments in 1995 made to such facilities.

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CRS-11
Other provisions were included in BBA 1997, BBRA 1999, and BIPA 2000, to
better target DSH payments to needy hospitals or to make other minor changes in
DSH payment policy. BBA 1997 required states to submit to the Secretary a
description of the methods used to identify and pay DSH hospitals, including
children’s hospitals, on the basis of the proportion of low-income and Medicaid
patients served by such hospitals. Payments made to each of the identified DSH
hospitals are required to be reported annually. The bill also requires that DSH
payments be made directly by the states to DSH hospitals and not be included in
capitation rates to managed care entities.
The Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999
(BBRA 1999), which was included in the Consolidated Appropriations Act for
FY2000 (P.L. 106-113) by reference, increased DSH payments for the following
states for FY2000 through 2002; the District of Columbia, Minnesota, New Mexico,
and Wyoming. That bill also clarified that Medicaid DSH payments are not to be
matched at the enhanced federal matching rate used for the State Children’s Health
Insurance Program.
BIPA 200013 clarified that certain managed care enrollees are to be included
when calculating the Medicaid inpatient utilization rates and the low-income
utilization rates used for computing DSH payments. The bill also earmarks new
DSH funds for certain public hospitals that are owned or operated by a state (or
instrumentality or unit of government within a state) that are not receiving DSH
payments in October of 2000 and that have a low-income utilization rate in excess
of 65%. Those funds rise from $15 million in 2002 to $375 million for FY2006 and
remain at that level for each year thereafter. It also added a requirement that the
Secretary implement accountability standards to ensure that DSH payments are used
in accordance with statutory requirements.
Finally, the Medicare Prescription Drug, Improvement, and Modernization Act
of 2003 (MMA 2003, P. L. 108-173), passed in December of 2003, establishes a 16%
increase in DSH allotments to states for FY2004 and raises allotments for certain
subsequent fiscal years. The increased amounts for 2002 only are not subject to the
12% ceiling on DSH allotments as a percentage of all medical assistance payments.
Allotments for years after FY2004 will be equal to FY2004 amounts unless the
Secretary of HHS determines that the allotments as would have been calculated under
prior law are equal to or exceed the FY2004 amounts. For such fiscal years,
allotments will be equal to allotments for the prior fiscal year increased by the
percentage change in the CPI-U for the prior fiscal year. The law also changes the
definition of a low DSH state to those states in which total DSH payments for
FY2000 are less than 3% (rather than 1% as under prior law) of the state’s total
Medicaid spending on benefits. In addition, P.L. 108-173 increases the floor
allotment amount for low DSH states for FY2004 through FY2008 by 16% each year
(over the prior year amount). For FY2009 forward, as for all other states, the
allotment for low DSH states for each year equals the prior year amount increased by
13 BIPA 2000 was incorporated by reference into H.R. 4577, The Consolidated
Appropriations Act of 2001 (P.L. 106-554). H.R. 4577 was passed by the House and Senate
on December 15, 2000 and was signed into law on December 21.

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CRS-12
inflation. Finally, as a condition of receiving federal Medicaid payments for FY2004
and beyond, states are required to submit to the Secretary of HHS a detailed annual
report and an independent certified audit on their DSH payments to hospitals.
Disproportionate Share Payments Today
To summarize the current law with respect to Medicaid DSH adjustments,
states:
! must pay DSH adjustments to hospitals serving a disproportionate
share of Medicaid patients and patients with special needs.
! must define which hospitals qualify as DSH hospitals and provide
for an adjustment in the payment rate for those hospitals in the
state’s Medicaid plan.
! have flexibility in establishing the designation of DSH hospitals but
must include in their definition at least all hospitals meeting
minimum criteria: (a) a Medicaid inpatient utilization rate in excess
of one standard deviation above the mean rate for the state; or (b) a
low-income utilization rate of 25%. States may not include hospitals
that do not have a Medicaid utilization rate of at least 1% as DSH
hospitals.
! have flexibility in calculating DSH payment amounts to hospitals
but must pay DSH hospitals at least: (a) an amount calculated using
the Medicare DSH payment methodology, or (b) an amount
calculated using a payment methodology that increases each
hospital’s adjustment as the hospital’s Medicaid inpatient utilization
rate exceeds the statewide average. DSH hospital payments cannot
exceed the hospital-specific cap, set at 175% (for two years) of the
costs of providing inpatient and outpatient services to Medicaid and
uninsured patients, less payments received from Medicaid and
uninsured patients for public hospitals, and at 100% of those costs
for private hospitals.
! cannot make DSH payments in an amount that exceeds the state’s
DSH allotment.
! except for in 2004, cannot have total DSH payments that exceed
12% of total Medicaid benefits payments.
In 2002, according to preliminary state reports, DSH hospital adjustments
totaled over $15.9 billion. The federal share of those payments was about $9.0
billion and represented 6.4% of total Medicaid payments for benefits, a significant
drop from the 1992 high of about 15.3%.14 Regular Medicaid payments for inpatient
hospital services were about $31.2 billion15. The 2002 DSH hospital adjustments to
inpatient hospitals totaled about 40% of regular Medicaid payments for inpatient
hospital services. This percentage varied considerably among the states from less
that 1% of regular hospital payments in a few states to several times more than
14 Prospective Payment Assessment Commission (PROPAC), p. 12.
15 This figure does not include payments made to hospitals under managed care capitation
payments.

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CRS-13
regular hospital payments. There were five states in 2002 in which DSH payments
to regular inpatient hospitals exceeded regular payments for inpatient hospital
services as reported to CMS.
DSH payments are highly concentrated in a few states. Six states — New York,
California, Texas, Louisiana, New Jersey, and Pennsylvania — accounted for over
half of 2002 DSH payments. Fourteen states made three quarters of all 2002 DSH
payments.
Table 4 shows FY2002 DSH allotments and payments as well as DSH
payments as a percentage of total medical assistance payments in each state. DSH
payments made in 2002 ranged from below than 1% of medical assistance in several
states to almost 18% of medical assistance in Louisiana. Because states have up to
two years to claim their DSH allotments, outlays for DSH payments can be a moving
target. The numbers below reflect preliminary 2002 payments as posted on the CMS
website at the time of publication.
Table 4. Disproportionate Share Payments and Payments as a
Percentage of Total Medical Assistance, FY2002
(in millions of dollars)
DSH payments
DSH payments as a
Total federal and
percentage of
State
state combined
Federal share
medical assistancea
Alabama
373.8
263.4
12.1%
Alaska
18.2
10.5
2.7%
Arizona
87.6
56.9
2.5%
Arkansas
14.5
10.6
0.6%
California
1349.5
694.4
5.0%
Colorado
161.7
80.9
7.0%
Connecticut
241.6
120.8
7.0%
Delaware
3.4
1.7
0.5%
District of Columbia
40.4
28.2
3.9%
Florida
392.0
221.2
4.0%
Georgia
433.2
255.6
6.9%
Hawaiib
—
—
—
Idaho
10.3
7.3
1.3%
Illinois
376.6
188.3
4.3%
Indiana
399.4
247.4
9.0%
Iowa
27.6
17.3
1.1%
Kansas
40.9
40.9
2.2%
Kentucky
197.4
138.0
5.2%
Louisiana
860.9
605.2
17.6%
Maine
51.4
34.2
3.6%
Maryland
136.9
68.5
3.8%
Massachusetts
623.2
311.6
7.7%
Michigan
405.2
228.3
5.4%
Minnesota
59.5
29.7
1.3%

---

CRS-14
DSH payments
DSH payments as a
Total federal and
percentage of
State
state combined
Federal share
medical assistancea
Mississippi
189.4
144.1
6.6%
Missouri
536.7
327.7
10.0%
Montana
0.3
0.2
0.1%
Nebraska
11.0
6.6
0.8%
Nevada
76.4
38.2
9.4%
New Hampshire
181.5
90.7
17.9%
New Jersey
1215.5
607.8
15.7%
New Mexico
12.3
9.0
0.7%
New York
2,861.3
1,430.7
7.9%
North Carolina
460.1
282.8
6.8%
North Dakota
2.3
1.6
0.5%
Ohio
654.3
384.6
6.8%
Oklahoma
24.1
17.0
1.1%
Oregon
22.9
13.6
0.9%
Pennsylvania
779.2
425.1
6.4%
Rhode Island
88.2
46.3
6.5%
South Carolina
391.1
271.2
11.9%
South Dakota
1.1
0.7
0.2%
Tennesseeb
—
—
—
Texas
1,423.1
856.8
10.5%
Utah
12.4
8.7
1.3%
Vermont
28.9
18.2
4.4%
Virginia
181.7
93.5
4.8%
Washington
357.9
180.3
6.9%
West Virginia
83.0
62.5
5.2%
Wisconsin
49.2
28.8
1.2%
Wyoming
0.1
0.1
0.1%
National Totals
15,949.2
8,991.4
6.5%
Source: CRS tabulations of data from CMS-64.
Notes: Payments may differ from allotments because allotments are the cap on a state’s DSH
obligations during the fiscal year. Payments are the outlays that occur during the year. Outlays in a
fiscal period may be made for obligations made in different fiscal periods.
a. Excludes payments for administration.
b. Does not make DSH payments.
In 2002, only four states were considered “high” DSH states (states with DSH
payments in excess of 12% of total Medicaid payments). This is down from the high
in 1993 when 21 states were considered “high” DSH states. Since the 12% ceiling
will not apply in 2004 only, the number of states exceeding that ceiling may rise for
the year.

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CRS-15
Designating Hospitals as Disproportionate Share
and Calculating Adjustments
The Medicaid law provides a great deal of discretion to states in designating
DSH hospitals and calculating DSH adjustments for designated hospitals. States
must provide DSH adjustments to at least those hospitals meeting certain minimum
criteria. The state may use another designation formula to define DSH hospitals;
however, the definition must include the hospitals meeting the minimum criteria
above. According to PROPAC, only 13 states used the minimum criteria in 1993.
Most states use an expanded definition of DSH allowing additional hospitals to be
designated as DSH. Because of the flexibility, there is a great amount of variation
across the states in the number of hospitals that are designated as DSH. Some states
designate only those hospitals that meet the minimum criteria while others designate
all or almost all hospitals.16
Even more flexibility is available in terms of the payment methodology. The
statute provides only the principles by which states should distribute the funds but
does not address the amount of funds the states pay to individual DSH hospitals from
their capped allotment. States must make minimum payments to DSH hospitals
using either the Medicare methodology or a formula providing payments that increase
as the hospital’s Medicaid inpatient utilization rate increases over the state’s average.
If a state uses its own formula it may vary payments to different types of hospitals,
as long as all hospitals of each type are treated equally and adjustments are
reasonably related to the hospitals’ Medicaid or low-income patient volume and the
minimum payment requirement is met. Since OBRA 93, payments to individual
hospitals are subject to a cap. The cap amount is equal to 100% of the cost of
providing inpatient and outpatient services to Medicaid and uninsured patients, less
payments received from Medicaid and uninsured patients (hospital-specific cap)
except for certain public hospitals in California which are capped at 175% of those
costs. Beginning in FY2003, and extending for two state fiscal years, all public
hospitals will be subject to the higher (175% of cost) ceiling. PROPAC found that,
in 1993, no two states’ payment methodologies were the same. Very few states relied
on the Medicare DSH formula and those that did were the states distributing the
fewest DSH dollars. Most states used a proportional payment formula but payments
varied widely depending upon how low-income utilization rates were calculated and
the level of funds available.17
Uses of Disproportionate Share Funds
A major reason for the perennial focus on DSH payments is that very little
reporting information about the uses of DSH funds has, in the past, been required of
states. Combined with the size of DSH payments, the inability to precisely say what
the funds are used for leads to concern that the program is either unnecessary or
abused. There has been some evidence, that, indeed, the program has in the past been
abused and DSH payments may only tenuously be related to their original purpose.
16 PROPAC, p. 14.
17 Ibid., p. 23.

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CRS-16
Hospitals have reported receiving only a portion of reported DSH payments while an
even smaller portion goes to hospitals that serve a disproportionate share of Medicaid
and low-income beneficiaries relative to other hospitals.
In 1994, the Urban Institute conducted a survey of states on Medicaid DSH
practices. They found that about half of the 1993 DSH payments were used to pay
providers back for their contributions, about one-sixth of reported payments went to
private and county providers and state hospitals, while one-third was kept by the
states to “finance diverse expenditure, including general health and welfare
expenditures.”18
Several provisions in BBA-1997 are targeted at the issue of the proper use of
DSH funds. A reporting requirement was added to the law. Under the new rule,
states will have to report annually to the Secretary on the methods used to identify
and pay DSH hospitals, including children’s hospitals. The method used to identify
DSH hospitals must have as its basis the proportion of low income and Medicaid
patients served by such hospitals. In addition, the bill also included limitations on
the amount of DSH payments that can be paid to individual mental hospitals or
institutions of mental disease. The facility specific caps, described above, are also
meant to ensure that more of the DSH funds are used to meet the intent of the law.
How Are Medicaid Disproportionate Share
Adjustments Different from Medicare
Disproportionate Share Adjustments?
Medicaid and Medicare DSH hospital adjustments are similar in that the major
basis for designating hospitals to receive payments is the proportion of services
provided to low-income patients. For Medicare designation, though, only hospitals
meeting the Medicare criteria qualify for payments. A Medicare DSH hospital is one
that has a “disproportionate patient” percentage that exceeds certain levels depending
upon the type of hospital. A hospital’s “disproportionate patient” percentage is
defined as the hospital’s total number of inpatient days attributable to federal SSI
Medicare beneficiaries divided by the total number of Medicare patients days, plus
the number of Medicaid patient days divided by the total patient days. For Medicaid
designation, on the other hand, states are not limited to the federal minimum criteria.
As long as at least those hospitals meeting the minimum criteria are classified as
DSH, the state may establish a more liberal methodology of designating DSH
hospitals.
Calculating payment adjustments for DSH hospitals can be different for
Medicaid and Medicare DSH hospitals. Although states may use the Medicare
payment methodology to calculate Medicaid DSH payments, most states do not and
18 Ku, L., and T. Coughlin. Medicaid Disproportionate Share and Other Special Financing
Programs: A Fiscal Dilemma for States and the Federal Government. Urban Institute,
1994.

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CRS-17
many of those that do use the Medicare methodology also use another methodology
for different types of hospitals.
PROPAC found in 1994 that there is a “striking disparity between Medicare and
Medicaid DSH expenditures, both in total amounts and as proportions of inpatient
hospital spending.” Then, Medicare DSH adjustments were $2.7 billion and only
equal to just over 4% of Medicare hospital spending compared to Medicaid payments
of well over 10 billion, equal to about one-third of Medicaid hospital payments.19
More recently, this disparity is even more striking. Medicare DSH adjustments were
estimated to be $6.8 billion in 2003, or 6.2% of Medicare hospital inpatient care.20
Medicaid DSH payments were over $15.9 billion, or about 40% of the size of regular
Medicaid payments to hospitals for general inpatient services21
19 PROPAC. Analysis of Medicaid Disproportionate Share Payment Adjustments.
Congressional Report C-94-01, January 1, 1994. p. 26.
20 CBO March 2004 Baseline for Medicare.
21 Total Medicaid payments to inpatient hospitals were $31.2 billion (excluding mental
hospitals) in 2002 based on preliminary CMS-64.

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