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Updated February 26, 2019
Medicaid Disproportionate Share Hospital (DSH) Reductions
The Medicaid statute requires states to make
the American Taxpayer Relief Act of 2012 (P.L. 112-
disproportionate share hospital (DSH) payments to
240),
hospitals treating large numbers of low-income patients.
This provision is intended to recognize the disadvantaged
the Bipartisan Budget Act of 2013 (P.L. 113-67),
financial situation of those hospitals because low-income
patients are more likely to be uninsured or Medicaid
the Protecting Access to Medicare Act of 2014 (P.L.
enrollees. Hospitals often do not receive payment for
113-93),
services rendered to uninsured patients, and Medicaid
provider payment rates are generally lower than the rates
the Medicare Access and CHIP Reauthorization Act of
paid by Medicare and private insurance. (See CRS Report
2015 (P.L. 114-10), and
R42865, Medicaid Disproportionate Share Hospital
Payments.)
the Bipartisan Budget Act of 2018 (BBA 2018; P.L.
115-123).
Whereas most federal Medicaid funding is provided on an
open-ended basis, federal Medicaid DSH funding is capped.
Under current law, the aggregate reductions to the Medicaid
Each state receives an annual DSH allotment, which is the
DSH allotments equal $4.0 billion in FY2020 and $8.0
maximum amount of federal matching funds that each state
billion for each year from FY2021 through FY2025.
is permitted to claim for Medicaid DSH payments. In
FY2018, federal DSH allotments totaled $12.3 billion.
Figure 1 shows estimates of aggregate DSH allotments for
FY2012 through FY2028 before the ACA reductions, with
DSH Allotment Reduction Amounts
the ACA reductions, and under current law. The ACA
The Patient Protection and Affordable Care Act (ACA; P.L.
reductions totaled $18.1 billion, and under current law the
111-148, as amended) has reduced the number of uninsured
DSH allotment reductions total $44.0 billion.
individuals in the United States through the health
insurance coverage provisions (including the ACA
Figure 1. Total DSH Allotments Before the
Medicaid expansion). Built on the premise that with fewer
Reductions, with the ACA Reductions, and Under
uninsured individuals there should be less need for
Current Law
Medicaid DSH payments, the ACA included a provision
directing the Secretary of the Department of Health and
Human Services (HHS) to make aggregate reductions in
Medicaid DSH allotments equal to $500 million in FY2014,
$600 million in FY2015, $600 million in FY2016, $1.8
billion in FY2017, $5.0 billion in FY2018, $5.6 billion in
FY2019, and $4.0 billion in FY2020.
Despite the assumption that decreasing the number of
uninsured individuals would reduce the need for Medicaid
DSH payments, the ACA was written so that, after the
specific reductions for FY2014 through FY2020, DSH
allotments would have returned to the amounts that states
would have received without the enactment of the ACA. In
other words, in FY2021, states’ DSH allotments would
have rebounded to their pre-ACA-reduced levels, with
Source: CRS calculation.
annual inflation adjustments for FY2014 to FY2021.
Notes: The consumer price index for all urban consumers used to
inflate the DSH allotments is based on the factors built into
Since the ACA, a number of laws have amended the ACA
Congressional Budget Office, The Budget and Economic Outlook: Fiscal
Medicaid DSH reductions by eliminating the reductions for
Years 2018 to 2028, April 2018. DSH allotments are different from
FY2014 through FY2019, changing the reduction amounts,
DSH expenditures. Allotments reflect the maximum amount of
and extending the reductions through FY2025. The specific
federal DSH funding available to states, and DSH expenditures are
laws that have amended the Medicaid DSH reductions are
the amounts paid to hospitals.
the Middle Class Tax Relief and Job Creation Act of
Under current law, the aggregate reductions relative to the
2012 (P.L. 112-96),
Medicaid DSH allotments before the ACA reductions will
be an estimated 31% reduction in FY2020 and an estimated
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Medicaid Disproportionate Share Hospital (DSH) Reductions
61% reduction in FY2021, and they will phase down to an
Centers for Medicare & Medicaid Services (CMS) released
estimated 55% reduction in FY2025. In FY2026, DSH
a proposed rule regarding the methodology for allocating
allotments will rebound to the pre-ACA-reduced levels,
the DSH reductions. The proposed methodology for
with annual inflation adjustments for FY2020 to FY2026.
allocating the Medicaid DSH reductions begins by splitting
the aggregate DSH reduction amount for each year into two
Statutory Requirements for Reductions
separate amounts: one DSH reduction amount for low DSH
to State DSH Allotments
states and another reduction amount for non-low DSH
Although the aggregate DSH reduction amounts are
states.
specified in statute, the Secretary is responsible for
determining how to distribute the aggregate DSH
Then, for each group of states, half of each group’s DSH
reductions among the states using some broad statutory
reductions would be allocated according to the uninsured
guidelines. The Secretary is required to impose larger
percentage factor and half of the DSH reductions would be
percentage DSH reductions on states that
allocated according to how states target their DSH funds.
As shown in Figure 2, the DSH reductions would be
have the lowest percentage of uninsured individuals
allocated according to the uninsured percentage factor
(determined by the Census Bureau’s data, audited
(50%), how states target their DSH funds according to the
hospital cost reports, and other information likely to
“high volume of Medicaid inpatient factor” (25%), and how
yield accurate data) during the most recent fiscal year
states target their DSH funds according to the “high level of
with available data or
uncompensated care factor” (25%). Each state’s reduction
would be limited to 90% of the unreduced allotment
do not target their DSH payments to hospitals with high
amount, which preserves at least 10% of each state’s DSH
volumes of Medicaid patients and high levels of
allotments.
uncompensated care (excluding bad debt).
The proposed methodology would not reduce any portion of
The statute also requires the Secretary to impose smaller
a state’s Medicaid DSH allotment that was included in the
percentage reductions on low DSH states (i.e., states with
budget neutrality calculation for a coverage expansion that
total Medicaid DSH payments for FY2000 between 0% and
was approved under a Section 1115 waiver as of July 31,
3% of total Medicaid medical assistance expenditures).
2009. This would affect the District of Columbia, Indiana,
Maine, Massachusetts, and Wisconsin.
The last specification provided in statute requires the
Secretary to take into account the extent to which the DSH
Figure 2 shows CMS’s illustrative example of the proposed
allotment for a state was included in the budget neutrality
methodology using a $2.0 billion aggregate Medicaid DSH
calculation for a coverage expansion approved under a
reduction on FY2017 allotments. Under this example, CMS
Section 1115 waiver as of July 31, 2009.
estimates that low DSH states would have an average
allotment reduction of 4.6% and non-low DSH states would
Although the statute provides the Secretary with flexibility
have an average allotment reduction of 17.2%.
regarding how to allocate the DSH reductions among the
states, in general, states with the lowest percentage of
Figure 2. Illustrative Example of Proposed Medicaid
uninsured individuals can be expected to receive relatively
DSH Reduction Methodology
larger percentage DSH reductions. In addition, states that
do not target their DSH payments to hospitals with the most
Medicaid patients and highest levels of uncompensated care
can be expected to receive relatively larger percentage DSH
reductions. Also, low DSH states should receive relatively
smaller percentage DSH reductions. As a result, a non-low
DSH state with a low percentage of uninsured individuals
that does not target its DSH payments can be expected to
receive a relatively larger percentage reduction and a low
DSH state with a high percentage of uninsured individuals
that targets its DSH payments should receive a relatively
smaller percentage DSH reduction.
The magnitude of the Medicaid DSH reductions is such that
most states are expected to have DSH allotment reductions.
Tennessee is the only state that is not subject to the
Medicaid DSH reductions due to the special statutory
Source: CRS using the illustrative DSH reduction factor weighting
authority that provides Tennessee with a Medicaid DSH
allocation from Centers for Medicare & Medicaid Services, “Medicaid
allotment.
Program; State Disproportionate Share Hospital Allotment
Proposed Methodology for Allocating
Reductions,” 82 Federal Register 35155, July 28, 2017.
DSH Reductions
Alison Mitchell, Specialist in Health Care Financing
On July 28, 2017, prior to passage of BBA 2018, which
eliminated the reductions for FY2018 and FY2019, the
IF10422
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Medicaid Disproportionate Share Hospital (DSH) Reductions
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https://crsreports.congress.gov | IF10422 · VERSION 4 · UPDATED