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Updated January 16, 2020
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);
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.
the Continuing Appropriations Act, 2020, and Health
Each state receives an annual DSH allotment, which is the
Extenders Act of 2019 (P.L. 116-59);
maximum amount of federal matching funds that each state
is permitted to claim for Medicaid DSH payments. In
the Further Continuing Appropriations Act, 2020, and
FY2019, federal DSH allotments totaled $12.6 billion.
Further Health Extenders Act of 2019 (P.L. 116-69);
and
DSH Allotment Reduction Amounts
The Patient Protection and Affordable Care Act (ACA; P.L.
the Further Consolidated Appropriations Act, 2020 (P.L.
111-148, as amended) has reduced the number of uninsured
116-94).
individuals in the United States through the health
insurance coverage provisions (including the ACA
Under current law, the aggregate reductions to the Medicaid
Medicaid expansion). Built on the premise that with fewer
DSH allotments equal $4.0 billion for the period beginning
uninsured individuals there should be less need for
May 23, 2020, and ending September 30, 2020, and $8.0
Medicaid DSH payments, the ACA included a provision
billion for each year from FY2021 through FY2025.
directing the Secretary of the Department of Health and
Human Services (HHS) to make aggregate reductions in
Figure 1 shows estimates of aggregate DSH allotments for
Medicaid DSH allotments equal to $500 million in FY2014,
FY2012 through FY2028 before the ACA reductions, with
$600 million in FY2015, $600 million in FY2016, $1.8
the ACA reductions, and under current law. The ACA
billion in FY2017, $5.0 billion in FY2018, $5.6 billion in
reductions totaled $18.1 billion, and under current law the
FY2019, and $4.0 billion in FY2020.
DSH allotment reductions total $44.0 billion.
Despite the assumption that decreasing the number of
Figure 1. Total DSH Allotments Before the
uninsured individuals would reduce the need for Medicaid
Reductions, with the ACA Reductions, and Under
DSH payments, the ACA was written so that, after the
Current Law
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
annual inflation adjustments for FY2014 to FY2021.
Since the ACA, a number of laws have amended the ACA
Medicaid DSH reductions by eliminating the reductions for
FY2014 through FY2019, changing the reduction amounts,
and extending the reductions through FY2025. The specific
laws that have amended the Medicaid DSH reductions are
the Middle Class Tax Relief and Job Creation Act of
2012 (P.L. 112-96);
Source: CRS calculation.
https://crsreports.congress.gov
link to page 2 link to page 2 
Medicaid Disproportionate Share Hospital (DSH) Reductions
Notes: The consumer price index for all urban consumers used to
Medicaid DSH reductions due to the special statutory
inflate the DSH allotments is based on the factors built into
authority that provides Tennessee with a Medicaid DSH
Congressional Budget Office, An Update to the Budget and Economic
allotment.
Outlook: 2019 to 2029, August 2019.
Proposed Methodology for Allocating
Under current law, the aggregate reductions relative to the
DSH Reductions
Medicaid DSH allotments before the ACA reductions will
On September 25, 2019, the Centers for Medicare &
be an estimated 31% reduction in FY2020 and an estimated
Medicaid Services (CMS) released a final rule regarding the
61% reduction in FY2021, and they will phase down to an
methodology for allocating the Medicaid DSH reductions.
estimated 55% reduction in FY2025. In FY2026, DSH
The methodology begins by splitting the aggregate DSH
allotments will rebound to the pre-ACA-reduced levels,
reduction amount for each year into two separate amounts:
with annual inflation adjustments for FY2020 to FY2026.
one DSH reduction amount for low DSH states and another
reduction amount for non-low DSH states.
Statutory Requirements for Reductions
to State DSH Allotments
Then, for each group of states, half of each group’s DSH
Although the aggregate DSH reduction amounts are
reductions would be allocated according to the uninsured
specified in statute, the HHS Secretary is responsible for
percentage factor and half of the DSH reductions would be
determining how to distribute the aggregate DSH
allocated according to how states target their DSH funds.
reductions among the states using some broad statutory
As shown in Figure 2, the DSH reductions would be
guidelines. The Secretary is required to impose larger
allocated according to the uninsured percentage factor
percentage DSH reductions on states that
(50%), how states target their DSH funds according to the
“high volume of Medicaid inpatient factor” (25%), and how
have the lowest percentage of uninsured individuals
states target their DSH funds according to the “high level of
(determined by the Census Bureau’s data, audited
uncompensated care factor” (25%). Each state’s reduction
hospital cost reports, and other information likely to
would be limited to 90% of the unreduced allotment
yield accurate data) during the most recent fiscal year
amount, which preserves at least 10% of each state’s DSH
with available data or
allotments.
do not target their DSH payments to hospitals with high
The methodology would not reduce any portion of a state’s
volumes of Medicaid patients and high levels of
Medicaid DSH allotment that was included in the budget
uncompensated care (excluding bad debt).
neutrality calculation for a coverage expansion that was
approved under a Section 1115 waiver as of July 31, 2009.
The statute also requires the Secretary to impose smaller
This would affect the District of Columbia, Indiana, Maine,
percentage reductions on low DSH states (i.e., states with
Massachusetts, and Wisconsin.
total Medicaid DSH payments for FY2000 between 0% and
3% of total Medicaid medical assistance expenditures).
Figure 2 shows CMS’s illustrative example of the
methodology using a $2.0 billion aggregate Medicaid DSH
The last specification provided in statute requires the
reduction on FY2017 allotments. Under this example, CMS
Secretary to take into account the extent to which the DSH
estimates that low DSH states would have an average
allotment for a state was included in the budget neutrality
allotment reduction of 4.6% and non-low DSH states would
calculation for a coverage expansion approved under a
have an average allotment reduction of 17.2%.
Section 1115 waiver as of July 31, 2009.
Figure 2. Illustrative Example of Proposed Medicaid
Although the statute provides the Secretary with flexibility
DSH Reduction Methodology
regarding how to allocate the DSH reductions among the
states, in general, states with the lowest percentage of
uninsured individuals can be expected to receive relatively
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
Source: CRS using the illustrative DSH reduction factor weighting
most states are expected to have DSH allotment reductions.
allocation from Centers for Medicare & Medicaid Services, “Medicaid
Tennessee is the only state that is not subject to the
https://crsreports.congress.gov
Medicaid Disproportionate Share Hospital (DSH) Reductions
Program; State Disproportionate Share Hospital Allotment
Alison Mitchell, Specialist in Health Care Financing
Reductions,” 82 Federal Register 35155, July 28, 2017.
IF10422
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