Medicaid Disproportionate Share Hospital (DSH) Reductions

Medicaid Disproportionate Share Hospital (DSH) Reductions

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Updated May 10, 2024
Medicaid Disproportionate Share Hospital (DSH) Reductions
The Medicaid statute requires states to make
FY2027 (see Figure 1). The aggregate reductions to the
disproportionate share hospital (DSH) payments to
Medicaid DSH allotments equal $8.0 billion for each of
hospitals treating large numbers of low-income patients.
those years.
This provision is intended to recognize the disadvantaged
financial situation of those hospitals because low-income
Figure 1 shows estimates of aggregate DSH allotments for
patients are more likely to be uninsured or Medicaid
FY2012 through FY2029 before the ACA reductions, with
enrollees. Hospitals often do not receive payment for
the ACA reductions, and under current law. The ACA
services rendered to uninsured patients, and Medicaid
reductions that never went into effect totaled $18.1 billion,
provider payment rates are generally lower than the rates
and under current law the DSH allotment reductions total
paid by Medicare and private insurance. (See CRS Report
$24.0 billion.
R42865, Medicaid Disproportionate Share Hospital
Payments.)
Figure 1. Total DSH Allotments from FY2012 to
FY2029 Without the Reductions, with the ACA
Whereas most federal Medicaid funding is provided on an
Reductions, and Under Current Law
open-ended basis, federal Medicaid DSH funding is capped.
Each state receives an annual DSH allotment, which is the
maximum amount of federal funds that each state is
permitted to claim for Medicaid DSH payments. In
FY2023, federal DSH allotments totaled $16.0 billion.
DSH Allotment Reduction Amounts
The Patient Protection and Affordable Care Act (ACA; P.L.
111-148, as amended) has reduced the number of uninsured
individuals in the United States through the health
insurance coverage provisions (including the ACA
Medicaid expansion). Built on the premise that with fewer
uninsured individuals there should be less need for
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
Source: CRS calculation using Consumer Price Index for Al Urban
billion in FY2017, $5.0 billion in FY2018, $5.6 billion in
Consumers estimates from Congressional Budget Office, The Long-
FY2019, and $4.0 billion in FY2020.
Term Budget Outlook: 2024 to 2025, March 2024.
Note: Medicaid DSH al otments were temporarily increased during
Despite the assumption that decreasing the number of
the Coronavirus Disease 2019 (COVID-19) public health emergency
uninsured individuals would reduce the need for Medicaid
period (i.e., FY2020 through the first fiscal quarter of FY2024).
DSH payments, the ACA was written so that, after the
specific reductions for FY2014 through FY2020, DSH
Under current law, the aggregate reductions relative to the
allotments would have returned to the amounts that states
Medicaid DSH allotments before reductions will be an
would have received without the enactment of the ACA. In
estimated 53% reduction in FY2025 phasing down to an
other words, in FY2021, states’ DSH allotments would
estimated 51% reduction in FY2027. In FY2028, DSH
have rebounded to their pre-ACA-reduced levels, with
allotments will rebound to the pre-reduced levels, with
annual inflation adjustments for FY2014 to FY2021.
annual inflation adjustments for FY2025 to FY2027.
The Medicaid DSH reductions have been amended by more
Statutory Requirements for Reductions
than a dozen laws since the ACA. These amendments have
to State DSH Allotments
delayed the implementation of the Medicaid DSH
Although the aggregate DSH reduction amounts are
reductions and modified the reduction amounts. Most
specified in statute, the HHS Secretary is responsible for
recently, the Medicaid DSH reductions were amended in
determining how to distribute the aggregate DSH
the Consolidated Appropriations Act, 2024 (P.L. 118-42).
reductions among the states using some broad statutory
guidelines. The Secretary is required to impose larger
Under current law, the Medicaid DSH reductions are to
percentage DSH reductions on states that (1) have the
occur from FY2025 (specifically, the period beginning
lowest percentage of uninsured individuals (determined by
January 1, 2025, and ending September 30, 2025) through
the Census Bureau’s data, audited hospital cost reports, and
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Medicaid Disproportionate Share Hospital (DSH) Reductions
other information) during the most recent fiscal year with
neutrality calculation for a coverage expansion that was
available data or (2) do not target their DSH payments to
approved under a Section 1115 waiver as of July 31, 2009.
hospitals with high volumes of Medicaid patients and high
This would affect the District of Columbia, Indiana, Maine,
levels of uncompensated care (excluding bad debt).
Massachusetts, and Wisconsin.
The statute also requires the Secretary to impose smaller
Figure 2. Illustrative Example of Medicaid DSH
percentage reductions on low DSH states (i.e., states with
Reduction Methodology
total Medicaid DSH payments for FY2000 between 0% and
3% of total Medicaid medical assistance expenditures).
The last specification provided in statute requires the
Secretary to take into account the extent to which the DSH
allotment for a state was included in the budget neutrality
calculation for a coverage expansion approved under a
Section 1115 waiver as of July 31, 2009.
Although the statute provides the Secretary with flexibility
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

Source: CRS using the il ustrative DSH reduction factor weighting
that does not target its DSH payments can be expected to
al ocation from Centers for Medicare & Medicaid Services, “Medicaid
receive a relatively larger percentage reduction and a low
Program; State Disproportionate Share Hospital Al otment
DSH state with a high percentage of uninsured individuals
Reductions,” 82 Federal Register 35155, July 28, 2017.
that targets its DSH payments should receive a relatively
smaller percentage DSH reduction.
Figure 2 shows CMS’s illustrative example of the
methodology using a $2.0 billion aggregate Medicaid DSH
The magnitude of the Medicaid DSH reductions is such that
reduction on FY2017 allotments. Under this example, CMS
most states are expected to have DSH allotment reductions.
estimates that low DSH states would have an average
Tennessee is the only state that is not subject to the
allotment reduction of 4.6% and non-low DSH states would
Medicaid DSH reductions due to the special statutory
have an average allotment reduction of 17.2%. Under
authority for Tennessee’s Medicaid DSH allotment.
current law, the annual Medicaid reduction amounts would
Methodology for Allocating DSH
be $8 billion for FY2025 through FY2027. So, the
Reductions
percentage reductions to state allotments would be larger
than the percentages presented in this illustrative example.
On September 25, 2019, the Centers for Medicare &
Medicaid Services (CMS) released a final rule regarding the
Impact of the Reductions to Hospitals
methodology for allocating the Medicaid DSH reductions.
As part of the hospitals’ lobbying efforts to delay the
The methodology begins by splitting the aggregate DSH
Medicaid DSH reductions this most recent time, it was said
reduction amount for each year into two separate amounts:
that the Medicaid DSH reductions “would be devastating to
one DSH reduction amount for low DSH states and another
the hospitals.” However, due to the flexibility that states
reduction amount for non-low DSH states.
have in making Medicaid DSH payments, the impact of the
Then, for each group of states, half of each group’s DSH
reductions on hospitals would vary depending on how states
reductions would be allocated according to the uninsured
implement their Medicaid DSH payments.
percentage factor and half of the DSH reductions would be
allocated according to how states target their DSH funds.
In FY2022, Medicaid DSH payments accounted for 22%
As shown in Figure 2, the DSH reductions would be
(or $15.0 billion) of the total Medicaid payments for
allocated according to the uninsured percentage factor
inpatient hospital services. According to the Medicaid and
(50%), how states target their DSH funds according to the
CHIP Payment and Access Commission, in state plan rate
“high volume of Medicaid inpatient factor” (25%), and how
year 2019, Medicaid DSH payments were made to 41% of
states target their DSH funds according to the “high level of
all U.S. hospitals. This ranged from less than 10% of
uncompensated care factor” (25%). Each state’s reduction
hospitals in a few states to 95% of hospitals in one state.
would be limited to 90% of the unreduced allotment
Also, the amount that hospitals receive in Medicaid DSH
amount, which preserves at least 10% of states’ allotments.
payments varies significantly by state.
The methodology would not reduce any portion of a state’s
Alison Mitchell, Specialist in Health Care Financing
Medicaid DSH allotment that was included in the budget
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Medicaid Disproportionate Share Hospital (DSH) Reductions

IF10422

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https://crsreports.congress.gov | IF10422 · VERSION 10 · UPDATED