Medicaid Disproportionate Share Hospital (DSH) Reductions

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Updated February 9, 2021
Medicaid Disproportionate Share Hospital (DSH) Reductions
The Medicaid statute requires states to make
 the Bipartisan Budget Act of 2013 (P.L. 113-67);
disproportionate share hospital (DSH) payments to
hospitals treating large numbers of low-income patients.
 the Protecting Access to Medicare Act of 2014 (P.L.
This provision is intended to recognize the disadvantaged
113-93);
financial situation of those hospitals because low-income
patients are more likely to be uninsured or Medicaid
 the Medicare Access and CHIP Reauthorization Act of
enrollees. Hospitals often do not receive payment for
2015 (P.L. 114-10);
services rendered to uninsured patients, and Medicaid
provider payment rates are generally lower than the rates
 the Bipartisan Budget Act of 2018 (BBA 2018; P.L.
paid by Medicare and private insurance. (See CRS Report
115-123);
R42865, Medicaid Disproportionate Share Hospital
Payments
.)
 the Continuing Appropriations Act, 2020, and Health
Extenders Act of 2019 (P.L. 116-59);
Whereas most federal Medicaid funding is provided on an
open-ended basis, federal Medicaid DSH funding is capped.
 the Further Continuing Appropriations Act, 2020, and
Each state receives an annual DSH allotment, which is the
Further Health Extenders Act of 2019 (P.L. 116-69);
maximum amount of federal matching funds that each state
is permitted to claim for Medicaid DSH payments. In
 the Further Consolidated Appropriations Act, 2020 (P.L.
FY2019, federal DSH allotments totaled $12.6 billion.
116-94);
DSH Allotment Reduction Amounts
 the Coronavirus Aid, Relief, and Economic Security Act
The Patient Protection and Affordable Care Act (ACA; P.L.
(P.L. 116-136);
111-148, as amended) has reduced the number of uninsured
individuals in the United States through the health
 the Continuing Appropriations Act, 2021, and Other
insurance coverage provisions (including the ACA
Extensions Act (P.L. 116-159);
Medicaid expansion). Built on the premise that with fewer
uninsured individuals there should be less need for
 the Further Continuing Appropriations Act, 2021, and
Medicaid DSH payments, the ACA included a provision
Other Extensions Act (P.L. 116-215); and
directing the Secretary of the Department of Health and
Human Services (HHS) to make aggregate reductions in
 the Consolidated Appropriations Act, 2021 (P.L. 116-
Medicaid DSH allotments equal to $500 million in FY2014,
260).
$600 million in FY2015, $600 million in FY2016, $1.8
billion in FY2017, $5.0 billion in FY2018, $5.6 billion in
Under current law, the Medicaid DSH reductions are to
FY2019, and $4.0 billion in FY2020.
occur from FY2024 through FY2027 (see Figure 1). The
aggregate reductions to the Medicaid DSH allotments equal
Despite the assumption that decreasing the number of
$8.0 billion for each of those years.
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
annual inflation adjustments for FY2014 to FY2021.
The Medicaid DSH reductions have been amended by a
number of laws since the ACA. 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);
 the American Taxpayer Relief Act of 2012 (P.L. 112-
240);
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Medicaid Disproportionate Share Hospital (DSH) Reductions
Figure 1. Total DSH Allotments Before the
The statute also requires the Secretary to impose smaller
Reductions, with the ACA Reductions, and Under
percentage reductions on low DSH states (i.e., states with
Current Law
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
Source: CRS calculation using Consumer Price Index for Al Urban
Medicaid patients and highest levels of uncompensated care
Consumers estimates from Congressional Budget Office, An Overview
can be expected to receive relatively larger percentage DSH
of the Economic Outlook: 2021 to 2031, February 2021.
reductions. Also, low DSH states should receive relatively
Figure 1 shows estimates of aggregate DSH allotments for
smaller percentage DSH reductions. As a result, a non-low
FY2012 through FY2029 before the ACA reductions, with
DSH state with a low percentage of uninsured individuals
the ACA reductions, and under current law. The ACA
that does not target its DSH payments can be expected to
reductions totaled $18.1 billion, and under current law the
receive a relatively larger percentage reduction and a low
DSH allotment reductions total $32.0 billion.
DSH state with a high percentage of uninsured individuals
that targets its DSH payments should receive a relatively
Under current law, the aggregate reductions relative to the
smaller percentage DSH reduction.
Medicaid DSH allotments before reductions will be an
estimated 57% reduction in FY2024 phasing down to an
The magnitude of the Medicaid DSH reductions is such that
estimated 54% reduction in FY2027. In FY2028, DSH
most states are expected to have DSH allotment reductions.
allotments will rebound to the pre-reduced levels, with
Tennessee is the only state that is not subject to the
annual inflation adjustments for FY2024 to FY2027.
Medicaid DSH reductions due to the special statutory
authority for Tennessee’s Medicaid DSH allotment.
Statutory Requirements for Reductions
to State DSH Allotments
Methodology for Allocating DSH
Reductions
Although the aggregate DSH reduction amounts are
specified in statute, the HHS Secretary is responsible for
On September 25, 2019, the Centers for Medicare &
determining how to distribute the aggregate DSH
Medicaid Services (CMS) released a final rule regarding the
reductions among the states using some broad statutory
methodology for allocating the Medicaid DSH reductions.
guidelines. The Secretary is required to impose larger
The methodology begins by splitting the aggregate DSH
percentage DSH reductions on states that (1) have the
reduction amount for each year into two separate amounts:
lowest percentage of uninsured individuals (determined by
one DSH reduction amount for low DSH states and another
the Census Bureau’s data, audited hospital cost reports, and
reduction amount for non-low DSH states.
other information) during the most recent fiscal year with
available data or (2) do not target their DSH payments to
Then, for each group of states, half of each group’s
DSH reductions would be allocated according to the
hospitals with high volumes of Medicaid patients and high
uninsured percentage factor and half of the DSH
levels of uncompensated care (excluding bad debt).
reductions would be allocated according to how states
target their DSH funds. As shown in
Figure 2, the DSH reductions would be allocated according
The methodology would not reduce any portion of a state’s
to the uninsured percentage factor (50%), how states target
Medicaid DSH allotment that was included in the budget
their DSH funds according to the “high volume of Medicaid
neutrality calculation for a coverage expansion that was
inpatient factor” (25%), and how states target their DSH
approved under a Section 1115 waiver as of July 31, 2009.
funds according to the “high level of uncompensated care
This would affect the District of Columbia, Indiana, Maine,
factor” (25%). Each state’s reduction would be limited to
Massachusetts, and Wisconsin.
90% of the unreduced allotment amount, which preserves at
least 10% of states’ allotments.
Figure 2 shows CMS’s illustrative example of the
allotment reduction of 4.6% and non-low DSH states would
methodology using a $2.0 billion aggregate Medicaid DSH
have an average allotment reduction of 17.2%.
reduction on FY2017 allotments. Under this example, CMS
estimates that low DSH states would have an average
https://crsreports.congress.gov


Medicaid Disproportionate Share Hospital (DSH) Reductions
Program; State Disproportionate Share Hospital Al otment
Figure 2. Illustrative Example of Medicaid DSH
Reductions,” 82 Federal Register 35155, July 28, 2017.
Reduction Methodology
Alison Mitchell, Specialist in Health Care Financing
IF10422

Source: CRS using the il ustrative DSH reduction factor weighting
al ocation from Centers for Medicare & Medicaid Services, “Medicaid


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https://crsreports.congress.gov | IF10422 · VERSION 8 · UPDATED