COD E R E D

Disproportionate Share Hospital ProgramStates also get federal Medicaid money for the Disproportionate Share Hospital Program. Thedisproportionate share program (DSH or “dispro”) provides reimbursement to hospitals thatserve a disproportionately large number of Medicaid patients or other low-income people to helpcompensate them for lost revenues. 28 The program was established with the BorenAmendment in 1981 (in OBRA 1980 and 1981), which repealed a Medicaid law that madestates pay for inpatient hospital services at the Medicare rate, and instead allowed them to usea rate that was “reasonable and adequate.” Congress recognized that this change would resultin lower Medicaid payments for many hospitals, especially those serving a large number ofMedicaid and uninsured patients, so it specified that the new payment rates take into accounthospitals that serve a “disproportionate share” of low-income people. DSH funds are subject tothe same federal matching rate as other Medicaid funding, though there is a ceiling on the totalamount for each state, unlike regular Medicaid funds, which are open-ended. The amount ofDSH payments received and their percentage of states’ total Medicaid budgets varies widelyfrom state to state. 29States were initially slow to start using DSH payments in the 1980s, but as more states gotinvolved and federal funding for DSH significantly increased in the late 1980s and early 1990s,Congress began passing legislation to limit DSH funding increases. Significant changes to DSHwere passed in 1991, 1993, 1997, 2000, and 2003. Several of the latest acts restore some ofthe cuts in DSH payments to states.The Medicaid Voluntary Contribution and Provider-Specific Tax Amendments of 1991 werepassed to ban provider donations and cap provider taxes to 25 percent of a state’s Medicaidmatch. Provider donations and taxes were methods that some states had started using to drawdown more federal matching funds without using any state funds, only money they collectedfrom providers and used for the state match to get more DSH funds for hospitals. The law alsocapped state DSH payments at approximately their 1992 levels, and capped national DSHpayments to 12 percent of total Medicaid expenditures. States whose DSH payments were lessthan 12 percent of their Medicaid costs could increase them at the same rate as their overallMedicaid programs, but states whose DSH payments were already 12 percent or more in 1992could not increase their current spending in the future. This law had the intended effect ofslowing DSH payment growth, and many states had to alter the financing structure of DSH andfind other revenue sources besides provider donations and taxes. Many states starting usingintergovernmental transfer programs (IGT), where funds were transferred from local and statehospitals to the state Medicaid program, and returned to the institutions along with the extrafederal matching funds. 30Congress included several provisions related to DSH in the Omnibus Budget Reconciliation Act(OBRA) in 1993 amid concerns that some hospitals who did not treat many Medicaid patientswere receiving DSH payments that exceeded their costs, and that some states were keepingpart of their DSH payments in the state budgets instead of directly helping safety-net providers.OBRA 1993 included laws stating that only hospitals with a Medicaid use rate of at least onepercent could receive DSH payments, and that total DSH payments to a single hospital couldnot be more than the unreimbursed costs of providing inpatient services to Medicaid patientsand uninsured patients. These laws went into effect in 1994 for most public hospitals and 1995for private hospitals. 31The Balanced Budget Act (BBA) of 1997 targeted DSH payments, among other federalexpenditures, for reduction. Some key changes in this legislation were to establish new DSHamounts for each state for 1998 to 2002 (decreasing each year), thus eliminating the limitsB-8