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established in 1991, and after 2002, allowing federal DSH spending to increase by the percentchanges in the Consumer Price Index (with a cap of 12 percent of each state’s total annualMedicaid spending). The law also limited the amount of DSH payments that mental hospitalscould receive to no more than 33 percent of a state’s DSH allotment (by 2002), and stated thatDSH payments for managed care patients had to be paid directly to hospitals and not tomanaged care organizations. BBA 1997 again required many states to alter their DSHprograms and to make cutbacks in DSH payments. 32The Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act (BIPA) of 2000enacted a variety of changes related to these programs. It gave temporary relief to statesdependent on DSH by making the DSH limits not decrease in 2001 and 2002 as planned, butinstead to equal the year before it for each year plus inflation (as long as the increases did notmake DSH over 12 percent of the state’s Medicaid spending). It also temporarily increased theDSH reimbursement rate for uncompensated care at public hospitals from 100 percent(established by OBRA 1993) to 175 percent for state fiscal years 2003 and 2004. It directedstates to count Medicaid managed care patients when calculating their formulas for whichhospitals are eligible for DSH, and it increased states’ DSH allotments to one percent for thosecurrently under one percent. It also called for regulations to be finalized and issued to graduallyphase out excess payments in the upper payment limit program, as explained below (enacted in2001). 33,34,35The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 had severalprovisions in it relating to Medicaid DSH payments. The act modified the planned limits on DSHgrowth by giving states a one-year increase of 16 percent for state FY 2004 over the states’2003 allotment, not subject to the 12 percent cap, and subsequent years stay at the 2004 leveluntil they match what would have been the allotment under the previous law (BIPA), then theyincrease annually at the previous year’s level plus the consumer price index for urbanconsumers (CPI-U). The law also raised the DSH allotments for extremely low DSH states, andmandated more details in the annual DSH report that states must give to the federalgovernment, including an independent audit. 36,37Upper Payment LimitsThe Upper Payment Limit (UPL) is a program that reimburses hospitals for the differencebetween what Medicaid pays for a service and what Medicare would have paid for it. Medicaidcannot pay more than Medicare would have paid for a service, and Medicare rates are generallyhigher, so this difference is called the “Medicaid upper payment limit.” Medicaid’s UPL rules,prior to March 2001, allowed states to maximize federal matching funds by paying certain publichospitals and nursing homes inflated amounts for treating Medicaid patients, which the federalgovernment then matched according to the state’s FMAP, as long as the payments to aparticular facility did not result in a violation of an aggregate UPL applicable to all facilities(these limits apply to regular Medicaid payments and not DSH, which has its own set of limits).The UPL was based on an estimate of what would have been paid under Medicare to an entireclass of providers, which usually resulted in an upper limit well above what states pay the sametype of providers under Medicaid. The state would pay the providers and then keep the rest ofthe federal matching funds for its own uses; these were often transferred back into state generalrevenue funds for non-Medicaid and even non-health costs. These payments effectivelyincreased participating states’ federal matching rates over what they were supposed to be. 38UPL arrangements became more common in 2000 as more states learned about them, andstates taking advantage of this began to receive criticism from the Governmental AccountingOffice and the HHS Office of Inspector General for exploiting the rules. New rules took effect onB-9