Disproportionate-Share Hospitals

By Evan S. Cole, Daniel Walker, Arthur Mora, and Mark L. Diana

doi: 10.1377/hlthaff.2014.0109

Identifying Hospitals That May Be

HEALTH AFFAIRS 33,
NO. 11 (2014): 2025–2033
©2014 Project HOPE—
The People-to-People Health

At Most Financial Risk From Foundation, Inc.

Medicaid Disproportionate-Share
Hospital Payment Cuts
Evan S. Cole (ecole@gsu.edu)
ABSTRACT Medicaid disproportionate-share hospital (DSH) payments are is an associate project
director at the Georgia Health
expected to decline by $35.1 billion between fiscal years 2017 and 2024, a Policy Center, Georgia State
reduction brought about by the Affordable Care Act (ACA) and recent University, in Atlanta.

congressional action. DSH payments have long been a feature of the

Daniel Walker is a Ph.D.
Medicaid program, intended to partially offset uncompensated care costs candidate in the School of
Public Health and Tropical
incurred by hospitals that treat uninsured and Medicaid populations. The Medicine, Tulane University, in
DSH payment cuts were predicated on the expectation that the ACA’s New Orleans, Louisiana.

expansion of health insurance to millions of Americans would bring

Arthur Mora is a clinical
about a decline in many hospitals’ uncompensated care costs. However, assistant professor in the
School of Public Health and
the decision of twenty-five states not to expand their Medicaid programs, Tropical Medicine, Tulane
combined with residual coverage gaps, may leave as many as thirty University.
million people uninsured, and hospitals will bear the burden of their
Mark L. Diana is an associate
uncompensated care costs. We sought to identify the hospitals that may professor in the School of
Public Health and Tropical
be the most financially vulnerable to reductions in Medicaid DSH Medicine, Tulane University.
payments. We found that of the 529 acute care hospitals that will be
particularly affected by the cuts, 225 (42.5 percent) are in weak financial
condition. Policy makers should recognize that decreases in revenue may
affect these hospitals’ ability to give vulnerable populations access to care.

B
efore the implementation of the
Affordable Care Act (ACA) began,
nearly fifty million people in the
United States were estimated to be
uninsured.1 For health care, this
population relies primarily on hospitals—which
were estimated to provide $44.6 billion worth of
uncompensated care in 2013.2
The federal government helps hospitals ab-
sorb this expense through its Medicaid dispro-
portionate-share hospital (DSH) payments. The
DSH program allocates Medicaid funds to states,
which distribute these funds to hospitals based
on their volume of Medicaid patients and the
dollar amount of uncompensated care they pro-
vide. The federal government distributes around
$11 billion annually in Medicaid DSH funds.3
The ACA originally included decreases in Med-
icaid DSH payments that would have totaled
$18.1 billion in the period 2014–20. The annual
cuts would have ranged from $500 million to
$5.6 billion in later years.4 The Protecting Access
to Medicare Act of 2014 delayed the implemen-
tation of these reductions and increased the total
to $35.1 billion. The cuts are now set to begin in
fiscal year 2017 and end in fiscal year 2024.
The delay may help hospitals prepare for the
change in funding. However, the increase in the
scale of reductions is dramatic. For example,
California and Texas would have had an estimat-
ed 2.80 percent and 5.52 percent reduction, re-
spectively, in fiscal year 2014 in their federal
allocation of Medicaid DSH funds had the cuts
begun as originally planned.5 Delaying the cuts
until fiscal year 2017 could mean that California
and Texas will face payment reductions in that

N ov em b e r 2 0 1 4 33:11 Health Affa irs 2025

Downloaded from HealthAffairs.org on March 11, 2024.
Copyright Project HOPE—The People-to-People Health Foundation, Inc.
For personal use only. All rights reserved. Reuse permissions at HealthAffairs.org.
Disproportionate-Share Hospitals
year of 10.08 percent and 19.87 percent, respec-
tively. In fiscal year 2018 the DSH payment re-
ductions to the two states could be 26.32 percent
and 51.88 percent, respectively.
Originally, the cuts in Medicaid DSH pay-
ments were justified by the expectation that
the ACA’s expansion of health insurance would
be accompanied by a decrease in uncompensated
care costs. However, many states rejected the
Medicaid expansion to people with incomes of
up to 138 percent of the federal poverty level. The
ACA is projected to leave 30.0 million people
without insurance, and the lack of Medicaid ex-
pansion accounts for an estimated 3.6–5.2 mil-
lion of these people.6,7 Persistent levels of un-
insured patients combined with DSH payment
reductions will shift the burden of these costs
from the federal government to hospitals.8
To remain financially viable, hospitals may re-
spond by reducing the amount of uncompensat-
ed care or other services they provide.9,10 For
example, officials at Grady Memorial Hospital,
a large safety-net hospital in Atlanta, stated that
DSH payment cuts coupled with a lack of Medic-
aid expansion in Georgia may force them to elim-
inate services such as mental health and obstet-
rics and gynecology, which would affect the
indigent population they serve.11 Administrators
at Grady also believe that this combination of
cuts and lack of expansion would eliminate the
hospital’s current profit margin.
The reduction in Medicaid DSH funding is
unique among funding cuts in allowing states
to determine how the reductions will be borne
across hospitals. Unlike other ACA policies such
as fee-for-service reductions, which will be ap-
plied universally to eligible hospitals, the distri-
bution of Medicaid DSH payments will be at the
discretion of each state’s regulators and elected
officials.
In a 2009 perspective piece, Michael Spivey
and Arthur Kellermann described how states
had worked for years to maximize their federal
match for Medicaid DSH funds, using a set of
rules from the Centers for Medicare and Medic-
aid Services (CMS) that fails to ensure that these
funds are properly allocated to the hospitals pro-
viding the greatest amount of uncompensated
care.12 As Spivey and Kellermann point out, hos-
pitals providing as little as 1 percent of their total
inpatient care to Medicaid patients can receive
DSH funds, and states that distribute their DSH
funds so liberally may be helping less deserving
hospitals at the expense of safety-net insti-
tutions.
For example, in 2008, 174 (approximately
96 percent) of Ohio’s hospitals received Medic-
aid DSH payments—with the largest DSH pay-
ment, representing 5.2 percent of all Ohio DSH
2026 Health Affai rs N ov em b e r 2 0 1 4 33:11
Downloaded from HealthAffairs.org on March 11, 2024.
Copyright Project HOPE—The People-to-People Health Foundation, Inc.
For personal use only. All rights reserved. Reuse permissions at HealthAffairs.org.
funds, going to one hospital. In contrast, thirty-
two (25 percent) of Wisconsin’s hospitals re-
ceived Medicaid DSH payments in 2008, and
one hospital received 36.5 percent of all of the
state’s DSH funds.13
State policy makers will have to make three
decisions that will greatly affect the future of
hospital finance in their state: whether to expand
Medicaid eligibility, how to distribute reduc-
tions in Medicaid DSH payments, and whether
to change the distribution of the payments in
response to the incentives created by the ACA
and implemented in CMS’s rules.
Hospitals’ financial health plays an important
role in how the institutions manage to adapt to a
changing environment.14 Compared to hospitals
in states that are expanding Medicaid eligibility
under the ACA, hospitals in states that are not
expanding eligibility may have differences in fi-
nancial health that could be exacerbated by re-
ductions in Medicaid DSH payments.
This study categorizes acute care hospitals in
expansion and nonexpansion states and evalu-
ates differences in financial health. The aim of
this analysis was to identify hospitals that may be
the most vulnerable financially to cuts in Medic-
aid DSH payments. Understanding the impact
on hospital finances of states’ decisions to ex-
pand Medicaid eligibility or not—combined with
reductions in Medicaid DSH payments—is criti-
cal as hospital managers develop a response to
these changes and state policy makers aim to
maintain access to high-quality health care for
their constituents.
Study Data And Methods
To identify hospitals that are sensitive to reduc-
tions in their Medicaid DSH payments, we cate-
gorized all hospitals that receive the payments
using four variables that are relevant to CMS’s
rules for reducing the payments. Two variables
(Medicaid expansion and high or low DSH pay-
ments) are at the state level, and two (Medicaid
DSH reliance and Medicaid volume or uncom-
pensated care status) are hospital-specific. Fol-
lowing the categorization, we identified and
compared the financial condition of two hospital
groups of interest (hospitals with high reliance
on DSH payments in high-DSH nonexpansion
states and hospitals with high reliance on DSH
payments in high-DSH expansion states) based
on the potential adverse impact of cuts in Med-
icaid DSH payments on them.
Data The data that we used to measure the
financial condition of hospitals came from the
2011 American Hospital Association (AHA) An-
nual Survey and data for 2011 in the Healthcare
Cost Report Information System (HCRIS). The

Hospitals in
nonexpansion states
will be under
additional stress as
their DSH payments
are reduced.
AHA survey contains information from approxi-
mately 6,300 US hospitals and captures informa-
tion on various aspects of their organizational
structure, ownership, system membership, ser-
vices provided, personnel, and financial perfor-
mance. Medicare-certified institutional pro-
viders are required to submit cost reports each
year, and HCRIS contains information from over
5,900 of these institutions on facility character-
istics, utilization, charges and costs, Medicare
settlement data, and financial statements.
Hospitals were identified as eligible for Med-
icaid DSH payments if they received the pay-
ments according to the 2008 Annual DSH Re-
ports.13 Each state is required to submit such a
report each year, and the reports are indepen-
dently audited.
States With High Or Low DSH Payments The
Affordable Care Act directed CMS to impose a
smaller percentage reduction on “low DSH
states,” those in which less than 3 percent of
the state’s Medicaid expenditures consist of
DSH payments. As specified by CMS’s final rule
on Medicaid DSH reductions,4 the average DSH
reduction for the first year among the seventeen
low-DSH states would be 1.3 percent, ranging
from 0.5 percent to 2.3 percent. In comparison,
the thirty-three “high DSH states” would have an
average reduction of 4.7 percent, ranging from
1.9 percent to 7.1 percent.
Of the $500 million in reductions in Medicaid
DSH payments that were scheduled for fiscal
year 2014, just $6.2 million was to come from
hospitals in low-DSH states.5 Hospitals in high-
DSH states would face significantly greater re-
ductions to their Medicaid DSH payments, in
both relative and raw amounts. Therefore, we
focused this analysis on hospitals located in
high-DSH states.
Expansion And Nonexpansion States The
uninsurance rate is estimated to decrease in ev-
ery state. However, states’ decisions to expand or
not to expand their Medicaid eligibility to
Copyright Project HOPE—The People-to-People Health Foundation, Inc.
For personal use only. All rights reserved. Reuse permissions at HealthAffairs.org.
138 percent of poverty will result in variations
across states in the size of the decrease. We cate-
gorized twenty-five states as expansion states
and twenty-five as nonexpansion states, accord-
ing to the most recent information available as of
the submission of this article.15
Hospitals in nonexpansion states will be under
additional stress as their DSH payments are re-
duced, since their states’ uninsured populations
will remain higher relative to those in expansion
states. Sixteen of the twenty-five nonexpansion
states were high-DSH states, as were seventeen
of the twenty-five expansion states.
Hospitals With High Or Low Reliance On
DSH Payments Reductions in Medicaid DSH
payments have the largest potential impact on
hospitals for which the payments represent a
significant portion of their total revenue. Among
hospitals eligible for the payments for which
data were available, Medicaid DSH payments ac-
counted for 2.52 percent of total revenues, on
average.
We divided hospitals eligible for the payments
into those with a high or low reliance on the
payments, depending on whether their propor-
tion of Medicaid DSH payments to total revenues
was greater or less than 2.52 percent. To calcu-
late this variable, we used the Medicaid DSH
payments from the 2008 Annual DSH Reports
and total revenue from the HCRIS data.
Medicaid Volume And Uncompensated Care
Status CMS is required to impose larger reduc-
tions on states that do not target DSH payments
to hospitals that either have a high volume of
Medicaid patients or provide a high level of un-
compensated care. Under the CMS final rule,4 a
hospital is considered to have a high volume of
Medicaid patients if its Medicaid inpatient utili-
zation rate is one standard deviation or more
above the mean rate among all hospitals in the
state that receive Medicaid payments. Hospitals
are considered to provide a high level of un-
compensated care if their ratio of uncompensat-
ed care costs to total Medicaid and uninsured
care costs is greater than the average ratio among
hospitals eligible for DSH payments in the state.4
To avoid greater subsequent reductions, states
are therefore incentivized to further target their
Medicaid DSH payments to hospitals with high
volumes of Medicaid patients or high levels of
uncompensated care. Some states may impose
smaller reductions in the payments to such hos-
pitals, at least initially. States that do not im-
prove their targeting of Medicaid DSH payments
may see greater reductions that will come at the
expense of all hospitals, regardless of their vol-
umes of Medicaid patients or levels of un-
compensated care.
Using CMS’s definitions,4 we calculated the
N ov e m b e r 201 4 3 3: 1 1 Health Affairs 2027
Downloaded from HealthAffairs.org on March 11, 2024.
Disproportionate-Share Hospitals
Medicaid inpatient utilization rates for each hos-
pital and state using the HCRIS data. We calcu-
lated uncompensated care averages using the
2008 Annual DSH Reports.
Hospitals’ Financial Condition This study
borrows from the method that Gloria Bazzoli
and coauthors used to compare hospitals based
on financial strength. Bazzoli and colleagues
used operating margin as one measure of finan-
cial viability to categorize hospitals as having
weak, moderate, or strong financial health.16
Operating margin, which excludes interest
payments and income taxes, is a measure of prof-
itability generated from the ongoing operations
of the hospital. We calculated the margin as the
difference between net patient revenues (includ-
ing DSH payments) and operating expenses
divided by net patient revenues. Using this
measure, hospitals’ financial conditions were
compared nationwide and categorized as weak
(the bottom quartile of the range), strong (the
top quartile), or moderate (the two middle
quartiles).
Groups Of Interest After the hospitals had
been categorized, we focused on two groups.
Group 1 consisted of the hospitals that had a high
reliance on DSH payments and that were in high-
DSH states that were not expanding Medicaid
eligibility. The hospitals in group 2 also had a
high reliance on DSH payments and were in
high-DSH states, but these hospitals were in
states that were expanding Medicaid eligibility.
▸ GROUP 1: Hospitals in group 1 are perhaps in
the most vulnerable position regarding reduc-
tions in Medicaid DSH payments. Hospitals with
high volumes of Medicaid patients or that pro-
vide high levels of uncompensated care may ini-
tially be protected from reductions because of
CMS’s incentive for states to concentrate Medic-
aid DSH payments on such hospitals. However,
states may not be responsive to that incentive.
And as DSH cuts increase between 2017 and
2024, hospitals with high Medicaid volume or
high levels of uncompensated care may not be
spared from the reductions. Overall, hospitals
without high Medicaid volume or high levels
of uncompensated care are particularly vulnera-
ble: They may be more likely to see greater re-
ductions as funding formulas seek to keep DSH
payments to other hospitals unchanged.
Additionally, the uninsurance rate will de-
crease for hospitals in nonexpansion states, but
people with incomes of less than 138 percent of
poverty will remain uninsured. If states concen-
trate their cuts on hospitals that do not have high
Medicaid volumes or high levels of uncompen-
sated care, these institutions may change their
behavior by providing less uncompensated care
or eliminating some services. This could shift
2028 H e a lt h A f fai r s November 2014 33:11
Downloaded from HealthAffairs.org on March 11, 2024.
Copyright Project HOPE—The People-to-People Health Foundation, Inc.
For personal use only. All rights reserved. Reuse permissions at HealthAffairs.org.
that care to the hospitals in these states that have
high Medicaid volumes or high levels of un-
compensated care.
▸ GROUP 2: Even in expansion states, hospi-
tals with a high reliance on DSH payments may
be at substantial risk. The ACA is estimated to
leave thirty million people uninsured.7 If a hos-
pital in an expansion state serves high volumes
of newly enrolled Medicaid beneficiaries and of
people who remain uninsured, DSH payments
would still be important. But under the CMS final
rule,4 those states with lower rates of uninsur-
ance—the expansion states—will see deeper cuts
in the payments.
Initially, the hospitals in group 2 may not be at
risk. However, as their state’s uninsurance rate
declines and cuts in DSH payments increase,
hospitals with a high reliance on the payments
that see high volumes of Medicaid or uninsured
patients may face heightened financial pressure.
Hospitals with high Medicaid volumes or high
levels of uncompensated care in states such as
Arkansas that have decided to purchase private
insurance for their expanded Medicaid popula-
tion could be at risk if they cannot attract these
privately insured patients.
People with private insurance may have a
greater choice of providers than if they were cov-
ered under traditional Medicaid. This could leave
some hospitals with a combination of lower Med-
icaid DSH payments and a worsening payer mix.
Limitations This study is subject to a few no-
table limitations. First, the analysis is cross-
sectional. A poor or excellent financial year for
a hospital may be an anomaly. Similarly, a hos-
pital could be categorized as having a high Med-
icaid volume or high level of uncompensated
care one year, but not the next.
Second, the 2008 data that we used from the
Annual DSH Reports were the most recent avail-
able. However, the financial indicator data were
from 2011. CMS officials have stated4 that they
intend to predominantly use data from the DSH
reports to identify hospitals with high volumes of
Medicaid patients or high levels of uncompen-
sated care, as well as to calculate total DSH pay-
ments. Therefore, we believe it was appropriate
to use data from the Annual DSH Reports when-
ever possible.
The third limitation concerns intergovern-
mental transfers, in which public hospitals pay
the state a given amount that is then used as
matching funds for the federal DSH payment.
This process leaves the net gain for such hospi-
tals undisclosed. As a result, public hospitals
appear to benefit more financially from Medic-
aid DSH payments than they actually do. This
could affect our measure of hospitals’ reliance
on the payments. However, previous research
has documented the prominent role of Medicaid
revenues17 and DSH payments at public safety-
net hospitals.18 Because our analysis categorizes
hospitals instead of using their DSH payments
for statistical testing, we believe that the impact
of this limitation is minimized.
Finally, the reader should note that this re-
search was based on the CMS rule that was to
be implemented in 2014 and 2015.4 Regulators at
CMS stated that they intend to revisit this rule
after 2015.4 However, with the delay in the im-
plementation of the reductions, the regulators
may change the DSH reduction methodology at
the beginning of fiscal year 2017. Any substantial
changes in it could affect the conclusions of this
article.
Study Results
The total sample identified in the AHA data was
4,407 acute care hospitals, of which 3,421 were
located in high-DSH states. A total of 2,104 acute
care hospitals were identified as eligible for Med-
icaid DSH payments and were successfully
matched across the AHA, HCRIS, and Annual
DSH Report data.
We were unable to match 503 hospitals that
were in the Annual DSH Reports with the other
data sources. However, some of these hospitals
may have closed or merged with other institu-
tions in the period 2008–11.
Additionally, sixty-four hospitals did not sub-
mit the data required to calculate the level of
uncompensated care they provided.We included
them in the study but categorized them as not
having a high volume of Medicaid patients or a
high level of uncompensated care.
Finally, hospitals from Delaware, Maine, Mas-
sachusetts, Tennessee, and Washington were not
included. Those states either did not submit a
DSH report in 2008 or concentrated their DSH
payments on a single psychiatric hospital.
A significantly greater percentage of hospitals
eligible for Medicaid DSH payments in non-
expansion states were in weak financial condi-
tion based on their operating margins, com-
pared to similar hospitals in expansion states
(Exhibit 1). Additionally, the proportion of hos-
pitals that were in strong financial condition was
greater in nonexpansion states than in the ex-
pansion states.
The categorization of all hospitals in high-
DSH states is presented in Exhibit 2 (see online
Appendix Exhibit A1 for a categorization of all
hospitals in low DSH states).19 We categorized
377 acute care hospitals as institutions that had a
high reliance on DSH payments and that were in
high-DSH states that were not expanding Med-
icaid eligibility (group 1). In this group, 41.7 per-
Copyright Project HOPE—The People-to-People Health Foundation, Inc.
For personal use only. All rights reserved. Reuse permissions at HealthAffairs.org.
cent (eighty-eight hospitals) with a high volume
of Medicaid patients or a high level of un-
compensated care and 43.4 percent (seventy-
two hospitals) that did not have a high volume
of Medicaid patients or a high level of un-
compensated care were in weak financial condi-
tion, according to their operating margins.
We identified 152 hospitals as institutions that
had a high reliance on DSH payments and that
were in high-DSH states that were expanding
Medicaid (group 2). In this group, 45.8 percent
(forty-four hospitals) with a high volume of Med-
icaid patients or a high level of uncompensated
care and 37.5 percent (twenty-one hospitals)
that did not have a high volume or high level
of uncompensated care were in weak financial
condition. Chi-square tests of hospitals in strong
and weak financial conditions between groups 1
and 2 were not significant.
Discussion
The objectives of this research were to identify
the hospitals that may be the most financially
vulnerable to reductions in Medicaid DSH pay-
ments and to analyze their financial condition.
We found that nonexpansion states had a larger
percentage of hospitals eligible for the payments
that were in weak financial condition—based on
their operating margins—compared to expan-
sion states.
However, when we focused on the hospitals in
the two groups of interest—hospitals that had a
high reliance on DSH payments and that were in
high-DSH nonexpansion states and hospitals
that had a high reliance on DSH payments and
that were in high-DSH expansion states—the
proportion of weak hospitals was similar in ex-
pansion and nonexpansion states. In all, 529
Exhibit 1
Financial Condition Of Acute Care Hospitals Eligible For Medicaid Disproportionate-Share
Hospital Payments, 2011
Hospitals in:
Expansion states Nonexpansion states
(n=967) (n=1,137)
Hospital operating margin
Mean (%) −4.68 −3.91
Standard deviation (%) 25.09 21.31
Hospitals whose financial condition is:
Strong 186 (19.2%)** 268 (23.6%)
Moderate 563 (58.2%) 536 (47.1%)
Weak 218 (22.5%)*** 333 (29.3%)
SOURCE Authors’ analysis of data from the Healthcare Cost Report Information System. NOTES
“Strong” financial condition is in the top quartile (5.08 percent or more). “Weak” is in the bottom
quartile (below −8.00 percent). “Moderate” is in the two middle quartiles. **p < 0:05 ***p < 0:01
November 2014 33:11 H ea lt h A f fai r s 2 029
Downloaded from HealthAffairs.org on March 11, 2024.
 Disproportionate-Share Hospitals

Exhibit 2

Categorization Of Acute Care Hospitals In States Where Medicaid Disproportionate-Share Hospital (DSH) Payments Account For At Least 3 Percent Of
State Medicaid Expenditures (“High DSH States”), 2011
Hospitals whose reliance on DSH payments is:
High (n=529) Low (n=1,258)
Financial condition Financial condition
Volume of Medicaid patients or level of uncompensated care No. Strong Moderate Weak No. Strong Moderate Weak
Hospitals in expansion states
High 96 8.3% 45.8% 45.8% 389 22.9% 58.9% 18.3%
Not high 56 14.3 48.2 37.5 304 18.1 60.9 21.1
Hospitals in nonexpansion states
High 211 16.1 42.2 41.7 329 28.3 48.0 23.7
Not high 166 10.8 45.8 43.4 236 25.4 51.7 22.9

SOURCE Authors’ analysis of data from the Healthcare Cost Report Information System and 2008 Annual DSH Reports. NOTES All hospitals in the exhibit were eligible for
DSH payments. Hospitals with a high reliance on the payments are those institutions whose proportion of Medicaid DSH payments to total revenues was greater than
2.52 percent; those with a low reliance had a proportion of less than 2.52 percent. Expansion states are those that have decided to expand eligibility for Medicaid to
people with incomes of up to 138 percent of the federal poverty level. Strong, moderate, and weak financial conditions are explained in the notes to Exhibit 1. A hospital is
considered to have a high volume of Medicaid patients if its Medicaid inpatient utilization rate is one standard deviation or more above the mean rate among all hospitals
in the state that receive Medicaid payments. A hospital is considered to provide a high level of uncompensated care if its ratio of uncompensated care costs to total
Medicaid and uninsured care costs is greater than the average ratio among hospitals eligible for DSH payments in the state.

hospitals were in one of the two groups of inter-
est. Of these hospitals, 225 (42.5 percent;
weighted average of hospitals with weak finan-
cial condition under “high DSH reliance” in
Exhibit 2) were in weak financial condition,
and 68 (12.9 percent; weighted average of hos-
pitals with strong financial condition under
“high DSH reliance” in Exhibit 2) were in strong
financial condition.
Variations In Hospitals’ Financial Health
An interesting finding of this analysis was the
wide range of financial health among hospitals
eligible for Medicaid DSH payments. Some of
the hospitals were financially strong, while the
weak could have significant negative operating
margins.
Of the 551 hospitals with weak operating mar-
gins, 42.1 percent had a high reliance on Medic-
◀
payments in subsidizing many at-risk hospitals.
Policy makers should recognize that many hos-
pitals that will be affected by cuts in Medicaid
DSH payments are already financially weak, and
that decreases in revenue may affect their ability
to provide vulnerable populations with access
to care.
As Medicaid DSH funds decrease during the
next several years, it is possible that the financial
condition of hospitals eligible for Medicaid
DSH payments will systematically change, with
a greater proportion of hospitals in non-
expansion states potentially shifting into a
weak financial condition relative to hospitals in
expansion states. An analysis by the Urban
Institute estimated that if every state expanded
its Medicaid program, hospitals would gain
$180.3 billion over ten years from additional pa-

42
High reliance on DSH
%
Of the 551 hospitals with
weak operating margins,
42.1 percent had a high
reliance on Medicaid DSH
payments as a source of
revenue.
aid DSH payments as a source of revenue. This
raises the question of how hospitals operate un-
der such financial distress.
Li-Lin Liu and coauthors examined financially
distressed hospitals and found that not-for-
profit institutions were less likely to close be-
cause of financial distress if they were the sole
hospital in a community, dependent on Medi-
care patients, or a small rural hospital.20 In addi-
tion, for-profit hospitals were more likely to be
adversely affected financially by having a high
volume of Medicare and Medicaid patients, com-
pared to not-for-profit or governmental hospi-
tals. The authors concluded that this association
may be because of differences in the allocation of
Medicaid DSH payments.
In turn, that indicates the critical role of the
tient revenues.21
The future distribution of these financial gains
tied to Medicaid expansion will obviously be re-
alized only by hospitals located in states that
expand their Medicaid eligibility. In expansion
states, decreases in DSH payments to hospitals
with a high reliance on the payments may be at
least partially offset by the added revenue from
the expansion. High-DSH-reliant hospitals in
nonexpansion states are similar to such hospi-
tals in expansion states in terms of their financial
condition and will also experience significant
DSH reductions but will not see increased reve-
nue through expansion.
In addition, hospitals that have a high reliance
on DSH payments and that are in high-DSH non-
expansion states may face higher demand for

2030 H e a lt h A f fai r s November 2014 33:11

Downloaded from HealthAffairs.org on March 11, 2024.
Copyright Project HOPE—The People-to-People Health Foundation, Inc.
For personal use only. All rights reserved. Reuse permissions at HealthAffairs.org.

States should weigh
various strategies to
reduce Medicaid DSH
payments and plan to
monitor the impact.
uncompensated care if other hospitals in their
state reduce the level of uncompensated care or
other less profitable services they provide. Going
forward, this policy change may push more hos-
pitals that have a high reliance on the payments
and that are in high-DSH nonexpansion states
into a weak financial condition. It may even
cause the weakest hospitals to close.
Furthermore, the financial disparity in all
states between hospitals that are eligible for
DSH payments and those that are not may in-
crease with the cuts in the payments. These out-
comes are worth monitoring because of their
potential impact on access to care for low-
income patients.
Changes In Hospitals’ Behavior Whether
or not reductions in Medicaid DSH payments
will alter hospitals’ behavior in providing un-
compensated care remains an important ques-
tion. Previous research has concluded that in-
creasing the funding for uncompensated care
at the state level can increase the provision of
uncompensated care.22,23
Research on the effects of cuts to uncompen-
sated care funds is more mixed. Anthony Lo
Sasso and Dorian Seamster found no relation-
ship between Medicaid DSH spending and the
provision of uncompensated care.24 However,
Hui-Min Hsieh and Gloria Bazzoli found that
nonprofit hospitals in California reduced their
uncompensated care services in response to re-
ductions in Medicaid DSH payments in the Bal-
anced Budget Act of 1997.9 Similarly, another
study on the effect of reductions resulting from
the 1997 act found that safety-net hospitals re-
duced their provision of uncompensated care.25
Based on these findings, policy makers and
researchers should monitor hospitals’ responses
to reductions in Medicaid DSH payments in their
state. The responses will likely vary and have
meaningful effects on access to care for low-
income and uninsured people.
Medicare DSH Payments A relevant policy
under the ACA that is not covered in this article
is the reduction in Medicare DSH payments. Be-
Copyright Project HOPE—The People-to-People Health Foundation, Inc.
For personal use only. All rights reserved. Reuse permissions at HealthAffairs.org.
ginning in fiscal year 2014, the federal govern-
ment will withhold 75 percent of Medicare DSH
payments, reduce that amount by the percentage
of reduction in the national uninsurance rate
(which is projected to be 5.6 percent),26 and dis-
tribute the remainder according to hospitals’ ra-
tio of uncompensated care to the total amount of
uncompensated care provided by all hospitals
that are eligible for Medicare DSH payments.26
On the one hand, this will put greater financial
stress on hospitals in nonexpansion states, since
the pool of Medicare DSH dollars will decrease
with the uninsurance rate while these hospitals
may not benefit from having more insured pa-
tients. On the other hand, hospitals that provide
the greatest amounts of uncompensated care in
the nation will still receive a large share of Medi-
care DSH funds. Those hospitals without high
volumes of Medicaid patients or high levels of
uncompensated care will see greater reductions
in their Medicare DSH payments, since they do
not provide a large amount of uncompensated
care relative to other hospitals in their state, let
alone those across the nation. This combination
of reductions without the financial benefits of
expansion could place such hospitals in an even
more vulnerable position than if they were faced
with Medicaid DSH cuts alone.
New State Policies It is likely that a wide
variety of state policies will emerge going for-
ward. State policy makers must choose whether
to continue with the status quo or to respond to
the incentives laid out by CMS and reallocate
Medicaid DSH funds toward hospitals with high
volumes of Medicaid patients or high levels of
uncompensated care.
To illustrate this point, consider Georgia, a
high-DSH nonexpansion state. In 2008, 88 per-
cent of all hospitals in Georgia received Medicaid
DSH payments.13 Our analysis included 122 of
these hospitals, 75 of which had high volumes
of Medicaid patients or high levels of uncompen-
sated care. The median and the mean DSH pay-
ments were predictably higher for those seventy-
five hospitals, compared to hospitals with lower
levels of Medicaid utilization or uncompensated
care (the median payments were $923,386 and
$516,530, respectively; the mean payments were
$4,041,314 and $1,395,883, respectively).
However, seventeen of the hospitals that did
not have high volumes of Medicaid patients or
high levels of uncompensated care were catego-
rized as having a high reliance on DSH pay-
ments. Nine of the seventeen had a weak finan-
cial condition, and eleven were rural hospitals.
In this case, greater cuts to hospitals without
high volumes of Medicaid patients or high levels
of uncompensated care could result in a dispro-
portionate burden on some rural communities.
N ov e m b e r 2 0 1 4 33 : 1 1 Health A ffairs 2031
Downloaded from HealthAffairs.org on March 11, 2024.
Disproportionate-Share Hospitals
The example also demonstrates a paradox for
some states: Responding to CMS’s incentives
may financially harm hospitals, but Medicaid
DSH payments were never intended to constitute
a significant level of revenue at hospitals without
high volumes of Medicaid patients or high levels
of uncompensated care. Thus, CMS’s final rule
on reductions to Medicaid DSH payments4 could
be considered a correction to policies that subsi-
dized hospitals using these funds.
Continuing with this scenario, Georgia policy
makers have three responses to choose from.
First, they could respond to the ACA incentives
by allocating a greater proportion of funds to
hospitals with high volumes of Medicaid pa-
tients or high levels of uncompensated care.
Advantages to this approach could include the
avoidance of cuts to vital services such as the
ones that may occur at Grady Memorial Hospital,
as well as the avoidance by the state of deeper
cuts to DSH payments in subsequent years. The
potential drawback is that such a policy could
adversely affect some hospitals in rural Georgia,
especially when concern over these facilities is
already high.27
The second possible response is to continue
with the status quo. This could be advantageous
in sustaining financially vulnerable hospitals
that do not have high volumes of Medicaid pa-
tients or high levels of uncompensated care, such
as the eleven rural hospitals mentioned above.
The disadvantages of this approach include a
greater financial strain on hospitals that do have
high Medicaid volumes or high levels of un-
compensated care—institutions that provide a
disproportionate share of indigent care—and
the fact that all hospitals would be left with an
even smaller pie of DSH payments in subsequent
years, according to CMS’s rules.4
A third, more practical, approach for Georgia
would be to pursue a strategy that balances the
needs of hospitals with high volumes of Medic-
aid patients or high levels of uncompensated
Some of the results described in this
article were presented as a poster at
AcademyHealth Annual Research
Meeting, San Diego, California, June 8,
2014.
2032 H e a lt h A f fai r s November 2014 33:11
Downloaded from HealthAffairs.org on March 11, 2024.
Copyright Project HOPE—The People-to-People Health Foundation, Inc.
For personal use only. All rights reserved. Reuse permissions at HealthAffairs.org.
care and the needs of rural hospitals that are
financially vulnerable to these reductions. That
is, the state could move forward with a policy that
directed a greater percentage of funds to the
former group of hospitals, while reserving an-
other pool of Medicaid DSH funds for rural hos-
pitals that have a high reliance on the funds and
are in a weak financial condition—which would
preserve care in certain areas of the state.
Georgia’s scenario is just one example. The
situation will vary greatly by state and may
change significantly if more states expand their
Medicaid programs, an option that many elected
officials in nonexpansion states appear to be
considering.28
Conclusion
Further research will be needed at the national,
state, and local levels on the consequence of
reductions in Medicaid DSH payments under
the Affordable Care Act. CMS has stated that it
does “not have sufficient information on the
relative impacts [of the reductions] that would
result from state decisions to implement the
new coverage group [the Medicaid expan-
sion].”4(p57294) Differences between expansion
and nonexpansion states must be explored, in
terms both of the financial health of providers
and of access to care for uninsured and low-
income people.
States should weigh various strategies to re-
duce Medicaid DSH payments and plan to moni-
tor the impact of the reductions. Effects will be
different across health care markets, with a
greater concentration of uncompensated care
at fewer hospitals being one possibility. How-
ever, the literature on the effect of the reductions
is sparse and mixed.9,24,25 Research at the local
level should focus on alternative policies regard-
ing access to care for vulnerable populations,
particularly in states that do not expand Medic-
aid eligibility. ▪
NOTES
1 DeNavas-Walt C, Proctor BD, Smith
JC. Income, poverty, and health in-
surance coverage in the United
States: 2012 [Internet]. Washington
(DC): Census Bureau; 2013 Sep
[cited 2014 Aug 21]. Available from:
http://www.census.gov/prod/2013
pubs/p60-245.pdf
2 Coughlin TA, Holahan J, Caswell K,
McGrath M. An estimated $84.9 bil-
lion in uncompensated care was
provided in 2013; ACA payment cuts
could challenge providers. Health
Aff (Millwood). 2014;33(5):807–14.
3 Mitchell A. Medicaid disproportion-
ate share hospital payments [Inter-
net]. Washington (DC): Congressio-
nal Research Service; 2013 Dec 2
[cited 2014 Aug 21]. Available from:
http://fas.org/sgp/crs/misc/
R42865.pdf
4 Centers for Medicare and Medicaid
Services. Medicaid program; state
Disproportionate Share Hospital al-
lotment reductions. Final rule. Fed
Regist. 2013;78(181):57293–313.
5 Centers for Medicare and Medicaid
Services. Medicaid program; state
Disproportionate Share Hospital al-
lotment reductions. Proposed rule.
Fed Regist. 2013;78(94):28551–69.
6 Kaiser Commission on Medicaid and
the Uninsured. The coverage gap:
uninsured poor adults in states that
do not expand Medicaid [Internet].
Washington (DC): The Commission;
2014 Apr 2 [cited 2014 Aug 21].
(Issue Brief). Available from: http://
kff.org/health-reform/issue-brief/
the-coverage-gap-uninsured-poor-
adults-in-states-that-do-not-expand-
medicaid/
7 Price CC, Eibner C. For states that
opt out of Medicaid expansion:
3.6 million fewer insured and
$8.4 billion less in federal payments.
Health Aff (Millwood). 2013;32(6):
1030–6.
8 Graves JA. Medicaid expansion opt-
outs and uncompensated care. N
Engl J Med. 2012;367(25):2365–7.
9 Hsieh HM, Bazzoli GJ. Medicaid
Disproportionate Share Hospital
payment: how does it impact hospi-
tals’ provision of uncompensated
care? Inquiry. 2012;49(3):254–67.
10 Coughlin TA, Long SK, Sheen E,
Tolbert J. How five leading safety-net
hospitals are preparing for the
challenges and opportunities of
health care reform. Health Aff
(Millwood). 2012;31(8):1690–7.
11 Blau M. This Georgia hospital shows
why rejecting Medicaid isn’t easy.
Washington Post. 2013 Jun 26.
12 Spivey M, Kellermann AL. Rescuing
the safety net. N Engl J Med. 2009;
360(25):2598–601.
13 Medicaid.gov. Medicaid Dispropor-
tionate Share Hospital (DSH) pay-
ments [Internet]. Baltimore (MD):
Centers for Medicare and Medicaid
Services; [cited 2014 Aug 22].
Available from: http://www
.medicaid.gov/Medicaid-CHIP-
Program-Information/By-Topics/
Financing-and-Reimbursement/
Medicaid-Disproportionate-Share-
Hospital-DSH-Payments.html
14 Sussman JB, Halasyamani LK, Davis
MM. Hospitals during recession and
recovery: vulnerable institutions and
quality at risk. J Hosp Med. 2010;
5(5):302–5.
15 Kaiser Family Foundation. Status of
state action on the Medicaid expan-
sion decision, as of December 11,
2013 [Internet]. Menlo Park (CA):
KFF; [cited 2013 Dec 21]. (Note that
this source is updated constantly, so
the information now available at this
web address is not the same as that
the authors accessed in Decem-
ber 2013, on which their calculations
are based). Available from: http://
kff.org/health-reform/state-
indicator/state-activity-around-
expanding-medicaid-under-the-
affordable-care-act/
16 Bazzoli GJ, Lindrooth RC, Clement
JP, Zhao M, Chukmaitov A. Did the
strong get stronger and the weak get
weaker? Examining changes in hos-
pital financial condition. J Health
Care Finance. 2006;33(2):55–69.
17 Zaman O, Cummings LC, Laycox S.
America’s safety net hospitals and
health systems, 2010: results of the
annual NAPH Hospital Characteris-
tics Survey [Internet]. Washington
(DC): National Association of Public
Hospitals and Health Systems; 2012
May [cited 2014 Aug 22]. Available
from: http://essentialhospitals.org/
wp-content/uploads/2013/12/
NPH214.pdf
18 Fagnani L, Tolbert J (National As-
sociation of Public Hospitals and
Health Systems, Washington, DC).
The dependence of safety net hos-
pitals and health systems on the
Medicare and Medicaid Dispropor-
tionate Share Hospital payment
programs [Internet]. New York
(NY): Commonwealth Fund; 1999
Nov [cited 2014 Aug 22]. Available
from: http://www.commonwealth
fund.org/usr_doc/fagnani_depend
safetynethospitals_351.pdf
19 To access the Appendix, click on the
Appendix link in the box to the right
of the article online.
Downloaded from HealthAffairs.org on March 11, 2024.
Copyright Project HOPE—The People-to-People Health Foundation, Inc.
For personal use only. All rights reserved. Reuse permissions at HealthAffairs.org.
20 Liu L, Jervis KJ, Younis M, Forgione
DA. Hospital financial distress, re-
covery and closure: managerial in-
centives and political costs. Journal
of Public Budgeting, Accounting,
and Financial Management. 2011;
23(1):31–68.
21 Dorn S, Buettgens M, Holahan J,
Carroll C. The financial benefit to
hospitals from state expansion of
Medicaid [Internet]. Washington
(DC): Urban Institute; 2013 Mar
[cited 2014 Aug 22]. Available from:
http://www.urban.org/uploaded
pdf/412770-The-Financial-Benefit-
to-Hospitals-from-State-Expansion-
of-Medicaid.pdf
22 Gaskin DJ. Altruism or moral haz-
ard: the impact of hospital un-
compensated care pools. J Health
Econ. 1997;16(4):397–416.
23 Thorpe KE, Phelps CE. The social
role of not-for-profit organizations:
hospital provision of charity care.
Econ Inq. 1991;29(3):472–84.
24 Lo Sasso AT, Seamster DG. How
federal and state policies affected
hospital uncompensated care provi-
sion in the 1990s. Med Care Res Rev.
2007;64(6):731–44.
25 Bazzoli GJ, Lindrooth RC, Kang R,
Hasnain-Wynia R. The influence of
health policy and market factors on
the hospital safety net. Health Serv
Res. 2006;41(4 Pt 1):1159–80.
26 Centers for Medicare and Medicaid
Services. Medicare program; hospi-
tal inpatient prospective payment
systems for acute care hospitals and
the long-term care hospital pro-
spective payment system and fiscal
year 2014 rates; quality reporting
requirements for specific providers;
hospital conditions of participation;
payment policies related to patient
status. Final rules. Fed Regist. 2013;
78(160):50495–1040.
27 Robeznieks A. Georgia governor acts
to bolster faltering rural hospitals.
Modern Healthcare [serial on the
Internet]. 2014 Apr 30 [cited 2014
Aug 22]. Available from: http://
www.modernhealthcare.com/
article/20140430/NEWS/
304309961
28 Millman J. 23 states still haven’t
expanded Medicaid. Which could be
next? Washington Post Wonkblog
[blog on the Internet]. 2014 Aug 29
[cited 2014 Sep 4]. Available from:
http://www.washingtonpost.com/
blogs/wonkblog/wp/2014/08/29/
23-states-still-havent-expanded-
medicaid-which-could-be-next
N ov em b e r 2 0 1 4 33:11 Health Affa irs 2033