Recent Developments In Medicare Disproportionate Share Hospital (DSH) Payments

Author:Mr Eric Zimmerman
Profession:McDermott Will & Emery

Hospitals that look to health reform initiatives for a reduction in their burden of uncompensated care may find that declining compensation for related costs offsets any expected gains. Two recent court decisions, as well as provisions in health reform bills, could further erode revenue for facilities in states with their own support funding for uninsured patients.

Since 1986, the Medicare program has made higher payments to hospitals that treat large numbers of low-income patients. The hospitals receiving the payments are classified as part of the Disproportionate Share Hospital (DSH) program. Eligibility for the DSH payments is determined by a series of complex formulas that consider the ratio of Medicaid patient days to total patient days and the ratio of patient days for Medicare beneficiaries receiving Supplemental Security Income (SSI) to total Medicare patient days.

The DSH payments were originally intended to compensate the hospitals for what was believed to be the higher cost associated with treating low-income patients. In the years since, the DSH payments have become a way to reimburse hospitals for costs related to uncompensated care. In its March 2007 report to Congress, the Medicare Payment Advisory Commission (MedPAC) suggested that DSH payments should not be seen as a mechanism for funding uncompensated care and that costs associated with uncompensated care have little relationship to the cost of treating Medicare patients.

Congress incorporated MedPAC's findings into both the House and Senate Finance Committee health care reform proposals. In addition, the outcome of two federal district court cases in New Jersey and Washington state suggest that hospitals should be prepared for closer scrutiny of their eligibility and possible reductions in DSH payments.

Health Reform Proposals The Senate Finance Committee bill would require the Centers for Medicare & Medicaid Services (CMS) to reduce DSH payments beginning in 2015, and create a separate payment to reflect hospitals' costs related to uncompensated care. Aggregate DSH payments would be reduced to 25 percent of current levels, the amount that the MedPAC report indicated was the actual amount of DSH payments that related to costs associated with care of low-income patients. The remaining 75 percent of the current DSH expenditures would be redirected to a new uncompensated care fund, which would then be allocated to hospitals as a new supplemental payment for providing...

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