Number A-14 in Series, "New Federalism: Issues and Options for States"

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Federal law requires state Medicaid programs to "take into account the situation of hospitals that serve a disproportionate number of low-income patients with special needs" when determining payment rates for inpatient hospital care. This requirement is referred to as the Medicaid disproportionate share hospital (DSH) payment adjustment. Expenditures for DSH have increased significantly in recent years: Between 1990 and 1996, for example, DSH payments grew from $1.4 billion to $15 billion (figure 1). By 1996, DSH payments accounted for 1 of every 11 (federal and state) dollars spent on Medicaid. Indeed, the increase in DSH payments was a major reason for the rapid growth in Medicaid expenditures in the early 1990s.

The Medicaid DSH program has sparked intense debate between the states and the federal government throughout the 1990s. The federal government has been strongly critical of some states' "abuse" of the DSH program, arguing that these states have used it to decrease their Medicaid fiscal responsibilities at the expense of the federal government. States, however, assert that the DSH program is essential to maintaining the health care safety net for vulnerable populations. In addition, hospitals (especially public facilities) argue that DSH payments are critical to their survival. The DSH program continues to be a highly important and controversial policy issue. In the 1997 federal budget discussions the Medicaid DSH program was a key issue, and many changes to the program were enacted, including federal cutbacks. This policy brief describes the origins and evolution of the DSH program. We review some of the history of, and the controversies surrounding, the program during the early 1990s, when DSH expenditures first began to escalate. We also discuss federal DSH legislation enacted during that time period. We conclude with highlights of the federal DSH provisions included in the Balanced Budget Act of 1997.

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