Winners in the scramble for DSH dollars are hospitals that are owned by the states

It’s time to rethink federal and state policies that guide the Medicaid disproportionate share hospital (DSH) program, says a Washington, DC, attorney who has worked in the field for more than a dozen years.

"We really need to look at DSH policy in the aftermath of the Balanced Budget Act, when payments have been cut across the board. It makes those DSH dollars even more valuable," says Michael Spivey, JD. Mr. Spivey is affiliated with the Capitol Alliance, a coalition of health care policy consultants in the Washington, DC, area.

As states look for opportunities in the Medicaid DSH program, there is inevitable grumbling that DSH money, once boosted with the federal match, doesn’t necessarily make its way back to providers in a fashion that reflects who is providing a disproportionate share of services to the poor and uninsured.

Who are the winners? State-owned hospitals are, says Mr. Spivey. In Texas, for example, state-owned facilities are paid 100% of their uncompensated costs, collectively about $600 million annually, through the DSH program, he says. All other facilities share what’s left of a DSH pot of approximately $1.5 billion.

"If state-owned facilities are first in line, I don’t think that’s irrational from the perspective of a state budgeter," he concedes.

He quickly adds that state facilities in Texas are not the "most disproportionate" providers of care to the program’s target population, either in dollar amount or volume. Moreover, inflation and cuts in DSH funding will gradually whittle away over time at the funds available to facilities not owned by the state and likely will reduce the proportion of their indigent care costs that DSH can pick up, says Mr. Spivey.

Funding formula

But what about the fact that state-owned facilities in Texas can and do make an intergovernmental transfer (IGT) that composes the "state" portion of the Medicaid DSH payment? To make sure they are not treated unfairly, does the funding formula have to take that payment into account?

"That would be a legitimate point, but the state-owned facilities are being treated better than not unfairly,’" Mr. Spivey says.

Even within the group of Texas hospitals not owned by the state, other disparities pop up, he says. Nine tax-supported hospital jurisdictions, all of which provide an IGT, get a net return on their DSH contributions amounting to about 38% to 40% of their nonreimbursed costs for indigent care, he says. The remaining 140 or so nonstate facilities participating in the disproportionate share program, none of which contribute to the DSH program, see about 90% of their uncompensated costs covered through DSH.

"There is cross-subsidization from the heavy disproportionate share to the less disproportionate share," says Mr. Spivey. "Should those be the policy goals in Texas? It leads to some very interesting and excited policy debate."

Medicaid programs often work with the hospital industry to rationalize the distribution of DSH funds in their respective states, taking into account facilities’ public contributions through IGTs and taxes. Still, the process can be more art than science, especially when the state defers to the industry to come up with a distribution scheme.

That’s the process in South Carolina, where both the hospital industry and the Medicaid program are looking carefully at the allocation of DSH funds, says Marianne Melton, director of Medicaid acute care reimbursement. She notes one instance in which their work so far has not addressed disparities in a hospital’s public contribution and its DSH reimbursement.

"The 501(c)3 hospitals that don’t pay taxes get away with murder," she says.

No requirement

Ms. Melton points out that all of South Carolina’s DSH money goes back to providers, a claim that not all states can make. Under DSH law and regulation, there is no requirement that IGTs used to attract the federal match will be returned to providers for services provided.

"You can end up with a policy in which providers get to keep nothing," notes Mr. Spivey. "There’s really nothing to prevent a state from doing that right now. For all the legislating, there hasn’t been much of an attempt to rationalize DSH policy."

Contact Mr. Spivey at (202) 383-9497 and Ms. Melton at (803) 898-1030.