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The Medicaid statute requires states to make disproportionate share
hospital (DSH) payments to hospitals treating large numbers of
low-income patients. This provision is intended to recognize the
disadvantaged financial situation of those hospitals because
low-income patients are more likely to be uninsured or Medicaid
enrollees. Hospitals often do not receive payment for services
rendered to uninsured patients, and Medicaid provider payment rates
are generally lower than the rates paid by Medicare and private
insurance. As with most Medicaid expenditures, the federal
government reimburses states for a portion of their Medicaid DSH
expenditures based on each state's federal medical assistance
percentage (FMAP). While most federal Medicaid funding is provided
on an open-ended basis, federal Medicaid DSH funding is capped.
Each state receives an annual DSH allotment, which is the maximum
amount of federal matching funds that each state is permitted to
claim for Medicaid DSH payments. In FY2012, federal DSH allotments
totaled $11.3 billion. The health insurance coverage provisions of
the Patient Protection and Affordable Care Act (ACA, P.L. 111-148
as amended) are expected to reduce the number of uninsured
individuals in the United States, which means there should be less
need for Medicaid DSH payments. As a result, the ACA included a
provision directing the Secretary of the Department of Health and
Human Services to make aggregate reductions in federal Medicaid DSH
allotments for each year from FY2014 to FY2020. The Middle Class
Tax Relief and Job Creation Act of 2012 (P.L. 112-96) extended the
DSH reductions to FY2021. The Supreme Court's decision regarding
the ACA Medicaid expansion does not impact these DSH reduction
amounts, but states' decisions about implementing the ACA Medicaid
expansion could impact the allocation of the DSH reductions across
states. While there are some federal requirements that states must
follow in defining DSH hospitals and calculating DSH payments, for
the most part, states are provided significant flexibility. One way
the federal government restricts states' Medicaid DSH payments is
that the federal statute limits the amount of DSH payments for
Institutions for Mental Disease and other mental health facilities.
Since Medicaid DSH allotments were implemented in FY1993, total
Medicaid DSH expenditures (i.e., including federal and state
expenditures) have remained relatively stable. Over this same
period of time, total Medicaid DSH expenditures as a percentage of
total Medicaid medical assistance expenditures (i.e., including
both federal and state expenditures but excluding expenditures for
administrative activities) dropped from 13% to 4%. This publication
provides an overview of Medicaid DSH. It includes a description of
the rules delineating how state DSH allotments are calculated and
the exceptions to the rules, how DSH hospitals are defined, and how
DSH payments are calculated. The DSH allotment section includes
information about how the ACA DSH reductions may be allocated among
the states, and the possible implications of the Supreme Court's
decision regarding the ACA Medicaid expansion. The DSH expenditures
section shows the trends in DSH spending and explains variation in
states' DSH expenditures. Finally, the basic requirements for state
DSH reports and independently certified audits are also outlined.
Medicaid is a means-tested entitlement program that finances the
delivery of primary and acute medical services as well as long-term
services and supports. Medicaid is a federal and state partnership
that is jointly financed by both the federal government and the
states. The federal government's share for most Medicaid
expenditures is called the federal medical assistance percentage
(FMAP) rate. Generally determined annually, the FMAP formula is
designed so that the federal government pays a larger portion of
Medicaid costs in states with lower per capita incomes relative to
the national average (and vice versa for states with higher per
capita incomes). Federal Medicaid funding to states is open-ended.
The federal government provides states a good deal of flexibility
in determining the composition of the state share (also referred to
as the non-federal share) of Medicaid expenditures. As a result,
there is significant variation from state to state in the funding
sources used to finance the state share of Medicaid expenditures.
In state fiscal year 2010, states reported that on average state
general funds (i.e., revenues from personal income, sales, and
corporate income taxes) made up 76% of the state share of Medicaid
expenditures and the remaining 24% was financed by "other state
funds" (i.e., provider taxes, local government funds, and tobacco
settlement funds). In FY2011, Medicaid expenditures totaled $428
billion, with the federal government paying $271 billion, about 63%
of the total. While Medicaid expenditures (like all health
expenditures) generally grow at a rate faster than the economy, as
measured by the gross domestic product (GDP), spending per enrollee
under Medicaid tends to be lower than the per person spending for
other forms of health insurance. One of the major factors impacting
Medicaid spending is the economy. Also, state-specific factors,
such as programmatic decisions and demographics, affect Medicaid
expenditures and cause Medicaid spending to vary widely from state
to state. Starting in FY2014, Medicaid expenditures are expected to
increase significantly as a result of the reforms enacted in the
Patient Protection and Affordable Care Act (ACA, P.L. 111-148 as
amended). The most noteworthy ACA change to Medicaid begins in
2014, or sooner at state option, when some states expand Medicaid
eligibility to adults under age 65 with income up to 133% of the
federal poverty level (FPL) (effectively 138% FPL with the Modified
Adjusted Gross Income 5% FPL income disregard). Following the June
28, 2012, Supreme Court decision in National Federation of
Independent Business v. Sebelius, it is uncertain how many states
will refuse to expand their Medicaid program to cover this new
group. The Congressional Budget Office and the Joint Committee on
Taxation updated their estimate of the ACA Medicaid expansion to
account for the Supreme Court decision, and they project the
expansion will cost $642 billion from FY2014 to FY2022, which is
$288 billion less than the estimate prior to the Supreme Court
decision. This report provides an overview of Medicaid's financing
structure, including both federal and state financing issues. The
Medicaid expenditures section of the report discusses economic
factors affecting Medicaid, state variability in spending, and
projected program spending. Other issues that are examined include
congressional proposals to turn Medicaid into a block grant
program, federal deficit reduction proposals affecting Medicaid,
and state fiscal conditions affecting Medicaid financing and
services.
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