Understanding DSH Payments and Medicaid

DSHIn 2014, states paid their hospitals $18 billion in Disproportionate Share Hospital (DSH) payments. These payments are an important source of income for many of our country's neediest hospitals.

But understanding what they are and how they work can be complicated.

In this article, we'll tell you everything you need to know to understand Medicaid DSH payments. Read on and find out what DSH payments are and how they can help your hospital.


What are Medicaid DSH Payments?

DSH payments are a way of providing extra funds to hospitals that treat a large number of low-income patients. That includes both patients on Medicaid and uninsured patients.

Hospitals tend to charge private insurance companies much more than uninsured or Medicaid patients. That means that even if these patients can pay their entire bill (which isn't always the case), the hospitals are still making less money by treating them.

But the costs don't end there, low-income patients tend to be sicker than higher-income patients. Even with the exact same diagnosis, a low-income patient is, on average, more expensive to treat.

Furthermore, low-income patients are much more likely to require social workers or translators. That means that hospitals that treat a higher proportion of these patients will need to have extra staff on hand to deal with their needs.

All of this adds up, making it expensive to treat low-income patients. But we, as a society, don't want to turn them away. And that's where Medicaid DSH comes in.

A Brief History of DSH Payments

When Medicaid was created in 1965, it was closely linked with Medicare. States had to follow very specific rules so that Medicaid payments were in agreement with Medicare payments.

However, in 1981, Congress loosened up the rules and decoupled Medicaid from Medicare. This gave state's much more freedom in the way they used their federal Medicaid funding.

Congress wanted to make sure the states didn't forget about needy hospitals, so they mandated that they make payments to hospitals that served a high proportion of low-income patients.

States were resistant at first, but throughout the 80's the law evolved and the rules tightened. Congress finally clarified and codified Disproportionate Share Hospital payments in 1992, and state allotments today are still based on those numbers.

Does Your Hospital Qualify for DSH Payments?

Your hospital can qualify for DSH payments in a few different ways.

The primary method of qualification starts with a calculation of the DSH patient percentage.

To find this percentage, you first add up all the inpatient days spent by patients who have both Supplemental Security Income and Medicare Part A. You then add this to the number of inpatient days spent by patients who are on Medicaid but aren't eligible for Medicare Part A. Finally, you divide this total by the total number of inpatient days spent by all patients.

It's basically the percentage of your hospital's resources that are spent on low-income patients.

If this percentage is over 15%, then the hospital qualifies for DSH payments.

However, if your hospital is a big urban hospital with over 500 beds, the calculation is different. Or, if it's a small rural hospital with fewer than 100 beds, it's also different. We won't go into those details here though.

If this sounds complicated, don't worry. You probably won't be the one determining whether or not your hospital qualifies. And if you are, you're going to need to do a lot more research to verify it.

What's important here is that you understand the basic idea behind DSH qualification.

Mandatory DSH Payments

The states have relative freedom over how they allocate their DSH funds. They can give them to any hospital that qualifies according to the above calculation. But those payments aren't mandatory.

However, it is mandatory that states give money to certified DSH hospitals. A hospital qualifies as DSH if it meets at least one of two criteria. Once again, they're a bit complicated so bear with us.

A hospital is a DSH hospital if it

  • has a Medicaid inpatient utilization rate that's one standard deviation or greater above the average for Medicaid hospitals in the state.
  • has a low-income utilization rate greater than 25%

States are required to give funding to any hospital meeting those requirements.

How Much Will Your Hospital Receive?

Once again, states have a fair amount of freedom in the way they allocate DSH funding. But federal law does force them to follow one of three general guidelines.

States can distribute funds based on a formula known as the DSH adjustment. This is a formula that takes into account how many low-income patients the hospital serves and provides money accordingly. This is the most straightforward of the three guidelines.

Guideline two involves the Medicaid inpatient utilization rate discussed above. Under this guideline, states provide more funds to a hospital if its Medicaid inpatient utilization rate is far above one standard deviation. This guideline emphasizes giving money to the hospitals that most need it.

Finally, states can provide funds based on hospital type. For example, if a state wants to provide more funds to teaching hospitals or children's hospitals it can do so. But they have to be consistent.

So basically, the amount your hospital receives will depend a lot on your state and what its goals are.

How Does Medicaid DSH Benefit Your Hospital?

The big benefit of Medicaid DSH is that it allows your hospital to treat low-income patients without having to worry about the financial challenges. In fact, under some systems, your hospital will have a financial incentive to treat low-income patients.

What's important is that people are getting the care they need when they need it. And that's what DSH payments are all about.

Incorporate Disproportionate Share Hospital Payments into Your Revenue Planning

If your hospital qualifies for DSH payments, then those payments should be an integral part of your revenue management plan.

We know managing hospital revenue is complicated. Hospitals receive money from a dizzying number of sources, both public and private, and keeping track of it all can be a nightmare.

That's why we're here. Read about our hospital revenue services, and if you have any other questions, don't hesitate to contact us.

Pete Ash

Pete is the Vice President of Sales & Client Services at DECO Recovery Management. He covers the Mid Atlantic region and specializes in Medicaid related topics. It is DECO’s Mission to maximize reimbursement to our clients by leveraging innovative technology, processes and compassionate advocates to provide exemplary service.

Categories: Medicaid

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