The Dependence of Safety Net Hospitals and Health Systems on the Medicare and Medicaid Disproportionate Share Hospital Payment Programs

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As subsidies for safety net hospitals are about to be reduced, a new study demonstrates the critical role of disproportionate share hospital (DSH) payments in financing care for the poor and uninsured. In The Dependence of Safety Net Hospitals and Health Systems on the Medicare and Medicaid Disproportionate Share Hospital Payment Programs, authors Lynne Fagnani and Jennifer Tolbert of the National Association of Public Hospitals and Health Systems (NAPH) detail the reliance of safety net hospitals—which treat all patients, regardless of their ability to pay—on the Medicare and Medicaid DSH payment programs.

The two subsidy programs were created in the early 1980s to compensate safety net hospitals for the additional costs associated with providing uncompensated care. Although some states have been criticized for using Medicaid DSH payments in ways that Congress never intended—such as financing care at state mental hospitals—analysis of the 1996 NAPH Hospital Characteristics Survey reveals that the Medicaid and Medicare DSH programs pay for nearly 30 percent of the unreimbursed care provided by safety net hospitals. State and local subsidies cover another 60 percent of this care.

The authors further show that prior to full implementation of the Medicaid DSH program in 1992, safety net institutions were losing money on their Medicaid-insured patients. Since payments began, these hospitals have realized positive Medicaid margins. If Medicaid and Medicare DSH payments were removed entirely from revenue streams, safety net hospitals would experience a 7 percent loss on total operations.

Because DSH payments are projected to be cut in half as a result of changes called for in the Balanced Budget Act of 1997, targeting payments to those safety net hospitals shouldering the greatest burden of uncompensated care will become ever more important. The report recommends reforming the Medicaid and Medicare DSH programs so that they conform more closely to the current reality of the health care marketplace. Steps could include reconfiguring the DSH allocation formula to reflect increasing use of outpatient services and holding states more accountable for how DSH monies are spent.

Facts and Figures

  • Although uncompensated care averages 6.1 percent of hospital costs nationwide, for many safety net hospitals uncompensated care accounts for more than 26 percent of total costs.
  • In 1997, nearly 96 percent of all DSH payments were made to urban hospitals.
  • The Balanced Budget Act of 1997 reduced Medicare DSH payments to hospitals by one percent per year from 1998 to 2002 and Medicaid DSH payments by 17 percent during this period.

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Publication Details

Publication Date: October 1, 1999
Authors: Lynne Fagnani and Jennifer Tolbert, National Association of Public Hospitals and Health Systems
Citation:

The Dependence of Safety Net Hospitals and Health Systems on the Medicare and Medicaid Disproportionate Share Hospital Payment Programs, Lynne Fagnani and Jennifer Tolbert, National Association of Public Hospitals and Health Systems, The Commonwealth Fund, October 1999

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