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FYI: Medicare's Disproportionate Share Hospital Payments

In addition to paying for medical services provided directly to beneficiaries, Medicare makes special payments to hospitals that treat a disproportionately high share of low-income patients. This FYI examines Medicare's "disproportionate share hospital" (DSH) payments.

  • Why does Medicare make DSH payments? Medicare's DSH payment adjustment was designed to compensate hospitals that treat a greater proportion of low-income persons. Such patients were believed to incur higher-than-average costs, so hospitals that served many of them would likely encounter greater costs for their Medicare patients than would other facilities. These hospitals often have higher uncompensated care costs and fewer patients with private insurance than other hospitals. In recent years, DSH payments have been increasingly viewed as serving the broader purpose of ensuring continued access to hospital care for Medicare beneficiaries and low-income populations.
  • How does Medicare make DSH payments? DSH payments are paid to facilities through Medicare Part A, which covers inpatient hospital care and some post-hospital services. These payments appear as special adjustments in the program's prospective payment system (PPS), which Medicare uses to reimburse hospitals for inpatient services.
  • In FY 1997, Medicare DSH payments totaled $4.5 billion, an increase from $2.2 billion in FY 1992. DSH payments accounted for about 2% of total Medicare costs in FY 1997.
  • What have been some criticisms of the current DSH payment system? How did the Balanced Budget Act of 1997 (BBA) begin to address these concerns? Critics have argued that the complex method used to determine DSH payments has not accurately measured the proportion of low-income patients in different hospitals, particularly rural and small urban facilities. As a result of the current system, Medicare's DSH payments have been highly concentrated in a relatively small number of large urban facilities. The BBA required the Health Care Financing Administration (HCFA) to submit, by August 1998, a new payment formula that treats hospitals equitably, regardless of size or location. The BBA also enacted general reductions in the DSH payment formula.

Moreover, prior studies have found that hospitals receiving high DSH payments do not treat a correspondingly high share of Medicare patients (although there are notable exceptions). As a result, some analysts think that policymakers should remove DSH payments from Medicare. They propose that these funds come from a broader revenue source, such as federal general revenues. Opponents fear that making DSH payments from general revenues could cause these payments to be targets for budget cuts, and eventually lead some DSH facilities to reduce services or close. The BBA did not specifically address the issue of removing DSH payments from Medicare.


Association of American Medical Colleges, "Medicare Disproportionate Share (DSH) Payments--Background Paper," Washington, DC, February 1997; 

Congressional Budget Office, The Economic and Budget Outlook: Fiscal Years 1999-2008, January 1998; 

Congressional Research Service, Medicare Provisions in the Balanced Budget Act of 1997, Aug. 18, 1997; 

Medicare Payment Advisory Commission, Report to the Congress: Medicare Payment Policy-Vol. I, Washington, DC, March 1998; 

Prospective Payment Assessment Commission, Report and Recommendations to the Congress, Washington, DC, 1997; 

Prospective Payment Assessment Commission, Medicare and the American Health Care System-Report to the Congress, Washington, DC, 1997.

Written by Craig Caplan, AARP Public Policy 
August 1998
© 1998 AARP
May be copied only for noncommercial purposes and with attribution; permission required for all other purposes. 
Public Policy Institute, AARP, 601 E Street, NW, Washington, DC 20049

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