Analysis of the Joint Distribution of
Disproportionate Share Hospital Payments

By
Barbara Wynn, Theresa Coughlin, Serhiy Bondarenko, and Brian Bruen

Prepared for
Assistant Secretary of Planning and Evaluation
U.S. Department of Health and Human Services
by
RAND
under contract with the Urban Institute

September 2002

This report is available on the Internet at:
http://aspe.hhs.gov/health/reports/02/DSH/

How to Obtain a Printed Copy

Report in PDF format

Contents

• Preface
• Acknowledgements

Executive Summary

• Introduction
• Overview of DSH Funding Policies
• What Is a Safety Net Hospital?
• How Should Financial Vulnerability Be Defined?
• Framework for Analyzing DSH Allocation Policies
• Hospital Data Set and Low-income Patient Variables
• Joint Distribution of DSH Payments under Current Policies
• Exploratory Analyses Using National HCUP Data
• Three State Analysis of Alternative DSH Policies
• Summary of Findings and Conclusions

Chapters

1. Overview of DSH Funding Policies
   • Medicare DSH Payments
   • Medicaid DSH Payments
   • Issues Related to Distribution of DSH Funds
2. A Policy Framework for Targeting Financially Vulnerable Safety Net Hospitals
   • What Is a Safety Net Hospital?
   • How Should Financial Vulnerability Be Defined?
   • Policy Issues
3. Hospital Data Set
   • National Databases
   • State Databases
   • Hospital Variables
4. Current Distribution of DSH
   • Medicare Payments
   • Medicaid DSH Payments
   • Joint Distribution of Medicare and Medicaid DSH Payments
5. Evalutating Current Distribution of DSH Using General Measures of Financial Pressure and Vulnerability
   • General Measures of Financial Vulnerability
   • Data.
   • Methods
   • Results
   • Conclusions
6. Alternative DSH Allocation Policies
   • Analytical Policy Issues
   • Potential Low-income Patient Measures
   • Other Potential Allocation Factors
   • Exploratory Analyses
7. Exploratory Analyses Using National HCUP Data
   • Data.
   • Methods
   • Results
   • Conclusions
8. Three State Analysis of Alternative DSH Policies
   • Overview of Medicaid DSH Programs
   • Financial Data
   • Variables
   • Methods
   • Results
   • Conclusions
9. Summary of Findings and Conclusions

• References
• Appendices
  • Appendix A Technical Documentation for Estimating DSH Payments
  • Appendix B Additional Tables on the Current Distribution of DSH Payments
  • Appendix C Summary of Financial Indicators by Hospital Class
  • Appendix D Simulation Results from Three State Analysis
  • Appendix E  Federal Support for Uncompensated Care Costs Incurred by Ambulatory Care Providers
• List of tables
  • Table ES.1 Safety Net Hospitals: Key Dimensions and Definitions
  • Table ES.2 Joint Distribution of FY1998 Medicare and Medicaid Payments By State
  • Table ES.3 Distribution of DSH Payments and Impact on Total Margins by Acute Care Hospital Categories
  • Table ES.4 Selected Measures of Serving Low-Income Patients: Hospital-Weighted Means and Correlation Between Measures Using 3-State Analysis File
  • Table ES.5 Correlation Between Financial Status Measures and Alternative DSH Allocation Policies
  • Table 1.1 Medicare DSH Qualifying Criteria and Formulae
  • Table 2.1 Safety Net Hospitals: Key Dimensions and Definitions
  • Table 4.1 Medicare DSH Payments by Category, FY 1998
  • Table 4.2 Medicaid DSH Payments to Facilities Under Different Scenerios, FY 1998
  • Table 4.3 Actual Medicaid DSH Distribution to Community Hospitals and Institutions for Mental Disease
  • Table 4.4. Summary of Distribution of Total FY1998 DSH Payments
  • Table 4.5 Medicaid DSH Payments By Region
  • Table 4.6 Actual Hospital-Specific DSH Payments by Category, FY1998
  • Table 4.7 Actual DSH Payments by State, FY1998
  • Table 5.1 Status of Cost Reports in HCRIS as of 6/30/01
  • Table 5.2 Summary of hospitals used in financial indicators analysis
  • Table 5.3 Summary of FY 1998 Financial Indicators
  • Table 5.4 Financial Indicators: Correlation Across Fiscal Years
  • Table 5.5 Comparison of Hospital Year-to Year Placement in Deciles Total Margin Net of DSH: 1997 to 1998
  • Table 5.6 FY 1998 Financial Indicators: Spearman rank correlation between indicators
  • Table 5.7 Cross-Indicator Comparison of Hospital Placement in Deciles
  • Table 5.8 Summary of Financial Indicators By Low-Income Utilization And Financial Status
  • Table 5.9 Summary of Financial Indicators By State
  • Table 6.1 Potential Measures of Care Provided to Low-Income Patients
  • Table 6.2 Potential Allocation Statistics
  • Table 7.1 Comparison of Hospitals in HCUP/DSH Database with National Weighted Estimates
  • Table 7.2 Proportion of Low-Income Patients By Payer: Hospital-Weighted Means and Correlation Between Measures
  • Table 7.3 Different Measures of Low-Income Inpatient Care: Hospital-Weighted Means and Correlation Between Measures
  • Table 7.4 FY 1998 Medicare Current Law and Federal Share of Medicaid Summary of Financial Indicators By State
  • Table 7.5 Distribution of Joint DSH Funds Based on Inpatient Days Attributable to Medicaid, Local Indigent Care, Self and No-charge Patients
  • Table 7.6 Correlation Between Selected DSH Allocation Policies and Net IncomeHCUP Analysis File
  • Table 8.1 Summary of State Financial Data Merged With HCUP/Medicare Cost Report Analysis File
  • Table 8.2 Simulations Using 3-State Data
  • Table 8.3 California FY1998 DSH Payments
  • Table 8.4 DSH Payments for CA Hospitals in Analysis File
  • Table 8.5 CA Hospital Financial and Utilization Data for Reporting Periods Ending in 1998
  • Table 8.6 Alternative DSH Allocation Policies: Distribution of Funds to California Hospitals
  • Table 8.7 New York DSH Payments For 1998
  • Table 8.8 CA Hospital Financial and Utilization Data for Reporting Periods Ending in 1998
  • Table 8.9 Alternative DSH Allocation Policies: Distribution of Funds to New York Hospitals
  • Table 8.10 Wisconsin DSH Payments For FY1998
  • Table 8.11 WI Hospital Financial and Utilization Data for Reporting Periods Ending in 1998
  • Table 8.12 Alternative DSH Allocation Policies: Distribution of Funds to WI Hospitals
  • Table 8.13 Selected Measures of Serving Low-Income Patients: Hospital-Weighted Means and Correlation Between Measures Using 3-State Analysis File
  • Table 8.14 Correlation Between Financial Status Measures and Alternative DSH Allocation Policies
  • Table A.1 Summary of Data Sources Used to Estimate Medicare DSH and and Total Payments
  • Table B.1 Actual Medicaid DSH Payments vs. Receipts by State
  • Table B.2 Total Estimated "New" DSH by Hospital Category
  • Table B.3 Esimated "New" DSH by State
  • Table C.1 Average Hospital Rankings on Selected Hospital Financial Indicators, FY1998
  • Table D.1A California Hospital DSH Payments Based on Low-Income Patient Utilization
  • Table D.1B California Hospital DSH Payments Based on Low-Income Patient Revenues
  • Table D.1C California Hospital DSH Payments Based on Financial Risk As % Operating Cost
  • Table D.1D California Hospitals:Sliding Scale DSH Payments Based on Financial Risk
  • Table D.2A New York Hospital DSH Payments Based on Low-Income Patient Utilization
  • Table D.2B New York Hospital DSH Payments Based on Low-Income Patient Revenues
  • Table D.2C New York Hospital DSH Payments Based on Financial Risk As % Operating Cost
  • Table D.2D New York Hospitals:Sliding Scale DSH Payments Based on Financial Risk
  • Table D.3A Wisconsin Hospital DSH Payments Based on Low-Income Patient Utilization
  • Table D.3B Wisconsin Hospital DSH Payments Based on Low-Income Patient Revenues
  • Table D.3C Wisconsin Hospital DSH Payments Based on Financial Risk As % Operating Cost
  • Table D.3D Wisconsin Hospitals:Sliding Scale DSH Payments Based on Financial Risk

Preface

The Medicare and Medicaid programs distribute extra payments to hospitals that treat a disproportionate share of indigent patients. The disproportionate share hospital (DSH) payment policies differ substantially between the two programs and, under Medicaid, across states as well. Nevertheless, the general objectives of each program are the same: to support the hospitals that are crucial to the health care safety net, and to preserve access to these hospitals for the respective program's enrollees.

Medicare and Medicaid DSH payments represent an important source of hospital revenues. In federal fiscal year 1998, Medicare DSH payments totaled an estimated $4.8 billion and Medicaid DSH payments totaled $15.0 billion, of which $8.3 billion were federal funds. This represented almost seven percent of total hospital revenues from all sources in that year. Yet relatively little is known about the distribution of these payments and how well they are targeted toward financially vulnerable safety net hospitals.

The Office of the Assistant Secretary for Planning and Evaluation in the Department of Health and Human Services contracted with the Urban Institute with RAND Health as its subcontractor to: 1) examine the distribution of both Medicare and Medicaid DSH funds across hospitals, 2) assess alternative criteria that could be used to identify safety net hospitals, 3) develop measures of hospital financial vulnerability to identify those safety hospitals that are under most financial pressure, and 4) explore the extent to which alternative allocation policies to the current Medicare and Medicaid DSH payment mechanisms would improve the distribution of funds to those safety net hospitals that are most vulnerable. This report provides the results of our analyses.

Acknowledgements

We would like to thank the members of our Technical Expert Panel, who provided many thoughtful insights and constructive comments. The members were: Linda Bilheimer, Ph.D., The Robert Wood Johnson Foundation; Molly Collins and Donald Mays, American Hospital Association; Lynne Fagnani, National Association of Public Hospitals and Health Systems; Stuart Guterman, Ph.D., Centers for Medicare and Medicaid Services; Leighton Ku, Ph.D., Center on Budget and Policy Priorities; Judith Lave, Ph.D., University of Pittsburgh; and, Matt Salo, National Governors' Association. Dr. Guterman was previously at the Urban Institute and made major contributions to the project's design and conceptual framework.

In addition, we are grateful for the help we received in our in-depth analysis of California, New York, and Wisconsin DSH payments. Individuals who provided assistance included Santiago Munoz at the California Public Hospital Association; Karen Heller, Elisabeth Wynn and Patricia Wang, Esq. at the Greater New York Hospital Association, and Jan Spooner at the Wisconsin Department of Health and Family Services.

Finally, we would like to thank our Project Officer, George Greenberg in the Office of the Assistant Secretary for Planning and Evaluation, DHHS and his colleagues Caroline Taplin and Jennifer Tolbert (now at the National Association of Public Hospitals and Health Systems) for the guidance and support that they provided throughout this project.

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Updated: 02/17/04