How Do Medicaid Disproportionate Share Hospital (DSH) Payments Change Under the ACA?

Based on the assumption of increased coverage and therefore reduced uncompensated care costs under the Affordable Care Act (ACA), the law calls for a reduction in federal Medicaid Disproportionate Share Hospital (DSH) allotments.  The statute requires annual aggregate reductions in federal DSH funding from FY 2014 through FY 2020.  To implement these annual reductions, the statute requires the Secretary of HHS to develop a methodology to allocate the reductions that must take into account 5 factors:  impose a smaller percentage reduction on low DSH states; impose larger percentage reductions on states that have the lowest percentages of uninsured individuals; impose larger percentage reductions on states that do not target their DSH payments on hospitals with high volumes of Medicaid inpatients or with high levels of uncompensated care, and the methodology must take into account whether the DSH allotment for a state was included in the budget neutrality calculation for a coverage expansion approved under section 1115 as of July 31, 2009.  The Centers for Medicare and Medicaid Services (CMS) released a final rule to allocate the reduction in the DSH allotments for FY 2014 and FY 2015 in September 2013. This brief provides some background in DSH payments, how DSH payments are affected by the ACA, the methodology for the DSH reductions across states for FY 2014 and FY 2015 and a look at the implications of the DSH reductions.