Academic journal article Health Care Financing Review

Medicaid Disproportionate Share and Other Special Financing Programs

Academic journal article Health Care Financing Review

Medicaid Disproportionate Share and Other Special Financing Programs

Article excerpt


One of the major factors causing the rapid growth of Medicaid expenditures from 1989 to 1992 was the increasing State use of DSH and related special financing programs, such as provider-specific taxes and IGTs. Similarly, the key reason for stabilized Medicaid spending growth in 1993 was the implementation of the cap on DSH payments (Coughlin, Ku, and Holahan, 1994; Winterbottom, Liska, and Obermaier, 1995). DSH payments were developed to help hospitals that provided disproportionate shares of care to the poor. But by the late 1980s and early 1990s, DSH payments became linked to provider taxes and related contributions as a strategy to increase Federal payments to States.

A hypothetical example illustrates how typical programs operate (Figure 1). Hospitals pay $50 million in taxes or IGTs to the State. The State, in turn, makes $60 million in DSH payments to hospitals. That is, hospitals receive $10 million more than they would without the program.(1) The State earns Federal matching funds based on the Medicaid DSH expenditure of $60 million. If the State has a 50-percent matching rate, it receives $30 million of Federal funds. Because the State gained $80 million in revenue ($50 million from hospitals and $30 million from the Federal Government) and makes $60 million in DSH payments, it has a net gain of $20 million. The net cost to the Federal Government is $30 million.

Special financing programs allowed States to increase Federal revenue while limiting the level of State-appropriated funds used for Medicaid. In 1993, DSH payments nationwide were about $17 billion and accounted for about 1 out of every 7 dollars spent in the Medicaid program. Put another way, Medicaid DSH payments in 1993 were roughly equal to the sum of Medicaid spending for all physician, laboratory, X-ray, outpatient, and clinic services (Winterbottom, Liska, and Obermaier, 1995).

In addition to the large fiscal effects of DSH payments, broader public finance questions arose. When the Bush Administration criticized these programs, States questioned the Federal Government's authority to determine what counts as a "State dollar." Although these issues were subsequently settled through legislation, the debate crystallized concerns about delineating appropriate Federal versus State obligations in paying for health care. By shifting costs to the Federal Government, States essentially shifted costs to taxpayers in other States. The Federal-State financing design of Medicaid permits this based on the Federal Medicaid Assistance Percentage (FMAP), but these programs effectively increased the Federal matching rate for Medicaid beyond FMAP levels in many States.

Because special financing programs account for such a large share of Medicaid spending, they are potentially a major funding source for health care reform. Most of the major health reform proposals debated in the last session of Congress called for either eliminating DSH payments or greatly limiting them and using the funds for insurance subsidies. The rationale was that, as more people became insured under reform, the need to pay hospitals additional money to defray the cost of uncompensated care would dissipate. Similarly, States are looking at Medicaid DSH funds as a way to help pay for health reform. Indeed, some States are already reprogramming DSH dollars to extend Medicaid protection to the uninsured as part of broad Medicaid section 1115 waivers.

The complicated flow of funds between providers, States, and the Federal Government makes it difficult to discern how much is actually spent for medical care in State Medicaid programs. For example, in Figure 1 the hospitals received $60 million in DSH payments, but actually only gained $10 million. Financial reports, such as the HCFA Form-64, would indicate that $60 million more was spent for hospital care, not $10 million.

Although special financing programs have received great attention in recent years, little is known about them. …

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