Association for Public Policy Analysis & Management

Hospitals and other providers of services to Medicaid patients typically cite Medicaid’s low payment rates as a problem that limits their ability to serve such patients. Partly as a response to the belief that Medicaid patients are unprofitable, Medicaid allows states to make direct payments to hospitals through the Disproportionate-Share Hospital (DSH) program and other uncompensated care programs. This money is distributed with significant discretion on the part of states, and very little is known about the effectiveness of these payments. Hospital supplemental payments are typically ignored in analyses of hospital finance, not least because of serious data limitations in measurement.

In this paper, we examine the types of hospitals that tend to get supplemental payments and assess the degree to which hospitals with high levels of Medicaid supplemental payments serve high levels of uninsured and Medicaid patients. We study the universe of community hospitals in Texas. Texas is one of the largest states in the nation and is also one of the largest recipients of federal DSH dollars, receiving more than $1 billion annually since 2013; representing approximately 9% of these allotments. We have constructed a unique dataset on Texas hospitals that links hospital discharges to hospital survey data, financial reports, and various forms of state supplemental payments, including DSH, from 2008-2014. This allows us to measure hospital supplemental payments very reliably as well as identify characteristics of hospitals and their relevant markets. Although our analysis is intended to be mostly descriptive, in 2011 Texas changed the way that it distributed payments through a federal Medicaid 1115 waiver, which allows us to examine the hospitals that received supplemental payments before and after this change and provides some plausibly exogenous variation in the amounts of supplemental payments received by hospitals. We model the distribution of hospital Medicaid and uninsured discharges as a function of supplemental payments and hospital and market characteristics, including nonprofit status, using both standard and quantile regression methods.

Because it was intended to reduce the need for such payments by decreasing the number of uninsured, the Affordable Care Act contains language intended to phase out DSH payments. One of the statutory requirements for reductions in federal DSH funding is that CMS develop a methodology, which among other things, imposes larger percentage reductions on DSH funds for states that do not target their DSH payments on hospitals with high Medicaid or uncompensated care patient volume. Although these DSH reductions have been continually delayed, they are still currently set to begin in FY 2018. Our estimates will help inform the degree to which these reductions may be desirable and the types of hospitals likely to be winners and losers from such a policy.