Administrator and Doctor Meeting

The ACA outlined a framework for how DSH payments to eligible hospitals will be reduced to coincide with reductions of uninsured patients. Read about the proposed methodology, along with illustrations of how various calculations will be made.

Navigating health reform

Expansion of Coverage Will Impact Disproportionate Share Hospital (DSH) Payments

  • Rob Schile
  • 6/3/2013
Update 7/8/2013: In July 2013, the Obama administration announced the employer mandate provision of the ACA would be delayed one year and not take effect until January 1, 2015. 


Expansion of Coverage Will Impact Disproportionate Share Hospital (DSH) Payments

A critical focus of the Affordable Care Act (ACA) was the expansion of coverage through the creation of health insurance exchanges and the expansion of Medicaid, which is scheduled to start January 1, 2014.

In accordance with this expansion, the ACA outlined a framework for how DSH payments to eligible hospitals will be reduced to coincide with reductions of uninsured patients. In its Proposed Fiscal Year 2014 Inpatient Prospective Payment System Update, the Centers for Medicare and Medicaid Services (CMS) outlined this adjustment methodology and how it intends to implement it.

Understanding the formula will be critical to hospitals who receive DSH payments because there will be both short-term and long-term cash flow implications, and hospitals will experience increased settlement risks related to DSH payments.

Below is a summary of CMS proposed methodology, along with illustrations of how various calculations will be made.

Proposed methodology

Beginning with discharge on or after October 1, 2013, eligible hospitals will have their DSH payments reduced to 25 percent of the payment they would have normally received under current formulas. CMS refers to this as the “empirically justified payment.”

The remaining 75 percent will be reduced to reflect the change in the percentage of individuals who are uninsured and under age 65, then redistributed to hospitals in the form of an additional DSH payment. The additional payment will be based on each hospital’s amount of uncompensated care for a specific period relative to the total uncompensated care by all hospitals during that same period. Prior to distribution, the DSH pool amount will be further reduced by an ACA-mandated additional 0.1 percent for 2014.

Formula guiding additional DSH payments

Each hospital’s additional DSH payment will be the product of three factors. The three factors and example calculations are outlined as follows:

Factor one: The CMS Office of Actuary estimated total DSH payments for all hospitals, minus 25 percent that will be distributed as empirically justified payments. According to CMS, the total estimated DSH payments for 2014 equate to approximately $12.3 billion. Factor one would be determined as follows:

Factor One: Pool for Additional DSH Payments

Variable Description DSH Pool

CMS Office of Actuary estimated 2014 DSH payments

Less: 75 percent reduction (DSH pool withheld to be used as factor one)



Empirically justified DSH payments federal fiscal year (FFY) 2014 for all hospitals $3,084,500,000
Remaining DSH amount for factor one $9,253,500,000

Factor two: This factor will identify the change in uninsured individuals from a baseline time period to 2013, which will represent the most recently available estimate prior to coverage expansion. The data will be calculated using the Congressional Budget Office (CBO) estimate of the uninsured population from 2010 of 18 percent as the baseline compared to their most recent estimate from February 2013 of 16 percent. The following table illustrates:

Factor Two: Estimated Change in Uninsured Population

Variable Description Percent

CBO estimated percent of uninsured 2010

CBO estimated percent of uninsured 2013



CBO estimated percent change in uninsured

Additional reduction per ACA



Total change in uninsured plus additional ACA reduction -11.2

Factor three: The final factor used in the calculation will reflect the hospital’s specific portion of uncompensated care as a percentage of uncompensated care provided by all hospitals. CMS discusses various data points that could be used in this calculation, including the data reported on Worksheet S-10 of the Medicare Cost Reports. The most recently available data for uncompensated care reported in the Medicare reports would be from those reports filed on or after May 1, 2010, which represents the initial year of this data being collected as a result of the electronic health record incentive program.

Due to concerns of accuracy in the data, CMS proposed to use the utilization of insured patients defined by Medicaid days, plus the inpatient days of Medicare SSI patients to determine factor three. This data will come from the most recently available Medicare cost reports, which are from the time period of 2010 – 2011. As a result, each hospital’s specific uncompensated care ratio will be provided by CMS.

Impact to DSH hospitals

The reimbursement to individual hospitals will vary based on all the factors included in the calculation, but the chart below illustrates the potential financial impact on a sample hospital.

Sample Hospital Calculation

Variable Description Sample Hospital
2013 hospital-specific DSH payment (estimate provided by CMS) $4,846,286
25 percent payment of empirically justified DSH payment (a) $1,211,571
FFY 2014 remaining DSH adjustment available to providers (factor one X factor two)

Hospital-specific DSH percent per CMS (factor three)



Hospital specific share of additional DSH payment from DSH pool (b) $4,014,103
2014 total estimated DSH payment (a+b) $5,225,675
Estimated percentage change in DSH payment versus prior year 7.8%

In this example, the hospital actually receives an increase in its DSH payment amount of approximately 8 percent. It is important to note that each hospital will be affected differently — some hospitals will have reductions in their DSH payments.

Start preparing now

Hospitals are facing a barrage of changes to their reimbursement streams, and modification to DSH payments is just one more added to the list. Understanding the potential impact on your organization is of vital importance to your short-range and long-range planning initiatives. The proposed DSH adjustment outlined by CMS will affect hospitals' cash flows at least in the short-term, and could potentially have greater implications.

Professionals with a depth of health care experience can help guide and advise you so you can better understand these complex changes.