The Medicare Disproportionate Share Hospital (DSH) adjustment provision has been in effect since 1986. The payment adjustment was designed to compensate hospitals that care for a greater proportion of low-income patients. According to Claire Herring, Senior Manager in Business Advisory Services for Ernst and Young, "these patients are thought to incur higher-than-average costs. In addition, according to Herring, "these hospitals often have higher uncompensated care costs and fewer patients with private insurance than other hospitals." Herring, who focuses on oversight and review of regulatory engagements for hospitals, primarily on DSH and Medicare bad debt for the firm, adds that "more recently, DSH payments also have been thought to serve the larger purpose of ensuring continued access to hospital care for low-income patients and Medicare beneficiaries."

How It Works

The DSH adjustment is calculated as a percentage add-on to the basic diagnosis-related group (DRG) payment. The amount of DSH payment a hospital receives is derived from a formula that sums up two ratios: the Supplemental Security Income (SSI) percentage and the Medicaid percentage. This sum, known as the DSH percentage is then factored into one of ten different formulas, depending on a hospital's size and urban versus rural status.

The payment formula depends on a hospital identifying Medicaid-paid days. Herring explains that, prior to a regulatory rule change commonly known as 97-2, referring to a February 1997 Program Memorandum from the Health Care Financing Administration (HCFA) the Centers for Medicare and Medicaid Services (CMS) HCFA, only acknowledged Medicaid-paid days in the Medicaid percentage ratio of the DSH calculation. During this time hospitals generally pulled their total Medicaid paid days into the DSH calculation "Following this memo," she notes, "Medicaid eligible unpaid days could be included in the calculation. Today, most Medicare fiscal intermediaries (FIs) and new Medicare Administrative Contractors (MACs) actually require hospitals to prove Medicaid eligibility, not just prove Medicaid payment." Herring also explains that in theory all Medicaid-paid days should represent days when the patient was eligible for Medicaid; however, in some states other programs are administered through the state and so auditors want to confirm the type of Medicaid program the patient was a participant in before allowing them in the DSH calculation."

Another important aspect of this program is the audit. In addition to filing the Medicaid and total hospital days inputs on the Medicare cost report, hospitals must create a detailed patient listing that supports the Medicaid days input. Currently, Medicare auditors use a variety of sampling techniques and audit methodologies to review the Medicaid days listing. To fully capture the DSH adjustment it is critical to capture all Medicaid-eligible days and eliminate any inappropriate days such as dual-eligible days. According to Herring, "With the consolidation of Medicare FIs into the new Medicare MACs I think we may finally see more consistency in the approach to auditing DSH."

Surviving the Audit

Given the importance of obtaining the DSH payment, what can hospital do at the front-end, when patients are admitted and during the time they are in the hospital, to make the reporting easier later in the process?

According to Herring, "Hospitals have had success in working to help patients apply for Supplemental Security Income (SSI) and Medicaid when they are first admitted to the hospitals. Vendors are available to assist hospitals with this front-end process. Increasing enrollment in both programs can improve the DSH percentage in the current year and potentially in future years as patients with chronic medical conditions are repeat visitors of local hospitals over a period of time."

Later, when an audit is announced, there are also steps a hospital can take to prepare for the process. Herring recommends reviewing the methodology the hospital team used to build the Medicaid days listing, trending the DSH percentage over the last five years, and looking for any fluctuation in the SSI percentage of Medicaid percentage. She also advises that hospitals "meet with their team to understand any audit adjustments for DSH they may have received in the past. Be prepared to provide auditors with UB-92s, proof of Medicaid eligibility, and possibly patient account history documentation."

Herring reminds hospitals that "the intricate details of building the DSH calculation, coupled with complexities in gathering and matching eligibility data, understanding Medicaid program codes and current issues with SSI makes optimizing the calculation challenging." She suggests: "Be certain to understand your internal team's skill set and plan to build the listing. Enlist external help for a check-up of your most recent DSH filings to determine if you are fully capturing this benefit for your organization."


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Publication Date: Thursday, March 12, 2009