Reforming the Medicaid Disproportionate Share Hospital Program. Health Care Financing Review 22(2

ederal law requires state Medicaid programs to “take into account the sit-uation of hospitals that serve a dispropor-tionate number of low-income patients with special needs ” when determining payment rates for inpatient hospital care. This requirement is referred to as the Medicaid disproportionate share hospital (DSH) payment adjust-ment. Expenditures for DSH have increased significantly in recent years: Between 1990 and 1996, for example, DSH payments grew from $1.4 billion to $15 billion (fig-ure 1). By 1996, DSH payments accounted for 1 of every 11 (feder-al and state) dollars spent on Medicaid. Indeed, the increase in DSH payments was a major reason for the rapid growth in Medicaid expenditures in the early 1990s. The Medicaid DSH program has sparked intense debate between the states and the federal government throughout the 1990s. The federal government has been strongly critical of some states ’ “abuse ” of the DSH program, arguing that these states have used it to decrease their Medicaid fiscal responsibilities at the expense of the federal government. States, however, assert that th