GAO: Some Hospitals Are Overpaid with DSH Payments

Despite changes in the laws, some hospitals may have been receiving supplemental payments from states for uncompensated costs of care for uninsured and Medicaid patients—better known as disproportionate share hospital (DSH) payments—that was far higher than what they should be paid, according to a new General Accountability Office (GAO) report.

During the early 2000s, the Department of Health and Human Services' Office of the Inspector General (HHS OIG) reported significant overpayments to hospitals resulting from states not using accurate methods or data for calculating hospitals' DSH payment limits. Specifically, the OIG found that if states had updated hospital DSH payment limits with cost and payment data for the year the payments were made, the states' hospital DSH payment limits and DSH payments would have been significantly lower.

In 2003, Congress mandated improved accountability for DSH payments under the Medicare Prescription Drug, Improvement, and Modernization Act (MMA) of 2003. In 2005, the Centers for Medicare and Medicaid Services issued a proposed rule in response to those DSH auditing and reporting requirements. However, this rule was not finalized until December 2008.

In the meantime, concerns had been raised about the accuracy of DSH payment limits—particularly if states were estimating limits using data that was not audited in an up-to-date fashion. GAO was asked to examine both how state DSH payments in 2006 compared to DSH payment limits, and how states' calculated 2006 DSH payment limits.

GAO looked at 682 hospitals in four states: California, Michigan, New York, and Texas. It found that DSH limits for 2006 were not calculated appropriately for 91 hospitals in California and 88 hospitals in Texas—specifically, that the states did not take into account all Medicaid payments the hospitals received. However, California, Michigan, and New York had processes to update their DSH payment limits to reflect actual costs and used data from sources subject to an audit for some hospitals.

GAO noted that California's experience alone indicates that implementing the requirements of CMS' 2008 final rule could have "a substantial effect on hospital-specific DSH payment limits" in the future. In 2006, the state reduced DSH payment limits for 22 hospitals by more than 49% after applying a methodology based on audited and updated data.

Although the 2008 DSH rule set a December 2009 deadline for states' 2005 and 2006 DSH audits and reports, CMS is providing states a transition period—through payment year 2010. According to CMS, the transition period was created because of concerns from states regarding budget cycles, planning complications, and the economic downturn. The transition period is intended to ensure states are not adversely affected, GAO said.