Achieving Equity in Disproportionate Share Payments to Rural Hospitals: An Examination of MedPAC's Revised Disproportionate Share Formula

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Project completed:
February 2002
The DSH adjustment has been criticized for its bias against small and rural hospitals. Analyses have shown that 95 percent of DSH payments go to urban hospitals and that only 20 percent of rural hospitals, compared to 50 percent of urban hospitals, qualify to receive DSH payments. The Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA) established a uniform DSH qualifying threshold and increased the add-on amount for small and rural hospitals. This study uses data from the 1998 Medicare Cost Report and Impact Files to examine the effect of these DSH revisions on rural hospitals. Estimates of the rural providers that would have qualified to receive DSH and the associated payments that these hospitals would have received if BIPA regulations had been in effect were calculated to determine the financial impact of this legislation. Additionally, the effect of DSH revisions on hospitals' financial performance, as measured by operating and total margins, was examined.