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HHS 10
Enhance Medicaid Payments to Certain Providers


Texas should increase its share of the Medicaid Disproportionate Share Hospital Payments (DSH) program reimbursement for state-owned hospitals from 100 percent to 175 percent of uninsured care costs, as allowed under new federal law. This would bring state-owned hospitals about $96 million more annually in DSH payments.


Medicaid, a joint state-federal program, provides medical assistance to needy persons under Title XIX of the federal Social Security Act. Federal law allows each state to administer Medicaid in accordance with a federally approved state plan, which must be designed in harmony with federal statutes and regulations. Several Medicaid programs can cover certain health care costs of the uninsured.

The large number of uninsured Texans requires some hospitals to spend a great deal on uncompensated care for indigent patients. One federal program designed to help hospitals with these costs is the Medicaid Disproportionate Share Hospital Payments (DSH) program, which has been available to the states since 1981. DSH will provide Texas with $855 million in federal fiscal 2002 and $853 million for federal fiscal 2003.[1] These funds are used to compensate hospitals who treat large numbers of indigent patients.

Exhibit 1
Texas Disproportionate Share Hospital Program
Federal Share
Fiscal 1997-2003

Fiscal Year Total
1997 $946,553,000
1998 $896,134,000
1999 $950,000,000
2000 $738,848,000
2001 $750,055,000
2002 (estimated) $855,899,000
2003 (projected) $853,338,000
Source: Texas Department of Health.

Texas’ DSH program reimburses state-owned hospitals and mental health institutions of the Texas Department of Mental Health and Mental Retardation (MHMR) for certain uninsured health care costs before distributing the remainder of the federal allotment to other public and private hospitals. Texas has distributed federal DSH funds ranging from $394 million in fiscal 1997 to $281 million in fiscal 2001 for state facilities. None of Texas’ DSH allotments has ever been left unclaimed.

Over the last decade, various federal limitations on DSH shifted payments away from state-owned hospitals and MHMR institutions to other Texas public and private hospitals. More recently, however, new federal law has allowed the state to claim a higher percentage of reimbursement for its uninsured costs on state-owned hospitals.

Federal funds disbursed to state-owned hospitals totaled $127 million for fiscal 2001 (Exhibit 2).

Exhibit 2
Federal Funding
Texas Disproportionate Share Hospital Program
Fiscal 1997-2001

Fiscal Year State-owned Teaching Hospitals TDH Hospitals MHMR Psychiatric Hospitals Total*
1997 $132,144,595 $15,634,879 $246,260,855 $394,040,329
1998 $107,293,649 $12,208,530 $181,710,162 $301,212,341
1999 $118,732,370 $13,049,515 $173,683,813 $305,465,699
2000 $123,939,658 $12,058,076 $172,955,193 $308,952,927
2001 $120,304,594 $ 7,149,575 $154,116,946 $281,571,115
*Totals may not add due to rounding.
Source: Texas Department of Health.

Local and state public hospitals provide most of the care to the uninsured in Texas. Texas public local hospitals provided about 45 percent or almost $1 billion of hospital spending on the uninsured and uncompensated Medicaid care in 2000. State hospitals provided an additional 21 percent of care.

Texas rural hospitals often operate on slender margins. Closures of rural hospitals can severely impact local communities by removing not only the only source of acute health care services in an area, but also removing a major employer and service from communities that may be struggling to survive.

Higher limits

In December 2000, the U.S. Congress approved the Medicare, Medicaid and State Child Health Insurance Program Benefits Improvement and Protection Act of 2000, which raised the DSH cost reimbursement limit from 100 to 175 percent of uninsured costs. This will allow states to use federal dollars to reimburse all public hospitals, including state-owned hospitals, at 175 percent of their uninsured costs. This provision becomes effective at the beginning of the federal fiscal 2003 and will remain in effect for two years. The new federal law also requires new accountability standards for DSH, since federal audits have uncovered some questionable claims by certain hospitals.[2]

This action was taken to provide additional support for public hospitals facing rising uncompensated care caseloads and reduced payments from other private and public health care programs. The change will allow Texas to claim additional DSH funding for its public hospitals beginning in fiscal 2004, should it amend its DSH plan to contain the 175 percent limit.

Several groups, however, are working to return the 175 percent limit to 100 percent, especially for state-owned hospitals. The U.S. Department of Health and Human Services opposes increasing the limit, citing irregularities in federal audits of the DSH program. Public hospitals that are not state-owned also would like to change the federal law to exclude state-owned hospitals. Since Texas’ DSH program covers its state-owned hospitals first, this change would produce more DSH funding for other public and private hospitals. The Texas Legislature must actively support the DSH 175 percent limit to maintain this funding change.

Upper payments limit

Another federal program called Upper Payments Limits (UPL) provides additional assistance to hospitals with uncompensated care costs. UPL allows states to enhance Medicaid payments to health care providers as long as the payments do not exceed what Medicare would have paid for the same service. States use intergovernmental transfers to provide the state’s contribution to these UPL payments.

Thirty states were using some type of UPL as of December 2001.[3] The federal Health Care Financing Administration estimates that of the $3.9 billion increase in federal Medicaid spending in federal fiscal 2000, about $1.9 billion represented UPL payments.[4]

In 2002, the Texas Health and Human Services Commission (HHSC) adopted UPL in a limited way. The agency filed a plan amendment and received approval to allow certain hospitals below the UPL cap—that is, those that receive Medicaid payments that are well below what they would receive under Medicare—to receive enhanced Medicaid payments. The amendment, however, only covers the public urban hospital districts in Harris, Tarrant, Dallas, El Paso, Ector, Lubbock, Nueces, Travis and Bexar counties. Under the current plan, these districts will receive $24.9 million in additional federal funds from the UPL program in fiscal 2001 and $105 million in fiscal 2002. HHSC also filed another 2002 plan amendment to cover certain rural hospitals.[5]

Both of these amendments rely on the concept of intergovernmental transfers (IGTs), which are transfers of local public funds to the state to be used as matching funds in certain federal programs. Therefore, the local governments benefiting from UPL also provide the matching funds used in the program.

The U.S. Department of Health and Human Services has expressed a concern that states may use UPL to reduce the state’s contribution to Medicaid below that required under federal law, and that states may redirect UPL funds to services not related to health care.

Texas’ UPL plan meets this concern by providing that UPL funds returned to the state must be used to enhance payments to hospitals or support medical teaching facilities.[6]


A. The Texas Health and Human Services Commission (HHSC) should increase public hospital limits on the Disproportionate Share Hospital (DSH) Program to 175 percent of their capped amounts, effective in fiscal 2004.

Texas legislators should work with Congressional representatives to ensure that the 175 percent rate is maintained in federal law and that state-owned hospitals continue to be covered.

B. HHSC should work with hospitals to expand its adoption of the Upper Payment Limit program.

These funds could be used to respond to any reductions in DSH payments.

C. HHSC should revise the current Medicaid disproportionate share formula. The formula should ensure that the hospitals that are affected by the Upper Payment Limit program are held harmless to the extent that they serve the uninsured and rural residents.

HHSC should increase the emphasis on service given to the uninsured in the formula and should require better data on service to the uninsured. HHSC would establish standards for data on services for financial reporting on these services and auditing of that information.

Fiscal Impact

State-owned hospitals would generate an additional $96 million each year of the biennium under the DSH 175 percent rate. This increase would be limited to two years, so the state would accrue no gains beyond fiscal 2005.

Texas’ leadership should work with Texas Congressional members to maintain the federal 175 percent allowable rate for state-owned hospitals. The impact to the Upper Payment Limit plan should offset any reductions in DSH payments to other hospitals.

Fiscal Year Gain to General Revenue (Loss) to Non-State Hospitals
2004 $96,000,000 ($96,000,000)
2005 $96,000,000 ($96,000,000)
2006 $ 0 $ 0
2007 $ 0 $ 0
2008 $ 0 $ 0


[1]The Texas Health and Human Services Commission, State of Texas Medicaid Expenditure Information (Austin, Texas, May 15, 2002), p. 1.

[2]Memorandum from Janet Rehnquist, Inspector General, U.S. Department of Health and Human Services, to Thomas Scully, administrator, Centers for Medicare and Medicaid Services, U.S. Department of Health and Human Services, Washington, D. C, December 27, 2001, p. 1.

[3]States with UPL plans include Alabama, Alaska, Arkansas, California, Florida, Georgia, Illinois, Indiana, Louisiana, Massachusetts, Michigan, Mississippi, Missouri, Montana, New Jersey, New Mexico, North Carolina, Ohio, Oregon, South Carolina, Texas and Washington. States with plans submitted include Colorado, Idaho, Iowa, Kentucky, Minnesota, Nebraska and New York. Center on Budget and Policy Priorities, “Administration’s Regulation to Reduce Medicaid ‘Upper Payment Limit’ Would Further Worsen State Budget Crises,” by Leighton Ku and Edwin Park (Washington, D.C., December 11, 2001), (Last visited on June 18, 2002.)

[4]Letter from Timothy M. Westmoreland, Director, Health Care Financing Administration, U.S. Department of Health and Human Services, to State Medicaid directors, Washington, D.C., July 26, 2000, (Last visited September 6, 2001.)

[5]Letter from Calvin G. Cline, Associate Regional Administrator, Division of Medicaid and State Operations, U.S. Department of Health and Human Services, Dallas, Texas, to Linda K. Wertz, State Medicaid Director, Texas Health and Human Services Commission, Austin, Texas, April 16, 2002; and letter from Calvin G. Cline, Associate Regional Administrator, Division of Medicaid and State Operations, U.S. Department of Health and Human Services, Dallas, Texas to Linda K. Wertz, State Medicaid Director, Texas Health and Human Services Commission, Austin, Texas, June 18, 2002.

[6]Memorandum from Janet Rehnquist to Thomas Scully, p. 1.