DEPARTMENT OF HEALTH & HUMAN SERVICES 
Centers for Medicare & Medicaid Services 
7500 Security Boulevard, Mail Stop S2-26-12 
Baltimore, Maryland 21244-1850 
Center for Medicaid and State Operations 
SMDL #02-013 
August 16, 2002 
Dear State Medicaid Director: 
I am writing to you to clarify policy regarding the Medicaid disproportionate share hospital (DSH) 
program.  Section 1902(a)(13) of the Social Security Act (the Act) provides that Medicaid 
inpatient hospital payment rates take into account the situation of hospitals that serve a 
disproportionate number of low-income patients with special needs. Section 1923 of the Act 
requires that state DSH programs recognize those hospitals that serve a disproportionate number of 
Medicaid and low-income patients by providing additional Medicaid payments to those hospitals 
that qualify. This letter clarifies questions states and providers have regarding the Medicaid DSH 
program, supplemental upper payment limit (UPL) payments, and payment for prisoner inmate 
care. 
Medicaid Supplemental UPL Payments and the Calculation of the OBRA 93 Uncompensated 
Care Cost Limits 
The Omnibus Budget Reconciliation Act of 1993 (OBRA 93) added section 1923(g) of the Act to 
require that states pay no more in DSH payments than 100 percent of each hospitals 
uncompensated care costs.  The Benefits Improvement and Protection Act (BIPA) of 2000 
increased the DSH limit to 175 percent of a hospitals uncompensated care for a period of two 
years for state fiscal years beginning after September 30, 2002, for all qualifying public hospitals. 
When a state calculates the uninsured costs and the Medicaid shortfall for the OBRA 93 
uncompensated care cost limits, it must reflect a hospitals costs of providing services to 
Medicaid patients and the uninsured, net of Medicaid payments (except DSH) made under the state 
plan and net of third party payments. States should be aware that Medicaid payments include any 
supplemental or enhanced upper payment limit payments paid to hospitals under the state plan. 
Not recognizing these Medicaid payments would overstate a hospitals amount of uninsured costs 
and Medicaid shortfall, thus inflating the OBRA 93 uncompensated care cost limits for that 
particular hospital. 
Prisoner Inmate Care and the Calculation of the OBRA 93 Uncompensated Care Cost Limits 
Section 1923(g) of the Social Security Act establishes a hospital-specific DSH limit.  It limits 
Medicaid payments to the costs incurred during the year of furnishing hospital services by the 
hospital to individuals who are either eligible for medical assistance under the State plan or have 
no health insurance or source of third party coverage for services provided during the year. 
Inmates of correctional facilities are wards of the State.  As such, the State is obligated to cover 
their basic economic needs (food, housing, and medical care) because failure to do so would be in 
violation of the eighth amendment of the Constitution. Therefore, because these individuals 
Page 2  State Medicaid Director  have a source of third party coverage, they are not uninsured, and the State cannot make DSH 
payments to cover the costs of their care. 
Further, this conclusion is consistent with Section 1905(a) of the Social Security Act and the 
regulations at 42 CFR 435.1008 and 435.1009, which prohibit (FFP) for services, provided to 
inmates of public institutions. To read section 1923(g) of the Social Security Act to permit 
additional DSH payments for the costs of prisoner care would directly conflict with this statutory 
prohibition, and effectively render the statutory prohibition meaningless. 
Calculation of the Medicaid Inpatient and Low-Income Utilization Formula 
Section 1923(b) of the Act spells out two formulas states must use to determine which hospitals, at 

a minimum, receive payments under the DSH program. The first formula, the Medicaid inpatient 

utilization rate formula, accounts for inpatient hospital days attributable to patients who for such 

days were eligible for medical assistance under a state plan approved under title XIX of the Act. 

The second formula, the low-income utilization rate formula, accounts for inpatient payments paid 

for patient services under a Medicaid state plan and charges for charity care. 

Section 701(b) of BIPA amended the low-income utilization rate formula and the Medicaid 

inpatient utilization rate formula.  Effective with DSH payments made on or after 

January 1, 2001, states must count Medicaid days of patients enrolled in managed care in the 

calculation of the Medicaid inpatient utilization rate, and count Medicaid payments paid by a 

managed care entity on behalf of the state in the calculation of the low-income utilization rate.

Please ensure that all DSH eligibility determinations made after January 1, 2001 comply with this 

requirement. 

If you have any questions regarding the clarification provided, please contact the National 

Institutional Reimbursement Team (NIRT) at (410) 786-3284 or submit your questions to the 

NIRT directly via e-mail (NIRT@cms.hhs.gov).

Sincerely, 
/s/ 
Dennis G. Smith 
Director 
cc: 

CMS Regional Administrators

CMS Associate Regional Administrators 
for Medicaid and State Operations  Page 3  State Medicaid Director

Lee Partridge

Director, Health Policy Unit

American Public Human Services Association

Joy Wilson

Director, Health Committee

National Conference of State Legislatures

Matt Salo

Director of Health Legislation

National Governors Association

Brent Ewig

Senior Director, Access Policy

Association of State and Territorial Health Officials

Jim Frogue

Acting Director, Health and Human Services Task Force

American Legislative Exchange Council

Trudi Matthews

Senior Health Policy Analyst

Council of State Governments