DEPARTMENT OF HEALTH & HUMAN SERVICES 
Health Care Financing Administration  
 Center for Medicaid and State Operations 
7500 Security Boulevard 
Baltimore, MD 21244-1850 
December 10, 1997  
Dear State Medicaid Director:  
This letter is one of a series that provides guidance on the implementation of the Balanced Budget Act of 1997 (BBA). 
Specifically, this letter outlines HCFAs policy regarding the disproportionate share hospital (DSH) allotments and how 
they apply to institutions for mental disease (IMD) or other mental health facilities under section 4721 of the Balanced 
Budget Act of 1997. For the purposes of this document, all references to fiscal years are Federal fiscal years.  
Section 4721(a) of the BBA replaces the current DSH allotment methodology with statutorily defined Federal DSH 
allotments. For Federal fiscal years 1998 through 2002, we use the Federal DSH allotments listed in the statute. For 
Federal fiscal years 2003 and thereafter, a States Federal DSH allotment will be equal to the States prior year Federal 
DSH allotment, if the amount is greater than 12 percent of medical assistance expenditures for the current Federal fiscal 
year. If the prior years Federal DSH allotment is less than 12 percent of current year medical assistance expenditures, the 
prior year allotment shall be increased by the Consumer Price Index for all Urban Consumers, capped at 12 percent of 
current year medical assistance expenditures.  
The following example explains how the Federal DSH allotments will be calculated for three States in FY 2003:  
   State A  State B  State C 
1. Prior Years Federal DSH Allotment  242,000,000  60,000,000  62,000,000 
2. Prior Years CPI-U  6.0%  6.0%  6.0% 
3. Calculated 2003 Federal DSH Allotment  256,520,000  63,600,000  65,720,000 
4. Projected Current Year Total Federal Medical 
1,500,000,000  1,200,000,000  525,000,000 
Assistance Expenditures as Adjusted by HCFA. 
5. Maximum Percentage  12.00%  12.0%  12.0% 
6. 12% of Adjusted Federal Medical Assistance 
180,000,000  144,000,000  63,000,000 
Expenditures (4 X 5) 
7. Actual 2003 Federal DSH Allotment  242,000,000  63,600,000  63,000,000 
 
State As prior year Federal DSH allotment of $242 million represents approximately 16% of the States total Federal 
medical assistance expenditures as estimated for 2003 on the HCFA 37 ($1.5 billion). Since State As prior year Federal 
DSH allotment exceeds 12 percent of total Federal medical assistance expenditure estimates for 2003, the States Federal 
DSH allotment for 2003 cannot be increased by the CPI and will remain $242 million.  
State Bs prior year Federal DSH allotment of $60 million represents approximately 5% of the States total Federal 
medical assistance expenditures as estimated on the HCFA 37 ($1.2 billion). Since State Bs prior year Federal DSH 
allotment doesnot exceed 12 percent of total Federal medical assistance expenditure estimates for 2003, the States 
Federal DSH allotment for 2003 will be $63.6 million, or $60 million increased by the CPI.  
State Cs prior year Federal DSH allotment of $62 million represents 11.8% of the States total Federal medical 
assistance expenditures as estimated for 2003 on the HCFA 37 ($525 million). Because $62 million is less than 12 percent 
of total Federal medical assistance expenditure estimates for 2003,the States Federal DSH allotment for 2003 can be 
increased by the CPI, but capped at 12 percent of total Federal medical assistance expenditures. State Cs Federal DSH 
allotment for FY 2003 is $63 million.  
Section 4721(b) of the BBA provides for a limit on the amount of Federal financial participation available for IMD DSH 
payments. Federal financial participation is not available for IMD DSH payments that exceed the lesser of:  
1.  A States 1995 total computable Mental Health DSH expenditures applicable to the 1995 DSH allotment as 
reported to the Secretary on the HCFA 64 as of January 1, 1997; or,    2.  The amount equal to the product of the States current year total computable DSH allotment (as calculated above) 
and the "applicable percentage."   
For FYs 1998-2000, the "applicable percentage " is defined as the ratio of 1995 total computable share mental health 
DSH payments (applicable to the 1995 DSH allotment) to the 1995 total computable share total DSH expenditures 
(applicable to the 1995 DSH allotment). For FYs 2001 and beyond, the applicable percentage is defined as the lesser of 
the applicable percentage as computed above, or 50% for fiscal year 2001; 40% for fiscal year 2002; and, 33% for each 
succeeding year. HCFA will publish annually a State-specific chart in the Federal Register which will contain each States 
IMD DSH limitation.  
HCFA understands that other DSH issues exist and will be sending a second letter addressing these issues in the near 
future. Comments or questions regarding this summary may be directed to Christine Hinds at (410) 786-4578 or Larry 
Reed at (410) 786-3325.  
Sincerely, 
/s/  
Sally K. Richardson   
Director   
Center for Medicaid and State Operations  
 
cc:  Jennifer Baxendell  National Governors Association  
Joy Wilson  National Conference of State Legislatures  
Lee Partridge  American Public Welfare Association  
All HCFA Regional Administrators  
All HCFA Associate Regional Administrators for Medicaid and State Operations