GAO 

United States Government Accountability Office

Report to the Ranking Member, 

Committee on Finance, U.S. Senate 

MEDICAID

Ongoing Federal 

Oversight of Payments 

to Offset 

Uncompensated 

Hospital Care Costs Is 

Warranted 

November 2009 

GAO-10-69 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

November 2009

MEDICAID

Ongoing Federal Oversight of Payments to Offset 

Uncompensated Hospital Care Costs Is Warranted 

Highlights of GAO-10-69, a report to the 

Ranking Member, Committee on Finance, 

U.S. Senate 

In addition to standard Medicaid 

payments, hospitals receive 

supplemental payments for 

uncompensated costs of care 

provided to uninsured and 

Medicaid patients. These 

supplemental payments are 

referred to as disproportionate 

share hospital (DSH) payments. 

Hospitals may also receive nonDSH supplemental payments. In 

fiscal year 2006, DSH payments 

totaled about $17 billion and nonDSH supplemental payments 

exceeded $6 billion. Hospitals’ DSH 

payments are limited to their 

uncompensated care costs, that is, 

their costs for covered care less 

Medicaid and other payments. 

Concerns have been raised about 

the accuracy of DSH payment 

limits, particularly as states may 

estimate limits using data that are 

not audited or up to date. GAO was 

asked to examine (1) how state 

DSH payments in 2006 compared to 

DSH payment limits, and 

(2) certain aspects of states’ 

calculations of 2006 DSH payment 

limits. In selected states, GAO 

analyzed state Medicaid payment 

data and interviewed officials from 

the states and from the Centers for 

Medicare & Medicaid Services 

(CMS), the federal agency that 

oversees Medicaid. 

What GAO Recommends

GAO recommends that CMS ensure 

that states account for all Medicaid 

payments, including non-DSH 

supplemental payments, when 

calculating DSH payment limits. 

CMS agreed with GAO’s 

recommendation. 

In four states selected on the basis of their large supplemental payments, 

state-reported DSH payments varied widely as a percentage of the hospitalspecific DSH payment limits that the states calculated. DSH payments to 682 

hospitals in California, Michigan, New York, and Texas ranged from less than 

1 percent to more than 169 percent of DSH payment limits. GAO identified a 

small number of hospitals in three states—California, New York, and Texas—

that received DSH payments in excess of their hospital-specific DSH payment 

limits, and officials from these states reported that they had taken or plan to 

take actions to correct the excess payments. The four states paid governmentoperated hospitals a relatively high proportion of their estimated DSH 

payment limits, with state-operated psychiatric hospitals called institutions 

for mental diseases receiving the largest relative payments in three states. 

In examining the four states’ calculations of 2006 DSH payment limits, GAO 

found that two of the four states’ hospital-specific DSH limits for 2006 were 

not calculated appropriately; that is, the states did not take into account all 

Medicaid payments the hospitals received. Specifically, when estimating 

hospital uncompensated care costs for the purpose of calculating their 2006 

DSH payment limits, for 91 hospitals in California and 88 hospitals in Texas 

the states did not, as required, take into account the non-DSH supplemental 

Medicaid payments the hospitals had received. In addition, in light of a series 

of reports from the Department of Health and Human Services’ Office of 

Inspector General that found that a number of states had used data that did 

not accurately represent hospitals’ costs, GAO examined whether the four 

states used updated data for calculating DSH payment limits, and had their 

state-calculated DSH payment limits or the data used to calculate them 

independently audited. GAO found that none of the four states (1) consistently 

updated 2006 hospital DSH payment limits and (2) subjected hospital DSH 

payment limits to an independent audit. 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. 

Under a final rule that CMS issued in December 2008, during the course of 

GAO’s review, all states will be required to use actual cost data for hospitalspecific DSH payment limits and have their DSH payment limits independently 

audited. Although the 2008 final rule set a December 2009 deadline for states 

to report to CMS the results of their independent audits of 2005 and 2006 DSH 

payments, there will be a transition period before the agency will take any 

action on such reports. California’s experience indicates that implementing 

the requirements of CMS’s 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 over 49 percent after applying a 

methodology based on audited and updated data. 

View GAO-10-69 or key components.

For more information, contact Katherine Iritani 

at (202) 512-7114 or iritanik@gao.gov. 
Page i GAO-10-69 

Contents 

Letter 1

Background 7 

DSH Payments Varied Widely Relative to State-Calculated Hospital 

DSH Payment Limits, with Relatively Higher Payments Made to 

Government-Operated Hospitals 13 

Not All Reviewed States Accounted for Non-DSH Supplemental 

Payments, Consistently Updated DSH Payment Limits, or 

Subjected DSH Payment Limits to Independent Audits 22 

Conclusions 27 

Recommendations for Executive Action 28 

Agency and External Comments and Our Evaluation 28 

Appendix I Objectives, Scope, and Methodology 31 

Appendix II Issues Related to Disproportionate Share Hospital 

Payments in Two States 34 

Appendix III Comparison of Disproportionate Share Hospital 

Payments to Payment Limits by Categories of 

Hospitals 35 

Appendix IV Comments from the Department of Health & Human 

Services 41 

Appendix V GAO Contact and Staff Acknowledgments 45 

Related GAO Products 46 

 Medicaid Supplemental Payments 
Tables 

Table 1: Examples of Congressional Actions to Control DSH 

Spending and Improve Accountability of DSH Payments, 

1990 through 2003 11 

Table 2: Number of Hospitals That Received a DSH Payment, 

Range of DSH Payments as a Percentage of StateCalculated Hospital DSH Payment Limits, and Range of 

DSH Payment Amounts by State, State Fiscal Year 2006 15 

Table 3: Comparison of Federal Share of DSH Payments to IMDs to 

IMD Payment Limits for Federal Fiscal Year 2006, by State 19 

Table 4: Audit Status of the Sources of Data Used by States in 

Calculating 2006 DSH Payment Limits, by State 25 

Table 5: Number of Hospitals and DSH Payments as a Percentage 

of State-Calculated DSH Payment Limits by Operating 

Organization and State, State Fiscal Year 2006 36 

Table 6: Number of Hospitals and DSH Payments as a Percentage 

of State-Calculated DSH Payment Limits by Hospital Type 

and State, State Fiscal Year 2006 37 

Table 7: DSH Payments, State-Calculated DSH Payment Limits, and 

DSH Payments as a Percentage of Limits Grouped by 

State, Operating Organization, and Type of Hospital, State 

Fiscal Year 2006 38 

Table 8: Hospitals’ Share of Total Uncompensated Care Costs, 

Hospitals’ Share of Total DSH Payments, and Total DSH 

Payments by State, Operating Organization, and Hospital 

Type, State Fiscal Year 2006 39 

Table 9: DSH Payments, Non-DSH Supplemental Payments, and 

Total Supplemental Payments by State, Operating 

Organization, and Hospital Type, State Fiscal Year 2006 40 

Figures 

Figure 1: Basic Components for Calculating Hospital DSH Payment 

Limits 10 

Figure 2: DSH Payments as a Percentage of State-Calculated DSH 

Payment Limits, by State and Operating Organization, 

State Fiscal Year 2006 17 

Figure 3: DSH Payments as a Percentage of State-Calculated DSH 

Payment Limits by State and Hospital Type, State Fiscal 

Year 2006 18 

Page ii GAO-10-69 Medicaid Supplemental Payments
Figure 4: Three States’ Standard Medicaid and Medicaid DSH 

Payments to Government-Operated IMDs as a Percentage 

of the Hospitals’ Total Operating Costs, State Fiscal Year 

2006 21 

Abbreviations 

CMS Centers for Medicare & Medicaid Services 

DSH disproportionate share hospital 

FMAP federal medical assistance percentage 

HHS U.S. Department of Health & Human Services 

IMD institution for mental diseases 

MMA Medicare Prescription Drug, Improvement, and 

 Modernization Act 

OIG Office of Inspector General 

UPL upper payment limit 

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Page iii GAO-10-69 Medicaid Supplemental Payments
Page 1 GAO-10-69 

 

United States Government Accountability Office

Washington, DC 20548 

 

November 20, 2009 

The Honorable Charles E. Grassley 

Ranking Member 

Committee on Finance 

United States Senate 

Dear Senator Grassley: 

Medicaid, a program that finances health care for certain low-income 

individuals, is a significant source of funding for hospitals, which receive 

billions of dollars both in standard Medicaid payments related to specific 

services for Medicaid patients and in Medicaid supplemental payments.1

The federal government and the states share in the cost of Medicaid, with 

the federal government matching at least 50 percent of state expenditures 

for Medicaid services and administration. In 2003, we designated Medicaid 

as a high-risk program, in part because of state financing arrangements in 

which states made large, inappropriate supplemental payments to 

government providers.2

 A large component of Medicaid supplemental 

payments is disproportionate share hospital (DSH) payments, which are 

designed to help offset hospitals’ uncompensated costs for serving 

Medicaid and uninsured low-income individuals. Many state Medicaid 

programs have also established other supplemental payments, which are 

also funded in part with federal dollars, to supplement standard Medicaid 

payments and help offset the costs of care provided to individuals covered 

by Medicaid. For example, over the years many states have used the 

flexibility under Medicaid’s upper payment limit (UPL) to make 

supplemental payments to hospitals and other providers that were 

separate from and in addition to standard Medicaid payments and DSH 

supplemental payments. For purposes of this report, we refer to these 

other Medicaid supplemental payments as non-DSH supplemental 

payments. In May 2008, we reported that states made at least $23 billion in 

Medicaid DSH and non-DSH supplemental payments during fiscal year 

1

Medicaid supplemental payments are payments separate from and in addition to those 

made at states’ standard Medicaid rates. 

2

GAO, High-Risk Series: An Update, GAO-09-271 (Washington, D.C.: Jan. 22, 2009). 

 Medicaid Supplemental Payments 
 

2006—nearly three-quarters as DSH payments—but that the exact amount 

was unknown because states did not report all their payments.3

Congress has taken certain actions to help ensure the integrity of Medicaid 

DSH payments. For example, in 1991, Congress limited overall federal 

expenditures for DSH payments and established DSH allotments for states, 

which are annual limits on federal matching funds available for payments 

made by each state to qualifying hospitals.4

 In 1993, Congress created a 

hospital DSH payment limit capping the amount of DSH payments a state 

may pay to an individual hospital.5

 As a result, under federal law, a 

hospital’s DSH payments may not exceed a hospital’s uncompensated care 

costs; that is, the costs incurred in furnishing hospital services during the 

year to Medicaid patients and the uninsured, net of Medicaid payments 

made to the hospital and of payments made by uninsured patients for 

those services.6

In response to continuing concerns about the integrity of DSH payments, 

Congress and the Centers for Medicare & Medicaid Services (CMS), the 

agency within the Department of Health and Human Services (HHS) that 

oversees the Medicaid program, took additional steps in the late 1990s and 

early to mid-2000s to ensure the appropriateness of states’ DSH payments 

to hospitals. 

• In 1997, Congress created a second type of DSH payment limit, which 

restricted the total amount of DSH payments a state could make to 

institutions for mental diseases (IMD) or other mental health facilities as a 

group.7

 

3

GAO, Medicaid: CMS Needs More Information on the Billions of Dollars Spent on 

Supplemental Payments, GAO-08-614 (Washington, D.C.: May 30, 2008). The American 

Recovery and Reinvestment Act of 2009 increased the amount of federal DSH funding 

available to individual states for fiscal years 2009 and 2010 by $456 million, according to 

Congressional Budget Office estimates. Pub. L. No. 111-5, Div. B, § 5002, 123 Stat. 115, 502-3 

(2009) (codified at 42 U.S.C. § 1396r-4(f)(3)). 

4

Medicaid Voluntary Contribution and Provider-Specific Tax Amendments of 1991, Pub. L. 

No. 102-234, § 3, 105 Stat. 1793, 1799-1803 (1991) (codified, as amended, at 42 U.S.C. 

§ 1396r-4(f)). 

5

Omnibus Budget Reconciliation Act of 1993, Pub. L. No. 103-66, § 13621, 107 Stat. 312, 629-

632 (1993) (codified, as amended, at 42 U.S.C. § 1396r-4(g)). 

6

42 U.S.C. § 1396r-4(g). 

7

Balanced Budget Act of 1997, Pub. L. No 105-33, § 4721, 111 Stat. 251, 511-514 (1997) 

(codified, as amended, at 42 U.S.C. § 1396r-4(h)). 

Page 2 GAO-10-69 Medicaid Supplemental Payments
 

• In 2002, CMS clarified in a letter to state Medicaid directors8 that states 

must account for non-DSH Medicaid supplemental payments when 

estimating uncompensated care costs; that is, non-DSH supplemental 

payments must be considered Medicaid payments for the purpose of 

estimating uncompensated care costs and calculating the associated 

hospital DSH payment limits.9

• In 2003, Congress mandated improved accountability for DSH payments 

under the Medicare Prescription Drug, Improvement, and Modernization 

Act of 2003 (MMA), by providing that the Secretary of HHS require, 

beginning in federal fiscal year 2004, states to submit annual, independent 

certified audits of their DSH programs and annually report information on 

their DSH programs. Required report information includes the hospitals 

that received DSH payments, the amount of DSH payments they received, 

and other information the Secretary determines is necessary to ensure the 

appropriateness of states’ DSH payments.10 In 2005, CMS issued a 

proposed rule in response to these DSH auditing and reporting 

requirements.11 As discussed later in this report, CMS did not finalize this 

rule until December 2008, during the course of this review.12

Concerns about state DSH programs and CMS’s oversight and 

accountability for DSH and non-DSH supplemental payments have 

continued. In 2006, HHS’s Office of Inspector General (OIG) published a 

summary of findings from prior reviews of 10 states’ DSH payments. The 

 

8

CMS provides guidance to states about Medicaid program requirements in several ways, 

including through a published State Medicaid Manual, standard letters issued to all state 

Medicaid directors, and technical guidance manuals on particular topics. 

9

See Centers for Medicare & Medicaid Services. Letter to State Medicaid Directors (Aug. 16, 

2002). 

10Pub. L. No. 108-173, § 1001(d), 117 Stat. 2066, 2430-2431 (2003) (codified, as amended, at 

42 U.S.C. § 1395r-4(j)). In 1997, Congress had previously required that states provide an 

annual report to the Secretary of Health and Human Services describing DSH payments 

made to each hospital. Balanced Budget Act of 1997, Pub. L. No. 105-33, § 4721, 11 Stat. 251, 

511-514 (1997) (codified, as amended, at 42 U.S.C. § 1396r-4(a)(2)). However, according to 

CMS officials, reporting on DSH payments was inconsistent among the states. 

11Medicaid Program: Disproportionate Share Hospital Payments, 70 Fed. Reg. 50,262 

(Aug. 26, 2005). 

12Medicaid Program: Disproportionate Share Hospital Payments, 73 Fed. Reg. 77,904 

(Dec. 19, 2008). Because this rule was not finalized until 2008, we did not consider the 

related provisions of the MMA or this rule as requirements for the 2006 payments that we 

reviewed. 

Page 3 GAO-10-69 Medicaid Supplemental Payments
 

HHS OIG found that one state’s DSH payment limits and associated DSH 

payments were not accurate because the state did not account for nonDSH supplemental payments. They also found the states that used 

historical cost and payment data to estimate hospitals’ uncompensated 

care costs would have significantly lowered their DSH payments and 

payment limits if they had updated the limits with actual cost data once 

they became available. In our May 2008 report, we reported additional 

concerns about CMS’s ability to oversee state DSH programs given the 

lack of information it collected on states’ Medicaid supplemental 

payments. We found that CMS did not require states to report hospitalspecific data, such as data on the DSH and non-DSH supplemental 

payments made to each hospital. Such data are needed to ensure that 

(1) states account for non-DSH supplemental payments when calculating 

hospital uncompensated care costs and associated DSH payment limits 

and (2) DSH payments to individual hospitals do not exceed these limits.13

This report responds to your request for information on how states’ DSH 

payments to individual hospitals and categories of hospitals compare to 

hospital DSH payment limits and on state methods for estimating 

uncompensated care costs.14 For selected states, this report examines the 

following. 

1. How 2006 DSH payments to individual hospitals and categories of 

hospitals compare to 2006 hospital DSH payment limits. 

2. Certain aspects of states’ methods for estimating uncompensated care 

costs for the purpose of calculating hospitals’ 2006 DSH payment 

limits. 

To determine how DSH payments to hospitals and categories of hospitals 

compared to hospital DSH payment limits in selected states, we obtained 

state-reported DSH payments for state and federal fiscal year 2006 and 

state-calculated DSH payment limits for fiscal year 2006 for all hospitals,15

 

13In addition, we found that state reporting of non-DSH supplemental payments to CMS was 

incomplete, in that not all states were reporting their payments to CMS. 

14For purposes of this report, we categorized hospitals by operating organization 

(government or private), by hospital type (children’s, general, and IMD), and by 

combinations of operating organization and hospital type. 

15In this report, we refer to the hospital DSH payment limits that were calculated by the 

states and reported to us as state-calculated DSH payment limits. 

Page 4 GAO-10-69 Medicaid Supplemental Payments
 

including IMDs, that received a DSH payment.16 We obtained this 

information for four selected states—California, Michigan, New York, and 

Texas—which were included in our May 2008 report on Medicaid 

supplemental payments. These states represented those that reported 

making the largest total amount of DSH and non-DSH supplemental 

payments in 2005. Although Massachusetts was included in our May 2008 

report, we excluded the state from this review because it did not make 

DSH payments in 2006.17 For the four states selected for this review, we 

examined DSH payments as a percentage of hospital DSH payment limits 

and determined whether these payments exceeded the limits.18 We also 

obtained information from a CMS database that allowed us to categorize 

hospitals by operating organization (government or private) and hospital 

type (children’s, general, or IMD) and performed additional comparisons 

between payments and hospital-specific limits across different hospital 

categories.19 Because of past concerns about DSH payments to stateoperated IMDs, we identified total DSH payments made to IMDs in each 

state and compared the federal share of these payments to each state’s 

IMD DSH payment limit for federal fiscal year 2006 as published in the 

Federal Register.

20 We also compared Medicaid and DSH payments to 

these hospitals to state data on each hospital’s total operating costs. We 

reviewed relevant Medicaid laws, regulations, and policy documents and 

 

16We obtained both state and federal fiscal year data because facility-specific DSH payment 

limits are applied for the state fiscal year and federal IMD payment limits are applied for 

the federal fiscal year. 

17Under the authority of an approved Medicaid section 1115 demonstration, Massachusetts 

does not make DSH payments to hospitals for fiscal years 2006 through 2011. 

18We included as DSH payments all payments that a state counted against its 2006 hospital 

DSH payment limits. Before state fiscal year 2006, private hospitals in California received a 

substantial amount in DSH payments, but beginning in state fiscal year 2006, the state 

converted nearly all of these payments to non-DSH supplemental payments, referred to as 

“DSH replacement” payments. Our analysis includes a total of $160 in DSH payments that 

California made to 96 private hospitals, but does not include the more than $464 million in 

DSH replacement payments the state made to these hospitals as non-DSH supplemental 

payments. For the purpose of this analysis, we considered the $464 million as non-DSH 

supplemental payments. 

19To calculate DSH payments as a percentage of state-calculated DSH limits for a category 

of hospitals, we divided the sum of the DSH payments made to all hospitals in the category 

by the sum of these hospitals’ DSH payment limits. 

20Medicaid Program: Fiscal Year Disproportionate Share Hospital Allotments and 

Disproportionate Share Hospital Institutions for Mental Disease Limits, 72 Fed. 

Reg. 73,831 (Dec. 28, 2007). 

Page 5 GAO-10-69 Medicaid Supplemental Payments
 

discussed with CMS officials the federal requirements on DSH payment 

limits for individual hospitals and for IMDs as a group. 

We examined two aspects of selected states’ methods for calculating DSH 

payment limits: (1) the extent to which states accounted for non-DSH 

supplemental payments, as required, when estimating uncompensated 

care costs for the purpose of calculating 2006 hospital DSH payment 

limits, and (2) the extent to which states updated hospital DSH payment 

limits with actual cost data for 2006 when they became available and had 

their state-calculated hospital DSH payment limits and the data used to 

calculate them independently audited. To assess these aspects of state 

hospital DSH payment limit calculations, we reviewed documentation of 

state methods in state Medicaid plans and state policy guidance provided 

by state officials. We reviewed relevant federal Medicaid policy documents 

and discussed related CMS policies with CMS officials. We also obtained 

and reviewed the data and calculations states used to estimate 

uncompensated care costs for state fiscal year 2006. We discussed state 

methods and data with state officials and reviewed documentation needed 

to determine the extent to which states updated 2006 DSH payment limits 

with 2006 cost and payment data, when they became available, and had 

their payment limits independently audited. In addition, we determined the 

extent to which the data sources states used to calculate DSH payment 

limits were subject to independent audit, for example by a public 

accounting firm or a state auditing agency. 

Beyond these two aspects of state methods for estimating hospital 

uncompensated care costs, we did not examine the states’ methods for 

estimating uncompensated care costs. In addition, we did not 

independently test data used by states to estimate uncompensated care 

costs for the purpose of calculating DSH payment limits. That is, we did 

not audit states’ data sources or determine the extent to which they 

accurately captured costs and payments related to inpatient and 

outpatient services to Medicaid enrollees or low-income uninsured 

individuals. We requested that the states review the data they reported to 

us and confirm that they were complete and accurate. We also checked for 

missing data and inconsistencies in the data. We determined that the state 

data on 2006 DSH payments and 2006 state-calculated hospital DSH 

payment limits were sufficiently reliable for the purposes of comparing 

state-reported DSH payments to state-calculated DSH payment limits. The 

information we obtained from the four states cannot be generalized to all 

states. 

Page 6 GAO-10-69 Medicaid Supplemental Payments
 

We conducted this performance audit from June 2008 through October 

2009 in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe 

that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives. 

Title XIX of the Social Security Act established Medicaid as a federal-state 

partnership that finances health care for certain low-income individuals, 

including children, families, the aged, and the disabled.21 In 2008, Medicaid 

provided health coverage for over 62 million individuals. Within broad 

federal requirements, each state operates and administers its Medicaid 

program in accordance with a CMS-approved state Medicaid plan. These 

plans detail the populations served, the services covered (such as 

physician services, nursing home care, and inpatient hospital care), and 

the methods used to calculate payments to providers. Qualified health care 

providers are paid for rendering covered services to Medicaid 

beneficiaries.22 The federal government matches state Medicaid 

expenditures for services according to a state’s federal medical assistance 

percentage (FMAP). The FMAP is based on a statutory formula under 

which the federal share of a state’s Medicaid expenditures for services 

may range from 50 to 83 percent.23 

Background 

All state Medicaid programs make supplemental payments—that is, 

payments that are separate from and in addition to those made at a state’s 

standard payment rates—to certain providers. For the purposes of this 

 

21Medicaid programs are administered by the 50 states, the District of Columbia, Puerto 

Rico, and 4 U.S. territories. 

22In order to receive reimbursement for services, providers must have a valid Medicaid 

provider agreement in place with the state. 

23States with lower per capita incomes receive a higher FMAP. 42 U.S.C. §§ 1396b(a)(1), 

1396d(b). For the period covered in this review, the federal government reimbursed 

California and New York at 50 percent, Michigan at 57 percent, and Texas at 62 percent of 

state expenditures for Medicaid services. States also may be eligible for an increased FMAP 

under the American Recovery and Reinvestment Act of 2009 for 27 months from October 1, 

2008, through December 31, 2010, but this increased FMAP does not apply to DSH 

payments. Pub. L. No. 111-5, Div. B, § 5001, 123 Stat. 115, 496-502 (2009) (codified at 42 

U.S.C. § 1396d note). 

Page 7 GAO-10-69 Medicaid Supplemental Payments
 

report, we classified supplemental payments into two general categories: 

DSH and non-DSH. 

• DSH payments. Under federal law, states are required to make DSH 

payments to hospitals that serve a disproportionate share of low-income 

individuals.24 Congress established DSH payments to hospitals in 1981 

when changes were made to the methods states could use to determine 

Medicaid hospital payment rates, in response to concerns about the effects 

those changes could have on hospitals serving large numbers of Medicaid 

and low-income individuals.25

• Non-DSH payments. Most states also make non-DSH supplemental 

payments to providers, though unlike DSH payments, these payments are 

not required. In reviewing the purposes of the non-DSH supplemental 

payment programs in five states, we reported in May 2008 that in some 

cases, the states’ reported purposes for their non-DSH programs were 

similar to those of DSH programs in that they provided supplemental 

payments to hospitals serving Medicaid, indigent, or uninsured individuals, 

or a combination of these groups. Non-DSH supplemental payments 

include those made under Medicaid’s UPL.26 Federal Medicaid regulations 

define the UPL as a ceiling on federal matching of Medicaid 

 

24In establishing hospital payment rates, states must take into account the situation of 

hospitals that serve a disproportionate number of low-income patients with special needs. 

42 U.S.C. § 1396a(a)(13)(A)(iv). States are required to make DSH payments to DSH 

hospitals, which are defined as any hospital that has a Medicaid inpatient utilization rate of 

at least 1 percent and meets additional criteria, such as (i) has a Medicaid inpatient 

utilization rate of at least one standard deviation greater than the average rate for other 

Medicaid-participating hospitals in the state or (ii) has a low-income utilization rate of 

more than 25 percent. 42 U.S.C. §§ 1396r-4(b), (d)(3). Some states operate HHS-approved 

1115 Medicaid demonstrations under which the state does not make DSH payments 

directly to hospitals. For example, Tennessee and Hawaii incorporate a portion of their 

DSH funding into payments to managed care organizations and all of Massachusetts’s DSH 

funds are used to support a special fund for safety net health care providers. 

25Omnibus Budget Reconciliation Act of 1981, Pub. L. No. 97-35, § 2173, 95 Stat. 357, 808-809 

(1981) (codified, as amended, at 42 U.S.C. § 1396a(a)(13)). Congress has since created and 

modified requirements for the DSH program at various times. For example, in 1987, 

Congress further formalized the DSH program by establishing criteria for the program 

including (i) requiring states to submit state plan amendments authorizing DSH payments, 

and (ii) providing a definition for DSH hospitals. Omnibus Budget Reconciliation Act of 

1987, Pub. L. No. 100-203, § 4112, 101 Stat. 1330 (1987) (codified, as amended, at 42 U.S.C. 

1396a note). 

26Some states also make non-DSH supplemental payments under Medicaid demonstrations 

authorized under section 1115 of the Social Security Act. 

Page 8 GAO-10-69 Medicaid Supplemental Payments
 

expenditures.27 This ceiling is based on what Medicare—the federal health 

care program for seniors aged 65 and older and some disabled 

individuals—would pay for comparable services. States’ standard paymen

rates for providers are, in practice, often less than the UPL, and states 

have established programs to make non-DSH supplemental payments to 

providers that are above standard Medicaid payments but below the UP

t 

L. 

on has been focused on Medicaid supplemental payments, in 

l 

Under federal Medicaid law, states must restrict DSH payments made to 

r 

rred in 

by 

 on 

 

Much attenti

part because of their growth and size and also because of concerns that 

we and others have raised. From 1994 through 2007, we issued reports on

various inappropriate payment arrangements whereby states received 

federal matching funds by making large, often temporary, supplementa

payments to certain government providers.28 In May 2008, we found that 

CMS’s Medicaid expenditure reports showed that between October 2005 

and September 2006 states made approximately $17 billion and $6 billion 

in DSH and non-DSH supplemental payments, respectively, but states did 

not report all non-DSH payments. 

an individual hospital to a hospital’s annual uncompensated care costs fo

hospital services provided to Medicaid and uninsured patients.29

Specifically, uncompensated care costs are defined as those incu

furnishing inpatient and outpatient services by the hospital to individuals

who either are eligible for Medicaid or have no health insurance (or other 

source of third-party coverage), net of any Medicaid payments and 

payments by uninsured patients. Hospitals collect cost information 

inpatient, outpatient, and other types of services as well as information

the amount of services provided to Medicaid, uninsured, and other patient 

populations. States then combine the cost information with information on 

27Separate UPLs exist for inpatient services provided by hospitals, nursing facilities, and 

intermediate care facilities for the mentally retarded, and outpatient and clinic services 

provided by hospitals and clinics. These UPLs are applied on an aggregate basis to three 

categories of providers: local-government-owned or -operated facilities, state-governmentowned or -operated facilities, and privately owned and operated facilities. See 42 C.F.R. 

§§ 447.272, 447.321. 

28A list of related GAO products can be found at the end of this report. 

2942 U.S.C. § 1396r-4(g). There is an exception to this requirement. Congress authorized 

certain public hospitals in California to receive DSH payments up to 175 percent of their 

uncompensated care costs associated with Medicaid and uninsured patients. Medicare, 

Medicaid, and SCHIP Balanced Budget Refinement Act of 1999, Pub. L. No. 106-113, App. F, 

§ 607, 113 Stat. 1501, 1501A-396 (1999) (codified, as amended, at 42 U.S.C. § 1396r-4 note). 

Page 9 GAO-10-69 Medicaid Supplemental Payments
 

the amount of services provided to Medicaid and uninsured patients to 

estimate the costs related to providing hospital services to these patient

For example, when estimating inpatient costs for Medicaid patients, a 

state may multiply the average cost of a day of inpatient care by the 

number of days of inpatient care provided to Medicaid patients. Gene

to determine the uncompensated care costs for Medicaid patients, states 

subtract Medicaid payments from the hospital’s estimated Medicaid 

costs.

s. 

rally, 

y 

Figure 1: Basic Components for Calculating Hospital DSH Payment Limits 

30 Through this process, states calculate hospital DSH payment 

limits. The methods and data sources used to determine uncompensated 

care costs for the purpose of calculating DSH payment limits may vary b

state. Figure 1 illustrates the basic components of the hospital DSH 

payment limits as identified by CMS. 

costs.30 Through this process, states calculate hospital DSH payment 

limits. The methods and data sources used to determine uncompensated 

care costs for the purpose of calculating DSH payment limits may vary b

state. Figure 1 illustrates the basic components of the hospital DSH 

payment limits as identified by CMS. 

a

Hospital-specific DSH limit calculations must account for situations where Medicaid revenues exceed 

 

Medicaid costs. When calculating a hospital’s DSH payment limit, a state must account for such a 

Medicaid surplus by subtracting it from the hospital’s uncompensated care costs for uninsured 

patients. 

30Payments received from or on behalf of Medicaid patients, such as out-of-pocket 

payments and Medicare payments for patients who are eligible for both Medicaid and 

Medicare, are also subtracted from estimated Medicaid costs. 

Source: GAO analysis of CMS information.

Medicaid costs include:

• Inpatient and outpatient fee-for-service (FFS) Medicaid costs

• Inpatient and outpatient Medicaid managed care costs

Medicaid revenues include:

• Inpatient and outpatient Medicaid FFS payments

• Payments from Medicaid managed care organizations

• Medicaid non-DSH supplemental payments

• Other payments made on behalf of Medicaid-eligible patients

Uninsured costs include:

• Inpatient and outpatient costs for hospital services provided 

 to patients with no source of third-party coverage

Uninsured revenues include:

• Revenues from or on behalf of patients with no source of 

 third-party coverage

•

U

• 

 Estimated uncompensated care costs for Medicaid patientsa

+ Estimated uncompensated care costs for uninsured patients

= Hospital DSH payment limit

Medicaid costs

- Medicaid revenues

= Estimated uncompensated care costs for 

Medicaid patients

•

M

•

•

•

•

U

•

care costs for

Uninsured costs

- Uninsured revenues

= Estimated uncompensated care costs for 

uninsured patients

Page 10 GAO-10-69 Medicaid Supplemental Payments
 

Since the early 1990s, a variety of legislative actions have been taken at the 

federal level to control federal spending and improve accountability of 

DSH payments, including the 1993 hospital DSH payment limits and the 

1997 payment limit for IMDs as a group (see table 1). Within these 

requirements states have broad flexibility in how they distribute their DSH 

funding among DSH-eligible hospitals. 

Table 1: Examples of Congressional Actions to Control DSH Spending and Improve Accountability of DSH Payments, 1990 

through 2003 

Congressional action Condition 

In 1991, Congress limited overall federal expenditures for DSH 

and established allotments limiting federal DSH funds to individual 

states.a

Rapid growth in DSH expenditures, from just under $1 billion in 

1990 to almost $17 billion in 1992. 

In 1993, Congress set a limit on DSH payments to individual 

hospitals equivalent to a hospital’s uncompensated care costs.b

Inappropriate payment arrangements through which some states 

made unusually large DSH payments to government hospitals, 

which then returned the bulk of the payments to the state. 

In 1997, Congress limited the total amount of DSH payments 

states could make to IMDs or other mental health facilities.c

A large share of DSH payments were paid to state-operated 

psychiatric hospitals, where they were used to pay for services not 

covered by Medicaid or were returned to the state treasuries. 

In 1997, Congress required that states provide an annual report to 

the Secretary of HHS describing DSH payments made to each 

hospital.d 

In 2003, Congress provided that the Secretary was to require 

states to submit annual DSH reports and independent certified 

audits of DSH payments.e

Lack of information on state DSH programs, including the 

hospitals receiving DSH payments and the amount of DSH 

payments received. 

Source: GAO. 

a

Medicaid Voluntary Contribution and Provider-Specific Tax Amendments of 1991, Pub. L. No. 102-

234, § 3, 105 Stat. 1793, 1799-1803 (1991) (codified, as amended, at 42 U.S.C. § 1396r-4(f)). 

Congress capped total annual federal DSH payments at 12 percent of total Medicaid expenditures, 

excluding administrative costs. Out of this amount, each state was to receive its federal allotment 

based on a formula, which generally was capped at 12 percent of the state’s total Medicaid 

expenditures for the federal fiscal year. 

b

Omnibus Budget Reconciliation Act of 1993, Pub. L. No. 103-66, § 13621, 107 Stat. 312, 629-632 

(1993) (codified, as amended, at 42 U.S.C. § 1396r-4(g)). 

c

Balanced Budget Act of 1997, Pub. L. No. 105-33, § 4721, 111 Stat. 251, 511-514 (1997) (codified, 

as amended, at 42 U.S.C. § 1396r-4(h)). 

d

Balanced Budget Act of 1997, Pub. L. No. 105-33, § 4721(c) 111 Stat. 251, 514 (1997) (codified, as 

amended, at 42 U.S.C. § 1396r-4(a)(2)). 

e

Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Pub. L. No. 108-173, 

§ 1001(d), 117 Stat. 2066, 2430-2431 (2003) (codified, as amended, at 42 U.S.C. § 1395r-4(j)). In 

2005, CMS issued a proposed rule to implement the statutory auditing and reporting requirements 

and a final rule implementing these requirements was published in December 2008, during the course 

of this review. 

Page 11 GAO-10-69 Medicaid Supplemental Payments
 

Despite these actions, concerns have continued regarding state DSH 

programs, particularly about the accuracy of states’ calculation of hospitalspecific DSH payment limits and the extent to which CMS ensures federal 

requirements are followed. During the early 2000s, the HHS OIG reported 

significant overpayments to hospitals resulting from states not using 

accurate methods or data for estimating hospitals’ uncompensated care 

costs for the purpose of calculating DSH payment limits. Specifically, in a 

series of reports issued between 2001 and 2004, the OIG found that (1) one 

state did not account for non-DSH supplemental payments when 

calculating DSH payment limits, and (2) some states calculated DSH 

payment limits using historical data that were not updated, even when cost 

data from the relevant payment year were available.31 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.32

The OIG stated that the lack of specific federal requirements contributed 

to excess DSH payments, and recommended that CMS issue regulations 

requiring states ensure that DSH payments are updated to reflect actual 

incurred costs. In response to the OIG report, CMS indicated that when it 

finalized its 2005 proposed DSH rule, which addressed the auditing and 

reporting requirements in the MMA, it would require states to ensure that 

DSH payment limits are updated to reflect cost and payment data for the 

payment year. In addition, our May 2008 report found that five states 

making large supplemental payments had multiple supplemental payment 

programs from which they made payments and that payments were 

concentrated on a small proportion of providers. We also found that some 

providers received substantial payments from more than one program, and 

that CMS was not collecting the facility-specific information needed to 

ensure that states’ payments were not exceeding the hospital-specific DSH 

limits. We recommended that CMS expedite issuance of a final rule in 

response to the auditing and reporting requirements in the MMA. The 

 

31The HHS OIG review of 10 states’ DSH programs resulted in 19 reports issued between 

2001 and 2004 and culminated in a 2006 summary report. HHS OIG, Audit of Selected 

States’ Medicaid Disproportionate Share Hospital Programs, A-06-03-00031(Washington 

D.C.: March 2006). The OIG based its analyses of updating DSH payment limits on federal 

statutory language stating that hospital DSH payment limits must be based on “costs 

incurred during the year of providing hospital services.” 

32The OIG found that by not accounting for non-DSH supplemental payments when 

calculating DSH payment limits, one state made DSH payments exceeding hospital DSH 

payment limits by $46 million. The OIG also found that by not updating historical data used 

to estimate uncompensated care costs with actual costs, four states made DSH payments 

exceeding hospital DSH payment limits by about $679 million. 

Page 12 GAO-10-69 Medicaid Supplemental Payments
 

agency issued the final rule in December 2008, during the course of this 

review. 

In the four states we reviewed, state DSH payments varied widely relative 

to the state-calculated DSH payment limits. The four states paid 

government-operated hospitals a relatively high proportion of their statecalculated DSH limits. State-operated IMDs received the largest relative 

payments in three states. 

DSH Payments Varied 

Widely Relative to 

State-Calculated 

Hospital DSH 

Payment Limits, with 

Relatively Higher 

Payments Made to 

Government-Operated 

Hospitals 

Four States’ 2006 DSH 

Payments Ranged Widely 

as a Percentage of StateCalculated Hospital DSH 

Payment Limits 

When we compared 2006 DSH payments to the 2006 hospital DSH payment 

limits calculated by the four selected states—California, Michigan, New 

York, and Texas—we found that, for the 682 hospitals that received DSH 

payments in these states, DSH payments varied widely relative to statecalculated DSH payment limits. Hospitals’ DSH payments ranged from less 

than 1 percent to more than 169 percent of state-calculated DSH payment 

limits. Three states—California, New York, and Texas—made DSH 

payments to a small number of hospitals that exceeded the 2006 DSH 

payment limits.33 Specifically, 5 of 147 hospitals in California, 1 of 226 

hospitals in New York, and 9 of 182 hospitals in Texas received payments 

in 2006 that exceeded their state-calculated DSH payment limits. However, 

officials from these states reported that they had taken or planned to take 

the following actions to correct the excess payments: 

• Officials from California and New York reported that, as of September 

2009, they had not completed the reconciliation processes they have in 

place for certain DSH hospitals, including those that we identified as 

 

33During our review, we also found issues related to compliance with federal DSH 

requirements that were outside the scope of this review. We discussed these issues with 

CMS officials. See appendix II for a summary of these issues. 

Page 13 GAO-10-69 Medicaid Supplemental Payments
 

receiving payments exceeding limits.34 They indicated that once their 2006 

DSH payment limits were finalized as part of this process, DSH payment 

limits would be based on actual incurred costs for 2006, and that they 

would reduce DSH payments as necessary to correct for excess payments. 

• Texas officials reported that they had identified and addressed the excess 

payments we identified. They provided documentation indicating that the 

state had reduced 2007 DSH payments to eight of the nine hospitals 

overpaid in state fiscal year 2006 by an amount equal to the total excess 

payments made to the hospitals in 2006.35

The dollar amount of 2006 DSH payments to individual hospitals also 

varied widely, ranging from 1 cent to more than $395 million. (See table 2.) 

California reported both the lowest and the highest DSH payment 

amounts: the state made a total of only $160 in DSH payments to 96 private 

hospitals and paid $2 billion in DSH payments to 51 government 

hospitals.36 Before state fiscal year 2006, private hospitals in California 

received a substantial amount in DSH payments, but beginning in state 

 

34DSH payment amounts and state-calculated DSH payment limits for 22 hospitals in 

California, including those for the several California hospitals that received DSH payments 

in excess of the state-calculated DSH payment limits, 18 hospitals in Michigan, and 203 

hospitals in New York, were determined using historical cost data. Each of these states had 

processes in place to update the payment limits for these hospitals, and make adjustments 

to the associated payments, once actual cost data for the payment year becomes available. 

At the time of our review, this reconciliation process had not occurred. 

35Texas officials were unable to reduce the 2007 DSH payment to the ninth hospital 

because it was not eligible to receive DSH payments in state fiscal year 2007. 

36California distributes a pro-rata share of the $160 pool to private hospitals that qualify for 

DSH payments. In California, some private hospitals received as little as 1 cent in DSH 

payments. 

Page 14 GAO-10-69 Medicaid Supplemental Payments
 

fiscal year 2006, the state converted these payments to non-DSH 

supplemental payments, referred to as “DSH replacement” payments.37

Table 2: Number of Hospitals That Received a DSH Payment, Range of DSH Payments as a Percentage of State-Calculated 

Hospital DSH Payment Limits, and Range of DSH Payment Amounts by State, State Fiscal Year 2006 

DSH payments as a percentage of 

state-calculated DSH limits DSH payment amounts 

State Number of hospitals Low Median High Low Median High

Californiaa147 <1% <1% 169%b$<1 $2 $395,712,888

Michigan 127 <1 12 100 42 652,960 57,229,935

New York 226 <1 44 101c301 1,682,330 82,470,289

Texas 182 8 39 106d23,924 1,134,613 186,877,453

Source: GAO analysis of state-reported data on DSH payments and state-calculated DSH payment limits. 

a

Our analysis of California included DSH payments totaling $160 paid to 96 private hospitals. The 

DSH payment amounts to these private hospitals ranged from 1 cent to $14.53. The relatively small 

size of these DSH payments skewed the median DSH payment for the state. When the DSH 

payments to the private hospitals were excluded from our analysis, the median DSH payment as a 

percentage of state-calculated DSH limits was 10 percent and the median DSH payment was 

$1.1 million. 

b

DSH payments made to five hospitals in California exceeded the hospitals’ DSH payment limits. 

According to California officials, under the state’s process for updating payment limits based on 

historical data to actual cost data once they become available, any identified overpayment would be 

corrected. 

c

DSH payments made to one hospital in New York exceeded the hospital’s DSH payment limit. 

According to New York officials, under the state’s process for updating payment limits based on 

historical data to actual cost data once they become available, any identified overpayment would be 

corrected. 

d

DSH payments made to nine hospitals in Texas exceeded the hospitals’ DSH payment limits. Texas 

officials reported that they made adjustments to the state’s 2007 DSH payments that addressed 

overpayments made to these hospitals in 2006. We did not include any 2007 payment adjustments in 

this analysis of 2006 DSH payments. 

 

37Although California replaced DSH payments to private hospitals with non-DSH 

supplemental payments in state fiscal year 2006, according to state officials, the state used 

the same methodology to calculate the payment amounts for individual hospitals as it had 

used when the payments were considered DSH payments. Further, as we reported in our 

May 2008 report, California stated that the purpose of DSH replacement payments was to 

provide supplemental reimbursement to private hospitals that serve a disproportionate 

share of Medicaid, indigent, and uninsured patients; and officials indicated to us that the 

payments may be used to offset the costs of care to uninsured patients. According to CMS 

officials, however, because these payments are now considered non-DSH supplemental 

payments, they can only be used for Medicaid patients and services. Because of the 

potential that California’s DSH replacement payments are being used by hospitals for nonMedicaid purposes, we referred this issue to the HHS OIG in July 2009 for follow-up. 

Page 15 GAO-10-69 Medicaid Supplemental Payments
 

When categorized by operating organization, government-operated 

hospitals received higher DSH payments, relative to their state-calculated 

DSH payment limits, than privately-operated hospitals.38 As shown in 

figure 2, DSH payments to government-operated hospitals as a percentage 

of the hospital DSH payment limits ranged from 47 percent in New York to 

88 percent in Michigan. For privately-operated hospitals, this percentage 

ranged from less than 1 percent in California to 37 percent in Texas. (See 

table 5 in app. III for detailed information on our comparison of DSH 

payments to state-calculated DSH limits by operating organization.) 

Four States Paid 

Government-Operated 

Hospitals a Relatively High 

Proportion of Their StateCalculated Hospital DSH 

Payment Limits, with 

State-Operated IMDs 

Receiving the Largest 

Relative Payments in 

Three States 

DSH Payments by Operating 

Organization 

 

38Our analysis of DSH payments as a percentage of state-calculated DSH payment limits 

was done in the aggregate: for each hospital category, we divided the sum of the hospitals’ 

DSH payments by the sum of their state-calculated DSH payment limits. 

Page 16 GAO-10-69 Medicaid Supplemental Payments
 

Figure 2: DSH Payments as a Percentage of State-Calculated DSH Payment Limits, 

by State and Operating Organization, State Fiscal Year 2006 

0

10

20

30

40

50

60

70

80

90

100

California Michigan New York Texas a,b

Percentage of state-calculated DSH limits

Source: GAO analysis of state-reported data on DSH payments and state-calculated DSH payment limits.

State

Government

Private

61

0

22

88

32

47

37

56

a

For government-operated hospitals in California, state-calculated DSH payment limits were equal to 

175 percent of uncompensated costs associated with Medicaid and uninsured patients. 

b

Our analysis of California included DSH payments totaling $160 paid to 96 private hospitals. The 

DSH payment amounts to these private hospitals ranged from 1 cent to $14.53. As a result, DSH 

payments to private hospitals in California were less than 1 percent of these hospitals’ DSH payment 

limits. 

When grouped by hospital type, in three of the four states—Michigan, New 

York, and Texas—IMDs received larger DSH payments, measured as a 

percentage of state-calculated DSH payment limits, than general hospitals 

and children’s hospitals. DSH payments to IMDs as a percentage of their 

state-calculated DSH payments limits were 91 percent in Michigan, 

68 percent in New York, and 106 percent in Texas (see fig. 3). California 

did not make significant DSH payments to IMDs: of the state’s nearly 

$2.1 billion in DSH payments for state fiscal year 2006, about $164,000 was 

paid to IMDs. (See table 6 in app. III for detailed information on our 

comparison of DSH payments to state-calculated DSH limits by hospital 

type.) 

DSH Payments by Hospital 

Type 

Page 17 GAO-10-69 Medicaid Supplemental Payments
 

Figure 3: DSH Payments as a Percentage of State-Calculated DSH Payment Limits 

by State and Hospital Type, State Fiscal Year 2006 

0

10

20

30

40

50

60

70

80

90

100

110

Texasc California Michigan New York a,b

Percentage of state-calculated DSH limits

Source: GAO analysis of state-reported data on DSH payments and state-calculated DSH payment limits.

State

General

IMD

Children’s

42

68

33

73

91

24

0 0

50

106

42

7

a

For government-operated hospitals in California, state-calculated DSH payment limits were equal to 

175 percent of uncompensated costs associated with Medicaid and uninsured patients. 

b

Our analysis of California included DSH payments totaling $160 paid to 96 private hospitals—10 

IMDs, 79 general hospitals, and 7 children’s hospitals. The payment amounts for these private 

hospitals ranged from 1 cent to $14.53. As a result, DSH payments as a percentage of DSH payment 

limits for IMDs and children’s hospitals were less than 1 percent for California. 

c

DSH payments made to nine IMDs in Texas exceeded the hospitals’ DSH payment limits. Texas 

officials reported that they made adjustments to the state’s 2007 DSH payments that addressed 

overpayments made to these hospitals in 2006. We did not include any 2007 payment adjustments in 

this analysis of 2006 DSH payments. 

Considering both operating organization and hospital type, in the same 

three states—Michigan, New York, and Texas—state-government-operated 

IMDs received the largest DSH payments relative to their state-calculated 

DSH payment limits.39 (See tables 7, 8, and 9 in app. III for detailed 

 

39California DSH payments to IMDs totaled about $164,000 for state fiscal year 2006, and no 

DSH payments were made to state-operated IMDs. 

Page 18 GAO-10-69 Medicaid Supplemental Payments
 

information on our comparison of DSH payments to state-calculated DSH 

limits by the combination of operating organization and hospital type.) 

When we compared each state’s total DSH payments made to IMDs to the 

federal limit on the amount that each state can pay to IMDs as a group, we 

found that three of the four states paid IMDs at or near the federal limit. In 

Michigan, New York, and Texas, IMDs as a group were paid 97, 100, and 

100 percent of the 2006 IMD limits published in the Federal Register.

40

California has an IMD limit significantly lower than the other three states, 

and its payments to IMDs were 11 percent of the IMD limit for the state. 

(See table 3.) Officials from the remaining three states told us that they 

annually allocate the maximum amount of DSH funds allowed to stateoperated IMDs.41

DSH Payments to IMDs 

Table 3: Comparison of Federal Share of DSH Payments to IMDs to IMD Payment 

Limits for Federal Fiscal Year 2006, by State 

(Dollars in millions) 

State 

DSH payments to 

IMDs (federal share)

IMD payment limit 

(federal share)a

Payments as a 

percentage of IMD 

payment limit

California $0.1 $0.7b11%

Michigan 80.3 82.4 97

New York 302.5 302.5 100

Texas 174.1 174.1 100

Source: GAO analysis of state-reported data on DSH payments and 2006 federal IMD DSH payment limits. 

a

DSH payments that can be made to IMDs are limited to the lesser of total DSH payments made to 

IMDs and other mental health facilities in 1995 or 33 percent of the federal share of DSH payments 

made to IMDs and other mental health facilities out of the state’s 1995 DSH allotment. As a result, 

this limit may be lower than the sum of state-calculated hospital DSH payment limits for individual 

IMDs. 

b

California’s IMD DSH limit is relatively low because it is based on the state’s IMD DSH expenditures 

in federal fiscal year 1995, which represented less than 1 percent of DSH payments made that year. 

 

40CMS calculates and publishes each state’s federal fiscal year IMD DSH limit annually. 

Each state’s IMD limit is presented as the total amount of DSH payments allowed (federal 

and state share), and as the maximum federal payments allowed. See 72 Fed. Reg. 73,831 

(Dec. 28, 2007) for final IMD limits for federal fiscal year 2006. 

41Within the IMD payment limit and the hospital DSH payment limit, states have broad 

flexibility in how they distribute their DSH allotment (total amount of federal DSH funding 

allowed) among DSH-eligible hospitals. 

Page 19 GAO-10-69 Medicaid Supplemental Payments
 

In the three states that made DSH payments to state-operated IMDs—

Michigan, New York, and Texas—2006 Medicaid payments (considering 

both DSH payments and standard Medicaid payments) also covered a 

significant share of the total 2006 costs of operating these hospitals, and 

for two state-operated IMDs in different states, total Medicaid payments 

exceeded total operating costs.42 Total operating costs are all direct and 

indirect costs incurred in operating a hospital, including costs of providing 

medical care to patients, general management, building maintenance, and 

personnel. In Michigan, 88 percent of the state’s operating costs for 5 IMDs 

were covered by Medicaid; in New York, 45 percent of the state’s operating 

costs for 23 IMDs were covered by Medicaid; and in Texas, 85 percent of 

the state’s operating costs for 9 IMDs were covered by Medicaid. In each 

case, DSH payments constituted the bulk of Medicaid payments to the 

IMDs (see fig. 4). In Michigan, Medicaid payments exceeded total 

operating costs for 1 of the 5 IMDs by a total of $2.1 million, 6 percent of 

the facility’s operating costs. Based on data provided during the course of 

our review, 2006 Medicaid payments exceeded total 2006 operating costs 

for 1 of the 9 Texas IMDs by $1.8 million, 3 percent of the facility’s 

operating costs.43

 

42DSH and standard Medicaid payments exceeding total operating costs could be a result of 

overstated uncompensated care costs, DSH payments being in excess of DSH payment 

limits, or other factors. We did not determine the specific reasons that Medicaid payments 

exceeded total costs for these two facilities. 

43Texas officials provided revised 2006 operating cost data as part of their technical review 

of a draft of this report. Although we did not assess their reliability, these revised data 

indicate that Medicaid payments represented 99.6 percent, rather than 103 percent, of this 

facility’s 2006 operating costs. 

Page 20 GAO-10-69 Medicaid Supplemental Payments
 

Figure 4: Three States’ Standard Medicaid and Medicaid DSH Payments to 

Government-Operated IMDs as a Percentage of the Hospitals’ Total Operating 

Costs, State Fiscal Year 2006 

0

10

20

30

40

50

60

70

80

90

100

Texas (9)

New York (23)

Michigan (5)

Percentage of total operating costs

State (Number of IMDs)

Standard Medicaid payments

DSH payments

Source: GAO analysis of state-reported data on DSH payments, standard Medicaid payments and operating costs.

76 10

35

82

3

13

Page 21 GAO-10-69 Medicaid Supplemental Payments
 

Not All Reviewed 

States Accounted for 

Non-DSH 

Supplemental 

Payments, 

Consistently Updated 

DSH Payment Limits, 

or Subjected DSH 

Payment Limits to 

Independent Audits 

Although states are required to account for non-DSH supplemental 

payments when estimating hospital uncompensated care costs, two of the 

four reviewed states did not consistently do so when calculating their 2006 

hospital DSH payment limits. In examining whether the reviewed states 

used methods to ensure that their 2006 DSH payment limits accurately 

reflected hospitals’ costs, we found that none of the four reviewed states 

consistently updated 2006 hospital DSH payment limits and subjected 

hospital DSH payment limits to an independent audit. Although states 

were not required to take these steps in 2006, they will be required to do 

so in the future under CMS’s rule, which was finalized in December 2008. 

Contrary to Federal 

Requirements, Two States 

Did Not Account for 

Medicaid Non-DSH 

Supplemental Payments, 

Thus Overestimating 

Uncompensated Care 

Costs 

Two of the four states we reviewed, California and Texas, did not adhere 

to the federal requirement that states include non-DSH supplemental 

payments as Medicaid payments when estimating hospital uncompensated 

care costs for purposes of setting DSH payment limits. By not accounting 

for non-DSH supplemental payments, both California and Texas 

overestimated uncompensated care costs and the associated DSH payment 

limits for a number of hospitals. This resulted in DSH payments in excess 

of the correctly calculated hospital DSH payment limits for some hospitals 

in Texas. 

• California included some, but not all, non-DSH supplemental payments as 

Medicaid payments when estimating hospitals’ uncompensated care costs. 

Specifically, the state did not include $22.4 million in non-DSH 

supplemental payments paid to 91 hospitals in its estimates of the 

hospitals’ Medicaid revenues and did not offset these revenues against the 

hospitals’ incurred Medicaid and uninsured costs. By not accounting for 

these payments, the estimated uncompensated care costs and the 

associated DSH payment limits for these hospitals were overstated by 

about 1 percent. However, because most California hospitals received 

DSH payments that were less than their state-calculated DSH payment 

limits, we estimate that correcting for this adjustment would not have 

resulted in any hospitals receiving DSH payments in excess of their limits. 

• Texas did not account for any of the $883.4 million in non-DSH 

supplemental payments paid to 88 of the state’s 182 DSH hospitals in its 

estimates of hospitals’ uncompensated care costs. Texas officials told us 

that they did not account for any non-DSH supplemental payments 

Page 22 GAO-10-69 Medicaid Supplemental Payments
 

because they first make DSH payments and then limit non-DSH 

supplemental payments to a hospital’s remaining uncompensated care 

costs. Our analysis indicates that this methodology was not always 

followed. After accounting for non-DSH supplemental payments, we 

estimated that Texas’s 2006 DSH payments to 12 hospitals exceeded DSH 

payment limits by $1.3 million ($769,038 in federal funds). 

Reviewed States Did Not 

Consistently Update DSH 

Payment Limits or Subject 

Limits to Independent 

Audits; CMS’s 2008 DSH 

Rule Requires All States to 

Do So in the Future 

Not all of the reviewed states had processes to update 2006 DSH payment 

limits for all hospitals with actual 2006 cost and payment data when they 

become available. Only one of the reviewed states had a process to update 

DSH payment limits for all hospitals with actual 2006 cost and payment 

data when they become available. Two states had processes for some 

hospitals and one state did not have a process for any of its hospitals. For 

203 DSH hospitals in New York, the state made interim payments to 

hospitals based on hospitals’ uncompensated care cost data from 2000 and 

2004. For the remaining 23 hospitals, uncompensated care costs were from 

2004. For all 226 hospitals, the state has a process to finalize its payment 

limits once data on uncompensated care costs from 2006 are available, and 

then compare 2006 DSH payments to the finalized limits and make DSH 

payment adjustments as necessary. For 22 of the 147 hospitals in 

California, the state initially estimated 2006 uncompensated care costs 

using 2004 and 2005 data; and for 18 of the 127 hospitals in Michigan, the 

state initially estimated 2006 uncompensated care costs using 2003 and 

2004 data. According to state officials, for these hospitals each state will 

update their estimates once 2006 data become available.44 For other 

hospitals, however, states did not have processes to update DSH payment 

limits. For the remaining 125 hospitals in California and 109 hospitals in 

Michigan, and all 182 hospitals in Texas, cost data from earlier years were 

trended forward to estimate 2006 uncompensated care costs when 

calculating 2006 DSH payment limits, but the limits were not updated 

when actual 2006 data became available.45

 

44Officials from California and New York reported that they expect to have final 2006 DSH 

limits calculated by the end of 2009. Michigan officials reported that final 2006 DSH limits 

would by calculated by the end of 2012. 

45Specifically, California’s calculations of 2006 hospital DSH payment limits for 125 of its 

147 hospitals were based on 2003 and 2004 data, Michigan’s calculations for 109 of its 127 

hospitals were based on 2003 and 2004 data, and Texas’s calculations for all 182 of its 

hospitals were based on 2004 data. 

Page 23 GAO-10-69 Medicaid Supplemental Payments
 

None of the four states we reviewed had their 2006 hospital DSH payment 

limit calculations independently audited. When estimating hospitals’ 

uncompensated care costs for purposes of calculating 2006 DSH payment 

limits, however, the states sometimes used data sources that were subject 

to audit, but they did not do so consistently for all hospitals or all data, as 

shown in the following examples.46

• In California, for the 22 government-operated hospitals that received 99 

percent of the state’s DSH payments, the state auditor conducted an audit 

of hospital cost reports, which provide Medicaid fee-for-service inpatient 

cost data. Other cost and payment data for the 22 hospitals were from 

sources not subject to audit. For the remaining 125 hospitals in California, 

the state used an audited data source for Medicaid fee-for-service payment 

data, but cost and other payment data were from sources that were not 

subject to audit. 

• For all 127 hospitals in Michigan, the state used an audited data source for 

Medicaid fee-for-service cost and payment data, but other cost and 

payment data were from sources that were not subject to audit. 

• New York requires 203 government- and privately-operated hospitals to 

submit state cost reports that are ultimately certified by an independent 

auditor. For the remaining 23 hospitals in New York, the state used some 

data sources that were not subject to audit. 

• For all 182 hospitals in Texas, the information the state used to convert 

hospital charges to hospital costs came from an audited data source,47 but 

hospital charge and payment data were from annual state surveys that 

were not subject to audit.48

 

46In our review, we determined whether the various data sources states used were subject 

to independent audit, either before or after the data were used to estimate uncompensated 

care costs. 

47To convert hospital charges to hospital costs, Texas used the cost-to-charge ratio from 

each hospital’s Medicare cost report. This ratio represents a hospital’s total costs compared 

to total charges. The Medicare cost reports are audited by contractors hired by the federal 

government to pay hospitals for caring for Medicare beneficiaries. 

48To calculate hospital DSH payment limits, Texas obtains Medicaid charge and payment 

data from annual surveys of the state contractor that processes Medicaid fee-for-service 

claims and from the managed care organizations that pay hospitals for services provided to 

Medicaid managed care patients. These entities are subject to audit, which typically 

includes testing their data. However, the data provided by these entities in response to the 

state’s surveys, which are used to calculate DSH payment limits, are not independently 

audited. 

Page 24 GAO-10-69 Medicaid Supplemental Payments
 

Data sources used by the states that were not subject to audit included 

self-reported hospital cost and payment data for Medicaid and uninsured 

patients obtained through annual hospital surveys and data from statedeveloped Medicaid forms designed to capture cost and payment data for 

Medicaid managed care and uninsured patients. See table 4 for the audit 

status of the sources of data states used to calculate 2006 hospital DSH 

payment limits. 

Table 4: Audit Status of the Sources of Data Used by States in Calculating 2006 

DSH Payment Limits, by State 

Type of cost and payment data 

State 

Medicaid fee-forservice Medicaid managed 

care Uninsured 

California ◒ ◒ ◒

Michigan ● ○ ○

New York ◒ ● ◒

Texas ◒ ◒ ◒

Source: GAO analysis of information from California, Michigan, New York, and Texas. 

Legend: 

● All data sources are independently audited 

◒ Some data sources are independently audited 

○ No data sources are independently audited 

Although states were not required by CMS to either update DSH payment 

limits with actual cost and payment data or have DSH payment limit 

calculations independently audited in 2006, CMS will require all states to 

do so in the future. Specifically, in December 2008, during the course of 

this review, CMS finalized a DSH rule that requires updating and 

independent auditing of DSH limits and payments for all DSH hospitals in 

all states.49 The 2008 DSH rule required that states have their DSH 

programs independently audited and certified to verify that 

 

4973 Fed. Reg. 77,904 (Dec. 19, 2008). In this report, we use the term 2008 DSH rule to refer 

to this final rule. The rule implements requirements to improve the accountability over 

DSH payments as imposed under the Medicare Prescription Drug, Improvement, and 

Modernization Act of 2003 (MMA), Pub. L. No. 108-173, § 1001(d), 117 Stat. 2066, 2430-2431 

(2003) (codified, as amended, at 42 U.S.C. § 1395r-4(j)). 

Page 25 GAO-10-69 Medicaid Supplemental Payments
 

• each eligible hospital is allowed to retain DSH payments so that these 

payments are available to offset uncompensated care costs in order to 

reflect the total amount of claimed DSH expenditures; 

• DSH payments to each hospital comply with the hospital’s DSH payment 

limit based on measuring DSH payments to each hospital during the 

payment year against the hospital’s actual uncompensated care costs for 

the same year;50

• only the uncompensated care costs of providing inpatient hospital and 

outpatient hospital services to Medicaid-eligible and uninsured individuals 

are included in the calculation of the hospital DSH payment limits; 

• the state included all Medicaid payments, including non-DSH supplemental 

payments, in the calculation of hospital DSH payment limits;51

• the state has documented and retained a record of Medicaid inpatient and 

outpatient service costs, Medicaid expenditures, uninsured inpatient and 

outpatient service costs, and payments made by or on behalf of the 

uninsured; and 

• records must include a description of the methodology for calculating 

each hospital’s DSH payment limit, including the definition of incurred 

costs. 

Although the 2008 DSH rule set a December 2009 deadline for states’ 2005 

and 2006 DSH audits and reports, CMS provided states a transition 

period—through payment year 2010. According to CMS, the transition 

period was created due to concerns from states regarding budget cycles, 

planning complications, and the economic downturn. The transition 

period is intended to ensure states are not adversely affected 

 

50In the preamble to the rule, CMS recognized that states may need to estimate DSH 

payments and DSH payment limits for an upcoming year. States must ensure, however, that 

using estimates does not result in DSH payments that exceed a hospital’s incurred 

uncompensated care costs by revising methodologies or providing for the reconciliation of 

prospective DSH payments. See 77 Fed. Reg. at 77,944. According to CMS officials, the 

payment year can vary by state. While it typically corresponds with a state’s fiscal year, the 

payment year may also follow the federal fiscal year or another time period established by 

the state, according to CMS officials. 

51This provision reiterates a CMS 2002 policy which clarified that non-DSH supplemental 

payments are Medicaid payments and must be accounted for when calculating hospital 

DSH payment limits. 

Page 26 GAO-10-69 Medicaid Supplemental Payments
 

retrospectively by the availability of new data resulting from the new 

requirements, as well as to give states time to develop and refine their 

reporting and auditing processes. According to CMS, any findings of 

noncompliance with hospital DSH payment limits resulting from state 

reports for payment years 2005 through 2010 will not be acted upon by 

CMS, though these findings may be used to question the calculation of 

hospitals’ DSH payment limits for 2011 and years thereafter. 

California’s experience indicates that states’ implementation of 

requirements of the 2008 DSH rule to update and audit hospital DSH 

payment limit calculations could have a substantial effect on states’ 

estimates of uncompensated care costs and associated hospital DSH 

payment limits. In 2006, California began using a new methodology to 

estimate uncompensated care costs for calculating DSH payment limits for 

22 public hospitals that received 99 percent of the state’s DSH payments. 

Under this new methodology, the state uses cost data from sources that 

are audited and also updates the DSH payment limits when actual cost and 

payment data for the DSH payment year become available. Using this new 

methodology, California’s 2006 DSH payment limits for these hospitals 

were over 49 percent lower than what they would have been using the 

state’s previous method, which used self-reported hospital data from 2003 

and 2004.52

Since the early 1990s, Medicaid’s DSH program has grown significantly 

and at times has been used by some states to inappropriately generate 

federal Medicaid matching funds. Over the years, Congress has taken steps 

to ensure the integrity of the program by establishing new requirements, 

including hospital DSH payment limits that cap a hospital’s DSH payments 

to its uncompensated care costs. However, we found that for 2006, two 

states did not account for non-DSH supplemental payments when 

calculating hospital DSH payment limits, as required. We also found 

variation in the extent to which states took measures to ensure the 

accuracy of their hospital DSH payment limit calculations. 

Conclusions 

 

52We were able to make this assessment because California continued to calculate 

uncompensated care costs for all DSH-eligible hospitals, including the 22 for which the 

state now uses data from audited cost reports, under the prior methodology. Although 

Michigan has instituted a similar methodology for 18 of its 127 hospitals, we could not 

assess the effect of this change because we did not have estimates for these 18 hospitals 

using the previous methodology. 

Page 27 GAO-10-69 Medicaid Supplemental Payments
 

CMS has an important role in ensuring that states adhere to federal DSH 

requirements, and issuance of the 2008 DSH rule is a positive step toward 

improved federal oversight of the tens of billions of dollars paid annually 

in Medicaid supplemental payments. The state DSH reports and audit 

reports required under federal law should provide information that CMS 

needs to ensure states’ compliance with and enforcement of DSH 

requirements, such as ensuring that states account for non-DSH 

supplemental payments when calculating DSH payment limits. The effect 

of the 2008 DSH rule will depend, however, upon the extent to which CMS 

uses the information reported by states to identify and correct problems in 

state DSH programs. Ongoing federal oversight is warranted to ensure that 

states are following federal requirements and taking corrective actions, as 

needed. 

In light of our findings from selected states that existing DSH requirements 

are not always followed, we recommend that CMS ensure that states 

account for all Medicaid payments, including non-DSH supplemental 

payments, when calculating DSH payment limits. 

We provided a draft of this report to HHS for comment. Responding for 

HHS, CMS agreed with our recommendation. The full text of CMS’s 

comments is reprinted in appendix IV. 

CMS provided clarifications and comments, which we incorporated as 

appropriate. In particular, CMS correctly noted that we referred to the 

DSH audit and reporting final rule published in December 2008, and that 

we did not consider this rule or the related provisions of the MMA as 

requirements for the 2006 payment data that we reviewed. CMS also 

suggested additional language describing the time frames for transitioning 

and implementing the final rule, which we considered and incorporated as 

appropriate. 

Recommendations for 

Executive Action 

Agency and External 

Comments and Our 

Evaluation 

We also provided a draft of this report to California, Michigan, New York, 

and Texas for technical review. California and Michigan had no comments; 

New York concurred with our findings; and Texas provided the following 

comments related to three findings in the draft report. 

Page 28 GAO-10-69 Medicaid Supplemental Payments
 

• First, in response to our finding that Texas did not account for all nonDSH supplemental payments, Texas officials noted that the state was 

taking corrective action by updating its DSH payment methodology to 

limit the amount of DSH and non-DSH supplemental payments to hospital 

DSH payment limits. 

• Second, in light of our finding that combined DSH and standard Medicaid 

payments to one state-operated IMD in Texas exceeded the facility’s 

operating costs in 2006, the state provided revised 2006 operating cost 

data. Based on these revised data, total Medicaid payments to the IMD 

would have represented 99.6 percent, rather than 103 percent, of this 

facility’s operating costs. We did not assess the reliability of the revised 

data, but noted its effect in the final report. 

• Third, Texas asserted that we underreported the extent to which the 

Medicaid cost and payment data the state used in calculating DSH hospital 

payment limits came from sources that were subject to audit. Texas uses a 

contractor to process the state’s Medicaid fee-for-service claims and relies 

on managed care organizations to pay hospitals for services provided to 

Medicaid managed care patients. To calculate DSH payments, Texas 

obtains Medicaid cost and payment data by surveying the fee-for-service 

contractor and the manage care organizations. These entities are subject 

to audit, which typically includes testing their data. However, the 

reliability of the data provided by these entities in response to the state’s 

surveys are not independently verified. Therefore, we continue to report 

that some Medicaid fee-for-service and managed care data are from 

sources not subject to an independent audit. 

Texas also provided technical views that we considered and incorporated 

as appropriate. 

As arranged with your office, unless you publicly announce the contents of 

this report earlier, we plan no further distribution until 30 days after its 

issuance date. At that time, we will send copies of this report to the 

Secretary of Health and Human Services, the Administrator of the Centers 

for Medicare & Medicaid Services, the State Medicaid Directors of 

California, Michigan, New York, and Texas, and other interested parties. In 

addition, the report will be available at no charge on the GAO Web site at 

http://www.gao.gov. 

Page 29 GAO-10-69 Medicaid Supplemental Payments
 

If you or your staff members have any questions, please contact me at 

(202) 512-7114 or iritanik@gao.gov. Contact points for our Offices of 

Congressional Relations and Public Affairs may be found on the last page 

of this report. Major contributors to this report are listed in appendix V. 

Sincerely yours, 

ni 

Acting Director, Health Care 

Katherine M. Irita

Page 30 GAO-10-69 Medicaid Supplemental Payments
Appendix I: 

Methodology 

Objectives, Scope, and 

Page 31 GAO-10-69 

Appendix I: Objectives, Scope, and 

Methodology 

To review states’ Medicaid disproportionate share hospital (DSH) 

payments, we examined DSH payments and DSH payment limits in four 

selected states: California, Michigan, New York, and Texas. These states 

were four of the five states included in our May 2008 report on 

supplemental payments that states made to Medicaid providers.1

 The five 

states represented those that reported making the largest total amount of 

DSH and non-DSH supplemental payments in 2005.2

 For this review, we 

interviewed state officials in each of the four states and collected 

information on each hospital that received a DSH payment for state fiscal 

year 2006, including DSH payments received, non-DSH supplemental 

payments received, standard Medicaid payments received, and statecalculated DSH payment limits.3

 We also obtained information on the data 

sources used in state calculations of DSH payment limits, including 

information on whether the data sources were subject to audit. 

Using state-provided data on DSH payments and hospital DSH payment 

limits for state fiscal year 2006, we calculated for each hospital its DSH 

payment as a percentage of its state-calculated DSH payment limit. We 

identified hospitals whose DSH payments exceeded the state-calculated 

DSH payment limits. We also examined DSH payments as a percentage of 

hospital DSH payment limits across hospital categories: operating 

organization (private or government), hospital type (general, institutions 

for mental diseases (IMD), or children’s) and combinations of operating 

organization and hospital type.4

 We also compared state DSH payments to 

Comparison of DSH 

Payments to 2006 

DSH Payment Limits 

 

1

GAO, Medicaid: CMS Needs More Information on the Billions of Dollars Spent on 

Supplemental Payments, GAO-08-614 (Washington, D.C.: May 30, 2008). 

2

The fifth state in our May 2008 report, Massachusetts, was excluded in this report because 

under the authority of an approved Medicaid section 1115 demonstration the state does not 

make DSH payments to hospitals for fiscal years 2006 through 2011. 

3

Hospital DSH payment limits are applied on a state fiscal year basis. 

4

We determined hospital operating organization and hospital types from a database of 

providers maintained by CMS that contains provider-reported information on each facility. 

We classified hospitals operated by proprietary or nonprofit organizations as private and 

hospitals operated by governmental entities—such as counties, states, or hospital 

districts—as government. For hospital type, we considered psychiatric hospitals, called 

institutions for mental diseases (IMD), and children’s hospitals as separate hospital types, 

and classified all other hospital types—including short-term, long-term, critical access, and 

rehabilitation hospitals—as general hospitals. We classified four IMDs for children in New 

York as IMDs because the federal aggregate limit on DSH payments to IMDs includes IMDs 

for children. To calculate DSH payments as a percentage of state-calculated DSH limits for 

a category of hospitals, we divided the sum of the DSH payments made to all hospitals in 

the category by the sum of these hospitals’ DSH payment limits. 

 Medicaid Supplemental Payments 
Appendix I: Objectives, Scope, and 

Methodology 

IMDs to each state’s IMD limit for federal fiscal year 2006 published in the 

Federal Register.

5

 For this analysis we obtained from states the DSH 

payments they made for federal fiscal year 2006. In addition, because of 

past concerns with DSH payments to state-operated IMDs, we compared 

the total Medicaid payments (including DSH payments and standard 

Medicaid payments) made to state-operated IMDs to the operating costs of 

these hospitals, which we obtained from the states. 

We examined two aspects of the four states’ methods for calculating DSH 

payment limits: (1) the extent to which selected states accounted for nonDSH supplemental payments, as required since 2002, and (2) the extent to 

which selected states updated hospital DSH payment limits with actual 

cost data for 2006 when they became available, and had their statecalculated hospital DSH payment limits or the data used to calculate them 

independently audited. 

To determine the extent to which selected states accounted for non-DSH 

supplemental payments, as required since 2002, we interviewed state 

officials on the methods and data they used to estimate uncompensated 

care costs. We reviewed documentation of state methods in state Medicaid 

plans, administrative manuals, and internal policy guidance provided by 

state officials. We obtained information from state officials as to whether 

and how they account for non-DSH supplemental payments when 

estimating hospital uncompensated care costs. We also analyzed states’ 

data and calculations to determine whether non-DSH supplemental 

payments were accounted for as required. 

Review of Methods 

Used by States to 

Estimate 

Uncompensated Care 

Costs for the Purpose 

of Establishing 

Hospital DSH 

Payment Limits 

To determine the extent to which selected states updated hospital DSH 

payment limits with actual cost data for 2006 when they became available, 

and state-calculated hospital DSH payment limits were independently 

audited, we reviewed documentation of state methods in state Medicaid 

plans and state policy guidance provided by state officials. We reviewed 

relevant federal Medicaid policy documents and discussed related CMS 

 

5

Each year, CMS calculates and publishes each state’s federal fiscal year IMD DSH limit. 

CMS published preliminary 2006 IMD limits in October 2006, and published the final IMD 

limits in December 2007. Each state’s IMD limit is presented as the total amount of DSH 

payments allowed (federal and state share), and as the maximum federal payments 

allowed. See 71 Fed. Reg. 58,398 (Oct. 3, 2006) for preliminary IMD limits for federal fiscal 

year 2006, and 72 Fed. Reg. 73,831 (Dec. 28, 2007) for final IMD limits for federal fiscal year 

2006. There was no difference between the preliminary and final IMD limits for the four 

states we examined. 

Page 32 GAO-10-69 Medicaid Supplemental Payments
Appendix I: Objectives, Scope, and 

Methodology 

policies with CMS officials. We also interviewed officials and examined 

state data and calculations. In addition, when hospital DSH payment limit 

calculations were not independently audited, we determined the extent to 

which the data sources states used to calculate these limits were subject 

to audit, for example by a public accounting firm or a state auditing 

agency. 

Beyond these two aspects of state methods for estimating hospital 

uncompensated care costs, we did not examine the states’ methods for 

estimating uncompensated care costs. In addition, we did not 

independently test the reliability of the data used by states to estimate 

uncompensated care costs. That is, we did not audit states’ data sources or 

determine the extent to which they accurately captured costs and 

payments related to services to Medicaid enrollees or low-income 

uninsured individuals. We requested that the states review the data they 

reported to us and confirm that they were complete and represented 2006 

hospital DSH payments and hospital DSH payment limits. We also checked 

for missing data and inconsistencies in the data. We determined that the 

states’ data were sufficiently reliable for the purposes of comparing statereported DSH payments to the state-calculated DSH payment limits and 

for assessing the extent to which states’ methods for estimating 

uncompensated care costs accounted for Medicaid non-DSH supplemental 

payments. The information we obtained from the four states cannot be 

generalized to all states. 

We conducted this performance audit from June 2008 through October 

2009 in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe 

that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives. 

Page 33 GAO-10-69 Medicaid Supplemental Payments
Appendix II: Issues Related to 

Disproportionate Share Hospital Payments in Appendix II: Issues Related to Two States 

Disproportionate Share Hospital Payments in 

Two States 

During the course of our review, we identified two issues related to 

compliance with federal requirements regarding disproportionate share 

hospital (DSH) payments. These issues were outside the scope of our 

review, as they dealt with hospitals’ eligibility to receive DSH payments. 

We discussed these cases with CMS officials so that they could review 

them and take appropriate corrective actions. Specifically, we found the 

following. 

• We found that Michigan made $34 million in DSH payments to a stateoperated institution for mental diseases (IMD) for state fiscal year 2006, 

even though the IMD was not eligible to receive DSH payments because 

the IMD was not an enrolled and participating Medicaid provider. CMS 

officials confirmed that under federal law and regulations, all health care 

providers must be enrolled and certified to participate in Medicaid before 

they can receive Medicaid payments, including DSH payments. 

• We identified one privately operated IMD in Texas that received a DSH 

payment despite having no uncompensated care costs. After making 

$46,000 in DSH payments to the IMD, the state realized the facility did not 

have uncompensated care costs and discontinued payments. The state did 

not recoup the payments, however, because according to state officials the 

payments were made in good faith that the hospital had uncompensated 

care costs. 

We also identified a third issue that was resolved during the course of our 

review. Specifically, Michigan used a method for calculating DSH payment 

limits that did not always account for all Medicaid payments when 

calculating DSH payment limits. In 2006, we found that for nine hospitals, 

which had an outpatient surplus—payments for outpatient services that 

exceeded outpatient costs—the state chose to use only the 

uncompensated costs for inpatient services to calculate 2006 hospital DSH 

payment limits. By ignoring outpatient surpluses, the state overstated the 

hospitals’ uncompensated care costs by $7.5 million, and the state made 

DSH payments exceeding these costs by $7.0 million. In July 2009, 

however, the state terminated this practice, effective for state fiscal year 

2009. Officials stated that they changed their methods as a result of 

clarification provided in CMS’s 2008 DSH rule. 

Page 34 GAO-10-69 Medicaid Supplemental Payments 
Appendix III: Comparison of 

Disproportionate Share Hospital Payment

Payment Limits by Categories of Hospitals

s to 

Page 35 GAO-10-69 

Appendix III: Comparison of 

Disproportionate Share Hospital Payments to 

Payment Limits by Categories of Hospitals 

This appendix provides the results of our analysis of state fiscal year 2006 

disproportionate share hospital (DSH) payments, state-calculated DSH 

payment limits, and uncompensated care for each state we reviewed—

California, Michigan, New York, and Texas. In each of the four states, for 

hospitals categorized by operating organization and hospital type, we 

calculated (1) DSH payments as a percentage of state-calculated DSH 

payment limits, (2) DSH payments as a percentage of total state DSH 

funding, and (3) uncompensated care provided as a percentage of total 

uncompensated care provided in each state. 

• Table 5 provides information on DSH payments as a percentage of statecalculated DSH payment limits by operating organization (government or 

private) and state. 

• Table 6 provides information on DSH payments as a percentage of statecalculated DSH payment limits by hospital type (general, institution for 

mental diseases (IMD), or children’s)1

 and state. 

• Table 7 provides information on DSH payments as a percentage of statecalculated DSH payment limits by state and by combinations of operating 

organization and hospital type. 

• Table 8 provides information on uncompensated care costs as a share of 

total uncompensated care costs and DSH payments as a share of total DSH 

payments by state and by combinations of operating organization and 

hospital type. 

• Table 9 provides information on DSH payments, non-DSH supplemental 

payments, and total supplemental payments by state and by combinations 

of operating organization and hospital type. 

 

1

We classified IMDs for children as IMDs because the federal aggregate limit on payments 

to IMDs includes IMDs for children. 

Medicaid Supplemental Payments
Appendix III: Comparison of 

Disproportionate Share Hospital Payments to 

Payment Limits by Categories of Hospitals 

Table 5: Number of Hospitals and DSH Payments as a Percentage of State-Calculated DSH Payment Limits by Operating 

Organization and State, State Fiscal Year 2006 

(Dollars in millions) 

State 

Operating 

organization Number of hospitals Total DSH payments 

Total statecalculated DSH 

payment limits 

DSH payments as a 

percentage of DSH 

payment limitsa,b

CaliforniacGovernment 51 $2,065 $3,397 61%

Private 96 <1 1,978 <1

Michigan Government 23 197 225 88

Private 104 243 1,119 22

New York Government 49 1,103 2,333 47

Private 177 774 2,446 32

Texas Government 86 1,105 1,980 56

Private 96 444 1,200 37

Source: GAO analysis of state-reported data on DSH payments and state-calculated DSH payment limits. 

a

DSH payments as a percentage of state-calculated DSH payment limits is in the aggregate (i.e., sum 

of payments divided by sum of state-calculated limits). 

b

For government-operated hospitals in California, state-calculated DSH payment limits were equal to 

175 percent of uncompensated care costs associated with Medicaid and uninsured patients. 

c

Our analysis of California included DSH payments totaling $160 paid to 96 private hospitals—10 

IMDs, 79 general hospitals, and 7 children’s hospitals. The payment amounts for these private 

hospitals ranged from 1 cent to $14.53. The 96 private hospitals were eligible to receive a DSH 

payment. 

Page 36 GAO-10-69 Medicaid Supplemental Payments
Appendix III: Comparison of 

Disproportionate Share Hospital Payments to 

Payment Limits by Categories of Hospitals 

Table 6: Number of Hospitals and DSH Payments as a Percentage of State-Calculated DSH Payment Limits by Hospital Type 

and State, State Fiscal Year 2006 

(Dollars in millions) 

State Hospital type Number of hospitals Total DSH payments 

Total state-calculated 

DSH payment limits 

DSH payments as a 

percentage of limitsa,b

Californiac IMD 14 $<1 $50 <1%

General 126 2,065 4,970 42

Children’s 7 <1 355 <1

Michigan IMD 5 142 155 91

General 121 281 1,166 24

Children’s 1 17 23 73

New York IMDd 23 605 894 68

General 202 1,272 3,881 33

Children’sd1 <1 5 7

Texas IMD 16 319 301 106e

General 159 1,158 2,734 42

Children’s 7 72 144 50

Source: GAO analysis of state-reported data on DSH payments and state-calculated DSH payment limits. 

a

DSH payments as a percentage of state-calculated DSH payment limits is in the aggregate (i.e., sum 

of payments divided by sum of state-calculated limits). 

b

For government-operated hospitals in California, state-calculated DSH payment limits were equal to 

175 percent of uncompensated care costs associated with Medicaid and uninsured patients. 

c

Our analysis of California included DSH payments totaling $160 paid to 96 private hospitals—10 

IMDs, 79 general hospitals, and 7 children’s hospitals. The payment amounts for these private 

hospitals ranged from 1 cent to $14.53. The 96 private hospitals were eligible to receive a DSH 

payment. 

d

We classified four IMDs for children in New York as IMDs because the federal aggregate limit on 

payments to IMDs included IMDs for children. 

e

DSH payments made to nine hospitals in Texas exceeded the hospitals’ DSH payment limits. Texas 

officials reported that they made adjustments to the state’s 2007 DSH payments that addressed 

overpayments made to these hospitals in 2006. We did not include any 2007 payment adjustments in 

this analysis of 2006 DSH payments. 

Page 37 GAO-10-69 Medicaid Supplemental Payments
Appendix III: Comparison of 

Disproportionate Share Hospital Payments to 

Payment Limits by Categories of Hospitals 

Table 7: DSH Payments, State-Calculated DSH Payment Limits, and DSH Payments as a Percentage of Limits Grouped by 

State, Operating Organization, and Type of Hospital, State Fiscal Year 2006 

(Dollars in millions) 

State 

Operating 

organization Hospital type 

Number of 

hospitals

Total DSH 

payments 

Total statecalculated DSH 

payment limits 

DSH payments as a 

percentage of 

limitsa,b

CaliforniacGovernment IMD 4 $<1 $18 1%

Government General 47 2,065 3,379 61

Private IMD 10 <1 32 <1

Private General 79 <1 1,591 <1

Private Children’s 7 <1 355 <1

Michigan Government IMD 5 142 155 91

Government General 18 55 70 79

Private General 103 226 1,096 21

Private Children’s 1 17 23 73

New York Government IMDd23 605 894 68

Government General 26 498 1,440 35

Private General 176 774 2,441 32

Private Children’sd 1 <1 5 7

Texas Government IMD 9 313 295 106e

Government General 77 792 1,685 47

Private IMD 7 5 7 80

Private General 82 366 1,049 35

Private Children’s 7 72 144 50

Source: GAO analysis of state-reported data on DSH payments and state-calculated DSH payment limits. 

a

DSH payments as a percentage of state-calculated DSH payment limits is in the aggregate (i.e., sum 

of payments divided by sum of state-calculated limits). 

b

For government-operated hospitals in California, state-calculated DSH payment limits were equal to 

175 percent of uncompensated care costs associated with Medicaid and uninsured patients. 

c

Our analysis of California included DSH payments totaling $160 paid to 96 private hospitals, The 

payment amounts for these private hospitals ranged from 1 cent to $14.53. The 96 private hospitals 

were eligible to receive a DSH payment. 

d

We classified four IMDs for children in New York as IMDs because the federal aggregate limit on 

payments to IMDs included IMDs for children. 

e

DSH payments made to nine hospitals in Texas exceeded the hospitals’ DSH payment limits. Texas 

officials reported that they made adjustments to the state’s 2007 DSH payments that addressed 

overpayments made to these hospitals in 2006. We did not include any 2007 payment adjustments in 

this analysis of 2006 DSH payments. 

Page 38 GAO-10-69 Medicaid Supplemental Payments
Appendix III: Comparison of 

Disproportionate Share Hospital Payments to 

Payment Limits by Categories of Hospitals 

Table 8: Hospitals’ Share of Total Uncompensated Care Costs, Hospitals’ Share of Total DSH Payments, and Total DSH 

Payments by State, Operating Organization, and Hospital Type, State Fiscal Year 2006 

(Dollars in millions) 

State 

Operating 

organization Hospital type 

Number of 

hospitals

Share of total 

uncompensated 

care costsa

Share of total DSH 

payments 

Total DSH 

payments

CaliforniabGovernment IMD 4 <1% <1% $<1

Government General 47 50 100 2,065

Private IMD 10 <1 <1 <1

Private General 79 40 <1 <1

Private Children’s 7 9 <1 <1

Michigan Government IMD 5 12 32 142

Government General 18 5 13 55

Private General 103 82 52 226

Private Children’s 1 2 4 17

New York Government IMDc23 19 32 605

Government General 26 30 27 498

Private General 176 51 41 774

Private Children’sc 1 <1 <1 <1

Texas Government IMD 9 9 20 313

Government General 77 53 51 792

Private IMD 7 <1 <1 5

Private General 82 33 24 366

Private Children’s 7 5 5 72

All four states Government IMD 41 10 18 1,060

Government General 168 39 58 3,410

Private IMD 17 <1 <1 5

Private General 440 47 23 1,366

Private Children’s 16 4 2 89

Source: GAO analysis of state-reported data on DSH payments and state-calculated uncompensated care costs. 

a

We used state-calculated uncompensated care costs for this analysis, including for the 49 

government hospitals in California that were eligible to receive DSH payments up to 175 percent of 

uncompensated care costs. 

b

Our analysis of California included DSH payments totaling $160 paid to 96 private hospitals. The 

payment amounts for these private hospitals ranged from 1 cent to $14.53. The 96 private hospitals 

were eligible to receive a DSH payment. 

c

We classified four IMDs for children in New York as IMDs because the federal aggregate limit on 

payments to IMDs included IMDs for children. 

Page 39 GAO-10-69 Medicaid Supplemental Payments
Appendix III: Comparison of 

Disproportionate Share Hospital Payments to 

Payment Limits by Categories of Hospitals 

Table 9: DSH Payments, Non-DSH Supplemental Payments, and Total Supplemental Payments by State, Operating 

Organization, and Hospital Type, State Fiscal Year 2006 

(Dollars in millions) 

State 

Operating 

organization Hospital type 

Number of 

hospitals DSH payments

Non- DSH 

supplemental 

payments 

Total DSH and nonDSH supplemental 

paymentsa

CaliforniabGovernment IMD 4 $<1 $0 $<1

Government General 47 2,065 1,216 3,281

Private IMD 10 <1 0 <1

Private General 79 <1 122 122

Private Children’s 7 <1 82 82

Michigan Government IMD 5 142 0 142

Government General 18 55 77 131

Private General 103 226 470 696

Private Children’s 1 17 54 71

New York Government IMDc23 605 0 605

Government General 26 498 0 498

Private General 176 774 0 774

Private Children’sc 1 <1 0 <1

Texas Government IMD 9 313 0 313

Government General 77 792 773 1,565

Private IMD 7 5 0 5

Private General 82 366 79 445

Private Children’s 7 72 32 104

All four states Government IMD 41 1,060 0 1,060

Government General 168 3,410 2,067 5,476

Private IMD 17 5 0 5

Private General 440 1,366 671 2,038

Private Children’s 16 89 168 257

Source: GAO analysis of state-reported data on DSH payments and non-DSH supplemental payments. 

a

DSH and non-DSH supplemental payments may not sum to total because of rounding. 

b

Our analysis of California includes DSH payments totaling $160 paid to 96 private hospitals. The 

payment amounts for these private hospitals ranged from 1 cent to $14.53. The 96 private hospitals 

were eligible to receive a DSH payment. 

c

We classified four IMDs for children in New York as IMDs because the federal aggregate limit on 

payments to IMDs included IMDs for children. 

Page 40 GAO-10-69 Medicaid Supplemental Payments
Appendix IV: Comments from the Department Appendix IV: Comments from the of Health & Human Services 

Department of Health & Human Services 

Page 41 GAO-10-69 Medicaid Supplemental Payments 
Appendix IV: Comments from the Department 

of Health & Human Services 

Page 42 GAO-10-69 Medicaid Supplemental Payments
Appendix IV: Comments from the Department 

of Health & Human Services 

Page 43 GAO-10-69 Medicaid Supplemental Payments
Appendix IV: Comments from the Department 

of Health & Human Services 

Page 44 GAO-10-69 Medicaid Supplemental Payments
Appendix V: 

A

GAO Contact and Staff 

cknowledgments 

Page 45 GAO-10-69 

Appendix V: GAO Contact and Staff 

Acknowledgments 

GAO Contact Katherine M. Iritani, (202) 512-7114 or Iritanik@gao.gov 

In addition to the contact name above, James C. Cosgrove, Director; 

Catina Bradley, Assistant Director; Susannah Bloch; Tim Bushfield; Helen 

Desaulniers; Aaron Holling; Tom Moscovitch; Perry Parsons; and Hemi 

Tewarson made key contributions to this report. 

Acknowledgments 

 Medicaid Supplemental Payments 
Related GAO Products Related GAO Products 

High-Risk Series: An Update. GAO-09-271. Washington, D.C.: January 22, 

2009. 

Medicaid: CMS Needs More Information on the Billions of Dollars Spent 

on Supplemental Payments. GAO-08-614. Washington D.C.: May 30, 2008. 

Medicaid Financing: Long-Standing Concerns about Inappropriate State 

Arrangements Support Need for Improved Federal Oversight. 

GAO-08-650TT. Washington D.C.: April 3, 2008. 

Medicaid Financing: Long-Standing Concerns about Inappropriate 

State Arrangements Support Need for Improved Federal Oversight. 

GAO-08-255TT. Washington D.C.: November 1, 2007. 

Medicaid Financing: Federal Oversight Initiative is Consistent with 

Medicaid Payment Principles but Needs Greater Transparency. 

GAO-07-214. Washington D.C.: March 30, 2007. 

Medicaid Financial Management: Steps Taken to Improve Federal 

Oversight but Other Actions Needed to Sustain Efforts. GAO-06-705. 

Washington D.C.: June 22, 2006. 

Medicaid Financing: States’ Use of Contingency-Fee Consultants to 

Maximize Federal Reimbursements Highlights Need for Improved 

Federal Oversight. GAO-05-748. Washington D.C.: June 28, 2005. 

Medicaid: States’ Efforts to Maximize Federal Reimbursements 

Highlight Need for Improved Federal Oversight. GAO-05-836T. 

Washington D.C.: June 28, 2005. 

T

Medicaid: Intergovernmental Transfers Have Facilitated State 

Financing Schemes. GAO-04-574T. Washington D.C.: March 18, 2004. 

Medicaid: Improved Federal Oversight of State Financing Schemes Is 

Needed. GAO-04-228. Washington D.C.: February 13, 2004. 

Major Management Challenges and Program Risks: Department of 

Health and Human Services. GAO-03-101. Washington D.C.: January 2003. 

Medicaid: HCFA Reversed Its Position and Approved Additional State 

Financing Schemes. GAO-02-147. Washington D.C.: October 30, 2001. 

Page 46 GAO-10-69 Medicaid Supplemental Payments
Related GAO Products 

Medicaid: State Financing Schemes Again Drive Up Federal Payments. 

GAO/T-HEHS-00-193. Washington D.C.: September 6, 2000. 

Medicaid: Disproportionate Share Payments to State Psychiatric 

Hospitals. GAO/HEHS-98-52. Washington D.C.: January 23, 1998. 

Medicaid: Disproportionate Share Payments to Institutions for Mental 

Diseases. GAO/HEHS-97-181R. Washington D.C.: July 15, 1997. 

Medicaid: States Use Illusory Approaches to Shift Program Costs to 

Federal Government. GAO/HEHS-94-133. Washington D.C.: August 1, 1994. 

(290723) Page 47 GAO-10-69 Medicaid Supplemental Payments
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