For fiscal year 2014, Medicare overhauled the methodology for determining the Disproportionate Share Hospital (DSH) payment component of the Inpatient Prospective Payment System (IPPS), which Medicare uses to pay acute care hospitals for inpatient services. Under the new methodology, operating DSH payments are reduced by 75% to create the “empirically justified” DSH payment. The changes to the DSH payment methodology are estimated to reduce total IPPS payments by about 0.4%, but the changes by area and by provider can be significant. Medicare Advantage plans may see a slightly lower reduction in DSH payments to providers, which is due to the methodology used by the Centers for Medicare and Medicaid Services (CMS) to calculate prospective Uncompensated Care payments.

This paper quantifies the changes by area, provides details of the mechanics of the new DSH and Uncompensated Care payments, and discusses issues specific to Medicare Advantage plans.