Disproportionate share hospital (DSH) payments are one type of Medicaid supplemental payment that states are required to make to hospitals serving low-income patients. States are permitted to make other non-DSH fee-for-service (FFS) supplemental payments, managed care pass-through payments, and waiver supplemental payments. Medicaid Background

Medicaid is a joint federal-state program that provides primary and acute medical services, as well as long-term services and supports, to a diverse low-income population. States must follow broad federal rules to receive federal funds, but they have flexibility to design their own versions of Medicaid within the federal statute's basic framework. This flexibility results in variability across state Medicaid programs. Medicaid enrollees generally receive benefits through either a FFS or managed care service delivery system. Under FFS, state Medicaid programs pay health care providers for each service provided to a Medicaid enrollee. Under managed care, Medicaid enrollees receive most or all of their services through a managed care organization (MCO) under contract with the state, and the MCO is primarily paid on a capitated basis (i.e., a set amount per enrollee regardless of the services used). Medicaid is financed jointly by the federal government and the states. In addition to the Medicaid payments for services provided to enrollees, states may make supplemental payments , which are Medicaid payments to providers that are separate from and in addition to Medicaid payments for services. Payments for Services

For the most part, states establish their own payment rates for Medicaid providers to deliver services to Medicaid enrollees. Payment rates vary by state. Federal statute requires these rates to be "consistent with efficiency, economy, and quality of care and ... sufficient to enlist enough providers so that care and services are available" to Medicaid enrollees at least to the same extent they are available to the general population in the same geographic area. This requirement is referred to as the equal access provision . Low Medicaid provider payment rates in many states and their impact on provider participation have been perennial policy concerns. Often, providers receive supplemental payments in a lump sum, and these supplemental payments are not tied to services provided to Medicaid enrollees. For example, states may provide supplemental payments to providers to support quality initiatives, graduate medical education, and certain types of facilities (e.g., rural or safety net providers), among other reasons. All states make supplemental payments under FFS. These payments are provided to many different Medicaid providers, such as hospitals, nursing facilities, physicians, and mental health facilities. For certain institutional providers, there are upper payment limits (UPLs) on the amount of supplemental payments; these limits are what Medicare would pay for the same or comparable services. States also make supplemental payments through managed care and Section 1115 waivers. Under managed care, states historically have made pass-through payments . These payments are included in the payments states make to MCOs (i.e., capitation rates), and the MCOs are expected to make the payments to providers as directed by the state. CMS also may provide Medicaid Section 1115 waiver authority to permit states to make certain supplemental payments that they otherwise are not permitted to make under Medicaid rules. Data on Medicaid FFS non-DSH supplemental payments, managed care pass-through payments, and Section 1115 waiver payments generally are limited. The remainder of the report provides an overview of supplemental Medicaid payments to providers. FFS Supplemental Payments

All states make supplemental payments under FFS, and different federal regulations and requirements apply depending on the type of payment and the type of provider. FFS Supplemental Payment Expenditures30

In FY2017, states reported $40.6 billion in total Medicaid FFS DSH and non-DSH supplemental payment expenditures (i.e., including both federal and state expenditures), or 7.2% of total Medicaid medical assistance expenditures (i.e., including federal and state expenditures but excluding administrative expenditures). FFS Supplemental Payments as a Share of Total Medicaid Expenditures

Total Medicaid DSH and non-DSH supplemental payment expenditures as a share of total Medicaid medical assistance expenditures (i.e., including federal and state expenditures but excluding administrative expenditures) varied widely across all 50 states and the District of Columbia, ranging from 0.4% of total state Medicaid spending in North Dakota to 19.9% of total state Medicaid spending in Alabama (see Figure 1 ). FFS Supplemental Payments by Provider Type

In FY2017, nationally the majority of supplemental payment expenditures, including both DSH and non-DSH payments, were made to hospitals.
Medicaid is a means-tested entitlement program that finances the delivery of primary and acute medical services, as well as long-term services and supports. Medicaid is a federal and state partnership that is jointly financed by the federal government and the states. States must follow broad federal rules to receive federal matching funds, but they have flexibility to design their own versions of Medicaid within the federal statute's basic framework. This flexibility results in variability across state Medicaid programs.
In general, benefits are made available to Medicaid enrollees via two service delivery systems: fee for service (FFS) or managed care. Under FFS, the state Medicaid program pays health care providers for each covered service provided to a Medicaid enrollee. Under managed care, Medicaid enrollees receive most or all of their services through a managed care organization (MCO), which is under contract with the state and is paid primarily on a capitated basis (i.e., a set amount per enrollee regardless of the services used).
For the most part, states establish their own payment rates for services rendered by Medicaid providers. Payment rates vary by state. Federal statute requires these rates to be "consistent with efficiency, economy, and quality of care and … sufficient to enlist enough providers so that care and services are available" to Medicaid enrollees at least to the same extent they are available to the general population in the same geographic area. This requirement is referred to as the equal access provision. Low Medicaid provider payment rates in many states and their impact on provider participation have been perennial policy concerns. Some states rely on supplemental payments to offset low Medicaid payments for services or to support safety-net providers.
Supplemental payments are Medicaid payments to providers that are separate from and in addition to the payments for services rendered to Medicaid enrollees. For example, states may provide supplemental payments to providers to support quality initiatives, graduate medical education (GME), and certain types of facilities (e.g., rural or safety-net providers), among other reasons. Often, providers receive supplemental payments in a lump sum. States make supplemental payments through FFS, managed care, and waivers, but the mechanism for making these payments differs according to the service delivery system.
Most states make supplemental payments under FFS. Some of these payments are federally required, whereas others are optional for states. States make supplemental payments to many different Medicaid providers, such as hospitals, nursing facilities, physicians, and mental health facilities. Medicaid disproportionate share hospital (DSH) payments are the only type of FFS supplemental payment that states are required to make. States also are permitted, but not required, to make other non-DSH FFS supplemental payments, which typically are limited by upper payment limits (UPLs) for certain institutional providers. These UPLs are what Medicare would pay for the same or comparable services.
All states and the District of Columbia make either DSH or non-DSH supplemental payments under FFS, and these payments represent a sizeable percentage of total Medicaid spending. In FY2017, states reported $40.6 billion in total FFS Medicaid supplemental payment expenditures (i.e., DSH and non-DSH, including both federal and state expenditures), or 7.2% of total Medicaid medical assistance expenditures (i.e., including federal and state expenditures but excluding administrative expenditures). At the state level, total Medicaid DSH and non-DSH supplemental payment expenditures as a share of total Medicaid medical assistance expenditures (i.e., including federal and state expenditures but excluding administrative expenditures) varied widely across all 50 states and the District of Columbia. Nationally, the majority of DSH and non-DSH supplemental payment expenditures (80% of the $40.6 billion) were made to hospitals.
States also make supplemental payments through managed care and waivers. Under managed care, states historically have made pass-through payments. These payments are included in the payments states make to MCOs, and the MCOs are expected to make the payments to providers as directed by the state. Pass-through payments are not tied to services provided to Medicaid enrollees. The Centers for Medicare & Medicaid Services (CMS) also may provide Medicaid waiver authority to permit states to make certain supplemental payments that they are not otherwise permitted to make under Medicaid rules.
This report provides an overview of the most prevalent types of Medicaid supplemental payments, including FFS supplemental payments, managed care pass-through payments, and Section 1115 waiver payments. The report also presents data about Medicaid FFS supplemental payment spending by state and by provider type.