Medicaid Financing of State and County Psychiatric Hospitals

Appendix B. The Use of Intergovernmental Transfers in the Disproportionate Share Hospital Payment Program

Some observers believe that States' inclusion of Institution for Mental Diseases exclusions (IMDs) in their disproportionate hospital share (DSH) programs is closely tied to the use of intergovernmental transfers (IGTs).

A hypothetical example, adapted from Coughlin and Liska (1997), illustrates how the IGT process works (see Figure B.1). Consider a hospital with $2 million in uncompensated care. If the hospital were located in a State where the Federal match was 50 percent, the State would reimburse the hospital $2 million in DSH payments by funding $1 million itself and receiving the additional $1 million from the Federal Government as a result of the match. With an IGT, the process might change. For example, the State may pay the hospital $12 million in DSH monies, well above the actual cost of $2 million (1a). The Federal Government would match half of that payment, or $6 million (1b). If the hospital were publicly owned, the State could institute an IGT and transfer $10 million back from the hospital (2). In the end, the hospital would be just as well off; it would be reimbursed for its uncompensated care cost of $2 million, the State would receive a net of $4 million in additional monies (spending $6 million and taking back $10 million), and the Federal Government would pay out $6 million. The net of $4 million received by the State could then be applied to other operations, such as funding other mental health services, offsetting any State appropriations made to the hospitals, or just reverting to the State general fund for State-designated use (Coughlin and Liska 1997). Given this context, Coughlin and Liska (1998) have hypothesized two reasons why States decided to incorporate IMDs into their DSH programs. First, given that many IMDs are publicly owned, States may take back the money through IGTs. Second, the use of IMDs makes it easier to spread DSH payments over more hospitals and thus spend down the entire State DSH allotments, since facility-based caps limit the allotment that can go to individual facilities.

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