Medicaid: Disproportionate Share Payments to State Psychiatric Hospitals
(Letter Report, 01/23/98, GAO/HEHS-98-52).

Pursuant to a congressional request, GAO reviewed Medicaid
disproportionate share hospital (DSH) program payments to state
psychiatric institutions, focusing on: (1) how the amount of DSH
payments to state psychiatric hospitals compares with DSH payments made
to other types of hospitals; (2) how the proportion of Medicaid
beneficiaries in state psychiatric hospitals compares with the
proportion in other state hospitals; and (3) what proportion of the
maximum allowable DSH payment states paid state psychiatric hospitals
compared with the proportion of the maximum allowable paid to other
types of hospitals.

GAO noted that: (1) Medicaid DSH payments to state psychiatric hospitals
were far larger on average than payments made to other types of local
public and private hospitals in states GAO contacted, enabling the
states to obtain federal matching funds to indirectly cover costs of
services provided to patients in institutions for mental diseases (IMD)
that Medicaid cannot pay for directly; (2) overall, DSH payments to
state psychiatric hospitals averaged about $29 million per hospital
compared with $1.75 million for private hospitals; (3) in four of the
six states, the average DSH payments to state psychiatric hospitals were
also much larger than those to other state-owned hospitals; (4) in the
two other states, DSH payments to the other state-owned hospitals were
larger than payments to state psychiatric hospitals; (5) in all but one
state, the average DSH payment per bed day was also much higher for
state psychiatric hospitals than for other types of hospitals,
indicating that the large DSH payments were not simply a function of
hospital size; (6) the Balanced Budget Act of 1997 limits the proportion
of a state's DSH payment that can be paid to IMDs, which should reduce
such payments to state psychiatric hospitals in at least some cases; (7)
state psychiatric hospitals receiving DSH payments in five of the six
states GAO reviewed often served smaller proportions of Medicaid
patients than other state-owned, local public, and private hospitals;
(8) for example, the 1996 average Medicaid utilization rate at Texas
state psychiatric hospitals was about 3 percent, while the average rate
at other types of hospitals was much higher, up to 37 percent at local
public hospitals; (9) however, in one state, the state psychiatric
hospital served a higher proportion of Medicaid patients than other
hospitals receiving DSH payments; (10) the states in GAO's review
allocated DSH funds to state psychiatric hospitals at or near the
maximum allowed by Medicaid rules and made DSH payments to other
hospitals that were far below their limits; (11) each of the six states
made 1996 DSH payments to its state psychiatric hospitals at more than
90 percent of the maximum allowable amount, and four of the six states
paid these hospitals the maximum allowed; (12) other types of hospitals
often received much less; and (13) for example, local public hospitals
in Kansas as well as private hospitals in Michigan and North Carolina
all received, on average, less than 10 percent of their allowed maximum.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  HEHS-98-52
     TITLE:  Medicaid: Disproportionate Share Payments to State 
             Psychiatric Hospitals
      DATE:  01/23/98
   SUBJECT:  State-administered programs
             Mental health care services
             Health care programs
             Intergovernmental fiscal relations
             Mental hospitals
             Health care costs
IDENTIFIER:  Medicaid Disproportionate Share Hospital Program
             Kansas
             Michigan
             Texas
             North Carolina
             Maryland
             New Hampshire
             
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Cover
================================================================ COVER


Report to the Honorable
Kent Conrad, U.S.  Senate

January 1998

MEDICAID - DISPROPORTIONATE SHARE
PAYMENTS TO STATE PSYCHIATRIC
HOSPITALS

GAO/HEHS-98-52

Medicaid

(101588)


Abbreviations
=============================================================== ABBREV

  DSH - ABC
  HCFA - ABC
  HHS - ABC
  IMD - ABC

Letter
=============================================================== LETTER


B-276914

January 23, 1998

The Honorable Kent Conrad
United States Senate

Dear Senator Conrad: 

States have been searching for ways to help finance the $172 billion
Medicaid program, a jointly funded federal and state entitlement
program providing medical assistance to low-income people.  Beginning
in the mid-1980s, states began to use so-called creative financing
mechanisms, such as provider-specific taxes and voluntary
contributions, which were returned to the providers in the form of
increased Medicaid reimbursements, and disproportionate share
hospital payments to public hospitals, which were returned to the
state through intergovernmental transfers.  These mechanisms both
allowed states to increase the federal Medicaid contributions they
received without effectively increasing their own matching funds and
contributed significantly to Medicaid's more than 25-percent annual
growth in 1991 and 1992.\1 To restrict the use of some of these
mechanisms, the Congress passed the Medicaid Voluntary Contribution
and Provider-Specific Tax Amendments of 1991 that limited the sources
of state matching funds.  Through the Omnibus Budget Reconciliation
Act of 1993, the Congress added limits on payments that could be made
under the disproportionate share hospital (DSH) program to further
restrict state financing mechanisms.\2

While these legislative actions have significantly reduced the
states' use of these financing mechanisms, states continue to find
innovative ways to obtain additional federal funds.  Some observers
are now concerned that state Medicaid programs making large DSH
payments to state psychiatric hospitals are benefiting state
treasuries by indirectly paying some of the cost of institutional
services for adults that federal law prohibits Medicaid programs from
covering.\3 Because of these concerns, you asked us to follow up on
our July 1997 correspondence on DSH payments to institutions for
mental diseases and determine the extent to which this is
occurring.\4 Accordingly, our objectives were to determine (1) how
the amount of DSH payments to state psychiatric hospitals compares
with DSH payments made to other types of hospitals, (2) how the
proportion of Medicaid beneficiaries in state psychiatric hospitals
compares with that proportion in other hospitals, and (3) what
proportion of the maximum allowable DSH payment states paid state
psychiatric hospitals compared with the proportion of the maximum
allowable paid to other types of hospitals.\5

States do not routinely provide data to answer these questions to the
Health Care Financing Administration (HCFA), the agency responsible
for administering Medicaid at the federal level.  Consequently, we
visited or contacted officials in Kansas, Maryland, Michigan, New
Hampshire, North Carolina, and Texas.  We chose these states on the
basis of our analysis of the 1993 through 1995 DSH expenditure data. 
We picked Michigan and Texas for site visits because those states
reported high growth in mental health DSH expenditures during the
period.  We selected Maryland, New Hampshire, and North Carolina for
site visits because their mental health DSH expenditures represented
a high proportion of their total DSH expenditures.  In addition, we
contacted Kansas because it reported a large decline in mental health
DSH expenditures.  We obtained information on DSH payments made to
individual hospitals in 1996 from the state Medicaid agencies and
then compared them by type of hospital in each of the six states. 
Further, we examined related data on Medicaid utilization rates and
hospital-specific maximum allowable DSH payments.  Finally, we
contacted headquarters and regional officials in HCFA to discuss
Medicaid DSH payments and the statutes and regulations governing
these payments.  We performed our work between July 1997 and December
1997 in accordance with generally accepted government auditing
standards. 


--------------------
\1 For more information, see Medicaid:  States Use Illusory
Approaches to Shift Program Costs to Federal Government
(GAO/HEHS-94-133, Aug.  1, 1994). 

\2 This program provides supplemental payments to hospitals that
serve large numbers of Medicaid and other low-income patients. 

\3 Medicaid has never allowed states to pay for services provided to
individuals between the ages of 21 and 65 who are in institutions for
mental diseases (IMD).  IMDs are hospitals with more than 16 beds
that specialize in psychiatric care, such as state psychiatric
hospitals. 

\4 Medicaid:  Disproportionate Share Hospital Payments to
Institutions for Mental Diseases (GAO/HEHS-97-181R, July 15, 1997). 

\5 The Omnibus Budget Reconciliation Act of 1993 set maximum
allowable DSH payments at no more than a hospital's costs of
providing inpatient and outpatient services to Medicaid and uninsured
patients, less payments received from Medicaid and uninsured
patients. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

Medicaid DSH payments to state psychiatric hospitals were far larger
on average than payments made to other types of local public and
private hospitals in the states we contacted, enabling the states to
obtain federal matching funds to indirectly cover costs of services
provided to patients in IMDs that Medicaid cannot pay for directly. 
Overall, DSH payments to state psychiatric hospitals averaged about
$29 million per hospital compared with $1.75 million for private
hospitals.  In four of the six states, the average DSH payments to
state psychiatric hospitals were also much larger than those to other
state-owned hospitals.  In the two other states, DSH payments to the
other state-owned hospitals were larger than payments to state
psychiatric hospitals.  In all but one state, the average DSH payment
per bed day was also much higher for state psychiatric hospitals than
for other types of hospitals, indicating that the large DSH payments
were not simply a function of hospital size.  The Balanced Budget Act
of 1997 limits the proportion of a state's DSH payment that can be
paid to IMDs; this should reduce such payments to state psychiatric
hospitals in at least some of these states. 

State psychiatric hospitals receiving DSH payments in five of the six
states we reviewed often served smaller proportions of Medicaid
patients than other state-owned, local public, and private hospitals. 
For example, the 1996 average Medicaid utilization rate at Texas
state psychiatric hospitals was about 3 percent, while the average
rate at other types of hospitals was much higher, up to 37 percent at
local public hospitals.\6 However, in one state, the state
psychiatric hospital served a higher proportion of Medicaid patients
than other hospitals receiving DSH payments. 

The states in our review allocated DSH funds to state psychiatric
hospitals at or near the maximum allowed by Medicaid rules and made
DSH payments to other hospitals that were far below their limits. 
Each of the six states made 1996 DSH payments to its state
psychiatric hospitals at more than 90 percent of the maximum
allowable amount, and four of the six states paid these hospitals the
maximum allowed.  Other types of hospitals often received much less. 
For example, local public hospitals in Kansas as well as private
hospitals in Michigan and North Carolina all received, on average,
less than 10 percent of their allowed maximum. 


--------------------
\6 A hospital's Medicaid utilization rate is its number of inpatient
days for Medicaid beneficiaries divided by its total number of
inpatient days. 


   BACKGROUND
------------------------------------------------------------ Letter :2

In 1965, Medicaid was established as a jointly funded federal and
state program providing medical assistance to qualified low-income
people.  At the federal level, the program is administered by HCFA,
an agency within the Department of Health and Human Services (HHS). 
Within a broad legal framework, each state designs and administers
its own Medicaid program.  States decide how much to reimburse
providers for each service and whether to cover optional services,
such as eyeglasses and dental care. 

The federal and state governments share in the cost of Medicaid, with
the federal government paying at least 50 percent and not more than
83 percent of a state's costs, as determined by a formula.  This
formula considers a state's average per capita income relative to the
national per capita income and is intended to reduce differences
among the states in medical care coverage to the poor and to
distribute the burden of financing program benefits fairly among the
states.  The formula-derived match rate is called the federal medical
assistance percentage.  In fiscal year 1997, the federal government
share averaged about 57 percent of Medicaid expenditures. 

Besides making payments to medical providers for services rendered,
states are required to make additional Medicaid payments (DSH
payments) to hospitals that serve large numbers of Medicaid and other
low-income patients.  Within federal guidelines, states may designate
disproportionate share hospitals but must include hospitals with high
utilization rates for Medicaid or low-income patients.  Hospitals
must receive DSH payments if their Medicaid utilization rate is at
least one standard deviation greater than the average for hospitals
participating in Medicaid or if their low-income utilization rate
exceeds 25 percent.  States may designate other hospitals to receive
DSH funding if the hospital's Medicaid utilization rate is at least 1
percent of its total bed days. 

Total DSH allocations to states are limited by federal formula, and
within states, payments to individual hospitals are limited to the
costs of uncompensated care that hospitals provide plus the shortfall
between costs and payments for care of Medicaid patients.  In
addition to designating certain hospitals to receive DSH payments,
federal rules give states three options for setting minimum DSH
payments.  Within these limits, states have broad discretion when
determining the size of Medicaid DSH payments to individual
hospitals. 

The creative financing mechanisms that states began using in the
mid-1980s to maximize federal Medicaid contributions without
effectively committing their own share of matching funds took various
forms.  One involved using provider-specific tax revenue or provider
donations to fund a state's share of a later Medicaid payment to the
providers.  For example, hospitals might have paid $50 million in
taxes or provider donations to the state.  The state, in turn, made
$60 million in payments to hospitals.  The state received federal
matching funds based on the Medicaid expenditure of $60 million.  If
the state had a 50-percent matching rate, it received $30 million of
federal funds.  Because the state received $80 million in revenue
($50 million from hospitals and $30 million from the federal
government) and made $60 million in payments, it had a net gain of
$20 million.  Also the hospitals received a net increase in revenues
of $10 million, entirely from federal dollars. 

States also benefited when they used their own funds to initiate
payments to public providers.  Under this financing mechanism, states
generated federal matching funds by increasing payment rates for a
particular group of public providers, such as nursing homes, public
hospitals, or state psychiatric hospitals.  However, these providers,
through the use of intergovernmental transfers, returned all or the
majority of federal and state funds to state treasuries. 

Federal legislation in 1991 and 1993 essentially banned provider
donations, required that provider taxes be broad based, limited
provider taxes to 25 percent of a state's share of Medicaid
expenditures, and prevented states from repaying provider taxes. 
Also, the legislation placed a cap on a state's total DSH payments
and limited such payments to 100 percent of a hospital's unrecovered
costs of serving Medicaid and uninsured patients.  As these and other
restrictions have been phased in, Medicaid DSH payments have dropped
from a peak of $17.9 billion in 1995 to $14.7 billion in 1996. 
However, the legislation did not restrict states' use of
intergovernmental transfers.  Creative financing mechanisms involving
DSH payments to public hospitals and intergovernmental transfers are
still possible, although the limit for DSH payments of 100 percent of
unrecovered costs constrains the hospitals from recovering more than
their actual costs. 

The federal government has never shared in the costs of services
provided to adults in IMDs because mental health services have
traditionally been considered a state and local responsibility. 
These hospitals may be reimbursed by Medicaid for services for
patients younger than 21 or older than 64.  They are also eligible
for DSH payments, like other hospitals, if their Medicaid utilization
rate is at least 1 percent.  The majority of IMDs that receive DSH
payments are state psychiatric hospitals. 


   STATES MADE LARGER DSH PAYMENTS
   TO STATE PSYCHIATRIC HOSPITALS
   THAN TO OTHER HOSPITALS
------------------------------------------------------------ Letter :3

Medicaid DSH payments in 1996 to state psychiatric hospitals in the
six states were generally far larger than those to other types of
hospitals.  The states in our review devoted a significant share,
from 20 to 89 percent in 1996, of their total DSH expenditures to
state mental hospitals.  DSH payments to state psychiatric hospitals,
and other state-owned hospitals, enabled states to obtain federal
Medicaid matching funds benefiting the state treasury.  The Balanced
Budget Act of 1997 should reduce the DSH payments to state
psychiatric hospitals from 1996 levels in some of our study states,
because it limits the proportion of a state's DSH spending that may
be paid to state psychiatric hospitals.\7 However, the amount of the
reductions will depend in part on how states use the flexibility
inherent in the Medicaid program. 

Four of the six states in our study made DSH payments to state
psychiatric hospitals that were larger on average than payments to
any other type of hospital.  In Michigan and Texas, payments to state
psychiatric hospitals were on average less than to other state-owned
hospitals.  However, in both Michigan and Texas, payments to state
psychiatric hospitals still averaged far more than payments to local
public and private hospitals.  Table 1 shows the average 1996 DSH
payment for each type of hospital in the states we reviewed. 



                                         Table 1
                         
                         Average DSH Payments per Hospital in Six
                              States, State Fiscal Year 1996

                                                              New       North
Type of hospital       Kansas    Maryland    Michigan   Hampshire    Carolina       Texas
-----------------  ----------  ----------  ----------  ----------  ----------  ----------
State psychiatric     $12,814     $14,314     $26,774     $45,041     $36,516     $38,545
Other state-            1,987          36      42,834           0      18,164      57,134
 owned
Local public               64           0       1,206           0       1,453       8,213
Private \                 259       2,722         688       3,310         185       3,310
-----------------------------------------------------------------------------------------
Note:  Dollars are in thousands.  Excludes hospitals not receiving
DSH payments. 

To determine whether the large DSH payments were a function of
hospital size, we compared the average DSH payment per bed day for
each type of hospital in the six study states.  For five states, this
ratio was greater for state psychiatric hospitals--and for other
state-owned hospitals in one state--than for other types of
hospitals, indicating that the difference in average DSH payments
between groups does not result from differing hospital size.  For
example, Kansas state psychiatric hospitals received more than $150
in DSH for each bed day, while private hospitals received about $5,
and average DSH payments per bed day to other state-owned hospitals
and local public hospitals were about $19 and $11, respectively. 
Table 2 shows the average DSH payment per inpatient bed day in 1996
for the different types of hospitals in the six states. 



                                         Table 2
                         
                          Average DSH Payments per Inpatient Bed
                           Day in Six States, State Fiscal Year
                                           1996

                                                              New       North
Type of hospital       Kansas    Maryland    Michigan   Hampshire    Carolina       Texas
-----------------  ----------  ----------  ----------  ----------  ----------  ----------
State psychiatric        $154        $217        $390        $756        $280        $366
Other state-               19           2         165         Not         105         666
 owned                                                 applicable
Local public               11         Not          63         Not          29         396
                               applicable              applicable
Private                     5          35          11         155           4          76
-----------------------------------------------------------------------------------------
DSH payments made to state psychiatric hospitals account for a
significant portion of the total DSH payments made in these six
states.  In fact, three of the six allocated more than half of their
total DSH spending to state psychiatric hospitals.  Table 3 shows the
percentage of total DSH payments made to state psychiatric hospitals
in 1996. 



                          Table 3
          
             DSH Payments to State Psychiatric
           Hospitals in Six States Compared With
           Total DSH Payments, State Fiscal Year
                            1996

                  DSH payments
                      to state
                   psychiatric     Total DSH
State                hospitals       payment       Percent
----------------  ------------  ------------  ------------
Kansas                   $51.2         $57.4            89
Maryland                 114.5         152.6            75
Michigan                 240.9         347.5            69
New Hampshire             45.0         137.7            33
North Carolina\a         146.1         362.8            40
Texas                    308.4       1,517.3            20
----------------------------------------------------------
Note:  Dollars in millions. 

\a Payment data for North Carolina are estimates, because final cost
settlements for 1996 had not been completed at the time of our
review. 

DSH payments to state psychiatric hospitals benefited the state by
the amount of the federal portion of the DSH payment, because the
federal funds were returned to the state treasury or replaced money
the state would otherwise have needed to spend for hospital
operations.  For example, DSH payments made to New Hampshire
Hospital, a state psychiatric hospital, are treated as board-and-care
revenue to the hospital and returned to the state's general fund. 
The DSH payment returned to the treasury consists of both state funds
spent and the federal contribution, resulting in a gain to the state
treasury of the federal portion of the DSH payment, or 50 percent. 

In other states, officials told us that Medicaid DSH payments to
state-operated hospitals reduced, by the federal share of the DSH
payments, the amount of state funds spent to operate the hospital. 
For example, officials from Texas told us that the availability of
DSH payments to state psychiatric hospitals has allowed the state to
change its financing for these hospitals.  They told us that while
appropriation statutes for state psychiatric hospitals provided for
general state revenues to cover full hospital operations, the amount
of state-appropriated funds actually spent to operate these hospitals
is reduced by the federal share of the DSH payment.  If the DSH
payment were not available, more of the appropriated funds would
actually be spent on hospital operations. 


--------------------
\7 DSH payments to institutions for mental diseases will be limited
to the lesser of 1995 mental health DSH payments or the "applicable
percentage" times the state's total DSH allotment for that year.  For
federal fiscal years 1998-2000, the applicable percentage is the
ratio of 1995 total mental health DSH payments to total DSH payments. 
For federal fiscal years 2001 and beyond, the applicable percentage
is the lesser of the applicable percentage above, or 50 percent in
2001, 40 percent in 2002, and 33 percent for succeeding years. 


   PROPORTION OF STATE PSYCHIATRIC
   HOSPITALS' BED DAYS FOR
   MEDICAID PATIENTS IS SMALLER
   THAN FOR MOST OTHER HOSPITALS
------------------------------------------------------------ Letter :4

State psychiatric hospitals in the six states generally served
relatively fewer Medicaid patients than other hospitals while
receiving larger DSH payments.  Only 6 of 34 state psychiatric
hospitals in the six states have a Medicaid utilization rate higher
than 25 percent.  However, this calculation does not include patients
between ages 21 and 65 who would have been eligible for Medicaid
coverage if they were not in an IMD.  Some of these hospitals serve
many children covered by Medicaid.  States are allowed to designate
other hospitals to receive DSH payments as long as they have at least
1-percent Medicaid utilization.  Average Medicaid utilization rates
for state psychiatric hospitals in 1996 ranged from 3.1 percent in
Texas to 22.1 percent in Kansas.  In three states, at least one IMD
had a Medicaid utilization rate close to the 1-percent minimum
necessary to qualify for DSH.  For example, one of the eight state
psychiatric hospitals in Texas had a 1.4-percent rate, and five other
Texas state psychiatric hospitals had rates lower than 3 percent. 

Other types of hospitals, with lower DSH payments, generally had
higher, and in some cases much higher, Medicaid utilization rates. 
Other state-owned hospitals in Maryland, for example, had average
Medicaid utilization rates five times as great as the average for the
state's psychiatric hospitals.  North Carolina private hospitals
averaged 19-percent Medicaid utilization, but the state's four state
psychiatric hospitals averaged less than half that rate, and the
state psychiatric hospital with the highest rate (18 percent) still
fell below the private hospitals' average.  Table 4 shows the average
Medicaid utilization for each type of hospital for our study states
in 1996. 



                                         Table 4
                         
                          Average Medicaid Utilization Rates in
                            Six States, State Fiscal Year 1996

Type of                                                       New       North
hospital           Kansas      Maryland    Michigan     Hampshire    Carolina       Texas
-------------  ----------  ------------  ----------  ------------  ----------  ----------
State                22.1          13.5        16.7          17.5         9.3         3.1
 psychiatric
Other state-         28.1          72.9        28.3           Not        32.4        27.8
 owned                                                 applicable
Local public         42.6           Not        19.3           Not        21.9        37.0
                             applicable                applicable
Private              22.2          37.9        26.8           6.8        19.0        27.7
-----------------------------------------------------------------------------------------
Note:  Figures are percentage of total bed days. 

An exception to the pattern of higher Medicaid utilization rates in
private hospitals is New Hampshire.  There, the only state
psychiatric hospital has a center for children, about 80 percent of
whom qualify for Medicaid. 


   STATES PAID STATE PSYCHIATRIC
   HOSPITALS AND OTHER STATE-OWNED
   HOSPITALS A HIGHER PROPORTION
   OF MAXIMUM ALLOWABLE DSH
   PAYMENTS
------------------------------------------------------------ Letter :5

State psychiatric hospitals generally received DSH payments at or
near the maximum allowed by Medicaid rules, while other hospitals
often received payments that were well below their maximums.  Within
federal limits, states targeted DSH payments to state psychiatric
hospitals and in some cases to other state-owned hospitals.  Local
public hospitals and private hospitals generally received DSH
payments at rates that were a smaller proportion of the maximum
allowable.  In some cases, the proportions were much smaller, as for
local public hospitals in Kansas, which received only 8 percent of
the maximum the state could have paid them.  Table 5 shows the
percentage of the maximum allowable DSH payments made to each group
of hospitals for our study states in 1996. 



                                         Table 5
                         
                             DSH Payments in Six States as a
                          Percentage of Maximum Allowable, State
                                     Fiscal Year 1996

Type of                                                       New       North
hospital           Kansas      Maryland    Michigan     Hampshire  Carolina\a       Texas
-------------  ----------  ------------  ----------  ------------  ----------  ----------
State               100.0          91.0       100.0         100.0       100.0        99.7
 psychiatric
Other state-         34.7           1.8       100.0           Not       100.0       100.0
 owned                                                 applicable
Local public          8.1           Not        60.5           Not       100.0        77.9
                             applicable                applicable
Private              10.7          21.0         9.4          78.1         3.4        79.0
-----------------------------------------------------------------------------------------
\a Payment data for North Carolina are estimates, because final cost
settlements for 1996 had not been completed at the time of our
review. 

Individual hospital maximum DSH payments were established by the
Omnibus Budget Reconciliation Act of 1993, which limits each
hospital's DSH payment to its cost of care for uninsured and Medicaid
patients, less payments received from them or on their behalf.  The
cost of care for patients who have insurance is not included in the
determination.  Similarly, state and local funds appropriated to a
hospital are not included in the calculation of individual hospital
limits. 

DSH payments to other state-owned hospitals can provide to the state
benefits similar to those of large DSH payments to state psychiatric
hospitals.  In some states, these hospitals used intergovernmental
transfers to return their DSH funds to the state treasury.  In
addition, officials from North Carolina told us that local public
hospitals returned the majority of their DSH payments to the state. 


   CONCLUSIONS
------------------------------------------------------------ Letter :6

In state fiscal year 1996, state psychiatric hospitals in the six
states we reviewed received between 20 and 89 percent of total
Medicaid DSH payments, even though state psychiatric hospitals
represented a much smaller portion of the number of hospitals in the
states and even though state psychiatric hospitals often had lower
Medicaid utilization rates than other hospitals.  In each of the six
states, payments to state psychiatric hospitals covered more than 90
percent of the maximum allowable payment to state psychiatric
hospitals.  These large DSH payments have enabled states to obtain
federal matching funds that indirectly cover costs of services that
state Medicaid programs cannot pay for directly.  Implementation of
restrictions on payments to IMDs in the Balanced Budget Act of 1997
should reduce some of these large payments. 


   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :7

We provided a draft of this report to the HCFA Administrator for
review and comment.  HCFA officials who reviewed the report told us
that the report was accurate.  They pointed out that although DSH
payments to IMDs enable the states to obtain federal matching funds
to indirectly cover the costs of services provided to patients in
IMDs that Medicaid cannot pay for directly, this is within the rules
of the Medicaid program.  They also suggested some technical changes
to the report, and we modified the text to reflect their comments. 
We also discussed the information in the report on the states with
officials in each state.  They provided technical comments that we
incorporated as appropriate. 


---------------------------------------------------------- Letter :7.1

We are sending copies of this report to the Secretary of HHS, the
Administrator of HCFA, state officials in the states we contacted,
and others who are interested.  We will also make copies available to
others upon request.  Please call me at (202) 512-7114 or Leslie G. 
Aronovitz at (312) 220-7600 if you or your staff have any questions
about this report.  Other major contributors to this report include
Paul D.  Alcocer, Robert T.  Ferschl, Barbara A.  Mulliken, and Paul
T.  Wagner, Jr. 

Sincerely yours,

William J.  Scanlon
Director, Health Financing and
 Systems Issues


*** End of document. ***