In 1990, California added the Disproportionate Share Program (DSH) to their Medicaid program. The DSH was to increase hospitals' fiscal incentives for treating the poor by transferring money to those who treat a disproportionate number of the indigent. The goal was to increase care for the poor. However, a recent study concludes that the DSH not only failed to increase care for the poor, but actually decreased care for the poor.

The study finds that private hospitals attracted a greater percentage of the Medicaid patients after the DSH was implemented, while rejecting a greater number of the uninsured. The study found that:

• From 1990 to 1995, private hospitals treated from 57.5 percent to 70.7 percent of all Medicaid patients, while their treatment of the uninsured dropped from 62.4 percent to 52 percent.

• From 1991 to 1998, payments from the DSH to private hospitals increased by $198 million, while payments to public hospitals decreased by $160 million.

Consequently, public hospitals have had to treat a greater number of the uninsured with less funding:

• For every dollar in DSH funding, local governments decreased funding of their hospitals by a dollar.

• Public hospitals also had to treat a larger proportion of the uninsured, rising from 37.6 percent in 1990 to 48.0 percent in 1995.

According to the study, private hospitals have used their additional revenue almost exclusively on increasing their financial assets. Consequently, private hospitals' net financial assets have increased by 2.5 million dollars, while public hospitals' net financial assets have decreased by $1.7 million dollars.

Thus, the DSH program resulted in less effective public hospitals, wealthier private hospitals and a net loss of $18 billion tax dollars -- if these results hold nationwide.

Source: Andrew Balls, "Federal Spending Brings No Extra Care," NBER Digest, October 2000. Based on Mark G. Duggan, "Hospital Ownership and Public Medical Spending," Working Paper No. w7789, July 2000, National Bureau of Economic Research, 1050 Massachusetts Avenue, Cambridge, Mass. 02138, (617) 868-3900.

For NBER summary http://www.nber.org/digest/oct00/w7789.html