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How does the Medicare DSH 15% threshold work?

Short answer

A hospital generally qualifies for a Medicare DSH payment adjustment when its disproportionate patient percentage, the sum of a Medicare/SSI fraction and a Medicaid fraction, reaches 15 percent. Below that it generally gets no DSH adjustment and no uncompensated care payment, which depends on it. Above it the adjustment rises with the percentage, though 75 percent of the amount is withheld to fund the uncompensated care pool.

Last reviewed October 19, 2026

The two fractions

A hospital's disproportionate patient percentage is determined by adding the results of two computations, then expressing the sum as a percentage (42 CFR 412.106(b)).

The Medicare/SSI fraction has, as its numerator, patient days for patients entitled to both Medicare Part A (including Medicare Advantage) and SSI, and as its denominator, all days for patients entitled to Medicare Part A. On the cost report this is Worksheet E, Part A, line 30, and the instructions say to obtain the percentage from your contractor.

The Medicaid fraction has, as its numerator, days for patients who were not entitled to Medicare Part A and who were eligible for Medicaid, and as its denominator, total patient days. A patient counts as eligible for Medicaid on a given day if the patient is eligible on that day for inpatient hospital services under a State Medicaid plan. On the cost report this is line 31, and line 32 adds lines 30 and 31 to give the hospital's DSH patient percentage.

The 15 percent threshold

The threshold is 15 percent for an urban hospital with 100 or more beds and for a rural hospital with 500 or more beds. The regulation sets the same 15 percent for the other hospital classes it lists, for discharges on or after April 1, 2001. A hospital whose percentage is below its threshold does not qualify through the percentage route.

There is a second route. Under 42 CFR 412.106(c)(2), an urban hospital with 100 or more beds that can demonstrate that, during its cost reporting period, more than 30 percent of its net inpatient care revenues are derived from State and local government payments for care furnished to indigent patients is also classified as a disproportionate share hospital, with a payment adjustment factor of 35 percent for discharges on or after October 1, 1991 (412.106(d)(2)(v)). The rest of this guide describes the percentage route.

How the adjustment grows

For a hospital that qualifies, the payment adjustment factor depends on where the percentage falls. Between 15 percent and 20.2 percent, the factor is 2.5 percent plus 65 percent of the difference between 15 percent and the hospital's percentage. Above 20.2 percent, it is 5.88 percent plus 82.5 percent of the difference between 20.2 percent and the hospital's percentage.

Some classes have a ceiling. The regulation caps the factor at 12 percent for sole community hospitals, urban hospitals with fewer than 100 beds, rural hospitals with 100 or more beds that are neither sole community hospitals nor rural referral centers, and rural hospitals with 100 or fewer beds, with an exception for Medicare-dependent small rural hospitals. Hospitals that meet the first threshold paragraph (urban with 100 or more beds, rural with 500 or more beds) and rural referral centers have no such cap in the regulation.

The 75 percent reduction and the uncompensated care payment

For discharges on or after October 1, 2013, the amounts otherwise payable under the adjustment are reduced by 75 percent (42 CFR 412.106(f)). Hospitals that qualify for payments under the section also receive an uncompensated care payment, which is the product of three factors (412.106(g)).

Factor 1 is the difference between CMS's estimates of what would have been paid without the reduction and what is paid with it: 75 percent of estimated Medicare DSH payments. Factor 2 is one minus the percent change in the share of people without insurance. Factor 3 is the hospital's share of all uncompensated care among the hospitals that receive payments, measured from Worksheet S-10.

The cliff

The uncompensated care payment goes only to hospitals that qualify for DSH payments. A hospital that qualifies through the percentage, and whose percentage slips from just above its threshold to just below it, loses the adjustment and the uncompensated care payment together unless it qualifies another way, so a small change in the percentage can move a large amount of money. The worked example below shows the adjustment on either side of the line.

What moves the percentage

The Medicare/SSI fraction is supplied to the hospital by its contractor, so the hospital cannot recompute it from its own cost report. The Medicaid fraction moves with the hospital's Medicaid-eligible days and its total days. Policy changes that alter Medicaid enrollment, such as the community engagement requirement that CMS's interim final rule (91 FR 33348, June 3, 2026) says states must implement no later than January 1, 2027, change who is eligible and so change the days counted.

As of the FY 2027 IPPS final rule, published August 4, 2026 (91 FR 49570)

Factor 1 (75% of estimated Medicare DSH payments)
$11,825,250,000
Factor 2 (one minus the change in the uninsured rate)
67.14%
Uncompensated care amount (Factor 1 x Factor 2)
$7,939,472,850
Factor 3 basis (audited Worksheet S-10, 3-year average)
FY 2021, FY 2022 and FY 2023 cost reports

These figures come from the FY 2027 final rule and change every year. They are shown for illustration; confirm the current values with CMS before relying on them. A hospital's own uncompensated care payment also depends on its Factor 3, which CMS publishes hospital by hospital in Table 18 of the rule's data files.

Worked example: an urban hospital with 100 or more beds

Illustrative percentages, not a real hospital. Adjustment factors come from the formulas above; the 25 percent column applies the 75 percent reduction.

Percentage 25.0%: factor 5.88% + 82.5% x (25.0% - 20.2%)
9.84%, of which 25% is 2.46%
Percentage 17.0%: factor 2.5% + 65% x (17.0% - 15%)
3.80%, of which 25% is 0.95%
Percentage 14.9%: below the 15% threshold
No adjustment, and no uncompensated care payment

Frequently asked questions

What does DSH stand for?
Disproportionate share hospital. It is the Medicare payment adjustment for hospitals that serve a disproportionate number of low-income patients, set out in 42 CFR 412.106.
Can a hospital recompute its own Medicare/SSI fraction?
Not from its cost report. The Worksheet E, Part A instructions tell the hospital to obtain the SSI percentage on line 30 from its contractor.
Why is the uncompensated care payment tied to the DSH threshold?
The regulation provides the uncompensated care payment to hospitals that qualify for payments under the DSH section. A hospital that does not qualify for the adjustment does not receive it.
Do the FY 2027 figures apply to every year?
No. Factor 1, Factor 2 and the cost report years behind Factor 3 are set again in each year's IPPS final rule. The regulatory formulas change much less often.

Sources

This guide is general information drawn from the sources above, last reviewed October 19, 2026. It is not legal, reimbursement, or filing advice. Rules, figures, and file listings change; confirm against the source before relying on them.

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