Federal law requires state Medicaid agencies to take into account the situation of hospitals that serve a disproportionate number of low-income patients with special needs when determining payment rates for inpatient hospital care. Expenditures for this Medicaid disproportionate share hospital (DSH) payment now account for 1 of every 11 (federal and state) dollars spent on Medicaid in 1996. This policy brief describes the origins and evolution of DSH; discusses DSH legislation enacted during the 1990s when DSH expenditures first began to escalate; and highlights the federal DSH provisions included in the Balanced Budget Act of 1997.