Medicaid Disproportionate Share Hospital (DSH) payment is one of the major funds supporting health care providers as they treat low-income patients. However, Medicaid DSH payments have been targeted for major budget cuts in many health policy reforms. This study examines the association between the changes in Medicaid DSH payments resulting from the BBA policy changes and hospital outcomes, in terms of hospital provision of uncompensated care and quality of care. Economic theory of non-profit hospital behavior is used as a conceptual framework, and longitudinal data for California short-term, non-federal general acute care hospitals for 1996-2003 are examined. California was especially affected by DSH changes because it is one of the states with highly concentrated DSH payments and high uninsured rate. Economic theory suggests that hospitals would change their uncompensated care provision as well as quality of care when confronted with a reduction in public payments. Hospital uncompensated care costs and percent of operating costs devoted to uncompensated care are used to measure the provision of hospital uncompensated care. Six AHRQ’s Patient safety indicators (PSIs) and one composite measure are selected to measure hospital quality of care provided for Medicaid and uninsured patients as well as privately insured patients. The key independent variable is Medicaid DSH payments received by individual hospitals. This study also includes control variables such as other governmental financial subsidies, market characteristics, and hospital characteristics. The primary data sources include the detailed hospital annual financial data and Medicaid annual report data at the county level from California Office of Statewide Health Planning and Development, Healthcare Cost and Utilization Project (HCUP) state inpatient data (SID), American Hospital Association Annual Survey, Area Resource File, Interstudy HMO Data and Medicare cost report data. After controlling for different factors, the study findings suggest that not-for-profit hospitals may reduce their provision of uncompensated care in response to reductions of Medicaid DSH payments. The results, however, do not support the hypotheses that for-profit hospitals may reduce uncompensated care by a smaller degree than not-for-profit hospitals for a comparable DSH decline. With respect to quality of care model, the overall study findings do not strongly support there is an association between net Medicaid DSH payments and patient adverse events for both Medicaid/uninsured and privately insured.