Background

The IPPS provides incentives for hospitals to operate efficiently by paying  a predetermined, standardized amount for an entire inpatient episode of a  given type rather than the actual costs incurred in providing the care.  CMS calculates IPPS payments through a series of adjustments applied  to separate national base payment rates covering operating and capital  expenses. Specifically, the agency adjusts the base payment rates for  patients in different diagnosis-related groups, assuming that cases falling  into a particular grouping address similar clinical problems that are  expected to require similar amounts of hospital services.applies an area wage index to account for geographic differences in labor  costs. Finally, CMS determines whether supplemental Medicare  payments or other types of special treatment, such as those provided to  certain rural hospitals, are applicable.

		Area Wage Index

CMS adjusts hospital payments under IPPS using the area wage index,  to account for variation in labor costs across the country, as these costs  are largely beyond any individual hospital’s ability to control. The wage  index reflects how average hospital wages in each geographic area  compare to average hospital wages nationally, set as 1.0. Thus, Medicare  payment to a hospital in an area with lower wages is generally below the  national average payment and the payment to a hospital in a higher wage  area is generally above the national average. CMS considers each  distinct urban area as a single labor market, but it considers all rural  areas within a state as a single labor market and therefore assigns them  the same wage index. If its wage index does not fully account for its  relative labor costs, a hospital may qualify to be reclassified to a higher  wage index area in order to receive higher Medicare payments. To  request a reclassification to another geographic area, hospitals may apply  to the Medicare Geographic Classification Review Board (the Board), an  entity established by Congress. Among various criteria for reclassification,  a hospital must demonstrate close proximity to the area for which it is  seeking redesignation.

		Medical Education Payments

Medicare reimburses teaching hospitals and academic medical centers  for both the direct and indirect costs of their residency training programs.  Direct graduate medical education payments cover the direct costs of  resident training, such as salaries and benefits. The indirect medical  education (IME) adjustment—a percentage add-on to IPPS rates— reflects the higher patient care costs associated with resident education.  The size of the IME adjustment depends on the hospital’s teaching  intensity, which is generally measured by a hospital’s number of residents  per bed.

		Medicare Disproportionate Share Hospitals

The Medicare disproportionate share hospital (DSH) adjustment generally  provides supplemental payments to hospitals that treat a disproportionate  number of low-income patients. To qualify for this payment adjustment,  a hospital’s disproportionate patient percentage (DPP)—the share of  low-income patients treated by the hospital—must generally equal or  exceed a specific threshold level determined by a statutory formula.amount of Medicare DSH payment adjustment varies by hospital location  and size.

		Types of Rural Providers under IPPS

Rural hospitals may qualify for special treatment in determining payment  rates under IPPS, although some urban hospitals may also qualify,  through three programs: sole community hospitals (SCH), rural referral   In some  centers (RRC), and Medicare-dependent hospitals (MDH).cases, hospitals may qualify for more than one of these rural provider  types, allowing them to receive multiple adjustments to their IPPS  payment rates.

	Numerous Statutory Provisions Have Resulted in Increased Medicare Payments to Certain Hospitals

We identified 16 statutory provisions enacted between 1997 and 2012  that modified Medicare payment for inpatient services in a way that  benefitted a subset of hospitals. These provisions allow hospitals to  receive adjustments to their wage index, alter classification criteria for  supplemental payments or other special treatment, or exclude hospitals  from the IPPS. Most of the provisions we identified targeted rural  hospitals for increased payment.

		Some Provisions Have Enabled Hospitals to Qualify for a Different Wage Index

We identified seven statutory provisions that have enabled hospitals to  receive Medicare payment under a higher or nearby wage index. Some  provisions moved hospitals in specific, named counties into different  wage index areas, or set a minimum wage index for hospitals meeting  certain criteria. Other provisions allow hospitals to reclassify from an  urban to a rural area. Still others enable rural hospitals near urban areas  to qualify for the higher wage index of the nearby area.
Section 4410 of BBA established a rural floor by requiring that the area  wage index for a hospital in an urban area of a state could not be less  than the area wage indexes for hospitals in that state’s rural area. The  provision applied to patient discharges beginning in fiscal year 1998, and  specified that the implementation of the rural floor must be budget  neutral—that is, any changes in the wage index for hospitals subject to  the floor may not increase or decrease aggregate Medicare payments for  the operating costs of inpatient services. Initially, this upwards  adjustment only applied in states with at least one rural IPPS hospital.  The rural floor provision increased the wage index for hospitals in urban  areas that had been paid under a lower wage index than the rural areas  of that state. In order to compensate for the increased wage indexes of  urban hospitals receiving the rural floor, CMS initially applied a nationwide  budget-neutrality adjustment to account for the additional payment to  these hospitals.
In fiscal year 2009, CMS changed this policy and began phasing in a  revised rural floor budget-neutrality adjustment that would be calculated  and applied on a state-by-state basis instead of on a nationwide basis. To  do so, the agency blended the nationwide and state-by-state budget  neutrality formulas for fiscal year 2009 and fiscal year 2010.within each state, some hospitals’ wage index increased, while other  hospitals’ wage index decreased, in order to ensure that total Medicare  payments to hospitals in that state remained the same.
As a result,  Section 3141 of PPACA reversed this policy by requiring that any  adjustments to the wage index must be applied on a budget-neutral basis  through a uniform national adjustment beginning in fiscal year 2011.  The application of the national budget-neutrality requirement has resulted  in a transfer of Medicare payments from hospitals in states where no  hospitals qualified for the rural floor to hospitals in states where at least  one hospital qualified for this adjustment. (For information on the impact  of this provision by state, see app. I.) In fiscal year 2012, the effect of this  PPACA provision was that hospitals in seven states (Alaska, California, Colorado, Connecticut,  Massachusetts, New Hampshire, and New Jersey) and Puerto Rico  received increased hospital payments; hospitals in Massachusetts received the largest increase in  payments—nearly $275 million—five times greater than New Jersey,  the next largest recipient;  to pay for the rural floor in these states, hospital payments in other  states were adjusted downward by as much as 0.5 percent, with a  median state reduction of $7.3 million; and hospitals in five states saw declines of over $20 million: New York  ($47.5 million), Texas ($34 million), Florida ($29 million), Illinois   ($26 million), and Michigan ($21 million).
Specific County and Area  Reclassifications (Expired)
Section 152 of BBRA reclassified hospitals in seven named counties or  areas, deeming them to be located in specifically named large  metropolitan areas, thus enabling them to qualify for the wage index of  that area. This provision benefitted hospitals in these counties that  competed for labor with nearby hospitals in higher wage areas. The  BBRA limited this reclassification to discharges during fiscal year 2000  and fiscal year 2001. Hospitals in the following specified counties were  reclassified:  Iredell County, North Carolina, was deemed to be located in the  Charlotte-Gastonia-Rock Hill, North Carolina-South Carolina  metropolitan statistical area (MSA);
Orange County, New York, was deemed to be part of the large urban  area of New York, New York;
Lake County, Indiana, was deemed to be located in the Chicago,
Lee County, Illinois, was deemed to be located in the Chicago, Illinois
Hamilton- Middletown, Ohio, was deemed to be located in the  Cincinnati, Ohio-Kentucky-Indiana MSA;
Brazoria County, Texas, was deemed to be located in the Houston,
Chittenden County, Vermont, was deemed to be located in the  Boston-Worcester-Lawrence-Lowell-Brockton, Massachusetts-New  Hampshire MSA.
Section 401 of BBRA allowed certain urban hospitals, beginning   January 1, 2000, to request to be reclassified as rural hospitals for  payment purposes under the IPPS. Generally, these hospitals may seek  a lower wage index in a rural area in order to receive higher payments as  a rural provider type, such as an SCH. According to CMS, the provision  benefits hospitals that are within an urban area, but are isolated from the  metropolitan core by distance or physical features. Under the BBRA  provision, to qualify for this reclassification, a hospital must submit an  application and meet one of the following criteria: be located in a rural portion of an MSA or an area defined as rural by be designated as a rural hospital by the state; would qualify as a rural, regional, or national referral center, or as an  SCH if the hospital was located in a rural area; or meet other criteria established by CMS.
By fiscal year 2013, 46 urban hospitals, comprising 1.3 percent of IPPS  hospitals, had been reclassified by CMS as rural under this provision.  Seven states—California, Florida, Missouri, New York, Pennsylvania,  Texas, and Virginia—had more than two qualifying hospitals.
Section 505 of MMA required that HHS establish a process, beginning in  fiscal year 2005, by which the agency may increase the wage index for  hospitals located in counties where potential employees commute to  higher wage index areas. The provision benefits hospitals located in  counties where a higher than average percentage of hospital employees  reside in that county but work in another county that has a higher wage  index. Hospitals in qualifying counties receive an average of the  differences between the higher and lower wage indexes, weighted by the  percentage of hospital workers in the qualifying county who work in the  higher-wage areas.
In the first year of implementation, fiscal year 2005,  the wage index increased for 555 eligible hospitals, representing  nearly 14 percent of IPPS hospitals; eligible hospitals had an average of 140 beds;
California, Texas, and Michigan had the most eligible hospitals with  89, 44, and 40 hospitals, respectively;
Massachusetts, Michigan, and Connecticut had the most qualifying  hospitals as a percentage of all hospitals in the state with 45, 31, and  29 percent, respectively; and
Utah, Minnesota, and Georgia benefited from the largest Medicare  payment adjustment as a result of their qualifying status.
Onetime Appeal of Wage Index  Reclassification by the Board  (Expired)
Section 508 of MMA required HHS to establish a process by January 1,  2004, so that a hospital denied a request to be reclassified to the wage  index of another area in its state could submit a onetime appeal to the  Board. The provision required the Board to grant appeals of and  reclassify qualifying hospitals, defined as those hospitals that did not  originally qualify for reclassification on the basis of distance or commuting  requirements but met other criteria such as quality factors, as specified by  HHS. The provision limited reclassifications to a three-year period for  appeals filed by February 15, 2004. The provision also capped additional  Medicare expenditures resulting from these reclassifications to   $900 million over the initial 3-year period. We found that, in its first year of  implementation,
130 hospitals, or approximately 3 percent of all IPPS hospitals,  qualified for this adjustment; and  four states—Connecticut, Michigan, North Dakota, and  Pennsylvania—had at least 10 qualifying hospitals each.
While originally enacted as a onetime and time-limited provision,  Congress extended reclassifications made under this provision numerous  times until they expired on March 31, 2012.
Section 10324 of PPACA established a hospital wage index floor  adjustment, beginning with discharges as of fiscal year 2011, for hospitals   The provision defined a frontier state as one in  located in frontier states.which at least 50 percent of counties have a population of fewer than   6 people per square mile and set the wage index in these areas at no  lower than 1.0. In other words, while the wage index for all other states is  a ratio of the average hourly hospital wage in the area to the national  average, if the wage index of a frontier state is lower than the national  average—or less than 1.0—this provision adjusts the wage index to 1.0.  Prior to implementation, CMS projected that  five states would meet the criteria to be designated as a frontier state:  Montana, Nevada, North Dakota, South Dakota, and Wyoming;
48 out of 82 IPPS hospitals in those states would be eligible for a  modified wage index that is at least 1.0; and  IPPS payments would increase by approximately $50 million in the  first year.

		Provisions Modifying Classification Criteria for IPPS Supplemental Payments or Other Types of Special Treatment

We identified five statutory provisions that have affected the number of  hospitals that qualify for IPPS supplemental payments or other types of  special treatment. Most of these provisions modified the classification  criteria for payment adjustments, thereby expanding the number of  hospitals that qualify for higher payments.
Section 211 of BIPA revised the Medicare threshold criteria for DSH,  resulting in an increased number of hospitals qualifying for a payment  adjustment. Effective for discharges as of April 1, 2001, this provision  allowed hospitals, regardless of location and size, to receive a DSH  adjustment with a DPP of 15 percent or greater. Originally, different types  of hospitals qualified for a DSH adjustment on the basis of varying DPP  thresholds. For instance, urban hospitals with 100 or more beds qualified  for a DSH payment with a minimum DPP of 15 percent, whereas urban  hospitals with fewer than 100 beds qualified for a DSH payment  adjustment with a minimum DPP of 40 percent. CMS reported that this  adjustment of the DPP qualifying threshold added 1,191 primarily rural and small urban hospitals to those already  receiving a DSH adjustment; for example, 351 additional rural  hospitals with fewer than 100 beds and 244 additional urban hospitals  with fewer than 100 beds started receiving a DSH adjustment after  implementation; would increase Medicare spending by $60 million from fiscal year  2001 through fiscal year 2002; and would not negatively affect any hospitals.
Section 402 of MMA modified the formulas used to calculate the DSH  payment adjustment for certain hospitals, thereby increasing payments to  these hospitals. Specifically, effective with discharges as of April 1,  2004, the DSH adjustment formula used for large urban hospitals was  applied to other types of hospitals, including SCHs, RRCs, other rural  hospitals with fewer than 500 beds, and urban hospitals with fewer than  100 beds. In addition, this provision capped this DSH payment  adjustment at 12 percent of the hospital’s IPPS rate, while exempting  RRCs from this cap. For instance, an urban hospital with fewer than   100 beds that qualifies for a DSH payment adjustment of 18.1 percent is  capped at the maximum 12 percent payment adjustment.
Section 406 of MMA established a new payment adjustment for low- volume hospitals beginning in fiscal year 2005 that accounts for the  higher costs per discharge at hospitals that admit a relatively small  number of patients. To qualify, hospitals had to be located more than  25 miles from another hospital and have fewer than 800 total discharges  annually. The provision required CMS to determine, on the basis of  empirical data, applicable percentage increases, not to exceed   25 percent, in payments for qualifying low-volume hospitals. CMS  explained in issuing the final rule implementing this MMA provision that  the agency analyzed data and determined that hospitals with fewer than  200 discharges a year have sufficiently higher costs relative to payments  to justify receiving a payment adjustment, but that hospitals with 200 to  800 discharges a year did not. CMS provided the maximum 25 percent  payment adjustment only to those qualifying hospitals that were located  more than 25 miles from another hospital and had fewer than 200  discharges in a given year. CMS reported that
CBO estimated this provision would increase Medicare program  expenditures by less than $50 million annually, and only three hospitals—one located in Florida and two located in South  Dakota—received a low-volume payment adjustment in fiscal year  2005. All were small (30 or fewer beds) rural hospitals classified as  SCHs.
Section 3125, as amended by section 10314, of PPACA temporarily  revised the qualifying criteria for a low-volume hospital designation  making it easier for hospitals to receive the payment adjustment.  Effective for fiscal year 2011 and fiscal year 2012, this provision  decreased the required distance from the nearest hospital from 25 miles  to 15 miles. In addition, it changed the maximum number of annual  discharges allowed from 800 total patients to 1,600 Medicare Part A  beneficiaries. The provision also required that payment adjustments for  qualifying low-volume hospitals be calculated using a continuous sliding  scale, paying up to an additional 25 percent to hospitals with 200 or fewer  annual Medicare Part A discharges.
As a result of these changes, both the number of hospitals receiving the  low-volume payment adjustment and the estimated Medicare  expenditures rose substantially. CMS reported that over the 2-year period, fiscal year 2011 and fiscal year 2012, the  provision was estimated to cost Medicare approximately $880 million;  and  the number of hospitals that received a payment adjustment rose to  approximately 645—or about 18 percent of IPPS hospitals—in fiscal  year 2011 from 3 hospitals the year before.
We found that, in fiscal year 2011, at least 40 percent of IPPS hospitals in each of 6 states received a  low-volume adjustment: Wyoming (67 percent), Vermont (50 percent),  New Mexico (43 percent), Minnesota (42 percent), Alabama   (41 percent), and Mississippi (41 percent); and  recipient hospitals were relatively small,rural areas, and likely to also receive a DSH payment adjustment.
Section 212 of BIPA modified one aspect of the MDH classification  criteria. Effective for cost reporting periods beginning April 1, 2001, it  changed the data source used to determine whether at least 60 percent  of a hospital’s discharges were Medicare beneficiaries. This provision  allowed a hospital to base this determination on two of the three most  recently audited fiscal year cost reporting periods.  Prior to this change, discharge data were based on cost reporting periods beginning in 1987.
This provision did not initially have a significant effect on the number of  qualifying hospitals or on Medicare payments. CMS estimated that a total  of 139 hospitals—all of which had previously been designated as  MDHs—would qualify as an MDH using this revised data source. The  agency further estimated that Medicare would spend an additional   $10 million in the first year of implementation. It is likely that this provision  had a greater effect on the number of hospitals qualifying for an MDH  classification in later years because it allowed hospitals to use recent,  rather than outdated, cost reports.

		Provisions Creating and Modifying Qualifying Criteria for CAHs

In 1997, Congress established the Critical Access Hospital (CAH)  program, under which qualifying small rural hospitals are excluded from  the IPPS and receive Medicare payment based on the reasonable costs  of providing services. In effect, CAHs receive higher payments for  providing services to Medicare beneficiaries than they would under the  IPPS. Specifically, section 4201 of BBA allowed states to apply for  approval to create a Medicare Rural Hospital Flexibility program (Flex  Program), under which states must designate at least one hospital as a   To be designated as a CAH, hospitals had to meet the following  CAH.qualifying criteria:  type of organization: nonprofit or public hospital;  services: must provide 24-hour emergency services deemed  necessary for ensuring access in each area served by the CAH;  location: rural county or other rural area in states with approved Flex  Programs; size: no more than 15 acute care inpatient beds; average inpatient stay: no more than 4 days (subject to certain  exceptions) patient access: (a) located either more than 35 miles from the nearest  hospital or CAH or more than 15 miles in areas with mountainous  terrain or only secondary roads, or (b) designated by the state as a  necessary provider of health care services to residents in the area.
Prior to implementation, CMS reported that approximately 51 facilities in  seven states—those participating in the demonstration program that  preceded the CAH program—would be eligible to become CAHs. While  the CAH program was expected to grow, CMS was not able to estimate  reliably how many additional states would choose to participate or the  potential cost of the CAH program to Medicare.
Section 403 of BBRA made a number of changes to qualifying criteria for  the CAH program. First, the provision changed the inpatient length of  stay requirement from a maximum of 4 days to an annual average of   4 days. Second, the provision removed the requirement that eligible  hospitals must be nonprofit or public, allowing for-profit hospitals to qualify  as CAHs, if so approved by their state. Third, the provision permitted a  state to designate as a CAH not only a currently operating hospital, but  closed facilities or facilities that were previously hospitals but currently  operate as a state-licensed health clinic or health center, if the facilities   Data indicate that in the 2 years following the  meet all other criteria.enactment of BBRA in 1999, 411 hospitals were newly designated as  CAHs.
See MMA, Pub. L. No. 108-173, § 405(e), (g), (h), 117 Stat. at 2266 (codified, as  amended, at 42 U.S.C. § 1395i-4(c)(2), (h)). reasonable cost basis).eliminated the ability of a state to designate a hospital as a necessary  provider, so that states could no longer waive the 35-mile distance  requirement to designate a hospital as a CAH. However, the provision  grandfathered all CAHs that had already received their CAH status by  being designated as a necessary provider.
Third, effective January 1, 2006, the provision  CBO estimated that these changes to the CAH program under this  provision would increase Medicare program expenditures by  approximately $100 million annually, according to CMS. Data show that in  2004 and 2005, the 2 years following enactment of MMA, 422 new CAHs  joined the program. However, the number of new CAH designations  dropped sharply in 2006 with the elimination of the necessary provider  designation. (See fig. 4.)
The CAH program has grown to a total of 1,328 hospitals as of 2012.  The majority of CAHs have the maximum 25 inpatient beds. In addition,  CAHs are largely concentrated in the central states, although all but five  states have at least one CAH. We found that the states with the largest  percentage of hospitals designated as CAHs are North Dakota and  Montana, with about 84 percent and 79 percent, respectively. (See fig. 5.)  Furthermore, according to MedPAC, 17 percent of CAHs are 35 or more  miles from the nearest hospital, 67 percent are between 15 miles and   35 miles from the nearest hospital, and 16 percent of CAHs are fewer  than 15 miles from the nearest hospital. These data indicate that not all  CAHs meet current qualifying criteria.
Section 1109 of HCERA authorized $400 million in Medicare payments to  qualifying hospitals in low-spending counties over 2 years, fiscal year  2011 and fiscal year 2012. This provision defined qualifying hospitals as  acute care hospitals located in a county that ranked within the lowest  quartile of age, sex, and race adjusted spending per beneficiary enrolled  in fee-for-service Medicare parts A and B. CMS allocated the additional  payments to each qualifying hospital in proportion to its share of Medicare  inpatient payments for all qualifying hospitals, based on fiscal year 2009  IPPS payments for operating expenses. In implementing this provision,
CMS made payments to about 400 hospitals, which accounted for   11 percent of all IPPS hospitals and approximately 8 percent of IPPS  beds;
Medicare expenditures increased $150 million in fiscal year 2011 and  $250 million in fiscal year 2012; on average, qualifying hospitals had 135 to 137 beds; half of qualifying hospitals were in urban areas and half were in rural  states with the most hospitals receiving this payment were New York  (50 hospitals), Wisconsin (40 hospitals), Virginia (31 hospitals),  Oregon (21 hospitals), and Iowa (20 hospitals).

	IPPS Payment Adjustments or Exclusions Affected Nearly All Hospitals

We found that, in 2012, payment adjustments to, or exclusions from, the  IPPS affected nearly all of the 4,783 hospitals in our review. Of these  hospitals—IPPS hospitals and CAHs—91 percent were subject to a  payment adjustment under the IPPS or were excluded from the IPPS  entirely. Specifically,
3,039 hospitals, or over 63 percent, qualified for at least one of the  following four types of payment adjustments under the IPPS: a DSH  adjustment, an IME adjustment, a wage index adjustment, or a rural  provider type adjustment for an RRC, SCH, or MDH designation;
1,328 hospitals, or about 28 percent, qualified as CAHs, excluding  them from the IPPS; and
416 hospitals, or about 9 percent, received IPPS payments that were  unadjusted for the modifications included in our review.
Among the 3,455 IPPS hospitals, the vast majority qualified for one of the  four categories of upward payment adjustment in 2012. The DSH  adjustment had the broadest reach, affecting payments to about 4 in 5 of  IPPS hospitals. Nearly 1 in 3 hospitals qualified for an IME adjustment, 1  in 3 qualified for a wage index adjustment, and almost 1 in 5 received a  rural provider type adjustment. Each of these categories of increased  payment benefited hospitals in both urban and rural areas. The DSH and  IME adjustments applied mostly to urban hospitals’ payments, whereas  the wage index adjustment was applied to more rural hospitals’  payments. Although rural provider type adjustments generally supported  payment to rural hospitals, about 20 percent of recipients were urban  hospitals. (See table 1.)
Among the 3,039 IPPS hospitals receiving additional payment, the  majority qualified for more than one category of payment adjustment. In  2012, roughly half of IPPS hospitals received two forms of adjustments  and 13 percent qualified for three forms of adjustments. Two percent of  IPPS hospitals qualified for four forms of adjustments, but no state had  more than 10 hospitals qualifying for four forms of increased payment.  The remaining IPPS hospitals, almost a third of the total, qualified for a  DSH adjustment alone. By location, we found that most hospitals in urban  areas qualified for one or two forms of increased payment, whereas most  hospitals in rural areas qualified for two or more forms of additional pay.  (See fig. 6.)
Of the 416 hospitals that did not qualify for IPPS payment adjustments,  nearly all were in urban areas and were distributed across most states.  Generally, they were substantially smaller than the average urban  hospital, typically having 98 beds compared to 224 beds.
The multiple types of adjustments to Medicare payments vary in their  financial effect, and can substantially affect a hospital’s revenue. Take, for  example, a beneficiary who undergoes coronary bypass surgery with  angioplasty and has a major complication or comorbidity. When this  surgery is performed at a teaching hospital in a large urban area that  treats a high percentage of low-income patients, the total operating  payment from Medicare comes to about $63,600. Specifically, in fiscal  year 2013, the IPPS operating base rate for that case, adjusted for the  local wage index, is approximately $41,500. Added to that amount is  about $14,100 for IME and roughly $8,000 for Medicare DSH. Thus, the  two payment adjustments increase the amount this hospital would receive  for this discharge by more than 50 percent.

	Concluding Observations

The IPPS streamlines how Medicare pays hospitals and gives hospitals  an incentive to economize by paying a fixed amount, set in advance. Over  time, however, numerous statutory provisions have been enacted that  provide, grandfather, or extend additional payments to IPPS hospitals or  exclude a substantial number of hospitals from the IPPS altogether. This  piecemeal approach to modifying the original IPPS—a patchwork of  individual “fixes”—has had the cumulative effect of most hospitals  receiving modifications and add-ons to the basic payment formula that  increase Medicare spending. In fact, over 90 percent of hospitals were  subject to either IPPS payment adjustments or exemptions in 2012.  These changes address characteristics of the hospital market such as  competition for labor, challenges to rural hospitals, and the need to  support Medicare-participating hospitals in certain markets. In addition,  organizations such as IOM and MedPAC have recently made  recommendations to strengthen the data used in geographic adjustments,  and to hone the targeting of rural special payment adjustments. Taken  together, these findings and recommendations suggest that, 30 years  after the IPPS was implemented, the way Medicare currently pays  hospitals may no longer ensure that the goals of the payment system— cost control, efficiency, and access—are being met.

	Agency Comments

HHS reviewed a draft of this report and did not have any general  comments. The agency provided technical comments, which we  incorporated where appropriate.
As we agreed with your offices, unless you publicly announce the  contents of this report earlier, we plan no further distribution of it until   30 days from its date. We will send copies of this report to the Secretary  of Health and Human Services. The report will also be available at no  charge on our website at http://www.gao.gov.
If you or your staffs have any questions about this report, please contact  me at (202) 512-7114 or cosgrovej@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff who made key contributions to this  report are listed in appendix III.

Appendix I: Estimated Effect of Nationwide Budget Neutrality of Rural Floor on Hospital Payments by State, Fiscal Year 2012 and 2013

	Fiscal year 2012

	Fiscal year 2012

Appendix II: Hospitals by Provider Type

Appendix III: GAO Contact and Staff Acknowledgments

	GAO Contact

	Staff Acknowledgments

In addition to the contact named above, Rosamond Katz, Assistant  Director; Alexander Galuten; Katherine Perry; Kathryn Richter; and   Hemi Tewarson made key contributions to this report.

Summary:
Why GAO Did This Study

To help control the growth of hospital spending, give hospitals an incentive to provide care efficiently, and ensure beneficiary access, Congress created the IPPS in 1983. Yet, Congress can enhance Medicare payments to certain hospitals by changing the qualifying criteria for IPPS payment categories, creating and extending exceptions to IPPS rules, or by exempting certain types of hospitals from the IPPS. The Institute of Medicine and the Medicare Payment Advisory Commission have stated that such practices undermine the integrity of the IPPS.
GAO was asked to review legislation that altered payments to certain hospitals. In this report, GAO (1) identified provisions of law that enhanced Medicare payments for only a subset of hospitals and (2) examined the extent to which hospitals qualified for adjustments to the IPPS or exemptions from the IPPS in 2012.
To conduct this work, GAO reviewed provisions enacted from 1997 to 2012 to identify those that adjusted payments to a subset of IPPS hospitals or exempted hospitals from the IPPS. GAO analyzed data to learn the number, location, and size of hospitals affected by these provisions and budgetary estimates for the first year of implementation, where available. GAO also analyzed 2012 data on 4,783 general hospitals to determine the number and types of adjustments they received, the extent to which they qualified for multiple adjustments, and the number exempted from the IPPS.
The Department of Health and Human Services reviewed a draft of this report, and provided technical comments, which we incorporated as appropriate.

What GAO Found

Over time, Congress has modified how Medicare reimburses certain hospitals under the inpatient prospective payment system (IPPS), which pays hospitals a flat fee per stay, set in advance, with different amounts for each type of condition. GAO identified numerous statutory provisions that individually increased Medicare payments to a subset of hospitals.
Seven provisions enabled hospitals to be paid under a different geographic wage index, which is used to address variation in labor costs.
Five provisions modified the classification criteria allowing IPPS hospitals to qualify for supplemental payments through the Medicare disproportionate share hospital (DSH) program or other types of special treatment.
Three provisions created and modified criteria for classifying small rural providers as Critical Access Hospitals (CAH), which are exempt from IPPS and instead are paid under an alternative methodology.
In general, while such provisions were designed to affect only a subset of hospitals, nearly all of the 4,783 hospitals in GAO's review qualified for an adjustment or exemption from the IPPS in 2012. About 91 percent were subject to an IPPS payment adjustment or were excluded from the IPPS entirely. Most hospitals, over 63 percent, qualified for at least one of four categories of increased payment, with DSH payments being the most common. Under the CAH program, 28 percent of hospitals were exempt from the IPPS. The remaining hospitals, 9 percent, received IPPS payments that were unadjusted for the modifications included in GAO's review. Moreover, many IPPS hospitals qualified for multiple categories of payment adjustments. These findings suggest that the way Medicare currently pays hospitals may no longer ensure that the goals of the IPPS--cost control, efficiency, and access--are being met.