Accountabilty 

GAO* Integrity * Reliability

United States General Accounting Office Health, Education, and

Washington, DC 20548 Human Services Division

B-285973

September 15, 2000

The Honorable William B. Thomas

Chairman, Subcommittee on Health

Committee on Ways and Means

House of Representatives

Subject: Medicare Hospital Payment: PPS Includes Several Policies Intended to

Help Rural Hospitals

Dear Mr. Chairman:

Since the inception of Medicare's prospective payment system (PPS) for inpatient

hospital services in 1983, many special payment provisions have been enacted to

adjust Medicare payments to rural hospitals. Despite these provisions, rural hospitals

on average have not fared as well under PPS as have their urban counterparts. In

1998, an estimated 40 percent of rural hospitals incurred losses on their Medicare

inpatient business. This has raised questions about existing policies for rural

hospitals under PPS.

This letter responds to your request for information on the scope and efficacy of

Medicare's existing rural hospital inpatient payment policies. Specifically, you asked

us to inventory the major special payment provisions available to rural hospitals

under PPS and to provide information on the inpatient financial performance of these

hospitals under PPS.' For this work, we reviewed current and past federal

regulations and Health Care Financing Administration (HCFA) program manuals and

memorandums on Medicare payment rules. We also interviewed officials from HCFA

and the Medicare Geographic Classification Review Board (MGCRB). We estimated

the number of rural hospitals using HCFA's fiscal year 2000 PPS Impact File. We

performed this work in accordance with generally accepted government auditing

standards between June and August 2000.

'We confined our analyses to payment policies for inpatient services under PPS. Hospitals may receive

Medicare payments for other services, such as outpatient services, skilled nursing facility care, and

home health care.

GAO/HEHS-00-174R Medicare's Rural Hospital Payment Policies
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In brief, we found that Medicare has implemented a variety of inpatient payment

policies that have the effect of increasing payments under PPS to certain rural

hospitals. Two-thirds of rural hospitals obtain some sort of special status to modify

their Medicare PPS payments. Rural hospitals with special designations generally

have fared better than other rural hospitals, although as a group they have still

experienced consistently poorer financial performance under Medicare's PPS than

have urban hospitals. There is considerable variation in performance behind this

average, and many rural hospitals operate at a loss in providing Medicare inpatient

services.

BACKGROUND

Medicare's inpatient PPS provides a prospectively determined, per-case payment for

all required hospital services associated with a Medicare beneficiary's hospital stay.

Separate base payments, or standardized amounts, are established for large urban

areas and all other areas.2 In fiscal year 2000, the standardized amount for large

urban areas is $3,951.03 and the amount for other areas is $3,888.46. The base

payment is adjusted to reflect each admitted beneficiary's expected resource needs

and the variation in local wage rates. Other hospital-specific payment adjustments

account for the higher costs of facilities with teaching programs and compensate

certain hospitals with a large share of low-income patients (termed the

disproportionate share hospital, or DSH, adjustment).

Of the roughly 5,000 short-stay hospitals serving Medicare beneficiaries, more than

2,100 are in rural areas.3 Despite making up 40 percent of the industry, they account

for only about 20 percent of inpatient discharges in 2000. Rural hospitals are

generally small, with an average of 63 beds per facility, and operate with an average

occupancy rate of only 35 percent. One-quarter of rural facilities have fewer than 30

beds, with an average daily census of six inpatients. These small rural hospitals

generally depend heavily on Medicare revenues. By contrast, urban hospitals average

202 beds each, with an average occupancy rate of 50 percent.

Some hospitals in rural areas face particular circumstances that may make them

vulnerable to financial difficulties. Their challenges include low patient volume,

sparse infrastructure, and particular demographic characteristics among the

populations they serve. Certain small rural hospitals may be the only hospital in their

Before 1995, the Medicare inpatient hospital PPS incorporated separate standardized amounts for

"large urban," "other urban," and rural areas. The Omnibus Budget Reconciliation Act of 1990, Pub. L.

No. 101-508, phased out the differential between "other urban" and rural hospital standardized

payment amounts by fiscal year 1995, leaving two base payment rates.

"Medicare defines "rural" and "urban" under the Office of Management and Budget's (OMB)

metropolitan-nonmetropolitan system. OMB defines metropolitan statistical areas (MSA) as cities

with 50,000 or more inhabitants or urbanized areas with at least 50,000 inhabitants and a total MSA

population of at least 100,000. Counties outside MSAs are regarded as rural. To account for the

geographic variation in labor costs, Medicare's hospital payment rates are adjusted separately for each

MSA and for each state's rural area, defined by the state's rural counties taken as a whole.

2 GAO/HEHS-00-174R Medicare's Rural Hospital Payment Policies
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geographic area and are essential for inpatient and other health care services. Rural

populations themselves tend to be different, being older, poorer, and less likely to be

insured, on average, than inhabitants of urban areas.

MORE THAN HALF OF RURAL HOSPITALS ARE

COVERED BY SPECIAL PAYMENT METHODS

Over the years, the Congress has established a number of PPS payment policies

aimed at aiding facilities that serve beneficiaries in rural areas. As a result, 65

percent of rural hospitals benefit from some sort of special payment treatment in

fiscal year 2000. In general, these policies provide relief to rural hospitals by allowing

them to receive payments based at least in part on their actual costs in providing

inpatient care to Medicare beneficiaries or by exempting them from some payment

provisions altogether (see table 1). Generally, these special policies raise payments

that these hospitals receive for providing care to the program's beneficiaries.

Table 1: Overview of Special Medicare Payment Policies for Rural Hospitals

Number of

Hospital hospitals in

designation Created Hospital type 2000' Payment methodb

Sole community 1974' Urban or rural hospitals that are the sole 747 Higher of the PPS payment

hospital (SCH) source of care in their community. rate or updated 1982 or 1987

hospital-specific rate. The

Balanced Budget

Refinement Act of 1999

(BBRA) added hospitalspecific 1996 costs as a

p)ayment option.

Rural referral 1983 Larger, rural hospitals that serve a wide 235 No special payment but

center (RRC) geographic area and provide broad array qualify more easily for urban

of services; operating characteristics and standardized payment

costs are similar to those of urban amount and wage index and

hospitals. receive higher

disproportionate share

payment.

Essential access 1989 Rural hospitals (or urban hospitals with 8 Higher of PPS payment rate

community similar service characteristics) that might or updated 1982 or 1987

hospital (EACH) otherwise close because of reduced hospital-specific rate.

volumes, low payment levels, and rising

costs. EACHs were larger hospitals that

provided medical backup services to

smaller hospitals in a network. The

Balanced Budget Act of 1997 (BBA)

prohibited additional hospitals from

being designated EACHs.

3 GAO/HEHS-00-174R Medicare's Rural Hospital Payment Policies
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Number of

Hospital hospitals in

designation Created Hospital type 2000' Payment methodb

Rural primary 1989 Same as EACH; RPCHs were very small, 0 Cost-based reimbursement.

care hospital limited-service hospitals operating as

(RPCH) part of a provider network. In 1997, the

RPCH designation was subsumed by

critical-access hospitals.

Medicare- 1990 Small, rural, high-Medicare-volume 360 In 1993 and earlier, the

dependent, small hospitals explicitly defined as hospitals higher of PPS payment rate

rural hospital that do not qualify as SCHs. or updated 1982 or 1987

(MDH) hospital-specific rate. In

1994 and later, the PPS

payment rate plus half the

difference between the PPS

rate and 1982 or 1987

hospital-specific rate, if

applicable.

Critical-access 1997 Very small rural hospitals (in general, no 195 Cost-based reimbursement.

hospital (CAH) more than 15 beds) that are either

isolated or an essential source of care in

their areas; they must have an average

length of stay of no more than 96 hours.

'Some hospitals are in more than one category. A hospital can be both a rural referral center (RRC)

and a sole community hospital or both an RRC and an essential access community hospital.

bA hospital's PPS payment rate is made up of the base per-case payment rate, adjusted for the

hospital's mix of cases and relative level of its workers' wages, and other special adjustments, if

applicable. A hospital-specific rate is based on each hospital's costs in a particular year, updated to

the present. Cost-based reimbursement pays hospitals the Medicare-allowed, reasonable costs of care

they provide to beneficiaries.

'The SCH designation existed before Medicare's PPS was created. SCHs were exempted from the

hospital cost limits in effect in 1974 under the Social Security Amendments, Pub. L. No. 92-603, sec.

223.

Source: GAO analysis of Federal Register notices, Code of Federal Regulations, and HCFA program

manuals and memorandums.

Hospitals are determined to be eligible for the special policies, based on factors such

as size and distance from similar hospitals or from urban areas. (See enclosures 11-V

for descriptions of these rural hospital payment categories.) Special designations

benefit large rural hospitals-those that have more than 275 beds-that qualify as

rural referral centers (RRC). A hospital that meets other criteria can qualify to be a

Medicare-dependent, small rural hospital (MDH) if it has fewer than 100 beds or a

critical-access hospital (CAH) if it has no more than 15 beds. 4 In addition to

qualifying for special designations on the basis of these criteria, hospitals that do not

otherwise qualify can receive these designations by means of legislative action. Many

hospitals have been grandfathered into sole community hospital (SCH) and RRC

designations.

4A CAH may have up to 25 beds if it also provides skilled nursing care and the number of beds used for

acute care inpatient services does not exceed 15.

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It is not clear whether the criteria used to determine eligibility actually identify all, or

only, facilities that were meant to be targeted. First, Medicare's definition of rural

does not distinguish among the wide variety of rural areas, which range from

suburban fringe districts to remote frontier locations in the West.5 Under this

definition, hospitals on the suburban fringe of a large urban area can be categorized

as rural, even though they may face the same labor costs as urban hospitals.

Conversely, hospitals in a large county in southern California can be classified as

urban, even if they are located in an area conventionally considered rural. As a

result, some hospitals are classified as urban when they resemble rural facilities and

vice versa. Other policy-specific criteria may also be problematic. For example, the

MDH criterion that hospitals must have served a large share of Medicare beneficiaries

in 1987 or 1988 may be unrelated to their current dependence on Medicare. Finally,

the benefits of some special designations do not increase payments for the majority

of hospitals so defined. In fiscal year 2000, about 65 percent of MDHs and SCHs will

not benefit from their special payment provision because their PPS rates are higher

than the special payment rate. However, they retain their designation to qualify for

other payment adjustments.

A provision of PPS known as "geographic reclassification," which has increased

Medicare payments for as many as 20 percent of rural hospitals, overlies these special

designation policies (see enc. VI). Under this provision, hospitals in lower-cost areas

(predominantly rural but including some urban areas) that are close to higher-cost

areas can apply annually to be paid as if they were actually located in the higher-cost

area. Hospitals may apply to be reclassified for the purpose of using another area's

standardized amount, wage index, or both. In general, a hospital may be reclassified

for the payment rate of another area if its wages and costs per case meet thresholds

defined in the law and regulation. In fiscal year 2000, nearly 500 hospitals are

reclassified under PPS (see table 2).

Table 2: Number of Reclassified Hospitals, Fiscal Years 1993-2000

Location 1993 1994 1995 1996 1997 1998 1999 2000

Urban 370 218 234 195 159 109 87 83

Rural 823 451 452 407 318 314 398 416

Total 1,193 669 686 602 477 423 485 499

Source: HCFA, PPS Impact File, fiscal years 1993-2000.

The payment adjustments under geographic reclassification are made within the

context of budget neutrality-that is, the Medicare program can spend no more as a

result of this policy than it would have spent in its absence. Therefore, increases in

payments to reclassified hospitals are offset by reductions in payments to all other

hospitals. The 416 rural hospitals that were reclassified in fiscal year 2000 received a

relative increase in their payments of 6.5 percent and, as a result, the 1,725 rural

hospitals that were not reclassified had their payments decreased by 0.4 percent.

5Medicare's definition of rural areas is in section 1886(d)(2)(D) of the Social Security Act.

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Geographic reclassification relies heavily on Medicare's hospital wage index, which

itself is the subject of two ongoing policy disputes. First, the metropolitan statistical

area (MSA)-non-MSA dichotomy may not accurately differentiate hospital labor

markets. All rural areas in a state are combined for payment purposes and the

statewide rural area may not fully distinguish the variability in wages across some

states. Second, the hospital wage index measures average wages in an area and

therefore reflects both the costliness of labor and the skill mix of workers employed.

Thus, hospitals with a relatively high-cost or low-cost mix of employees will be

disadvantaged or advantaged, respectively, by the wage index adjustment.

Under the various special policies, a single hospital can qualify for multiple

designations and can be considered urban for one provision and rural for another.

For example, a hospital may qualify as both an RRC and an SCH and may benefit

from both programs. Or, because reclassification allows hospitals to be

simultaneously urban and rural for its separate provisions, an SCH may reclassify en

from rural to urban to have the urban wage index used to determine its payments and

yet may still be considered a rural provider (see table 3). However, if it is reclassified

to receive the urban standardized amount, it could lose its SCH designation. By

contrast, RRCs can be reclassified to an urban area for both the wage index and

standardized amount and still retain their RRC status, thereby being eligible to

receive higher DSH payments and making it easier to be reclassified in future years.

Table 3: Status of Special Designation Hospitals Under Geographic Reclassification

Retains special designation when

hospital is reclassified for

Special designation Wage index Standardized

amount

RRC Yes Yes

MDH Yes No

SCH Yes Varies

Source: GAO analysis of Federal Register notices and interviews with HCFA officials.

POSITIVE MEDICARE MARGINS FOR RURAL HOSPITALS

ARE STILL LOWER THAN FOR URBAN HOSPITALS

Measured by Medicare inpatient margins-the relationship between a hospital's

Medicare PPS payments and its reported Medicare-allowable costs-rural hospitals

have demonstrated poorer financial performance under PPS than urban hospitals

have (see fig. 1).6 In 1984, urban hospitals' PPS margins were 7 percentage points

higher, on average, than were those for rural hospitals. After narrowing through

1992, the gap between rural and urban margins grew, and by 1998 it was 10

percentage points, reflecting slower cost growth among urban hospitals. In fiscal year

'The inpatient PPS margin is calculated as the difference between PPS payments and Medicareallowed inpatient costs as a percentage of payments.

6 GAO/HEHS-00-174R Medicare's Rural Hospital Payment Policies
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1998, the average rural margin was a little more than 5 percent, compared with an

almost 16 percent margin for their urban counterparts (see table 4).

Figure 1: Medicare Inpatient PPS Margins, 1984-98

Percentage

20

15

10

__ X~~rban Urba / 

5

0 

Rural

-5

1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

Note: The inpatient PPS margin is the difference between PPS payments and reported Medicareallowed inpatient costs as a percentage of payments. Margins reflect Medicare operating and capital

payments and costs and relevant adjustments and do not include separate direct graduate medical

education payments made to teaching hospitals. The data for 1998 are preliminary and are based on

data from 56 percent of all hospitals covered by PPS. The 1998 data have been weighted by teaching

status to improve predictive accuracy.

Source: Medicare Payment Advisory Commission, Report to the Congress: Selected Medicare Issues

(Washington D.C.: MedPAC, June 2000).

7 GAO/HEHS-OO-174R Medicare's Rural Hospital Payment Policies
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Table 4: Hospital Medicare Inpatient Margin by Hospital Group 1995-98

Hospital group 1995 1996 1997 1998

All hospitals 11.1% 15.8% 17.0% 14.4%

Urban 11.8 16.6 18.1 15.8

Rural 6.1 10.2 9.5 5.2

RRC 5.8 10.2 10.3 6.1

SCH 8.6 12.2 10.3 5.7

MDH 6.7 9.2 10.3 3.2

Other rural

Fewer than 50 beds 4.5 9.7 7.9 9.3

50 beds or more 4.6 8.7 7.8 2.6

Note: The inpatient PPS margin is the difference between PPS payments and reported Medicareallowed inpatient costs as a percentage of payments. Margins reflect Medicare operating and capital

payments and costs and relevant adjustments and do not include separate direct graduate medical

education payments made to teaching hospitals. The data for 1998 are preliminary and are based on

data from 56 percent of all hospitals covered by PPS. The 1998 data have been weighted by teaching

status to improve predictive accuracy.

Source: Medicare Payment Advisory Commission, Report to the Congress: Selected Medicare Issues

(Washington, D.C.: MedPAC, June 2000).

Financial performance under PPS varied considerably across rural hospital groups,

with rural facilities in special categories generally outperforming facilities that have

no special designation. However, these averages mask considerable variation within

each rural hospital group (see table 5). About a third of RRCs, SCHs, and MDHs had

negative Medicare inpatient margins in 1998. The 10 percent MDHs with the lowest

margins exhibited poorer financial performance under PPS than the lowest 10

percent of rural hospitals overall and only slightly better performance than the

bottom 10 percent of small rural hospitals with no special designation.

8 GAO/HEHS-00-174R Medicare's Rural Hospital Payment Policies
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Table 5: Distribution of Hospital Medicare Inpatient Margins by Hospital Group 1998

Percentile _

Percent with

Hospital group 1lo 25"' 50b 750 9otb negative

margin

AlU hospitals -14.4% -2.1% 8.8% 19.3% 28.7% 28.9%

Urban -7.4 1.8 11.8 21.3 30.7 20.6

Rural -21.6 -7.0 4.3 16.3 25.7 39.4

RRC -8.4 -3.8 4.3 11.6 23.2 31.7

SCH -19.7 -6.1 6.1 18.7 28.2 36.6

MDH -26.0 -6.7 6.6 19.3 26.7 35.2

Other rural

Fewer than 50 -29.4 -14.5 1.8 14.7 25.5 46.3

beds

50 beds or more -17.6 -7.2 1.9 14.2 21.7 43.2

Note: The inpatient PPS margin is the difference between PPS payments and reported Medicareallowed inpatient costs as a percentage of payments. Margins reflect Medicare operating and capital

payments and costs and relevant adjustments and do not include separate direct graduate medical

education payments made to teaching hospitals. The data for 1998 are preliminary and are based on

data from 56 percent of all hospitals covered by PPS. The 1998 data have been weighted by teaching

status to improve predictive accuracy.

Source: Medicare Payment Advisory Commission, ReDort to the Congress: Selected Medicare Issues

(Washington, D.C.: MedPAC, June 2000).

AGENCY COMMENTS

In commenting on a draft of this correspondence, HCFA said that, as we pointed out,

a variety of Medicare PPS policies have the effect of increasing payments to certain

rural hospitals. HCFA noted the challenges rural hospitals face in serving the medical

needs of their beneficiaries and outlined the various initiatives under way to ensure

that the unique needs of these providers are addressed.

HCFA also provided technical comments, which we have incorporated where

appropriate. HCFA's comments appear in enclosure VII.

We are sending copies of this letter to the Honorable Ms. Min-DeParle, Administrator

of HCFA, and others who are interested. We will also make copies available to others

on request.

9 GAO/HEHS-00-174R Medicare's Rural Hospital Payment Policies
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Please call me at (202) 512-7114 or Carol Carter, Assistant Director, at (312) 220-7711

if you or your staff have any questions. Staff who made major contributions to this

letter include Jean Chung, Christine DeMars, and James E. Mathews.

Sincerely yours,

Laura A. Dummit

Associate Director, Health Financing

and Public Health Issues

Enclosures - 7

10 GAO/HEHS-00-174R Medicare's Rural Hospital Payment Policies
ENCLOSURE I ENCLOSURE I

SCOPE AND METHODOLOGY

To document the historical development of Medicare's rural hospital payment

policies, we reviewed relevant legislation and regulations, published notices of

changes in policies, and program manuals and memorandums from the Health Care

Financing Administration (HCFA). We also reviewed research conducted by the

Office of Rural Health Policy within the Department of Health and Human Services

(HHS), the Medicare Payment Advisory Commission (MedPAC), and rural research

and advocacy organizations. We interviewed officials at HCFA and the Medicare

Geographic Reclassification Review Board (MGCRB) to clarify points in the

documentary evidence.

We used HCFA's prospective payment system (PPS) Impact File for fiscal year 2000

to estimate counts of each provider type and to develop other statistical information.

We contacted HCFA staff to clarify any questions we had about these data.

11 GAO/HEHS-00-174R Medicare's Rural Hospital Payment Policies
ENCLOSURE II ENCLOSURE II

MEDICARE PAYMENT FOR SOLE COMMUNITY HOSPITALS

The sole community hospital (SCH) designation is intended to ensure beneficiaries'

access to hospitals that are essential providers of health care within a geographic

area. It was first used in 1974 to exempt hospitals from the limits Medicare placed on

payments for routine inpatient operating costs (Medicare-allowed costs exclusive of

those associated with capital-interest depreciation and rent). Concern for beneficiary

access and hospital services underlies the designation's continuation under PPS.

SCHs are generally small rural hospitals that are isolated by location, weather or

travel conditions, or the absence of other hospitals. In fiscal year 2000, 747 hospitals

have an SCH designation, and 57 of these hospitals are also rural referral centers

(RRC). Medicare inpatient operating payments to SCHs for fiscal year 2000 are

estimated at $3.2 billion, or 34 percent of payments to rural hospitals.

QUALIFYING CRITERIA

Because hospitals can qualify as SCHs under various criteria, SCHs are not a

homogeneous group. Rural and urban hospitals can qualify as SCHs if they are

geographically isolated by more than 35 miles from other similar hospitals.

Alternatively, rural hospitals qualify even if they are less than 35 miles from other like

hospitals by meeting specific criteria related to treating the majority of patients in the

area, weather and travel conditions, or prior SCH designation.

Before the implementation of PPS, HCFA's regional offices had discretion in

designating hospitals SCHs. The absence of a clear standard led to substantial

variation across regions. When the Congress established PPS in 1983, Medicare

developed criteria to certify new SCHs, limiting SCH status only to rural hospitals

while retaining all 259 rural and urban SCHs designated before PPS.7 The Omnibus

Budget Reconciliation Act of 1989 (OBRA 89) relaxed the eligibility requirements,

allowing urban hospitals again to qualify for SCH designation.

PAYMENT

From the beginning of PPS until April 1, 1990, an SCH was paid a blended rate based

on the applicable PPS payment rate and its historical costs. It could apply for an

additional payment if it had had a significant increase in operating costs because of

the addition of new inpatient facilities or services or a decrease in inpatient

discharges because of circumstances beyond its control. Unlike other hospitals,

SCHs were reimbursed for 100 percent of their Medicare-related capital costs.

Because of this grandfather clause, some hospitals designated SCHs do not meet any of the current

qualifying criteria

12 GAO/HEHS-00-174R Medicare's Rural Hospital Payment Policies
ENCLOSURE II ENCLOSURE 1I

Beginning in April 1990, SCHs have received payments that are the higher of (1) the

PPS payment rate or (2) a rate based on their updated fiscal year 1982 or 1987 costs.

The Balanced Budget Refinement Act of 1999 (BBRA) provided that for cost

reporting periods beginning on or after October 1, 2000, an SCH can also choose to

receive a transitional rate based on its fiscal year 1996 costs if it was paid on the basis

of its historical costs during fiscal year 1999. An SCH may receive additional

payments if, because of circumstances beyond its control, its total number of

inpatient discharges decreases by more than 5 percent from one year to the next.8

SCHs, unlike other hospitals, are paid for their Medicare-related capital costs in their

entirety. Further, SCHs, like RRCs, are eligible for higher disproportionate share

(DSH) payments than other rural hospitals.

RECLASSIFICATION

SCHs receive special treatment under Medicare's geographic reclassification policies

(see enc. VI). Like RRCs, SCHs are not required to meet the proximity criteria that

apply to other hospitals for reclassification, meaning that they may be farther than 35

miles away from the metropolitan statistical area (MSA) or rural area to which they

are seeking reclassification. Furthermore, some SCHs can retain their SCH status

upon reclassification and are thus able to continue to benefit from their special

payment rules.9

Medicare's claims administration contractors for hospitals, called intermediaries, determine this lumpsum payment, which cannot exceed the difference between the SCH's Medicare inpatient costs and its

Medicare inpatient revenue.

9All SCHs more than 35 miles from another hospital retain their status upon being reclassified. Those

located less than 35 miles from another hospital lose their SCH status.

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ENCLOSURE I ENCLOSURE I

To qualify as an SCH, a hospital must

* Be geographically isolated by more than 35 miles from other similar hospitals.

Or

* Be located in a rural area, be between 25 and 35 miles from other like hospitals, and

meet one of the following criteria regarding market share, availability of specialty

services, and accessibility.

-At least 75 percent of the residents or Medicare beneficiaries in the service area

who are admitted as inpatients are admitted to the hospital rather than other like

hospitals located within a 35-mile radius of the hospital or the hospital's service area

(whichever area is larger).

-The hospital has fewer than 50 beds and does not meet the 75percent market

share criterion because patients sought specialty care outside the service area that

the hospital was unable to provide.

-Because of local topography or severe weather conditions, the other like hospitals

are inaccessible.

Or

* Be located in a rural area between 15 and 25 miles from other similar hospitals but

the other hospitals are inaccessible because of local topography or periods of

prolonged severe weather conditions.

Or

* Be located in a rural area and be at least 45 minutes' travel time from the nearest

hospital because of distance, posted speed limits, and predictable weather

conditions.

Or

* Have been an SCH before PPS was implemented and the circumstances under

which the hospital received SCH status have not changed.

14 GAO/HEHS-00-174R Medicare's Rural Hospital Payment Policies
ENCLOSURE III ENCLOSURE im

MEDICARE PAYMENT FOR RURAL REFERRAL CENTERS

In the original 1983 PPS legislation, the Secretary of HHS was authorized to make

adjustments to PPS payments to take into account the special needs of RRCs. RRCs are

relatively large rural hospitals that provide a broad array of services and treat patients

from a wide geographic area. These hospitals serve as referral sites for rural physicians

and community hospitals that may lack the resources or expertise to handle more

complicated cases. There are 235 RRCs with Medicare inpatient operating payments

estimated to be $3.6 billion (39 percent of Medicare payments to rural hospitals) for

fiscal year 2000.'0

QUALIFYING CRITERIA

Under the original legislation, RRCs had to be either large hospitals or primary providers

of care in their area Later, criteria were added to qualify hospitals whose operating

costs and characteristics resembled their urban counterparts. Over time, the Congress

has liberalized these criteria so that more hospitals can qualify for RRC designation."

Additionally, as a result of provisions contained in the Balanced Budget Act of 1997

(BBA), HCFA has reinstated as an RRC any rural hospital that ever had, but lost, its RRC

status.'

Beyond the basic requirement of being located in a rural area, there are three ways a

hospital may qualify as an RRC. First, the hospital may qualify by having at least 275

beds. Second, a rural hospital that does not meet the bed-size criterion can demonstrate

that it is a primary provider of care in the area. Third, a hospital may meet criteria that,

in general, show that its mix of cases and volume of discharges are similar to the urban

hospitals in its census region and either that it is a primary source of care or that it offers

a full range of services.

RRC PAYMENT

Originally, RRC payments were based on the other urban rather than the rural

standardized payment amount. In fiscal year 1995, RRCs lost some of the benefit of their

status when the other urban and rural standardized amounts were consolidated.

However, RRCs still receive special treatment under the DSH payment adjustment. An

RRC that qualifies for DSH payment receives higher DSH payments than other rural

hospitals.

'0 Fft-seven of these hospitals are also SCHs, and 3 are also essential access community hospitals.

"The criteria that were relaxed were those related to a hospital's minimum bed size and minimum volume

of discharges

'

2As a result of a BBRA provision, former RRCs in urban areas will be reinstated as such on October 1,

2000.

15 GAO/HEHS-00-174R Medicare's Rural Hospital Payment Policies
ENCLOSURE III ENCLOSURE III

RECLASSIFICATION

Relaxed geographic reclassification criteria make reclassification easier for RRCs than

for other hospitals (see enc. VI). 1 3 Before BBA, any hospital that was reclassified to an

urban area for purposes of the standardized amount lost its RRC status. However,

because provisions in BBA and BBRA will result in reinstating all RRCs that had lost

their status, all reclassified RRCs will be redesignated as such and continue to benefit

from this designation in subsequent years.

To be an RRC, a hospital must be rural and

* Have at least 275 beds.

Or

* Have at least half of its Medicare patients referred from other hospitals or from

physicians not on the hospital's staff and have at least 60 percent of its Medicare

patients and 60 percent of its Medicare services delivered to patients residing more

than 25 miles from the hospital.

Or

* Meet the following criteria:

-Have a case-mix index that is equal to either the median case-mix index for urban

hospitals in its census region or all urban hospitals nationally and

-Have at least 5,000 discharges a year or, if fewer, the median number of

discharges in urban hospitals in its census region and

-One of the following must be true:

-At least 40 percent of its inpatients are referred from other hospitals or

physicians not on the hospital's staff or

-At least 60 percent of its discharges are beneficiaries who reside more

than 25 miles from the hospital or

-More than half ofits medical staff are specialists.

Or

* Qualify under a grandfathering provision.

1

3RRCs are not subject to the proximity requirement, meaning that they may be more than 35 miles from

the MSA or rural area to which they are seeking reclassification. Additionally, to be reclassified for the

wage index, an RRC need be only more similar to the hospitals in the area to which it is seeking

reclassification. It is not compared with hospitals in its actual geographic location.

16 GAO/HEHS-00-174R Medicare's Rural Hospital Payment Policies
ENCLOSURE IV ENCLOSURE IV

MEDICARE PAYMENT FOR ESSENTIAL ACCESS COMMUNITY HOSPITALS

RURAL PRIMARY CARE HOSPITALS. AND

CRITICAL-ACCESS HOSPITALS

EACHS AND RPCHS

The program for essential access community hospitals (EACH) and rural primary care

hospitals (RPCH) was created by OBRA 89 to target hospitals that could not meet the

RRC minimum volume requirements or that had fixed costs that were not adequately

covered by SCH payment provisions.'4 The purpose of the program was to allow rural

hospitals (or urban hospitals with similar service area characteristics) that might

otherwise close because of reduced volumes, low payments, or rising costs to operate on

a reduced scale.

By statute, the EACH-RPCH program was limited to seven states that received grants to

develop rural health networks consisting of EACHs and RPCHs.'" EACHs were larger

facilities that provided medical backup services to designated RPCHs in the network.

RPCHs were limited-service rural hospitals that provided emergency outpatient and

inpatient hospital care.

THE MEDICARE RURAL HOSPITAL

FLEXIBILITY PROGRAM AND

CRITICAL ACCESS HOSPITALS

BBA built on the experience of the EACH-RPCH program and replaced it with the

Medicare Rural Hospital Flexibility Program (MRHFP). MRHFP differs from EACHRPCH in that it is a national program. Through MRHFP, states establish rural health

networks that consist of at least one critical-access hospital (CAH) and at least one fullservice hospital. The goals of MRHFP are to maintain the health care infrastructure in

small rural communities by preserving access to existing primary care services and to

enable hospitals to provide limited acute care (especially emergency care) services to

rural Medicare beneficiaries.

QUALIFYING CRITERIA

BBA eliminated the EACH category but allowed existing EACHs to retain this

designation. In fiscal year 2000, eight hospitals continue to be paid under Medicare's

EACH designation.'6 To be designated an EACH, a hospital must have had medical

backup service and transfer agreements with RPCHs in its network. Furthermore, in

"Although the program was created in 1989, HCFA did not publish the final rules until May 1993.

'These states were California, Colorado, Kansas, New York, North Carolina, South Dakota, and West

Virginia

'

6Three of these hospitals are also RRCs.

17 GAO/HEHS-00-174R Medicare's/Rural Hospital Payment Policies
ENCLOSURE IV ENCLOSURE IV

general, it must have had at least 75 beds and must have been located more than 35 miles

from another EACH, RRC, or hospital with more than 75 beds. To be designated an

RPCH, a hospital could not have had more than six inpatient beds and had to have

maintained an average inpatient length of stay of 72 hours or less.

BBA also repealed the RPCH classification and allowed RPCHs to be considered CAHs if

they met the CAH eligibility criteria. To be designated a CAH, a hospital must be

geographically isolated or certified as a necessary provider of health care services and

must be located in a state that has an MRHFP. In general, CAHs can have no more than

15 beds and the annual average patient stay cannot exceed 96 hours."7 There are

currently 195 CAHs-51 were formerly part of the EACH-RPCH program, and 144 are

newly designated facilities. Medicare payments to CAHs totaled $772 million in fiscal

year 1997.8

PAYMENT

EACHs are considered SCHs for payment purposes and are paid the higher of their PPS

payment rate or a rate based on the hospital's updated fiscal year 1982 or 1987 costs.

Like RPCHs before them, CAHs are paid their actual Medicare-allowable reasonable

costs of providing inpatient services.

RECLASSIFICATION

A rural EACH that is reclassified to an urban area for purposes of the standardized

amount loses its status as a rural EACH and, consequently, loses its special payment

provision (see enc. VI). There is no special payment benefit for urban EACHs.

Geographic reclassification does not apply to RPCHs and CAHs, since they are not paid

on the basis of the PPS.

To qualify as a CAH, a hospital must

* Be geographically isolated or certified as a necessary provider of health care services,

* Be located in a state that has an MRHFI,

* Have no more than 15 beds orno more than 25 beds if it also provides skilled nursing

facility-level care, and

* Have an annual average patient length of stay of no more than 96 hours.

"Hospitals with beds that are used interchangeably for acute care and skilled nursing facility-level care can

have up to 25 beds, provided that no more than 15 beds are used at any one time for acute care.

This amount excludes expenditure data for 10 CAHs for which data were not available.

18 GAO/HEHS-00-174R Medicare's /Rural Hospital Payment Policies
ENCLOSURE V ENCLOSURE V

PAYMENT POLICY FOR MEDICARE-DEPENDENT HOSPITALS

Since 1990, Medicare has given special payment protection to small rural hospitals that

were a major source of care for Medicare beneficiaries. The purpose of providing special

payment to these Medicare-dependent, small rural hospitals (MDH) was to maintain

beneficiaries' access to hospital services.

The original MDH legislation limited this special hospital designation from April 1990

through March 1993. However, legislation has extended the program three times.19

There are 360 MDHs with Medicare inpatient operating payments estimated to be $703

million for fiscal year 2000 (8 percent of total Medicare payments to rural hospitals) for

fiscal year 2000.

QUALIFYING CRITERIA

To qualify as an MDH, a hospital must have fewer than 100 beds, must be rural, and must

have served a high proportion of Medicare patients during fiscal year 1987 or 1988.

Additionally, SCHs cannot be MDHs. Hospitals do not have to apply for this payment

adjustment; if they qualify, they are automatically designated.

PAYMENT

Until 1993, MDHs were paid the higher of their PPS payment rate or an amount based on

their updated fiscal year 1982 or 1987 average cost per case. In 1994, the payment

methodology became less advantageous to MDHs. They are now paid the PPS payment

rate plus half of the difference, if any, between their updated 1982 or 1987 costs and the

PPS payment rate.

MDHs are also entitled to an additional payment adjustment if, because of circumstances

beyond their control, their total number of inpatient discharges decreases by more than 5

percent from one year to the next. Medicare's claims administration contractors for

hospitals, called intermediaries, determine this lump-sum payment, which cannot exceed

the difference between the MDH's Medicare inpatient costs and its total Medicare

inpatient revenue.

RECLASSIFICATION

MDHs that are reclassified to an urban area for purposes of their standardized amount

lose their MDH status (see enc. VI). A HCFA official told us, however, that fewMDHs

seek reclassification because the financial benefits of being an MDH outweigh those of

reclassification.

"First, the Omnibus Budget Reconciliation Act of 1993 extended the designation through September 1994;

after a 3-year break, BBA reinstated the MDH designation from October 1997 through September 2001; and,

most recently, BBRA continued the MDH designation through fiscal year 2006.

19 GAO/HEHS-00-174R Medicare's Rural Hospital Payment Policies
ENCLOSURE V ENCLOSURE V

To qualify as an MDH, a hospital must

* Be rural,

* Have fewer than 100 beds,

* Have had at least 60 percent of its inpatient days attributable to Medicare

beneficiaries in fiscal year 1987 or 1988, and

• Not be an SCH.

20 GAO/HEHS-00-174R Medicare's Rural Hospital Payment Policies
ENCLOSURE VI ENCLOSURE VI

GEOGRAPHIC RECLASSIFICATION POLICIES UNDER MEDICARE'S

PROSPECTIVE PAYMENT SYSTEM

Since the beginning of PPS, a hospital's payment has been determined by its geographic

location. Not only are there separate standardized amounts for large urban areas and

other areas but the base payment amount is also adjusted for variations in labor costs

across different locations. However, sometimes a hospital's costs of providing services

are more similar to those of hospitals in other areas than its own, particularly where a

rural county borders an urban area. To address these situations, OBRA 89 established a

way for hospitals that are significantly disadvantaged by their actual geographic location

to be reclassified for payment to an area that more closely represents the market in

which they compete. In most cases, hospitals are reclassified from a rural area to an

urban area or from one urban area to a larger one.

Hospitals apply annually to be reclassified for the purpose of the standardized amount,

the wage index, or both. MGCRB, established by OBRA 89, evaluates hospitals'

applications for reclassification to different geographic areas, using objective criteria

HCFA developed. These criteria have been relatively stable over time. Individual

hospitals may apply for reclassification, or all the hospitals in a county may apply as a

group to be reclassified for both the standardized amount and the wage index. Some

hospitals have been reclassified through legislative provisions.

RECLASSIFICATION CRITERIA

For an individual hospital to be reclassified for a different wage index or standardized

amount, it must demonstrate a close proximity to the area to which it seeks

reassignment. This means that it is no more than 15 miles from this area if it is an urban

hospital or that it is no more than 35 miles if it is a rural hospital. Alternatively, at least

50 percent of the hospital's employees must reside in the area to which it seeks to

reclassify.

Generally, after meeting the proximity criterion, a hospital may be reclassified if it can

demonstrate that its costs are comparable with those of the hospitals in that area. For

purposes of the wage index, (1) the hospital must seek reassignment to an area with a

higher wage index, and (2) the hospital's average hourly wage must be significantly more

than the average hourly wage in its actual geographic area and be reasonably similar to

the area's average hourly wage to which it is reclassified. To qualify for another area's

standardized amount, a hospital must demonstrate that its cost per discharge is greater

than its current payment rate.

Under group reclassification, individual hospitals are able to bypass some of the specific

criteria under individual requests. For example, the proximity requirement does not

apply. Therefore, a rural hospital more than 35 miles from the target area can qualify if

its county is adjacent to the urban area to which it seeks reclassification. Further, cost

and wage data are aggregated among the hospitals in the group so that not every hospital

21 GAO/HEHS-00-174R Medicare's Rural Hospital Payment Policies
ENCLOSURE VI ENCLOSURE VI

has to meet the hourly wage criteria (in the case of the wage index) or have high costs

(in the case of the standardized amount).

THE EFFECT OF RECLASSIFCATION

ON DSH PAYMENTS

Following consolidation of the rural and the other urban standardized amount, HCFA did

not allow hospitals to be reclassified to areas with the same standardized amount. Some

rural hospitals had sought these reclassifications because, despite getting the same

standardized amount, it was easier to meet the criteria applied to urban hospitals to

receive DSH payments. BBA changed this policy to allow rural hospitals to be

reclassified to another area with the same standardized amount to qualify for higher DSH

payments.2 0

THE EFFECT OF RECLASSIFICATION

ON SPECIAL RURAL HOSPITAL

DESIGNATIONS

While all hospitals can apply for reclassification, some special types of hospitals receive

preferential consideration before MGCRB. RRCs and SCHs are able to benefit from a

"special access rule" that does not require a hospital to be within the reclassification

proximity perimeter. RRCs are further protected in that they do not lose their RRC

designation upon reclassification and they are exempt from criteria comparing them to

the hospitals in their actual geographic location. Similarly, some relatively isolated rural

and all urban SCHs that apply for reclassification for their standardized amount are able

to retain their special status upon reclassification and will continue to receive payment

as an SCH.2 ' However, other rural SCHs relatively close to other hospitals and all MDHs

that reclassify for the standardized amount lose their designations that entitle them to

these special payment provisions.

EFFECT ON PAYMENT

HCFA estimated that in fiscal year 2000, 416 rural and 83 urban hospitals would be

reclassified and would receive higher payments as a result of adjustments to the wage

index, the standardized amount, or both. As a whole, rural hospitals tend to benefit more

than urban hospitals from geographic reclassification. Because these higher payments

must be "budget neutral," payments to all other, nonreclassified-hospitals are lowered to

fund this increased spending.

'This provision expired 30 months after BBA was implemented; there are no plans to extend it.

2'SCHs 35 miles or further away from another hospital retain their SCH status.

22 GAO/HEHS-00-174R Medicare's Rural Hospital Payment Policies
ENCLOSURE VI ENCLOSURE VI

For an individual hospital to be reclassified for its standardized amount, it must meet the

0 Proximity criteria

-An urban hospital can be no more than 15 miles, and a rural hospital no more than 35 miles,

from the area to which is seeks to be reclassified or

-At least 50 percent of its employees reside in the target area

And

* Standardized amount criteria

-Its case-mixadj'usted costperdischarge must be equal to orgreater than the currentPPS

payment rate plus 75percent of the difference between the reclassifiedpaym ent rate and its

originalpayment rate.

For an individual hospital to be reclassified for its wage index, it must meet the

* Proxinity criteria

-An urban hospital can be no more than 15 miles, and a rural hospital no more than 35 miles, from

the area to which is seeks reclassification or

-At least 50 percent of its employees reside in the target area

And

* Wage index criteria

-An urban hospital's average hourly wage must be at least 108 percent of the average hourly wage

of its home area and at least 84 percent of the area to which it seeks reclassification.

-A rural hospital's average hourly wage must be at least 106 percent of the average hourly wage of

its home area and at least 82 percent of the area to which it seeks reclassification.

For a group to be reclassified for its standardized amount and wage index, it must meet the

* Adjacency criteria

-The county must be adjacent to the target MSA and

-An urban county must be located in the same consolidated MSA (CMSA) as the target MSA

And

* Standardized amount criteria

-In the aggregate, the group's case-mix adjusted cost per discharge must be equal to or greater

than the current PPSpayment rate plus 75 percent of the difference between the reclassified

payment rate and its payment rate if it was not reclassified

And

* Wage index criteria

-The average hourly wage, in the aggregate, must be at least 85percent of target area.

23 GAO/HEHS-00-174R Medicare's Rural Hospital Payment Policies
ENCLOSURE VII ENCLOSURE VII

COMMENTS FROM HCFA

DEPARTMENT OF HEALTH & HUMAN SERVICES Health Care Financing Administration

AUG 2o 9 A~i, Office of the Administrator AM 2L9 ;7 alWashington, D.C. 20201

TO: Laura A. Dumnmit

Associate Director

General Accounting Office (GAO)

FROM: Nancy-Ann Min DeParle r; fl\_ -

Administrator m

SUBJECT: GAO Draft Report: "Medicare Hospital Payment: PPS Includes Several

Policies Intended to Help Rural Hospitals" (GAO/HEHS-00- 174R)

Thank you for the opportunity to review and comment on this draft report concerning special

payment provisions that affect rural hospitals and their financial performance under the hospital

Inpatient Prospective Payment System (PPS).

We agree with your finding that there are a variety of Medicare PPS policies that have the affect

of increasing payments to certain rural hospitals. Assuring and enhancing access to quality care

for rural beneficiaries, while acting as a responsible steward of the Medicare Trust Fund, is a

priority for the Health Care Financing Administration (HCFA). About one in four Medicare

beneficiaries lives in rural America, and we understand that rural providers face unique

challenges in serving the medical needs of their beneficiaries. That is why we have taken a

number of steps to help rural providers, including rural hospitals. These facilities tend to be

smaller, have difficulty attracting and keeping health care professionals, and are more revenue

dependent on Medicare patients than their non-rural counterparts. Yet many rural hospitals have

higher average costs than their urban counterparts.

Although there have been several recent legislative changes to help support rural hospitals, the

Administration continues to take administrative steps to ensure that the unique needs of these

providers are addressed. In addition to administrative actions, the President, as part of the MidSession Budget proposal, has proposed a reserve for specific provisions to help rural hospitals,

which total $500 million over five years and $1 billion over 10 years.

As part of our commitment to ensuring rural beneficiaries' continued access to quality care, we

launched an aggressive monitoring effort on the effect of recent legislative on rural health care

providers. For example, we have created a Rural Health Initiative within our agency to increase,

and better coordinate, attention to rural issues. As part of this effort, we are continuing to closely

monitor how laws and regulations governing our programs affect rural beneficiaries and

providers. Also, we have enhanced our relationship with our colleagues at the Small Business

Administration to ensure we consider the special needs of small health care providers in all of

our programs, policies, and guidance.

We will continue to closely monitor how laws and regulations governing our programs affect

rural beneficiaries and providers. We look forward to working with GAO on this and other

issues.

Attachment

24 GAO/HEHS-00-174R Medicare's Rural Hospital Payment Policies
ENCLOSURE VII ENCLOSURE VII

Response of the Health Care Financing Administration to

GAO Draft Report: "Medicare Hospital Payment: PPS Includes

Several Policies Intended to Help Rural Hospitals"

The Health Care Financing Administration has long recognized the special needs of rural

providers. In fact, recent bipartisan legislation has had the affect of increasing payments to rural

hospitals.

Summary of Recent Legislation and the Impact on Rural Hospitals -

Balanced Budget Act

The bipartisan Balanced Budget Act of 1997 (BBA) created the Critical Access Hospital (CAH)

program. Under this program, facilities are reimbursed based on what they spend for each

patient, rather than on the average expected cost for specific diagnoses that most hospitals are

paid. To qualify, the facility must have no more than 15 acute beds, offer 24 hour emergency

care, and are generally located more than 35 miles from any other hospital.

The BBA also built upon other special provisions for rural providers. It:

* Reinstated the Medicare Dependent, Small Rural Hospital (MDH) designation, which had

expired in 1994. These facilities have fewer than 1 00 beds, do not serve as a Sole

Community Hospital (SCH), and Medicare patients accounted for at least 60 percent of

inpatient days or discharges during 1987. They can be paid higher rates based on their

own previous costs or the Federal prospective payment rate.

* Permanently grandfathered rural referral centers. These facilities have 275 or more beds,

serve beneficiaries living more than 25 miles away or referred by other hospitals, or have

specialists as more than half of staff physicians. They receive higher payment to assist in

caring for low-income patients and can more easily qualify for higher payments based on

nearby urban wage rates.

* Allowed more rural hospitals to obtain special disproportionate share hospital (DSH)

payments that are available to hospitals serving large numbers of low-income patients.

* Authorized payment for telemedicine, in which medical consultations are conducted via

an interactive telecommunication system, for beneficiaries residing in rural areas that

have a shortage of health care professionals.

The BBA also included payment reforms for several types of providers that directly impact rural

hospitals. For example, it modified inpatient hospital payment rules. It also mandated

development and implementation of prospective payment systems for skilled nursing facilities,

home health agencies, outpatient hospital care, and rehabilitation hospitals to encourage facilities

to provide care that is both efficient and appropriate.

Summary of Recent Legislation and the Impact on Rural Hospitals -

Balanced Budget Refinement Act

Working together, Congress and the Administration last year enacted the Balanced Budget

Refinement Act of 1999 (BBRA), which further enhanced these special payments for rural

25 GAO/HEHS-00-174R Medicare's Rural Hospital Payment Policies
ENCLOSURE VII ENCLOSURE VI[

Page 2 -- Response to Ms. Dummit

providers. Some of the important changes related to CAHs. The law included several provisions

to assist CAHs, such as:

* Applying the 96-hour length of stay limit on an average annual basis;

* Permitting for-profit hospitals to qualify for CAH designation;

* Allowing hospitals that closed or downsized since 1989 to be CAHs;

* Permitting CAHs to streamline their billing processes by combining physician and

hospital charges; and,

* Eliminating beneficiary coinsurance for clinical laboratory tests furnished by a CAH.

The BBRA also:

* Extended the MDH program for 5 years.

* Holds harmless small rural hospitals (with 100 beds or less) for 4 years during the

transition to the new prospective payment system for hospital outpatient care, and

provides separate, budget-neutral payments for high-cost patients and certain drugs,

devices, and biologicals for all hospitals, which will especially help hospitals that would

otherwise have had to spread these costs across a small case load.

* Raised the cap on medical residents by 30 percent in rural areas.

* Included incentives to encourage urban physician education programs to establish

separate training programs in rural areas.

Finally, the BBRA also strengthened the SCH provisions. The law included a one-year payment

increase by providing an update of the full market basket. To qualify for this program, these

facilities serve as the sole source of inpatient care in a community, either because they are

geographically isolated, or because severe weather conditions or local topography prevents

travel to another hospital. Under the more general program, they can be paid higher rates based

on their own previous costs or the Federal prospective payment rate.

The Administration is Continuing to Support Rural Hospitals

The Administration knows that more must be done to support rural providers. That is why we

continue to take steps to address the unique needs of rural hospitals through administrative

actions and proposed legislative activity.

HCFA Continues to Take Administrative Steps to Ensure Appropriate Payment to Rural

Hospitals

We have taken a number of administrative steps to further assist rural providers. For example,

we have made it easier for rural hospitals, whose payments are now based on lower, rural area

average wages, to be reclassified and receive payments based on higher average wages in nearby

urban areas. This allows them to apply for all the special rural designations described above and

the higher payments these designations confer.

We are helping rural hospitals adjust to the new outpatient prospective payment system by using

the same wage index for determining a facility's outpatient rates that is used to calculate inpatient

26 GAO/HEHS-00-174R Medicare's Rural Hospital Payment Policies
ENCLOSURE VII ENCLOSURE VII

Page 3 - Response to Ms. Durnmit

rates. We are postponing the expansion of the BBA "transfer policy" for 2 years which limits

hospital payments when patients with certain diagnoses are discharged early to a postacute care

setting, and considering whether further postponement is warranted. We also are working with

colleagues at the General Accounting Office and Medicare Payment Advisory Comunission to

review the impact and appropriateness of the wage index that is used to factor local health care

wages into Medicare payment rates and generally results in lower payments to rural hospitals

than to their urban counterparts.

HCFA is Listening to Concerns Expressed by Rural Providers

To better understand and actively address the special circumstances of rural providers and

beneficiaries, we launched a new Rural Health Initiative. We are meeting with rural providers,

visiting rural facilities, reviewing the impact of our regulations on rural health care providers,

and conducting more research on rural health care issues. We are participating in regularly

scheduled meetings with the Health Resources and Services Administration's Office of Rural

Health Policy to make sure that we stay abreast of emerging rural issues. And we are working

directly with the National Rural Health Association to evaluate rural access to care and the

impact of recent policy changes.

Our goal is to engage in more dialogue with rural providers and ensure that we are considering

all possible ways of making sure rural beneficiaries get the care they need. We are looking at

best practices and areas where research and demonstration projects are warranted. We want to

hear from those who are providing services to rural beneficiaries about what steps we can take to

ensure they get the care they need.

We have put together a team for this rural initiative that includes senior staff in our Central and

Regional Offices and dedicated personnel around the country. Each of our ten regional offices

has a staff person dedicated to rural issues. Providers can call this person directly to raise and

discuss issues, ideas, and concerns. We are confident that this initiative will ensure that

Medicare policies are attuned to the needs of rural health providers and beneficiaries.

HCFA is Working to Appropriately Expand Use of Telemedicine

We are proceeding with projects to evaluate Medicare coverage for telemedicine. We recently

completed a comprehensive, $230,000 technology assessment of telemedicine, in conjunction

with the Agency for Healthcare Research and Quality, under contract with the Oregon Health

Sciences University. This study involved an assessment of the clinical and scientific literature

dealing with the cost-effectiveness of telemedicine, specifically looking into the areas of "store

and forward' technologies, patient self-testing and monitoring, and potential telernedicine

applications for non-surgical medical services. We are also testing expanded coverage for

telemedicine. On February 28, 2000, we awarded a $28 million cooperative agreement to

Columbia University for the Informatics, Telemedicine, and Education Demonstration Project, as

required by the BBA. This randomized, controlled study will explore how teleconsultations

between physicians in New York City and rural, upstate New York affect diabetic patient care

27 GAO/HEHS-00-174R Medicare's Rural Hospital Payment Policies
ENCLOSURE VII ENCLOSURE VII

Page 4 - Response to Ms. Dummit

and program costs. The results of these studies will help inform future decisions on the

expansion of telemedicine beyond the current payment regulations.

New Budget Proposals Would Strengthen Beneficiary Access to Care in Rural Areas

The President's Mid-Session Budget proposal includes a reserve for specific provisions to help

rural hospitals, which total $500 million over 5 years and $1 billion over 10 years. This money

would be used for policies to improve the sustainability of rural hospitals, similar to those in the

bipartisan Health Care Access and Rural Equality Act of 2000 (H-CARE)." H-CARE, for

example, would accomplish several objectives supported by the Administration, such as:

* Provide payment increases that are fully adjusted for inflation to all rural hospitals with

100 beds or less;

* Make the MDH program permanent and make it easier for hospitals to qualify by letting

them use any of the three most recent audited cost reporting periods rather than their

1987 cost reporting period as mandated under current law;

* Pay CAHs for clinical diagnostic services based on reasonable costs and without the

beneficiary copayment;

* Extend payment flexibility for SCHs; and

* Provide grants for upgrading data systems.

We also would consider improving equity for rural hospitals in the Medicare DSH formula,

which provides additional funding for facilities that serve large numbers of low-income patients.

In addition, the Mid-Session Budget proposal would provide assistance for all hospitals totaling

$10 billion over 10 years, as well as $2 billion over 10 years for skilled nursing facilities and $3

billion over 10 years for home health agencies. All of these provisions will result in increased

payments to rural hospitals and other rural providers. Including the reserve for rural hospital

policies, the proposal includes a reserve fund of $21 billion over 10 years for developing future

policies.

(201078)

28 GAO/HEHS-00-174R Medicare's Rural Hospital Payment Policies
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