United States General Accounting Office

GAO Report to the Chairman, Subcommittee

on Human Resources and

Intergovernmental Relations, Committee

on Government Reform and Oversight,

House of Representatives

November 1996 RURAL HEALTH

CLINICS

Rising Program

Expenditures Not

Focused on Improving

Care in Isolated Areas

G O A

years

1921 - 1996

GAO/HEHS-97-24

GAO United States

General Accounting Office

Washington, D.C. 20548

Health, Education, and

Human Services Division

B-270103 

November 22, 1996

The Honorable Christopher Shays

Chairman, Subcommittee on Human Resources and

 Intergovernmental Relations

Committee on Government Reform and Oversight

House of Representatives

Dear Mr. Chairman:

Two decades ago, the Rural Health Clinic (RHC) program was established

to provide Medicare and Medicaid reimbursement to health clinics in

underserved rural communities. Today, Medicare and Medicaid continue

to reimburse RHC providers on the basis of their actual costs for providing

care. Most other providers treating Medicare and Medicaid patients

generally receive lower payments that are limited by set fee schedules.

Since the fee schedules were established in 1989, the number of clinics

participating in the RHC program has grown by over 30 percent a year to

nearly 3,000. Combined Medicare and Medicaid payments to them are

expected to be over $1 billion annually by the year 2000. This trend has

raised questions about the benefits that program expenditures are

providing to underserved Medicare and Medicaid populations.

In response to your request, we studied the following questions:

• Is the RHC program serving a Medicare and Medicaid population that would

otherwise have difficulty obtaining primary care?

• Are controls in place to ensure that costs claimed for reimbursement are

reasonable and to target the cost-reimbursement benefit of the program to

clinics needing it for financial viability?

Our review was performed using available national statistics and

information from our own detailed analysis of RHCs in four states—

Alabama, Kansas, New Hampshire, and Washington. Our detailed analysis

included such matters as where clinics were located, how many Medicare

and Medicaid beneficiaries they served, the amounts and types of costs

they claimed for reimbursement, and how their service patterns had

changed from 1992 to 1994. Details of our objectives, scope, and

methodology are in appendix I.

Page 1 GAO/HEHS-97-24 Rural Health Clinics
B-270103 

Results in Brief Contrary to its original purpose, the RHC program is generally not focused

on serving Medicare and Medicaid populations having difficulty obtaining

primary care in isolated rural areas. Rather, our work suggests that the

additional Medicare and Medicaid payments (estimated at $295 million for

1996) provided to RHCs increasingly benefit well-staffed, financially viable

clinics in suburban areas that already have extensive health care delivery

systems in place. Most RHCs are conversions of existing physician

practices that generally do not need or use the benefits under the program

to enlarge the size of the practice or take other actions to expand care

provided to underserved portions of the area’s population. Nevertheless,

RHC providers receive extraordinarily high reimbursement for each patient

visit for Medicare and Medicaid services at many clinics, as much as $214

for each patient visit at one clinic in our sample compared with an average

of $37 received by providers on the Medicare fee schedule.

Contributing to this problem are the program’s broad eligibility criteria,

and the requirement that the Health Care Financing Administration (HCFA)

reimburse all RHCs at cost, even if they are already financially viable using

standard Medicare and Medicaid payment methods. The situation is

exacerbated by HCFA’s not using its authority to set maximum payment

limits for nearly half of the RHCs that are operated as a part of a hospital or

other facility or implementing the screens necessary to determine whether

claimed costs at independent or facility-based RHCs are reasonable. As a

result, we found examples where a hospital-owned clinic claimed

overhead costs that were 120 percent of the direct costs of running the

clinic and an independent clinic claimed $270,000 in compensation for

each of its four staff physicians. In addition, once certified, RHCs remain

eligible for cost reimbursement indefinitely, even if the area they serve no

longer qualifies as rural or underserved.

To bring about improvements needed to direct assistance toward those

rural areas that the program was originally intended to serve, both the

Congress and the Secretary of Health and Human Services (HHS) will need

to establish additional eligibility criteria and controls over the costreimbursement benefit of the program.

Background In 1977, many rural communities were facing a disconnect between their

health care delivery systems and Medicare and Medicaid, the nation’s

primary health insurance programs for the elderly and the poor. Many

isolated rural communities that had not been able to attract or retain a

physician had come to rely on clinics that did not follow the traditional

Page 2 GAO/HEHS-97-24 Rural Health Clinics
B-270103 

model of physician delivery of medical services. These rural clinics were

staffed by specially trained nurse practitioners and physician assistants

who acted as either the primary care provider or assistants to overworked

sole physicians. However, services rendered by these nonphysician

providers were not covered by Medicare unless they were under the

immediate supervision of a physician, and coverage under Medicaid was at

the state’s discretion. As a result of this and other factors, some rural

clinics were confronted with serious financial problems. The Congress

became concerned that without Medicare reimbursement, many of these

clinics could never become self-sufficient and would be forced to close,

leaving many areas without primary health care services. Therefore, Public

Law 95-210 authorized Medicare and Medicaid reimbursement to

nonphysician primary care practitioners in RHCs.1

The RHC program is one of the few federal programs that is able to address

underservice in small communities that do not have a traditional health

care system in place. Other assistance programs, such as the National

Health Service Corps, which places providers in underserved areas,

generally require that such a system be present. With their nontraditional

approach, RHCs can provide care in areas where a traditional system is not

financially viable. Appendix II shows where RHCs were located throughout

the nation near the end of 1995.

The RHC program is administered by HCFA, which must certify as RHCs all

primary care providers requesting this status if they practice in a rural and

underserved area and meet the conditions of participation for the

Medicare program as determined by the state’s survey agency. An RHC may

be operated as an independent clinic or as part of a larger facility, such as

a hospital. Medicare and Medicaid pay independent and facility-based RHCs

differently, but both generally reimburse RHCs on the basis of the actual

costs of providing services. This practice continued in the 1980s, when the

Medicare program established maximum fees for services that would be

paid to most other providers. These new payment systems were developed

because paying for services on the basis of costs or charges created

incentives for inefficiency and cost escalation. However, RHCs continue to

receive cost-based reimbursement out of recognition that some clinics

might not be financially viable under a fee schedule approach.

1

Certified Nurse-Midwives in RHCs also became eligible for reimbursement in 1989 (P.L. 101-239).

Page 3 GAO/HEHS-97-24 Rural Health Clinics
B-270103 

Program Is Not

Targeting

Underserved

Medicare and

Medicaid Populations

The RHC program has grown rapidly since 1990, but not in those locations

where Medicare and Medicaid populations are having difficulty obtaining

primary care. At many of the locations that we were able to analyze in

depth, primary care was already available to the Medicare and Medicaid

population, and certifying an RHC appeared to have little or no effect on the

availability of care for any remaining underserved segments of the

population.

Growth Primarily in Areas

With Established Health

Care Systems

RHCs are increasingly being certified in areas with substantial populations

rather than in remote rural areas. The program was designed to primarily

benefit areas where population densities are insufficient to attract and

support a physician-run clinic.

The National Health Service Corps’ benchmark for the minimum number

of people needed to place a full-time primary care physician is 2,000,

according to the Chief of Site Development and Placement; however, as of

November 1995, only 5 percent of all RHCs were in areas with fewer than

2,000 people2

 living within 15 miles3 (see fig. 1). Even adjusting this

benchmark upward to 10,000 people would account for less than

25 percent of RHCs.

2

Population data as of 1990 census.

3

The Bureau of Primary Care within HHS considers that in rural areas with poor access roads, 15 miles

is the maximum acceptable distance for patients to have to travel to a primary care provider. For areas

with better roads, the normal acceptable distance is 20 to 25 miles.

Page 4 GAO/HEHS-97-24 Rural Health Clinics
B-270103 

Figure 1: Distribution of RHCs by

Population Living Within 15 Miles

31% • 10,001-25,000

27% • 25,001-50,000

19%•

More Than 50,000

•

5%

2,000 or Fewer

•18%

2,001-10,000

In contrast, 19 percent of RHCs had 50,000 or more people living within 15

miles of them, and this trend is increasing. As figure 2 shows, the

percentage of RHCs certified each year in areas with 50,000 or more people

increased from almost 9 percent to 22 percent from 1991 to 1995, while the

percentage for areas with populations of 10,000 or fewer decreased from

34 percent to 11 percent.

Page 5 GAO/HEHS-97-24 Rural Health Clinics
B-270103 

Figure 2: RHCs by Population and Year

Certified, 1991-95 Percent of All RHCs

0

5

10

15

20

25

30

35

40

45

50

2,000 or Fewer 2,001-10,000 10,001-25,000 25,001-50,000 More Than

50,000

Population Within 15 Miles of RHC

1991

1992

1993

1994

1995

Appendix III provides more detailed information on where RHCs are

located in our four sample states.

Our analysis indicates that many of the areas in which RHCs are being

certified are not only well-populated but also have existing—and

extensive—primary health care systems. We performed a more detailed

review of communities in Alabama, Kansas, New Hampshire, and

Washington, where 144 RHCs had been certified. Of these locations,

75 percent had primary care available to Medicare and Medicaid

beneficiaries before an RHC was certified. The main reason for this was

that over 65 percent of the 144 RHCs were conversions of existing physician

practices in the community that had been reimbursed by Medicare and

Medicaid for years. For example, physicians in New Hampshire had been

Page 6 GAO/HEHS-97-24 Rural Health Clinics
B-270103 

practicing an average of over 18 years before converting their practices to

RHCs, while those in Kansas and Alabama had been practicing an average

of over 15 years.4

Moreover, most communities also had additional health resources

available before RHC certification, indicating the presence of a welldeveloped health care delivery system. For example, at the time the RHC

was certified in Moses Lake, Washington, this community—with a

surrounding population of 25,000—had 17 practices with primary care

providers, a number of specialty practices, one hospital, two skilled

nursing facilities, a mental health facility, a hospice, and a home health

agency. Of the 144 RHCs in the four states reviewed, 57 percent had

anywhere from 2 to 18 primary care practice sites already in place, as well

as a combination of other specialized health care providers and facilities.

Sparsely populated, underserved communities still exist, and efforts to

establish RHCs in such locations appear minimal. For the four states in our

analysis, we noted that many communities with fewer than 5,000 people

had no Medicare or Medicaid primary care provider. Neither HCFA nor the

state rural health offices were aware of any efforts to actively target and

establish RHCs in these locations.5

 Instead, many RHCs were certified in the

same city where existing RHCs or other federally funded clinics were

already in place. Nationwide, 37 percent of the 2,599 RHCs certified near

the end of fiscal year 1995 were located in the same community as other

RHCs or federally qualified health centers (FQHC),6 with 74 cities having 3 to

6 RHCs. For example:

• 31 percent of the 144 RHCs in our four-state sample were in cities having 1

to 3 other RHCs or FQHCs and

• the city of Marianna, Florida, now has 7 RHCs for the 30,000 people living

within 15 miles, and 4 additional RHCs are 20 miles away in Chipley,

Florida, a community of 3,800.

4

Similarly, a nationwide survey conducted by the National Rural Health Clinic Association in 1994

found that nearly 74 percent of 487 RHCs had been in operation as private practices an average of over

12 years before they were certified as an RHC.

5

HHS’ Inspector General reported that a more rational and strategic placement of RHCs was needed to

ensure that government funding increased access to care. See Rural Health Clinics: Growth, Access

and Payment, HHS Office of the Inspector General, OEI-05-94-00040 (Washington, D.C.: 1996).

6

Like RHCs, FQHCs receive cost reimbursement from Medicare and Medicaid, and they may also

receive federal grant funding to address underservice.

Page 7 GAO/HEHS-97-24 Rural Health Clinics
B-270103 

RHCs Generally Not

Decreasing Distance to

Care

While the RHC program was created to develop or expand the availability of

health care in local communities, we did not find indications that the

growing number of clinics were decreasing the distance that beneficiaries

traveled for care. Our review of Medicare and Medicaid claims data for 119

clinics in our four-state sample showed that the availability of care within

communities did not change appreciably for at least 90 percent of

Medicare and Medicaid beneficiaries after the RHC was certified. At least

73 percent of the more than 42,000 Medicare and Medicaid beneficiaries

using RHCs in our sample had previously obtained care from a primary care

provider in the same city in which they lived or the same city in which the

RHC was. For example, of 203 Medicare and Medicaid beneficiaries

currently obtaining primary care at an RHC serving a surrounding

community of nearly 60,000 in Hutchinson, Kansas, only 15 were traveling

more than 15 miles for care before the RHC was certified.

Claims data were not available to identify the increased access to care that

the RHC program provided for populations other than Medicare and

Medicaid beneficiaries; however, RHCs are not required to address

underservice in the community. While many RHCs qualify for the program

because the overall population is designated as underserved, less than half

of the 76 RHCs we surveyed said that they used the program to expand their

staff or increase the number of patients they see. Even when certified for

areas underserved only for specific population groups, 86 percent of the

RHCs said that the program had not influenced the type of patients they

serve in the community. Regardless of how the underserved area is

defined, most RHCs believe that the uninsured poor make up the majority

of underserved people in their community; however, only 16 RHCs offered

services on a sliding fee scale based on the patient’s ability to pay for care.7

One RHC said that some of its physicians would not accept Medicaid

beneficiaries as patients unless they were in the state’s managed care

program.8

Program’s Benefits Best

Exemplified by RHCs in

Smallest Locations

Despite the lack of clear program effect in most locations, we did find

instances in which the RHC program improved access to care for Medicare

and Medicaid beneficiaries. About 3,500 of the 42,500 Medicare and

Medicaid beneficiaries in our four-state sample reduced the distance that

they had to travel for care by a median of 20 miles (to fewer than 15 miles)

7

Most clinics said that they would treat or refer all patients requesting care; however, other federal

programs require a sliding fee scale to improve the likelihood that the uninsured poor will seek care.

8

In some states, such as Washington, that have Medicaid managed care programs, RHCs receive higher

capitated payments than other providers.

Page 8 GAO/HEHS-97-24 Rural Health Clinics
B-270103 

by using the RHC. Those RHCs most successful in improving access tended

to locate in communities without Medicare or Medicaid providers or in

areas having a population of fewer than 5,000 within a 15-mile radius.

Following are some examples:

• Wadley, Alabama, a community of just over 500, was unable to support a

primary care practice until a nearby hospital set up an RHC staffed by a

part-time nurse practitioner. Distance to care was reduced by a median of

18 miles for 46 of the 118 Medicare beneficiaries using this clinic in 1994.

• A hospital district in eastern Washington uses three family physicians and

two physician assistants to run an RHC in Ritzville and two satellite clinics,

about 15 and 30 miles away, respectively. Distance to care was reduced by

a median of 48 miles for at least 80 of the 507 Medicare beneficiaries using

these clinics in 1994.

Broad Eligibility Criteria

Allow Growth in Areas

Where Need Is Minimal

A key reason that RHCs may be certified in areas unlikely to improve

access to care is the broad eligibility criteria, which provide no

requirement or incentive for RHCs to locate in places with little or no

existing medical infrastructure. To be certified as an RHC, a practice must

basically meet two tests in addition to meeting the normal conditions for

participation in Medicare:9

 it must be located in a rural area, and the area

must be designated as underserved. However, both tests are easily met,

and there are no additional requirements to ensure that the enhanced

payments under the program will be used to hire more providers or see

more patients.

Definition of Rural Under the law authorizing the RHC program, rural refers to any area not

designated as urbanized by the Bureau of the Census. Under this

definition, cities, towns, or census areas with populations under 50,000 are

considered rural. While the Census Bureau generally defines rural as areas

with populations of fewer than 2,500, even these areas may be located near

other cities that together constitute a substantial population base. Nearly

500 RHCs have populations of from 50,000 to more than 1 million within 15

miles of them.10

Definition of Underserved Under the law authorizing the RHC program, underserved refers to a

federally designated health professional shortage area (HPSA), a medically

9

Under federal law, clinics meeting the conditions of participation for Medicare automatically meet

conditions of participation for Medicaid.

10The median population surrounding these clinics was 83,000.

Page 9 GAO/HEHS-97-24 Rural Health Clinics
B-270103 

underserved area (MUA), or a state-designated underserved area.11 In an

earlier report, we pointed out several problems with the federal

underservice designations that need to be addressed before these

designations can be effectively used for targeting resources to the

underserved.12 For example, more than half of the underservice

designations may be invalid because they are outdated or do not consider

a significant number of primary care providers, such as nurse practitioners

or physician assistants, whose services are promoted by the RHC program.

Using the designations as they currently stand provides no assurance that

RHCs are only being permitted in areas that have insufficient numbers of

primary care providers. HHS’ Inspector General13 and administrators of the

underservice designation systems have said that HCFA needs to establish

additional program-specific screening criteria to better identify areas

needing RHCs; however, HCFA has not yet decided whether to request a

change in legislation for this purpose.

Controls Are Not in

Place to Ensure

Reasonable Costs and

Effective Targeting of

Funds

Because the RHC program’s cost-based reimbursement is usually more

generous than Medicare and Medicaid fee schedules, adequate controls

over claimed costs are particularly important. Using 1993 claims data, we

estimate on average that Medicare paid at least 43 percent more for

cost-based reimbursement to RHCs than it paid to other providers who

were paid using the fee schedule, while Medicaid paid at least 86 percent

more. Assuming this same difference between cost-based and fee schedule

payments continues, reimbursing RHCs will cost Medicare around an

additional $100 million and Medicaid about $195 million in 1996.14

We found four problem areas that may result in unneeded expenditure of a

portion of these Medicare and Medicaid funds: (1) no limit on payments

made to facility-based RHCs, (2) no screening to determine if claimed costs

are reasonable, (3) an inability to target cost-based reimbursement where

needed for financial viability, and (4) no mechanism to discontinue costbased reimbursement if the RHC’s location is no longer rural or

underserved.

11An HPSA is generally defined for a geographic area or a specific population group having fewer than

one primary care physician for every 3,500 people. An MUA uses additional factors besides primary

care shortages, such as the infant mortality rate, percentage of population with incomes below the

poverty level, and percentage of population age 65 and older. HHS may also designate areas as

underserved on the basis of the recommendation of state governors.

12Health Care Shortage Areas: Designations Not a Useful Tool for Directing Resources to the

Underserved (GAO/HEHS-95-200, Sept. 8, 1995).

13See Rural Health Clinics: Growth, Access and Payment, OEI-05-94-00040.

14The actual added cost to the Medicare and Medicaid programs is likely to be higher due to data

limitations explained in app. I.

Page 10 GAO/HEHS-97-24 Rural Health Clinics
B-270103 

Controls Are Lacking on

Payments to Facility-Based

RHCs

Nationwide data on ownership patterns show that nearly half of all RHCs

are operated by a facility such as a hospital, skilled nursing facility, or

home health agency.15 As of 1990, there were only 57 facility-based RHCs,

but their number has grown so rapidly in recent years that at the end of

1995 there were 1,267, or 46 percent of all RHCs (see fig. 3).

Figure 3: RHCs by Ownership Type, 1978-95

Number of RHCs

0

400

800

1200

1600

2000

2400

2800

3200

1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995

Year

Facility-Based RHCs

Independent RHCs

This ownership trend has implications for Medicare and Medicaid

expenditures because facility-based RHCs are not subject to the same

cost-reporting requirements16 and the annually adjusted limit, currently

$56, on the cost per visit as are independent RHCs. HCFA has not determined

15Facility-based clinics may be located within the facility or set up as separate clinics either in the

same community or in a different city and state.

16Cost reports for facility-based RHCs include only summary cost data, while those for independent

RHCs include a break out of costs by line item; the number and type of clinic staff; and the number of

patient visits at the RHC, which is subject to a productivity standard for Medicare and Medicaid

payment. Facility-based RHCs are exempt from these requirements even though they are often

operated as a separate clinic in a different community from the administering facility.

Page 11 GAO/HEHS-97-24 Rural Health Clinics
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how much more these facility-based RHCs receive from Medicare and

Medicaid as a result, but indications are that their average cost per visit is

often substantially higher. For example, our review of cost reports

submitted by a sample of 28 facility-based RHCs in 1993 and 1994 showed

that they were paid up to $21417 per Medicare patient visit while the

maximum amount paid to independent RHCs in these years was about $55.18

HCFA officials said that they did not establish cost limits for facility-based

RHCs, as they did for independent RHCs, because few facility-based RHCs

were certified when the program began and it was easier to reimburse

these RHCs the same way as Medicare paid the facility’s other outpatient

departments, on the basis of the lower of costs or charges for services.

Similarly, while HCFA estimates that Medicare and Medicaid payments to

RHCs will be close to $1 billion by the year 2000, this estimate excludes

Medicare payments that will be made to facility-based RHCs as well as

year-end adjustments that can increase payments to RHCs. HCFA has

established a working group that is addressing the issue of payment limits

for facility-based RHCs but has no estimate of when regulations will be

issued.

Screens for Reasonable

Costs Not Used for RHCs

While HCFA has established an overall payment limit for independent RHCs,

it has not implemented screening guidelines to assess whether claimed

costs of operating both independent and facility-based RHCs are

reasonable. These screening guidelines can be used to disallow costs in

cases where provider salaries are excessive or overhead costs are

disproportionately high. Because these guidelines were never

implemented, RHCs have no apparent limits on the amount or type of costs

they claim for Medicare and Medicaid reimbursement. For independent

RHCs, our sample of 228 cost reports provided the following examples:

• Compensation for physicians at 23 percent of the RHCs exceeded the

national mean of $127,000 by up to 50 percent or more. One clinic, for

example, claimed the equivalent of $270,000 for each of its four physicians.

• Some clinics claimed substantial costs related to hiring consultants or

incorporating the business. For example, one independent RHC with a

full-time physician, nurse practitioner, and other clinical staff claimed just

17The range of Medicare payments was $24 to $214, with a median payment of $73. Only cost reports

covering a full 12-month period and those with Medicare charges consistent with HCFA claims data

were used for this analysis.

18Costs claimed for reimbursement by independent RHCs in 1993 ranged from about $16 to $130 per

patient visit, with about half of the independent RHCs claiming costs in excess of the payment limit.

Page 12 GAO/HEHS-97-24 Rural Health Clinics
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under $140,000 during a 10-month reporting period for the compensation

of a “clinical consultant.”

Criteria to determine whether claimed overhead costs are reasonable are

especially needed for facility-based RHCs. HCFA eliminated overhead

screens for independent RHCs in 1982, stating that the maximum payment

limit established for them was sufficient for this purpose. However,

facility-based RHCs are not subject to this limit and their overhead costs are

generally higher because in addition to the direct overhead costs incurred

by the clinic, the administering facility allocates a portion of its own

overhead costs to the clinic for Medicare and Medicaid reimbursement.

This shifting of costs to RHCs for overhead categories such as the hospital

cafeteria or nursing administration occurs whether the RHC is located

within the facility or in a city that is 30 miles away. Our review of 28 cost

reports for facility-based RHCs showed that indirect overhead costs

allocated by the hospital added from 8 percent to 120 percent to the RHC

costs claimed for Medicare reimbursement.19

Some states have reduced the amount of Medicaid payments for this

cost-shifting at facility-based RHCs, while other states use Medicare’s

method.20 An Alabama Medicaid official estimated that the state’s action

limits the amount Medicaid pays to hospital-based RHCs in the state to

about 5 to 10 percent more than payments to independent RHCs. In

contrast, HCFA officials estimate that Florida, which reimburses hospitalowned RHCs in the standard manner, paid these RHCs at more than twice

the rate paid to independent RHCs.

We heard arguments both for and against allowing hospitals and other

facilities to shift a portion of their overhead costs to RHCs. However, we

found no evidence to support the assumption that the increased payments

resulting from such allocations improved RHC service to Medicare

beneficiaries. For example, costs for Medicare services at one RHC

increased by 66 percent after converting its ownership status from

independent to hospital-based. As an independent RHC in 1994, this clinic

claimed costs of $50 per Medicare visit, while as a hospital-owned RHC in

19The median amount of hospital overhead allocated to the clinics was 33 percent.

20States have done so by limiting payment to the lower of costs or charges for services at the RHC.

Under this methodology, payments are usually based on charges that include a lower percentage of

facility overhead allocations. Other states follow Medicare’s payment methodology, which combines

the costs and charges of the RHC with all other outpatient departments and then pays on the basis of

the lower of the aggregate costs or charges. Under this methodology, RHCs are generally paid on the

basis of costs. This payment method, because it includes a higher percentage of facility overhead

allocations, results in Medicare’s paying some RHCs three times or more than what they charged for

services.

Page 13 GAO/HEHS-97-24 Rural Health Clinics
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1995, costs per visit rose to $84. The RHC reported the same staffing levels

but 30 percent fewer Medicare beneficiary visits in 1995.

Cost Reimbursement Not

Targeted to RHCs Needing

the Subsidy to Survive

The decision to establish cost-based reimbursement for RHCs was largely

made out of concern that this payment method could help increase

beneficiary access by subsidizing the operation of clinics that might

otherwise be unable to survive financially. For example, financial

problems may exist for RHCs in communities too small to generate enough

patient visits or until new clinics establish a sufficient patient base.

However, under the law, all RHCs qualify for cost-based Medicare and

Medicaid reimbursement even if they have a substantial patient base.21

We asked the 76 clinics in our four-state sample about the importance of

cost reimbursement to their financial viability. Some newly established

clinics said that it was necessary only for the first few years while an

adequate patient base was being established. Most of the remaining clinics

said that they would be financially viable without cost reimbursement, but

they thought it should be continued because payments under Medicare

and Medicaid fee schedules were too low. Representatives and consultants

for small rural hospitals owning RHCs told us that the reimbursement

benefits under the program helped keep their hospitals financially viable

by offsetting the negative effects of Medicare and Medicaid reimbursement

reform and helping them compete against other hospitals moving into the

area. Representatives from independent clinics also said that cost

reimbursement allowed them to better compete for patients by paying

higher salaries to retain physicians or recruit additional ones to their

practices.

Cost reimbursement—along with other financial assistance—is still

important for clinics locating in areas with small populations, according to

RHC officials. Starting RHCs in such areas appears to remain a somewhat

risky financial venture that is helped by institutional sponsorship. In our

four-state sample, those few clinics among our 76 that had been started as

new RHCs in smaller locations were generally sponsored as satellite clinics

by a hospital, government entity, or independent provider network trying

to ensure coverage of its service area. For example, several such RHCs in

Washington are owned by hospital districts that have taxing authority to

support the clinics financially. Such sponsorship was considered

21For example, our review of 228 cost reports for independent RHCs for the years 1993 through 1995

showed that 44 percent of the independent RHCs reported patient visits in excess of the national

average of 7,200 for a primary care physician practice, with over 10 percent having 20,000 or more

visits.

Page 14 GAO/HEHS-97-24 Rural Health Clinics
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necessary, officials said, because the benefits of the RHC program alone

were not enough to overcome the difficulties associated with starting a

clinic in a sparsely populated rural area. Our review of clinics established

within the past 5 years showed that independent RHCs were more than

twice as likely to be terminated than those owned by facilities. However,

even facility-based RHCs fail without sufficient community support. For

example, two hospital-sponsored clinics in Alabama and one in

Washington, unable to attract a sufficient patient base for a full-time

practice, closed within 2 years because patients chose to travel to

providers in other communities for care or obtained care from competing

providers within the same community.

Subsidies Are Not

Discontinued When RHCs

No Longer Meet Initial

Program Criteria

Under current law, HCFA must continue cost-based subsidies to RHCs

indefinitely, even for clinics that are no longer located in underserved or

rural areas.22 This is significant because many areas of the United States

that were considered rural under the program in 1978 may now be part of

an urbanized area. For example, an RHC was established in 1978 in Merced,

California, when the city’s population was about 36,000. Merced’s 1990

population was more than 56,000—above the maximum of 50,000 under

the program’s eligibility criteria. Similarly, areas considered underserved

15 years ago may now have an adequate number of primary care

physicians. For example, one RHC in Marysville, Washington, was the only

Medicare and Medicaid provider when first established in 1978. Since that

time, 15 other primary care practices have been established in an area that

now has a population of 272,000 within 15 miles of the RHC. This RHC

continued to receive cost-based payments under the program through

1994.

Conclusions The RHC program is adrift without focus on its original goal of assisting

underserved rural communities or controls over costs to the Medicare and

Medicaid programs. As it continues to grow—primarily in well-populated

areas with established health care systems—there is little evidence to

demonstrate that this growth is directed at improving access to care on the

part of Medicare or Medicaid beneficiaries or other underserved segments

of the population. Creating controls to do so is important because the

program is often used as a way to increase the revenue of existing clinics

that may already be financially secure or to subsidize those clinics or

hospitals that are failing due to inefficiency or lack of community support.

22RHCs may lose their certification, however, if they fail to meet the conditions of participation for the

Medicare program or change ownership.

Page 15 GAO/HEHS-97-24 Rural Health Clinics
B-270103 

The law defines rural and underserved areas too broadly to ensure that the

program is directed and maintained in those rural communities with a

critical shortage of primary care providers. In our view, the key to

reorienting the program is to ensure that its most attractive feature for

providers—cost-based reimbursement—is tied to additional program

criteria developed to meet a clear program goal and that it is not used

merely as a competitive tool or avenue to indefinitely circumvent the

effects of Medicare and Medicaid payment reforms. Success in meeting the

original purpose of RHCs requires more active management at the federal,

state, and local levels to identify specific locations where clinics are

needed and to determine when financial assistance can reasonably be

discontinued.

Recommendations to

the Congress

To refocus the RHC program to meet its original purpose, the Congress

should amend the law to

• restrict the cost-based reimbursement benefit of the program to (1) RHCs in

areas with no other Medicare or Medicaid providers or (2) RHCs that can

demonstrate that existing providers will not accept new Medicare or

Medicaid patients and that the funding will be used to expand access to

them and

• require periodic recertification to ensure that clinics continue to meet

eligibility requirements for cost reimbursement.

Recommendations to

the Secretary of

Health and Human

Services

For those RHCs that continue to be reimbursed on a cost-reimbursement

basis, the Secretary of HHS should direct the Administrator of HCFA to

• revise Medicare payment policy (which Medicaid generally follows) to

hold facility-based RHCs to the same payment limits and cost-reporting

requirements as independent RHCs and

• apply reasonable cost principles to such categories as salaries and

overhead claimed for reimbursement by RHCs.

Agency Comments

and Our Evaluation

In commenting on a draft of this report (see app. IV), HHS stated that the

results of our study clearly show that the RHC program is not maximizing

its contribution to the safety net for underserved populations. HHS agreed

with the report’s overall conclusions and recommendations to the

Department.

Page 16 GAO/HEHS-97-24 Rural Health Clinics
B-270103 

More specifically, HHS concurred with our recommendation that HCFA

revise Medicare payment policy to hold facility-based RHCs to the same

payment limits and cost-reporting requirements as independent RHCs. HHS

stated that HCFA is in the process of developing proposed regulations that

would implement a similar upper payment limit for facility-based RHCs. HHS

also agreed with our recommendation that HCFA apply reasonable cost

principles to such categories as salaries and overhead claimed for

reimbursement by RHCs. HHS said that it would direct Medicare contractors

to increase the level of scrutiny on all costs incurred by RHCs, particularly

in such categories as salaries and overhead.

While HHS did not comment on our specific recommendation to the

Congress that the law be changed to provide additional program eligibility

criteria, HHS did concur with the basis for the recommendation. HHS agreed

with our conclusion that the current program eligibility criteria for

defining rural and underserved areas does not go far enough to ensure that

the program is directed and maintained in rural communities with critical

shortages of primary care providers. HHS suggested that further

documentation of the need for health care services in the target

community be required for RHC certification and cited the FQHC program as

an example of the workability of this approach. We agree with HHS’

comments on the critical need and possibilities for additional program

eligibility criteria. However, to accomplish this, a change in law along the

lines that we recommend would be necessary.

As agreed with your office, unless you publicly announce its contents

earlier, we plan no further distribution of this report until 10 days after its

issue date. At that time, we will send copies to the Secretary of HHS, the

Director of the Office of Management and Budget, appropriate

congressional committees, and other interested parties. We also will make

copies available to others on request. Please contact me on (202) 512-7119

if you or your staff have any questions on this report. Major contributors

to this report are listed in appendix V.

Sincerely yours,

Bernice Steinhardt

Director, Health Service Quality

 and Public Health

Page 17 GAO/HEHS-97-24 Rural Health Clinics
Contents

Letter 1

Appendix I 

Objectives, Scope,

and Methodology

20

Improving Access to Care 20

Controlling Program Costs 21

Appendix II 

Rural Health Clinics

as of November 1995

24

Appendix III 

Rural Health Clinics

by Population Size in

Our Four-State

Sample

26

Appendix IV 

Comments From the

Department of Health

and Human Services

31

Appendix V 

Major Contributors to

This Report

35

Figures Figure 1: Distribution of RHCs by Population Living Within 15

Miles

5

Figure 2: RHCs by Population and Year Certified, 1991-95 6

Figure 3: RHCs by Ownership Type, 1978-95 11

Figure III.1: RHCs in Alabama, by Population Size 27

Figure III.2: RHCs in Kansas, by Population Size 28

Figure III.3: RHCs in New Hampshire, by Population Size 29

Figure III.4: RHCs in Washington, by Population Size 30

Page 18 GAO/HEHS-97-24 Rural Health Clinics
Contents

Abbreviations

FQHC federally qualified health center

HCFA Health Care Financing Administration

HHS Department of Health and Human Services

HPSA health professional shortage area

MUA medically underserved area

RHC rural health clinic

Page 19 GAO/HEHS-97-24 Rural Health Clinics
Appendix I 

Objectives, Scope, and Methodology

Improving Access to

Care

Our first objective was to determine whether the RHC program was serving

a Medicare and Medicaid population that would otherwise have difficulty

obtaining primary care. The purpose of the program is to assist small rural

areas relying on nonphysicians or overworked sole physicians for care.

Therefore, we focused on where RHCs were located in terms of the

population of the communities they served and the number of other

primary care resources available. Because it is possible that these

providers were not available to all Medicare and Medicaid beneficiaries,

we identified the distances that beneficiaries had to travel to obtain

primary care before the RHC was certified.

Using mapping software, we established each RHC as the center of a circle

with a 15-mile radius and plotted 1990 population data from the Census

Bureau to identify how many people lived within the area of these circles.

We chose the area within a 15-mile radius as the RHC service area because

this is the maximum distance that HHS’ Bureau of Primary Health Care

considers reasonable for travel for primary care given the worst type of

existing rural road conditions.

We next focused our review on four states to determine the other primary

care resources available to Medicare and Medicaid beneficiaries. We

judgmentally chose Alabama, Kansas, New Hampshire, and Washington on

the basis of differences in geography, types of underservice, number and

mix of RHCs, and variances in the Medicare and Medicaid reimbursement

rates. We excluded those states that had recently been reviewed by HHS’

Inspector General and that were scheduled to be reviewed under an HCFA

contract. For these four states where 144 RHCs had been certified,23 we

contacted the fiscal intermediaries processing Medicare and Medicaid

claims and from each obtained the database of Medicare and Medicaid

providers. We screened these databases for primary care providers using

the provider type and specialty codes and aggregated them by practice

address. We then counted how many primary care practice sites existed in

communities before and after the RHCs were certified.

Our last step was to identify how far Medicare and Medicaid beneficiaries

had to travel to obtain care before RHCs were certified in their community.

We did this by analyzing Medicare and Medicaid claims data for all

beneficiaries using any of the 119 RHCs in our four-state sample that were

certified in 1993 and 1994. Our analysis included computing the

differences in miles between where the beneficiaries lived and where the

23The 144 RHCs account for all RHCs certified in New Hampshire and Washington but only those

certified in 1993 and 1994 in Kansas and Alabama.

Page 20 GAO/HEHS-97-24 Rural Health Clinics
Appendix I 

Objectives, Scope, and Methodology

RHC or prior primary care provider was located. We excluded those

beneficiaries from our analysis that had moved during the time period and

for which prior provider data were unavailable. We also telephoned 76 of

the 119 RHCs within our four-state sample and asked them whether the

program had any influence on expanding their staff, the number or type of

patients they see, or changing their practice to address the reasons

underservice existed in their communities.

Controlling Program

Costs

Our second objective was to identify whether controls were in place to

ensure that costs claimed for reimbursement are reasonable and to target

the cost-reimbursement benefit of the program effectively. We developed

an estimate of program costs, reviewed the controls over these costs, and

telephoned a sample of RHCs to determine their reliance on cost

reimbursement for financial viability.

Developing Program Cost

Estimates

We used 1993 as our base year in estimating how much additional

Medicare and Medicaid funding will be provided to RHCs in 1996 under the

cost-reimbursement benefit of the program instead of using the standard

fee schedules. We used 1993 as our base year for the estimate because this

was the most recent year for which Medicare and Medicaid data were

available.

In developing our estimate of program costs, we consulted with officials

from HCFA’s Office of the Actuary (Office of Medicare and Medicaid Cost

Estimates), Office of Research and Development (Division of

Reimbursement and Economic Studies), Bureau of Policy Development

(Office of Payment Policy), and Bureau of Data Management and Strategy.

Using 1993 summary claims data published by HCFA, we determined the

mean cost of a medical care visit paid from the fee schedule that HCFA

officials said would most closely approximate an RHC visit.24 We then

compared this figure with the amount that Medicare paid RHCs on average

for each RHC visit. We believe that this estimate is conservative for at least

two reasons:

• it does not include the results of the year-end cost-report settlement that

intermediary officials told us usually results in additional payments to RHCs

and

24RHC services include medical services generally provided in a primary care office setting plus six

basic laboratory tests. Other services, such as radiology, may be reimbursed separately under standard

reimbursement methods.

Page 21 GAO/HEHS-97-24 Rural Health Clinics
Appendix I 

Objectives, Scope, and Methodology

• the fee schedule data include medical services provided by urban and

specialist providers that generally receive higher reimbursement than rural

primary care providers.

To obtain the 1993 differential cost to Medicaid, we had to back into the

mean cost per visit on the Medicaid fee schedule by converting

Medicare-allowed charges into Medicaid payments. We used allowed

charges instead of payments because the latter excludes the beneficiary

deductible and copay that would be an incurred cost of the Medicaid

program. Next, we adjusted this cost using a Medicaid-to-Medicare fee

ratio developed by HCFA in conjunction with the Urban Institute.25 We then

compared this estimate of the mean Medicaid fee schedule payments with

the mean payments to RHCs.

We projected this estimate to 1996 Medicare and Medicaid RHC

expenditures provided by HCFA’s actuaries as follows:

• HCFA estimates Medicare expenditures only for independent RHCs. Because

facility-based RHCs now comprise about half of all RHCs, we increased our

initial estimate for Medicare accordingly.

• Medicaid estimates of RHC expenditures exclude payments to RHCs in

Texas, Arizona, Hawaii, New York, and Oregon, which do not report these

data separately to HCFA. Because the RHCs in these states comprise

16 percent of the national total, we increased our initial estimate for

Medicaid by this percentage.

Evaluating Cost Controls We next reviewed the controls that were in place to ensure that claimed

costs for Medicare and Medicaid reimbursement were reasonable. We

obtained a file of Medicare claims paid to all RHCs from 1991 to 1995 as

well as Medicaid claims paid to the RHCs in our four-state sample from

1994 to 1995. The claims-paid file gave us information on the number of

beneficiaries seen at the RHC, the number of visits, total charges, and total

payments.

We also obtained a sample of year-end cost reports for independent and

hospital-owned RHCs. The independent RHC cost reports provide detailed

information on various cost categories, staffing levels, and patient visits at

the RHCs. We used this information to identify the cost per visit at the RHCs

and to compare the claimed costs at RHCs with the national mean for

25This ratio was developed to compare the Medicaid fee schedule rates with the Medicare fee schedule

payment rates. The rate established for primary care in 1993 was 0.68.

Page 22 GAO/HEHS-97-24 Rural Health Clinics
Appendix I 

Objectives, Scope, and Methodology

similar providers. We used the national mean as a standard because

neither HCFA nor the fiscal intermediaries had used their legislative

authority to establish criteria for identifying whether claimed costs of the

RHCs were reasonable.

The cost reports for hospital-owned RHCs did not provide this type of

detailed information. However, in combination with other data sources,

we obtained the data necessary to calculate the cost per visit, the amount

of direct costs attributed to the RHCs, as well as the amount and type of

hospital overhead allocated to them. We calculated the cost per Medicare

visit for a judgmental sample of 28 facility-based RHCs26 using a three-step

process:

• First, we looked at schedule E, part B, of the cost report to see whether

Medicare paid all hospital outpatient departments on the basis of the

lower of either costs or charges for beneficiary services.

• Second, we looked at the RHC line item in schedule D, part IV, of the cost

report to determine how much of these costs or charges were attributable

to the RHC.

• Third, we obtained the number of Medicare beneficiary visits from either

the Provider Statistical & Reimbursement Report27 or from Medicare

claims for each RHC provider during the period covered by the cost report.

Assessing Cost

Reimbursement as a

Factor for Clinic Viability

We next reviewed the extent to which the cost-reimbursement benefit was

targeted to RHCs needing it to maintain or expand access. Because low

patient volume was cited as the primary reason that RHCs would need cost

reimbursement, we looked at the number of patient visits reported by a

sample of independent RHCs in their cost reports. We could not perform

this analysis on hospital-owned RHCs because HCFA does not require them

to include these data in their cost reports. We also conducted a telephone

survey of 76 RHCs in our four-state sample to determine their reliance on

cost reimbursement for financial viability.

We conducted our fieldwork from September 1995 through July 1996 in

accordance with generally accepted government auditing standards.

26Our sample of 28 cost reports excluded those that did not cover a full 12-month period and those in

which RHC charges in the cost report did not match those in HCFA’s claims data file.

27This HCFA report summarizes the number and amount of Medicare services and charges by revenue

center for a facility. For each RHC, we used the number of charges for any clinic revenue center

(excluding dental clinic charges) as a proxy for the number of clinic visits. We excluded charges at the

RHC for ancillary revenue centers, such as laboratory services, which we assumed would be

associated with a clinic visit.

Page 23 GAO/HEHS-97-24 Rural Health Clinics
Appendix II 

Rural Health Clinics as of November 1995

Page 24 GAO/HEHS-97-24 Rural Health Clinics
Appendix II 

Rural Health Clinics as of November 1995

Note: Triangles may indicate more than one RHC.

Page 25 GAO/HEHS-97-24 Rural Health Clinics
Appendix III 

Rural Health Clinics by Population Size in

Our Four-State Sample

The following figures show the location of RHCs in our four-state sample of

Alabama, Kansas, New Hampshire, and Washington. The RHCs are in the

center of the 15-mile radius we drew around each one to count the number

of people that live within a reasonable distance to care at the RHC per HHS

criteria.

Cities within a state are denoted by the irregular white patches. How close

RHCs are to these cities can be determined by comparing the area covered

by each circle with the boundaries of these cities. The extent to which

RHCs may be competing with providers in these cities or with each other

for patients in a community can be seen by looking at the circles’ overlap.

Page 26 GAO/HEHS-97-24 Rural Health Clinics
Appendix III 

Rural Health Clinics by Population Size in

Our Four-State Sample

Figure III.1: RHCs in Alabama, by

Population Size

Cities

Mobile

Birmingham

Montgomery

People Within 15 Miles

of the RHC

9,829 to 10,000 (1)

10,000 to 50,000 (41)

50,000 to 249,010 (20)

Notes: Each circle may indicate more than one RHC within the service area.

Numbers in parentheses indicate the number of RHCs in each population size.

Page 27 GAO/HEHS-97-24 Rural Health Clinics
Appendix III 

Rural Health Clinics by Population Size in

Our Four-State Sample

Figure III.2: RHCs in Kansas, by Population Size

Wichita

Kansas

City

Cities

People Within 15 Miles

of the RHC

1,752 to 10,000 (70)

10,000 to 50,000 (56)

50,000 to 88,127 (7)

Notes: Each circle may indicate more than one RHC within the service area.

Numbers in parentheses indicate the number of RHCs in each population size.

Page 28 GAO/HEHS-97-24 Rural Health Clinics
Appendix III 

Rural Health Clinics by Population Size in

Our Four-State Sample

Figure III.3: RHCs in New Hampshire,

by Population Size

Cities

Manchester

Concord

Berlin

People Within 15 Miles

of the RHC

6,596 to 10,000 (1)

10,000 to 50,000 (11)

50,000 to 52,009 (2)

Notes: Each circle may indicate more than one RHC within the service area.

Numbers in parentheses indicate the number of RHCs in each population size.

Page 29 GAO/HEHS-97-24 Rural Health Clinics
Appendix III 

Rural Health Clinics by Population Size in

Our Four-State Sample

Figure III.4: RHCs in Washington, by Population Size

Seattle

Longview

Cities

Richland

Spokane

People Within 15 Miles

of the RHC

2,248 to 10,000 (15)

10,000 to 50,000 (16)

50,000 to 272,447 (3)

Notes: Each circle may indicate more than one RHC within the service area.

Numbers in parentheses indicate the number of RHCs in each population size.

Page 30 GAO/HEHS-97-24 Rural Health Clinics
Appendix IV 

Comments From the Department of Health

and Human Services

Page 31 GAO/HEHS-97-24 Rural Health Clinics
Appendix IV 

Comments From the Department of Health

and Human Services

Page 32 GAO/HEHS-97-24 Rural Health Clinics
Appendix IV 

Comments From the Department of Health

and Human Services

Page 33 GAO/HEHS-97-24 Rural Health Clinics
Appendix IV 

Comments From the Department of Health

and Human Services

Page 34 GAO/HEHS-97-24 Rural Health Clinics
Appendix V 

Major Contributors to This Report

Sarah F. Jaggar, Issue Area Director

Frank Pasquier, Assistant Director, (206) 287-4861

Lacinda Baumgartner, Evaluator-in-Charge

Lisa Dobson, Evaluator

Stan Stenersen, Evaluator

Evan Stoll, Programmer Analyst

(108254) Page 35 GAO/HEHS-97-24 Rural Health Clinics
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