Medicare Reform: 

A Rural Perspective 

A Report to the Secretary 

U.S. Dept. of Health and Human Services 

The National Advisory 

Committee on Rural Health

May 2001

i 

Acknowledgements 

This report was prepared with the assistance of many people. Their time, feedback and 

suggestions were critical in helping the Committee meet its deadline and charge. 

We wish to acknowledge the hard work of the Committee members in identifying this topic, 

developing an agenda and continually reviewing and editing the multiple drafts that led to 

the final report. In particular, we want to thank H.D. Cannington for chairing the Report 

Subcommittee, and Keith Mueller for his meticulous edits and timely suggestions. We also 

want to acknowledge the help of the Rural Health Research Centers, particularly Rebecca 

Slifkin and Kathleen Dalton at the University of North Carolina at Chapel Hill’s Sheps 

Center for Rural Health Research; Curt Mueller and Bonnie Blanchfield at the Project Hope 

Walsh Center for Rural Health Analysis in Bethesda, Maryland; and Tim McBride at the 

University of Missouri. 

We also want to thank several others who were instrumental in this process. Patricia Taylor, 

the retired research director for the Office of Rural Health Policy and now a rural health 

consultant, provided quality feedback and edits on the report’s finance chapter. Helen Lee, a 

medical student at the University of North Dakota, provided key parts of the Workforce 

Chapter during her time in the Office as a Health Policy Fellow from the American Medical 

Student Association (AMSA). Finally, we wish to thank Dr. Wayne Myers, former director of 

the Office and Executive Secretary to the Committee, for his part in writing the forward and 

his editorial suggestions throughout the report. 

Sincerely, 

Marcia Brand, PhD 

Executive Secretary 

Forrest Calico, MD, MPH 

Staff 

Tom Morris, MPA 

Staff 

Michele Pray, MHS (candidate) 

Staff 

Sahira Rafiullah, MPA 

Staff 
ii 

The National Advisory Committee 

on Rural Health (NACRH) 

Chair 

Nancy Kassebaum Baker 

Burdick, KS 

Executive Secretary 

Marcia Brand 

Members

H.D. Cannington ** 

Swainsboro, GA 

Shelly Crow 

Eufaula, OK 

Alison Hughes * 

Tucson, AZ 

John Martin 

Fort Kent, ME 

Tom Nesbitt 

Sacramento, CA 

Jim Ahrens * 

Helena, MT 

Steve Eckstat 

Clive, IA 

Dana Fitzimmons 

Houston, TX 

Rachel Gonzales-Hanson 

Uvalde, TX 

Monnie Singleton 

Bamberg, SC 

Mary Wakefield * 

Fairfax, VA 

Stephanie Bailey 

Nashville, TN 

Dave Berk * 

Anacortes, WA 

Keith Mueller * 

Omaha, NE 

Sally Richardson * 

Charleston, WV 

* Member of Report Subcommittee 

** Chair of Report Subcommittee 
iii 

About the Committee 

NACRH is a 16-member citizens’ panel of nationally recognized rural health experts that 

provides recommendations on rural health issues to the Secretary of the Department of 

Health and Human Services. The Committee was chartered in 1987 to advise the Secretary 

of Health and Human Services on ways to address health care problems in rural America. 

Chaired by former U.S. Senator Nancy Kassebaum Baker of Kansas, the Committee’s 

private and public-sector members reflect wide-ranging, first-hand experience with rural 

issues—in medicine, nursing, administration, finance, law, research, business and public 

health. 

The Committee meets three times annually, once in Washington, D.C. and twice in the field. 

At each meeting, the Committee hears testimony from experts on any number of issues 

affecting rural health. The Committee then debates the issue and drafts recommendations, 

which are forwarded to the Secretary for review and consideration. Committee members, 

who serve staggered, four-year terms, represent the various dimensions of rural health, 

including provision and financing of services, research and development, workforce 

education and training and health services administration. 

Department Secretaries, senators, members of Congress, governors, state legislators, and 

many national, state and local health care leaders have worked with the National Advisory 

Committee in recent years to help shape its recommendations. Since its inception, the 

committee has developed a substantial body of formal recommendations to the Secretary for 

improving rural health. 
iv 

Forward 

By Wayne Myers 

Immediate Past Executive Secretary 

 

You can’t really discuss Medicare reform 

and its implications for rural beneficiaries 

without first getting a basic understanding 

of what rural means and what it may not 

mean. Depictions of rural America often 

fall victim to a nostalgic vision of peaceful 

farm country that look and feel like a 

homogenous subset of the rest of the 

more urbanized country. The assumptions 

inherent in that notion tend to create 

unanticipated problems across the board 

but particularly so in health care. 

Consequently, any discussion of rural is 

best served by providing some important 

context about the issues at hand. How 

large is the rural population? Is it cheaper 

to provide care in rural areas? Are rural 

health care providers inefficient? Do rural 

residents really have trouble accessing 

health care services? Is farming the 

dominant rural occupation? 

When the Committee asked me to provide 

a rural “context” for the report, I thought 

the best approach would be to examine 

the myths and realities that often get lost 

in any discussion about health care, rural 

America and the Medicare program. 

Myth No. 1: Rural populations 

are disappearing. 

“Rural” can be defined in many ways. 

The Office of Management and Budget 

(OMB) defines certain counties as 

“metropolitan.” Policy analysts regard 

counties not included by OMB in 

metropolitan areas as “rural.” This 

county-based system permits recognition 

of medical/social/economic functions of 

providers and the logistic challenges faced 

by consumers. It also considers the 

proportion of county residents 

commuting to jobs in cities as well as the 

presence or absence of “cities” in a 

county in deciding whether the county is 

functionally metropolitan or nonmetropolitan. 

Changes in the non-metropolitan 

population are complex because the 

criteria for designating areas as “nonmetropolitan” have changed over the 

years. Counties designated as nonmetropolitan in 1960 had 66 million 

people, 37 percent of the nations’ 

population. By 1996 those counties were 

home to 101 million people, but many of 

these counties had become parts of 

metropolitan areas. 

In 1980 the population of counties 

designated as non-metropolitan had 

declined to 48 million, or 27 percent of 

the United States population. By 1996 the 

non-metropolitan population had climbed 

to 53 million, but constituted only 20 

percent of the population.1 

In fact, rural areas are showing modest 

growth, though slower than that of metro 

areas. Areas undergoing marked growth 

are likely to be redefined as 

“metropolitan.” Improvements in 

transportation make it easier to commute 

to more distant jobs, and qualify more 

counties for designation as metropolitan, 

even without changes in population 

distribution. Although the proportion of 

the United States population living in 

non-metropolitan counties is declining, 

 

1 US Census Bureau. Statistical Abstracts of the 

United States, 119th Edition. 1999, p. 916-917. 
v 

the absolute number of non-metropolitan 

people is rather constant at around 50 

million. The Committee believes this 

significant population subgroup of 

Americans merits serious attention to 

their problems accessing and paying for 

health care. 

Myth No. 2: Rural health care 

should be cheap. 

Generally speaking, Medicare payment 

formulas are widely regarded as 

approximating the cost of providing 

health care efficiently. These formulae 

reflect an accumulation of Congressional 

choices related to which factors are to be 

included in estimating the costs of 

providing “efficient” health care. The 

reality is that of the various elements 

contributing to the cost of a unit of health 

care, some are more costly in large cities 

than in small towns, and some are less 

costly. Physicians and other health care 

professionals, especially advanced practice 

nurses and therapists, cost just as much in 

rural areas as in urban areas. Others, such 

as custodial workers, cost less. There is a 

perception that urban workers are more 

highly paid than their rural counterparts. 

This is not necessarily true. In many cases, 

rural providers compete with their urban 

neighbors for patient care and for many 

skilled workers. In the extreme, some 

providers often have to pay higher wages 

to attract skilled employees. 

Myth No. 3: Rural health care is 

inordinately expensive.

As noted previously, Medicare payment 

formulae recognize costs that are 

particularly high in urban areas and 

disregard costs that are particularly high in 

rural areas. Hence, rural providers, 

particularly small rural hospitals, seem 

always on the edge of fiscal collapse. A 

variety of special payments have been 

instituted to help them survive, such as 

payments to sole community hospitals 

(SCHs), critical access hospitals (CAHs) 

and Medicare Dependent Hospitals 

(MDHs). Despite these special 

provisions, payments per unit of care in 

rural hospitals remain well below 

payments to urban hospitals. 

Nevertheless, the need for special 

payments attracts more attention than the 

actual payment levels, leading to the 

perception that rural hospitals, with what 

otherwise would be seen as very 

economical operations, are relatively 

costly and inefficient. Rural advocates 

would argue that the need for special 

payments reflects problems with Medicare 

payment formulae rather than rural 

operations. 

Myth No. 4A: Rural Medicare 

beneficiaries don’t care about 

local access to care. 

It is true that many rural people, 

particularly young people, choose to travel 

to urban areas for their health care feeling 

that they will receive higher quality and 

more confidential care. However, it 

should be noted that Medicare 

beneficiaries behave quite differently in 

securing health care than younger rural 

residents. Although they have financial 

access to care wherever they choose to be 

seen, rural senior citizens overwhelmingly 

select local care in preference to remote 

care. 

Myth No. 4B: Rural health care 

needs can be met by urban 

centers. 

Few would argue that highly complex care 

should be available in every small town. 

And, as is now widely acknowledged, rates 

of accidental injury and death are far 

higher in rural than urban areas.2

 

 

2 Ricketts, T (ed.). Rural Health in the United 

States. Oxford Press. 1999, p. 26. 
vi 

Appropriate care that is received within 

the “golden hour” after injury or event is 

crucial. The Medicare population is also 

particularly vulnerable to heart attack and 

stroke. “Clot-buster” therapy, 

administered early and appropriately, can 

prevent devastating damage from evolving 

heart attacks and strokes. The decision 

whether to administer this treatment 

requires immediate access to moderately 

sophisticated diagnostic equipment and 

consultation. The consultation and 

imaging interpretation can be provided 

through telemedicine technology, but the 

first-level clinical judgment and diagnostic 

instrumentation cannot. Finally, it should 

be noted that the likelihood that a person 

will get appropriate chronic or acute care 

is related to ease of access. For older 

patients such as Medicare beneficiaries, 

transportation to health care is a major 

access barrier. More rural beneficiaries live 

in poverty (25% compared to 20% of 

urban beneficiaries),3

 lack access to public 

transportation (only 12% of communities 

with < 2500 people have access to public 

transportation)4 and have conditions 

interfering with activities of daily living5

than their urban counterparts. Convenient 

local access to appropriate comprehensive 

care is important to the health and quality 

of life of rural Medicare beneficiaries. 

Myth No. 5: Rural America is an 

idyllic, homogenous, healthy 

agrarian society. 

The typical nostalgic depiction of rural 

America may be as misleading as any of 

 

3 National Economic Council/Domestic Policy 

Council. “Prescription Drug Coverage and Rural 

Medicare Beneficiaries: A Critical Unmet Need.” 

June 13, 2000, p. 1. 

4 Ricketts, T (ed.). Rural Health in the United 

States. Oxford Press. 1999, p. 26. 

5 National Economic Council/Domestic Policy 

Council. “Prescription Drug Coverage and Rural 

Medicare Beneficiaries: A Critical Unmet Need.” 

June 13, 2000, p. 1. 

the myths that have been discussed but 

may be the hardest to dispel. The reality is 

that rural Americans are more likely to be 

poor (14% vs. 11% in urban areas),6

 old,7

and experiencing poor health and 

disabilities than their urban counterparts. 

They are less likely than their urban 

counterparts to have access to an 

automobile or public transportation or to 

have a telephone. Thus, access to primary 

medical services is problematic in many 

rural communities. 

The rural/urban disparity in mental health 

and social services is even greater. The 

rural elderly are less likely than the urban 

elderly to have private supplemental 

insurance and more likely to be on 

Medicaid. The rural elderly who stay in 

one place as they age are in poorer health 

than either their urban colleagues or those 

who relocate upon retirement. Depression 

and other mental disabilities are equally or 

more common among rural than urban 

people, though intervention services are 

relatively sparse. The rural elderly are also 

more likely to live alone, far from other 

family members. 

Few rural families have any involvement 

in farming. In 1990 only ten million 

people (4% of the population) were 

members of families earning any farmrelated income. Only three million 

people, or 1.3%, were members earning 

most of their income from farming. 

These percentages have probably declined 

further in the past decade. Manufacturing, 

on the other hand, provides similar 

proportions of jobs in rural and urban 

areas. 

 

6 US Census Bureau. “Poverty in the US, 1999.” 

Current Population Reports. September, 2000. 

7 US Census Bureau. “Metropolitan Population 

Estimates for July 1, 1999” and “March 1999 

Current Population Survey.” 
vii 

While rural America has fewer members 

of minority groups than urban areas, it is 

becoming more diverse. Many 

agricultural and food processing areas are 

witnessing rapid growth of their Hispanic 

populations, particularly in the Midwest 

and the South. Other communities are 

hosting new com-munities of immigrants 

from Southeast Asia. 

Summary

Simply put, rural America in 2001 may not 

fit the perceptions that have long been a 

staple of the public consciousness. These 

views, both directly and indirectly, have 

helped shape health policy decisions and 

not always for the better. As the debate on 

Medicare reform continues, the 

Committee believes it is important that 

policymakers give considerable thought to 

the 8.1 million rural beneficiaries across 

the country as they decide how to 

restructure and improve the Medicare 

program. 
viii 

Table of Contents 

EXECUTIVE SUMMARY 1

INTRODUCTION 2 

FINANCE 3 

Background 3 

Current Status 4 

The Payment Differential: Key Policy Issues 5 

The Wage Index 7 

The Disproportionate Share Adjustment 8 

Medicare Managed Care 9 

Issues Discussed 10 

Committee Consensus 11 

ACCESS 13 

Background 13 

Telemedicine 14 

Post-Acute Care 15 

Policy Considerations 16 

Issues Discussed 17 

Committee Consensus 18 

QUALITY 19

Background 19 

Defining Quality 20 

Key Rural Variables 21 

Issues Discussed 23 

Committee Consensus 23 

WORKFORCE 25

Background 25 

Medicare’s Role: Workforce 26 

The Changing Policy Landscape 27 

Legislative Changes 28 

Ideas Discussed 30 

Committee Consensus 31 

REFORM 33

Background 33 

Medicare Reform Options 34 

Committee Consensus 35 

RECOMMENDATIONS 38

Executive Summary 

A recent study indicates that it will cost 

twice as much money to provide today’s 

Medicare benefits in the year 2030 as it 

did in 1998 if no changes are made to how 

the program is structured or financed.1

Those figures clearly point to the need for 

some kind of Medicare redesign. 

And yet the timing presents another 

distinct challenge to lawmakers and 

policymakers. The health care system is 

going through one of its more turbulent 

periods in recent memory. The dramatic 

cuts and payment policy changes 

mandated by the Balanced Budget Act of 

1997 have not yet been fully implemented 

and their combined impact on the health 

care system remains unknown. 

It is important to note that during its first 

25 years, Medicare underwent very few 

major changes until the creation of the 

inpatient prospective payment system 

(PPS) in 1983, followed shortly thereafter 

by the introduction of the physician fee 

schedule.2

 

Since 1998, Medicare has added or will 

add new prospective payment systems for 

skilled nursing, home health, outpatient 

departments, rehabilitation facilities, longterm care hospitals, psychiatric facilities, 

ambulatory surgical centers and 

ambulance services. These changes figure 

to have a dramatic effect on the health 

 

1 The National Academy of Social Insurance. 

“Financing Medicare’s Future.” September 2000. 

2 Medicare also added fee schedules for laboratory 

services, radiology and ambulatory surgical centers 

between 1983 and 1998 but none of these was as 

dramatic as the introduction of inpatient PPS or 

the physician fee schedule. 

care environment.3 The prospect of 

following those changes with an even 

more far-reaching restructuring of the 

Medicare program may make the task 

ahead even more difficult. 

This report will not focus on the relative 

merits or problems with any specific 

legislative proposals put forth either by 

members of Congress or past 

administrations nor will it focus on the 

reform proposals put forth during the 

2000 Presidential campaign. Rather, this 

report will broadly examine the current 

status of the Medicare program as it 

relates to rural beneficiaries while also 

focusing on key issues that policymakers 

need to address to ensure that rural 

beneficiaries are treated equitably under a 

newly designed Medicare program. 

The report begins with a forward by Dr. 

Wayne Myers, a former Executive 

Secretary for the Committee, that 

provides a brief discussion of rural 

considerations designed to dispel some 

myths and reinforce certain realities. The 

report then focuses on four broad 

categories: access, finance, workforce and 

quality. From there, it moves into a 

discussion of reform that cuts across the 

initial four categories and identifies key 

rural issues that should be addressed in 

any redesign of the Medicare program. 

Each of the chapters begins with a 

background section and a discussion of 

key policy issues followed by a summary 

of the Committee discussion on that topic 

and recommendations to the Secretary. 

 

3 Guterman, S. “Putting Medicare in Context: How 

Does the Balanced Budget Act Affect Hospitals.” 

The Urban Institute. July 2000. 

1
Introduction 

Since 1987, the National Advisory 

Committee on Rural Health has served as 

a voice for rural concerns to the 

Secretaries of the U.S. Department of 

Health and Human Services. In that role, 

the Committee has made a wide range of 

recommendations on specific health 

issues, the great majority of which have 

focused on Medicare payment policy. 

During the past 10 years, the issue of 

Medicare reform has arisen at various 

junctures, most noticeably in 1994 with 

the discussion of health care reform and 

again in 1998 with the Bipartisan 

Commission on the Future of Medicare. 

More recently, Medicare reform was a key 

issue in the 2000 Presidential Campaign. 

Few policy issues are as daunting as 

Medicare reform. The sheer size of the 

program and its enormous influence on 

the rest of the health care environment 

make any discussion of redesign or 

modernization a contentious undertaking. 

Each year, Medicare accounts for more 

than $200 billion in Federal spending to 

cover the health care needs of close to 40 

million beneficiaries, 8.7 million of whom 

live in rural areas.4

 

Regardless of the political difficulties, the 

challenges facing the Medicare program 

need to be addressed. There are 39 million 

Medicare beneficiaries now and another 

77 million new beneficiaries will be 

eligible for Medicare by 2010.5

 Without 

changes to the program, the Medicare 

 

4 Health Care Financing Administration. Health 

Care Financing Review: Medicare and Medicaid 

Statistical Supplement. 1999, Table 6, p. 94. 

5 Testimony by U.S. Senator Bill First before the 

U.S. Senate Committee on Finance. February 24, 

2000. 

Hospital Insurance trust fund assets will 

run out by the year 2025.6 

At the same time, a discussion of 

Medicare reform also presents an 

opportunity to redesign and modernize 

Medicare. The Committee and many rural 

supporters have long believed that the 

current Medicare program does not serve 

rural beneficiaries equitably compared to 

urban beneficiaries. Consequently, the 

prospect of Medicare reform affords 

policymakers a chance to create a new 

Medicare program that serves all 

beneficiaries equitably and effectively. 

This report is intended to bring attention 

to some of the key rural issues that should 

be addressed in any redesign of the 

Medicare program. The Committee also 

hopes that the report will ensure that a 

rural voice is heard should the Congress 

and the Administration take on Medicare 

reform. 

 

6 “The Medicare Trustees Report.” March 2000. 

2
Hospitals By Bed Size Categories In 

2000 

Urban 

Hospitals Rural Hospitals

Beds

NumberPercent NumberPercent

0 - 99 672 25% 1,785 82%

0 - 49 1,170 54% 

50 – 99 615 28% 

100 – 

199 

924 35% 304 14%

100-149 

150-199 81 4% 

200 + 

beds 

1,069 40% 71 3%

All 

Hospitals 

2,665 2,160 

Nonfederal, acute care, general hospitals. 

Source: Federal Register, April, 2000. Adapted from 

Medicare program: Prospective payment system for 

hospital outpatient services. Health Care Financing 

Administration, U.S. Department of Health and Human 

Services. 

Finance 

Background 

Medicare financing plays a critical role in 

supporting the rural health care delivery 

system and continues to be the dominant 

source of health care reimbursement in 

rural areas. Medicare patient expenses in 

1998 accounted for 47 percent of total 

patient care expenses for rural hospitals, 

compared to 36 percent of urban 

hospitals.7 That makes rural hospitals 

particularly vulnerable to Medicare 

payment policy changes. 

The Medicare fee-for-service program 

remains the primary source of coverage 

for rural beneficiaries. Less than four 

percent of rural Medicare beneficiaries are 

enrolled in Medicare+Choice plans.8

 

The rural health care delivery system is 

dominated by small (50 beds or less) acute 

care hospitals with a low average daily 

 

7 Medicare Payment Advisory Commission. Report 

to Congress: Medicare Payment Policy. MedPAC. 

June 2000, Table C-16, p. 189. 

8 Rural Policy Research Institute. “A Report on 

Enrollment: Rural Medicare Beneficiaries in 

Medicare + Choice Plans.” Rural Policy Brief. 

RUPRI Center for Health Policy Analysis. March 

2000. 

census of used beds and a more limited 

patchwork of other services including 

general outpatient services, physician 

services, home health and skilled nursing 

care. 

The Medicare program employs several 

mechanisms to encourage providers to 

practice in rural areas and increase access 

to care for Medicare beneficiaries. For 

example, physicians practicing in rural 

health professional shortage areas 

(HPSAs) qualify for a 10-percent payment 

bonus. In addition, providers who practice 

in either Rural Health Clinics or Federally 

Qualified Health Centers can receive 

reasonable cost reimbursement for 

providing service to Medicare 

beneficiaries. 

The service mix in rural areas is 

considerably different than in urban areas. 

Health care in rural areas tends to be 

Medicare + Choice 

Medicare

+Choice 

Enrollment 

July ‘00 

Medicare

+Choice 

Enrollment 

Rate1 

July ‘00 

Growth in 

Enrollment 

Dec. ‘97–

Jun. ‘00 

Total 6,207,777 15.3 17.6 

Urban 6,005,149 19.4 17.8 

Rural 202,628 2.1 10.6 

Source: Data compilation by Tim McBride, University of 

MI, Department of Economics, taken from the RUPRI 

Medicare County Capitation file. 

3
Key Special Medicare Payment 

Categories 

Rural Health Clinics: These providers were 

authorized in 1977 and designed to improve 

access to care for Medicare beneficiaries. The 

clinics, which receive reasonable cost 

reimbursement under Medicare, can be either 

provider-based or free-standing and must be 

located in a rural area that is either a health 

professional shortage area (HPSA) or a medically 

underserved areas (MUA). There are currently 

3,448 RHCs. 

Federally Qualified Health Centers: These 

providers were authorized as a new provider type

under the Medicare program in 1990 and are 

designed to promote access to primary care 

services for beneficiaries in medically underserved 

areas (MUAs). The FQHC designation was 

created explicitly for government-subsidized 

community health centers (CHCs) and migrant 

health centers (MHCs) as well as several smaller 

variations. These facilities receive reasonable cost 

reimbursement under the Medicare program. 

There are currently 2,637 FQHCs in rural areas. 

focused on short-term acute and primary 

care with limited access to tertiary care 

centers and the specialty services they 

provide. 

Rural hospitals are often the focal point of 

the rural health care delivery system and 

the locus of inpatient and emergency care. 

These hospitals also are involved in 

providing home health, skilled nursing, 

long-term care and ambulance services for 

their communities. 

For example, all rural hospitals operate 

outpatient centers and 59 percent of these 

facilities also provide home health services 

while 34 percent offer skilled nursing 

services. Seventy-two percent of these 

hospitals have either a home health 

agency or a skilled nursing facility (SNF) 

while 21 percent of the facilities provide 

outpatient, SNF and home health 

services.9

 

 

9 1996 Medicare Cost Reports, PPS 13. 

Current Status 

The rural health care delivery system, like 

the health care system at large, is going 

through some turbulence. The Balanced 

Budget Act of 1997 attempted to slow 

Medicare growth by reducing 

reimbursement to all types of providers 

for all services. It also moved many of the 

Medicare payment systems that were still 

paid on a cost basis (most notably 

outpatient, skilled nursing, home health, 

and rehabilitation) to prospective payment 

systems while also creating a fee schedule 

for ambulance services. The Balanced 

Budget Refinement Act of 1999 continued 

that trend by moving long-term care and 

psychiatric hospitals into prospective 

payment. 

Although originally intended to produce 

$112 billion in Medicare savings over five 

years (1998-2002),10 the changes wrought 

by the BBA have had a far larger impact 

than expected. In FY 2000, Medicare 

spending will be $29 billion less than 

expected and the rural portion of that is 

seven billion.11 

Typically, rural providers operate on 

thinner Medicare margins than their urban 

counterparts and the BBA cuts have 

greatly diminished that thin bottom line. 

Rural hospitals saw their Medicare 

margins fall from 9.5 percent in 1997 to 

5.2 percent in 1998. Urban hospitals had 

an average margin of 15.8 percent in 1998, 

a drop of 2.3 percent from 1997.12 In fact, 

39.4 percent of rural hospitals had a 

 

10 Guterman, S. “Putting Medicare in Context: 

How Does the Balanced Budget Act Affect 

Hospitals.” The Urban Institute. July 2000. 

11 Testimony from Thomas Scully before the 

Senate Appropriations Subcommittee on 

Agriculture, Rural Development and Related 

Agencies. July 11, 2000. 

12 Medicare Payment Advisory Commission. 

Report to the Congress: Selected Medicare 

Issues. MedPac. June 2000, Table C-3, p. 178. 

4
negative Medicare operating margin in 

1998, compared to 20.6 percent of urban 

hospitals.13 

Rural hospitals, which are heavily 

dependent on Medicare and Medicaid, 

face difficulty trying to balance losses by 

shifting costs to third-party payers. This 

is exacerbated by the continuing growth 

nationally in the number of uninsured 

patients, which makes it tough to shift 

costs to either Medicare or Medicaid or to 

private insurers to cover the losses faced 

in treating the uninsured. 

The Balanced Budget Refinement Act 

(BBRA) of 1999 attempted to lessen the 

impact of the BBA by putting another $1 

billion back into the system for FY 2000 

and $15.8 billion over five years. Congress 

and the Administration agreed on further 

givebacks that provided another $36 

billion in adjustments at the close of the 

106th Congress in the BIPA of 2000 

legislation.14 That total, it should be noted, 

included payment adjustments for all 

 

13 Medicare Payment Advisory Commission. 

Report to the Congress: Selected Medicare 

Issues. Medpac. June 2000. 

14 Health Care Financing Administration. “CBO: 

BIPA gives providers $36.8 Billion over five 

years, $94.3 over 10.” January 4, 2001, p. 4. 

providers, including urban hospitals and 

HMOs. 

A few of the payment changes in the BBA 

and the subsequent adjustments in the 

BBRA have not been fully implemented 

so it is difficult to know the full impact. 

Early indications are that rural providers 

may be at risk for the next few years due 

to their dependence on a variety of 

changing payment streams (outpatient, 

home health and skilled nursing care). 

The Payment Differential: Key 

Policy Issues 

Historically, Medicare has spent less per 

beneficiary in rural areas than in urban 

areas. Medicare spends $5,696 per 

beneficiary in urban areas compared to 

$4,652 in rural areas.15 In part, this lower 

level of spending stems from the belief 

that it costs less to provide care in rural 

areas. In constructing the original 

inpatient PPS, analysts based their 

methodology on historical costs in the 

aggregate. There was also a perception 

that rural areas had a lower cost of doing 

business whereas urban areas faced higher 

costs particularly when it came to wages. 

Those perceptions became part of 

payment policy as the initial inpatient PPS 

included separate standardized rates for 

rural and urban hospitals, which led to 

considerable payment inequity. 

Some rural advocates continue to question 

the initial assumptions upon which the 

payment system was created. They 

wonder whether the underlying 

assumptions of the payment system 

underestimated costs in the rural settings 

for reasons related to under-utilization or 

practice styles, or decisions by local 

 

15 Health Care Financing Administration. Health 

Care Financing Review: Medicare and Medicaid 

Statistical Supplement. 1999, Table 15, p. 111. 

Percent of Hospitals with Negative 

Medicare Inpatient Margins, 1999 

(excluding graduate medical 

education by hospital group) 

Urban 26.3%

Rural 43.9%

Rural Referral 33.0%

Sole Community 42.2%

Medicare Dependent 36.1%

Other Rural < 50 Beds 54.5%

Other Rural > 50 Beds 45.1%

Source: Table B5, “Report to the Congress: Medicare 

Payment Policy.” Medicare Payment Advisory Commission. 

March, 2001. 

5
Key Rural Medicare 

Hospital Classifications 

Critical Access Hospitals (CAH): These small 

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. These hospitals receive 

cost-based reimbursement from Medicare and 

also are given greater regulatory flexibility related 

to staffing and coverage. 

Sole Community Hospitals (SCH): These 

facilities serve as the sole source of inpatient care 

in a community and must meet certain mileage 

and distance requirements in order to qualify for 

enhanced Medicare payments that are based on 

their historical costs. 

Medicare Dependent Hospitals (MDH): These 

facilities have fewer than 100 beds, do not serve 

as a SCH and must have a Medicare patient load 

(by either count or revenue) greater than 60 

percent in order to qualify for cost-based 

Medicare payments that are based on their 

previous costs. 

Rural Referral Centers (RRC): These facilities 

are high volume, treat a range of complicated 

cases and serve as a regional or national referral 

center. They have more flexibility for 

reclassification to a higher urban wage index and 

may receive higher DSH payments than small 

urban or most other rural hospitals. They must 

have at least 275 beds, meet a minimum 

discharge standard or meet a specialty 

composition standard of medical staff, referral 

volume or source of inpatients in order to qualify 

for special consideration under Medicare’s 

prospective payment system. 

governing boards to minimize charges 

thereby absorbing costs with non-patient 

revenue. There was also concern that, to 

their own detriment, rural providers may 

have charged less than their total costs for 

some services, either because of 

inadequate accounting systems or as a 

matter of policy. 

The separate rural and urban standardized 

rates were eliminated in 1995. While this 

change helped rural hospitals, a payment 

gap remains. Some attribute the 

differential to the wage index while others 

point to the disproportionate share 

adjustment. Others say it correctly reflects 

the difference of providing care in rural 

versus urban areas. Still others attribute 

the discrepancy to GME payments – two 

standardized rates (large core urban 

hospitals and all other hospitals) are used. 

Over the years, policymakers and 

lawmakers have acknowledged rural 

hospitals may be vulnerable under 

prospective payment systems that 

reimburse based on a national average and 

make no allowance for differences in 

volume and fixed costs. 

Certain rural hospitals can qualify for 

special payment under Medicare payment 

by being classified as a critical access 

hospital (CAH), sole community hospital 

(SCH), Medicare-dependent hospital 

(MDH) or a rural referral center (RRC). 

Each of these classifications brings 

enhanced payment to qualifying hospitals. 

The creation of this alphabet-soup of 

protections has served to provide some 

limited stability to the rural health care 

infrastructure but fails to address the core 

problem of why these hospitals struggle to 

survive. 

Some point to the issue of volume as a 

problem. Many smaller hospitals have 

fewer cases upon which to spread their 

fixed costs. The logic behind the use of a 

prospective payment system is to 

encourage efficiency among providers by 

paying a set price that encourages 

providers to provide their services in a 

cost-effective manner. Rural providers 

typically handle a lower volume of cases 

and cannot achieve the same economies 

of scale as larger providers.16 That can 

 

16 Atkinson, JG. “Needed: A ‘Low-volume 

Adjustment’ for Medicare Prospective Payment to 

6
The Wage Index: 

A Rural-Urban Comparison 

A hospital in Sylvester, Georgia will receive 11.8 

percent less per Medicare discharge than a 

hospital located in Albany, Georgia, which is 22 

miles away. This means Baptist Hospital Worth 

County in Sylvester would receive $4,069.29 for a 

patient admitted for simple pneumonia, whereas 

Phoebe Putney Memorial Medical Center will 

receive $4,550.69. Baptist Hospital Worth 

County would receive $585,864 less per year if 

50 percent of its admissions were Medicare and 

it were operating at 50 percent occupancy, or 25 

patients per day, due to the difference in the 

area wage index. 

Wage Index Reclassification 

Medicare attempts to address some of the 

problems associated with the wage index by 

allowing some hospitals to reclassify from one 

wage index area to another. 

As a result, rural hospitals located near an urban 

area with which they compete for labor can 

apply to get the same wage index as the nearby 

urban hospital. To qualify, the rural hospital must 

show that it is 15 miles from the area it wishes to 

be reclassified to. It must also show that its 

average hourly wage rate is less than 106 

percent of the average hourly wage in its current 

labor market and at least 82 percent of the 

average hourly wage for the area it is trying to 

reclassify to. 

At the same time, Medicare provides protection 

for the statewide rural wage rate area by 

calculating their wage index as if the 

reclassification had never taken place. This 

ensures that the hospitals remaining in the rural 

wage area do not suffer an aggregate reduction 

due to the loss of a reclassified hospital. This is 

important since the reclassified hospitals typically 

represent the higher end of the labor market 

that make up the statewide labor market 

calculation.

make survival under a prospective 

payment system somewhat difficult since 

payment is based on a national average 

cost in which the average is heavily 

weighted by the costs of large urban 

hospitals. Little research has been done on 

this issue to date. However, the Medicare 

Payment Advisory Commission 

(MedPAC) is expected to examine this 

issue in its June 2001 report. 

Others argue that current payment policy 

adjustments are the key causes of the 

urban-rural payment differential. They are: 

wage index, disproportionate share 

payment, GME (which will be discussed 

in the Workforce chapter) and managed 

care payment. 

The Wage Index 

The wage index is part of a complex 

calculation of Medicare hospital payments 

that attempts to account for differences in 

the cost of labor between hospitals. 

HCFA uses the wage index to adjust the 

estimated labor-related portion, which is 

estimated to be about 71 percent, of the 

standard payment per discharge. As a 

result, the index has a dramatic impact on 

 

Small Rural Providers.” For the George Mason 

University Center for Health Policy, Research & 

Ethics. World Wide Web publication. June 20, 

2000. 

Medicare inpatient PPS payments because 

of this multiplier effect. 

Some rural advocates point to several 

conceptual concerns with the current use 

of the wage index: 

 The state-wide rural wage markets do 

not represent true labor markets 

because geographically disparate 

hospitals are lumped together whether 

they use a similar labor pool or not. 

 The current calculation of the wage 

index fails to include an occupational 

mix adjustment that takes into 

account the differences in the types of 

workers used by rural and urban 

hospitals. 

 The current inpatient hospital wage 

index will be used to adjust for wages 

in other areas of the Medicare 

program, including outpatient 

7
services, skilled nursing care and home 

health. 

Criticizing the wage index, however, has 

proven far easier than fixing it. While the 

issues cited above may be clear, the 

potential fixes are problematic. For 

example, changing or subdividing the 

state-wide rural wage areas could have the 

effect of lowering payment for smaller 

more isolated rural hospitals located far 

from urban settings. That would result in 

a decrease in the wage rate because it 

would no longer have the benefit of the 

higher labor costs of the rural hospitals 

located at the urban fringe.17 

Similarly, the introduction of an 

occupational mix could have variable 

results. The Prospective Payment 

Assessment Commission (PROPAC) 

examined this issue in 1990 and found 

that while rural hospitals would be helped 

in the aggregate, some rural hospitals 

would face losses in specific regions of the 

country.18 

Both MedPAC and the General 

Accounting Office (GAO) are expected to 

re-examine wage index issues in reports 

mandated by the Balanced Budget 

Refinement Act of 1999.19 This work may 

shed light on the question of a rural-urban 

differential. 

There are also larger contextual policy 

issues to consider. The wage index is a 

zero-sum calculation. In order to give 

 

17 Dalton, K and Slifkin, B. Unpublished 

Research. University of North Carolina. Rural 

Health Research Center. Fall 2000. 

18 Williams, D; Pettengill, J; Lisk, C. “Adjusting A 

Wage Index For Geographic Differences in 

Occupational Mix.” Technical Report, 1-90-02. 

Prospective Payment Assessment Commission. 

June 1990. 

19 Section 410 and 411 of the Balanced Budget 

Refinement Act of 1999. 

more to rural hospitals, one would have to 

take more from urban hospitals. Any 

changes create winners and losers. It is 

also worth noting that it has taken HCFA 

years to refine the wage and hospital data 

it currently collects. Additional or 

substitute data would similarly take years 

to refine. 

 

The Disproportionate Share 

Adjustment 

Since 1986, Medicare has made special 

payments to hospitals that provide care to 

a disproportionate share of poor patients. 

MedPAC and others have long noted that 

the current DSH payment policy favors 

hospitals located in urban areas. 

Almost half of all urban hospitals receive 

DSH payments while only one-fifth of 

rural hospitals receive DSH payments. 

The differential was due mainly to 

different eligibility thresholds for urban 

and rural hospitals. However, Congress 

took a significant step toward addressing 

this issue in FY 2000 by creating a 

uniform eligibility standard for all 

hospitals. The legislation allows for 

eligible rural hospitals to get a payment 

adjustment up to 5.25 percent for their 

inpatient services.20

The equalization of the eligibility 

thresholds should result in significant 

payment gains for rural hospitals. 

However, the amount of DSH 

adjustments still differs for rural and 

urban hospitals. The adjustment still 

includes a formula that tends to reward 

urban hospitals with more than 100 beds 

by using steeply graduated payment 

adjustments.21 

 

20 Section 211 of the Beneficiary Improvements 

and Protection Act of 2000. 

21 Medicare Payment Advisory Commission. 

Report to the Congress: Medicare Payment Policy. 

MedPac. March 1999. 

8
The Urban Edge: 

Competition or Financial 

Advantage? 

Medicare + Choice is more prevalent in urban 

than rural areas. Is it because the urban plans are 

more competitive and efficient or do they have 

an inherent financial advantage? 

Rural advocates believe managed care plans are 

being overpaid in some urban areas. They 

believe this allows the plan to make profit and 

provides enough extra revenue to attract 

beneficiaries by offering expanded benefits such 

as prescription drugs and eye care. In rural areas, 

they argue, there is no excess above costs in the 

capitated payment. That makes it hard for rural 

plans to generate a profit and provides little 

financial flexibility to offer increased benefits. 

Others disagree and say the plans are not 

overpaid and rather rely on the power of the 

market to compete for beneficiaries. They argue 

that they keep costs low and operate efficiently 

enough to cover the costs of the expanded 

benefits. 

Some rural advocates say the current 

formula makes a value judgment that rural 

hospitals do not have the same burden of 

providing care to low-income patients as 

urban hospitals. The original logic of that 

premise was based on the finding that 

overall urban hospitals provide greater 

levels of charity and uncompensated care 

than rural hospitals. However, those 

findings are not uniform and the levels of 

charity care differ from state to state. For 

example, a five-state study showed that 

financially vulnerable rural hospitals tend 

to have higher levels of uncompensated 

care.22 The reality is that many rural 

hospitals are the 

provider of last resort in their 

communities and must take all patients 

regardless of ability to pay. 

Medicare Managed Care 

Medicare enrollees have had the option of 

being cared for by a managed care plan 

since 1982. This option gained increased 

policy endorsement in the Balanced 

Budget Act of 1997 and the creation of 

the Medicare + Choice program. The idea 

was that plans would compete against 

each other and this would help derive 

savings for the Medicare program by 

paying less than would normally be spent 

in FFS. 

The program, however, has been the 

source of some contention. The managed 

care plans have complained loudly that 

they have not been paid enough and have 

received payment adjustments in both the 

BBRA and BIPA. 

 

22 Sutton, J; Blachfield, B; Milet, M. “Is the rural 

safety net at risk? Analysis of charity and 

uncompensated care provided by rural hospitals in 

Washington, West Virginia, Texas, Iowa and 

Vermont." Draft Report issued to ORHP May 

2000. 

Others, including consumer advocates and 

watchdog groups, have claimed the plans 

have been overpaid, which has been 

confirmed in some cases by the Office of 

the Inspector General at the U.S. 

Department of Health and Human 

Services.23

Some of the loudest complaints have 

come from rural advocates. Prior to 1997, 

some counties in rural areas received as 

little as $221 per patient per month while 

some urban areas had monthly payment 

rates as high as $767. Not surprisingly, 

rural enrollment has not kept pace with 

urban areas. 

Despite significant changes in the 

Medicare + Choice program (including 

the establishment and then boost of a 

 

23 Office of Inspector General. “Review of 

Medicare Overpayments to Managed Care 

Organizations Due to Overstated Capitation 

Rates.” U.S. Department of Health and Human 

Services. December 1999. 

9
Total Medicare Spending 

Medicare 

Spending 

Total 

Expenditures (in 

millions) 

Amount 

per 

Enrollee 

Amount 

per 

Person 

Served 

Urban $134,200 $5,696 $6,228 

Rural $40,140 $4,652 $5,046 

Medicare enrollees in managed care plans are not 

included in the denominator. 

Source: HCFA: Health Care Financing Review: Medicare and 

Medicaid Statistical Supplement, 1999. Table 15, page 111. 

payment floor) and special initiatives 

designed to encourage participation, rural 

enrollment has lagged behind urban areas. 

Rural enrollees currently make up less 

than 4 percent of Medicare beneficiaries 

in managed care plans.24 

In FY 2000, 101 rural counties were 

affected by plans pulling out of their 

service area. In 27 of those counties, 

beneficiaries were left with one other 

Medicare + Choice plan to join. However, 

there were 27,000 beneficiaries in the 65 

other rural counties that were left without 

a viable option other than returning to 

traditional FFS. 25

Rural advocates believe one of the 

primary problems with the Medicare + 

Choice program is that it is based on the 

existence of a competitive market. That 

model does not fit most rural areas where 

few plans are lining up to compete. In 

fact, interested plans are often scared off 

by the low payments. 

Managed care plans are often further 

discouraged from moving into rural areas 

where the population is often spread out 

over a large geographic area. That makes it 

hard to set up the kind of provider 

network needed to effectively manage the 

care and the costs. Still other plans are 

concerned that they may face unexpected 

initial costs due to the historic underutilization of services that may result in an 

early spike in utilization that is not 

 

24 Shay, B and McBride, T. “A Report on 

Enrollment: Rural Medicare Beneficiaries in 

Medicare + Choice Plans.” Rural Policy Brief. 

RUPRI Center for Health Policy Analysis. March 

2000. 

25 McBride, TD and Andrews, C. “An Update on 

Medicare+Choice: Rural Medicare Beneficiaries 

Enrolled in Medicare+Choice Plans through 

October 2000.” Rural Policy Brief. RUPRI Center 

for Health Policy Analysis. March 2001, Vol. 6, 

No. 7 (PB2001-7). 

accounted for in the payment rate. The 

BBRA attempted to address this concern 

by creating additional payment for plans 

to accommodate those early utilization 

increases. The BIPA legislation extended 

that so that a plan could receive bonus 

payments in the first two years in a 

previously unserved county.26 These 

provisions may help encourage more 

plans to reach out to unserved counties 

but the true impact may not be known for 

some time. 

Issues Discussed 

Many rural advocates believe the current 

Medicare payment system is not adequate 

to ensure access to care for rural 

beneficiaries. One area that continues to 

generate a great deal of attention is the 

inpatient hospital wage index. Hospital 

administrators, in particular, point to this 

measure as the key culprit behind 

underpayment in rural areas. They believe 

rural providers should be paid the same 

wage rate as the average urban hospital. 

Researchers and policymakers, however, 

are less convinced that the wage index is 

the primary reason for rural-urban 

payment differentials. Instead, they point 

to a variety of factors from DSH 

payments, practice patterns and the 

 

26 Section 512 of the Balanced Budget Refinement 

Act and Section 608 of the Beneficiary 

Improvement and Protection Act of 2000. 

10
impact of volume within the DRG system 

as key issues to consider along with the 

wage index. 

The question over how to structure a 

more equitable Medicare payment system 

poses an equally difficult challenge. The 

Committee discussed several 

philosophical approaches ranging from 

dramatic restructuring of Medicare to 

incremental adjustments to the current 

system. 

On one extreme, Medicare could move 

away from its current reliance on fee-forservice delivery and develop a system that 

would emphasize local control. The idea 

behind this approach is to give control 

over how dollars are spent at the local 

community level so it can manage its own 

care more effectively, assuming there is 

adequate funding. This approach would 

help address the great variability across 

rural areas and avoid the problems of 

trying to fashion national payment policies 

that may or may not be relevant at the 

local level. This approach would also 

entail additional financial support to those 

communities that currently struggle to 

provide the necessary infrastructure to 

provide a basic level of care. 

Another option would be to use the 

Medicare program to make a stronger 

investment in the sustainability of the 

local health care system. Under this 

approach, Medicare would not only pay 

for services but also make a minimum 

separate investment in some rural 

communities in order to ensure the 

viability of the local health care delivery 

system. Such an approach would then 

allow Medicare to pay solely for the costs 

of care in its current payment systems 

without the need for the myriad of 

payment adjustments now in existence. 

On the other end of the spectrum, one 

could build on the current system in an 

incremental fashion. This approach could 

take two forms. The first would attempt 

to address current payment inequity by 

adjusting the current payment systems to 

reflect the reality of providing care in rural 

areas through the use of a volumeadjustment to the current prospective 

payment systems. The second form would 

take that concept a step further and 

construct completely new and separate 

rural prospective payment systems that 

would better reflect the realities of 

providing care in rural areas to isolated 

populations. 

Committee Consensus 

The Committee believes that in any 

redesign of the Medicare program special 

protections need to be put in place to 

ensure the viability of the fee-for-service 

delivery system. The Committee is 

concerned that reliance on managed care 

to address inequities in services for rural 

beneficiaries is problematic because of the 

lack of competing health plans in sparsely 

populated areas. 

The Committee believes Medicare has 

responsibility for both guaranteeing 

reasonable access to care and for ensuring 

that the local health care delivery system is 

not put at a disadvantage solely because of 

geographic location. 

At a minimum, the Committee believes 

Medicare policy should not create new 

problems for beneficiaries in terms of 

access to quality health care services. More 

appropriately, the Committee believes that 

Medicare payment policy should be 

adequate enough to ensure a basic benefit 

package that is available regardless of 

where the beneficiary is located. That 

benefit package, they noted, would 

include all of the current benefits as well 

11
as access to preventive care, dental 

benefits and prescription drugs. 

Recommendations 

The Secretary should: 

 Evaluate the need for a lowvolume adjustment within all of 

the Medicare prospective payment 

systems (See National Advisory 

Committee recommendations, 

1999). 

 Conduct research to determine the 

true cost of providing care to 

Medicare beneficiaries in rural 

areas that takes into account 

factors related to access, 

geographic isolation and volume. 

The results of this research should 

be used in redesigning the 

Medicare program to ensure 

equity of benefits for rural 

beneficiaries. 

 Continue collecting data on 

occupational mix and implement 

an adjustment to the wage index 

as soon as possible. 

 Collect wage data for both the 

skilled nursing and home health 

service areas and evaluate the 

impact of constructing an 

occupational mix adjustment 

within the wage index for both of 

these payment systems. 

 Continue to refine the 

methodology for the 

disproportionate share adjustment 

for hospitals to treat all hospitals 

equally. 

12
Health Professional Shortage Areas 

(HPSAs), 2000 

Urban Rural 

Medical 

designations 

893 1,847

Percent of all 

designations 

33 67

Percent of 

HPSA 

population 

54 46

Source: Bureau of Primary Health Care, Division of 

Shortage Designation 

Access 

Background 

The Medicare program was created in 

1965 to provide health insurance coverage 

for elderly Americans and, by and large, it 

has done that. The health services 

research literature is rich with studies that 

attempt to find a uniform and policyrelevant way to assess whether patients 

can get the care they need. This endeavor 

typically involves some degree of value 

judgements not only in terms of the 

infrastructure needed to ensure proximity 

to care but also in terms of socioeconomic 

status, cultural concerns, geographic 

barriers and physical factors. And it may 

mean different things for one population, 

such as the elderly, than it does for 

another, such as children or the 

uninsured. For the purposes of this 

discussion, however, the focus is solely on 

Medicare and rural beneficiaries. 

Rural populations are viewed as 

vulnerable to reduced access to health 

care services for a variety of reasons. 

Rural areas tend to have a limited number 

of health care providers, poorly developed 

health care systems, high prevalence rates 

of chronic illness and disability, 

socioeconomic hardships, and geographic 

and transportation barriers.27 Rural 

residents are likely to blame the lack of 

local resources for care as a key reason 

that some residents do not have a 

consistent source of care.28 

 

27 Schur, C and Franco, S. “Access to Care.” 

Project Hope Walsh Center for Rural Health 

Analysis. 1998. 

28 Hayward, RA; Beynard AM; Freeman, H.E.; 

Corey, C.R. “Regular Sources of Ambulatory Care 

and Access to Health Services.” American Journal 

of Public Health. 1991, Vol. 8, p. 434-438. 

The 8.9 million rural Medicare 

beneficiaries29 seek their care in a system 

that is markedly different from their urban 

counterparts. Rural Medicare beneficiaries 

are typically treated in a fee-for-service 

format and their provider base is heavily 

weighted toward primary care as 57 

percent of the physicians in these areas are 

generalists. In urban areas, only 27% of all 

physicians practice primary care. There 

are more specialists than generalists in 

urban areas.30 Not surprisingly, there are 

more than twice as many health 

professional shortage areas in rural areas 

(1,847) than in urban (893).31 

Rural Medicare beneficiaries also 

 

29 Health Care Financing Administration. Health 

Care Financing Review: Medicare and Medicaid 

Statistical Supplement. 1999, Table 6, p. 94. 

30 Rosenthal, TC and Fox, C. “Access to Health 

Care for the Rural Elderly.” Journal of the 

American Medical Association. October 25, 2000. 

31 The Bureau of Primary Health Care, Division of 

Shortage Designation. September 30, 2000. This is 

based on a physician to population ratio of 3000:1. 

A variety of factors (geographic, service area, and 

number of providers) determine HPSA 

designation. The provider to resident ratio is 

3,500:1 or 3,000:1 if there is unusually high 

demand for primary care or there is insufficient 

capacity in contiguous areas.

13
experience somewhat higher rates of 

hospitalization,32 although, not 

surprisingly, this decreases by 15 percent 

for those living more than 30 minutes 

from the hospital.33 Rural hospitals are 

staffed largely by generalists and have a 

vastly different case mix than urban 

hospitals. The rural facilities tend to focus 

on primary care, chronic care 

management and long-term care. 

These rural facilities continue to be the 

focal point in their communities. Over the 

past decade, hospitals in sparsely 

populated areas have had trouble 

remaining financially viable in the face of 

increasing pressure to cut Medicare 

payments. Policy experiments with 

Medicare payments to Medical Assistance 

Facilities in Montana and Rural Primary 

Care Hospitals in seven other states led to 

Medicare recognition nationally of Critical 

Access Hospitals (CAHs). Over the past 

three years approximately 320 small rural 

hospitals have accepted some constraints 

on their size and the length of time they 

can keep patients hospitalized in return 

for CAH designation which allows them 

to receive cost-based reimbursement from 

Medicare for both inpatient and 

outpatient services. 

Proponents argue that most of these 

hospitals are needed to assure immediate 

local access to urgently needed care, and 

that many of these hospitals would not 

have survived without the Critical Access 

Hospital provisions. The BBRA of 1999 

and the BIPA of 2000 relaxed some of the 

constraints required for designation. This 

 

32 Culler SD; Parchman JL; Przybylski, M. “Factors 

Related To Potentially Preventable 

Hospitalizations Among The Elderly.” Medical 

Care. 1998. 

33 “The Distance to Community Medical Care and 

the Likelihood of Hospitalization: Is Closer 

Always Better?” American Journal of Public 

Health. 1997. 

will increase the number of small hospitals 

surviving through this strategy, but may 

reduce the special character and 

contribution to access of the CAH. 

Telemedicine 

Telemedicine is often seen as a tool for 

increasing access to care, particularly for 

isolated rural areas. While telemedicine 

technology has been available as a 

technology for the past 40 years, it has 

gained increased acceptance in the last 10 

years. Some rural communities have 

turned to this technology to improve 

access to specialty care. Typically, this 

technology allows specialists from urban 

areas to treat rural patients by using 

telecommunication technologies to 

transmit medical images and videos over 

distances. Telemedicine offers promise for 

rural communities located far from 

medical specialists and may also help 

better serve rural areas given the high 

degree of frail elderly who suffer from 

chronic conditions and have difficulty 

traveling. 

The use of telemedicine appears to be 

growing, although few national studies 

have looked at utilization, clinical 

effectiveness or patient satisfaction. A 

1999 industry survey found that there 

were 170 telemedicine programs in 1998, 

up from 157 the previous year. Those 

telemedicine networks provided 52,223 

teleconsultations, an increase of 10,000 

from the previous year. States with the 

most programs are California, New York, 

Texas, North Carolina and Pennsylvania.34 

The use of this technology by Medicare 

beneficiaries is less clear. Medicare began 

 

34 “1999 Report on U.S. Telemedicine Activity: 

Desktop Reference for a Rapidly Evolving 

Industry.” The American Telehealth Service 

Providers and Telemedicine Today. 1999. 

14
Telemedicine: A Panacea? 

Many advocates have pointed to telemedicine as 

a tool for addressing access problems facing rural 

communities, but there are some questions 

about the extent to which this technology can 

address long-standing concerns. 

Telemedicine advocates see this technology as a 

way to bring more specialty care to rural areas by 

linking them with specialists at distant tertiary 

care centers. They also note that telemedicine 

links can help strengthen and stabilize rural 

hospitals. Over the past 10 years, there have 

been substantial technological advancements 

and reductions in cost, putting this technology 

within closer reach for struggling rural providers. 

Others, however, are more cautious. They are 

concerned that policymakers may overestimate 

the power of this technology to solve some of 

the more intractable problems faced by rural 

delivery systems. They are concerned that 

political leaders and policy makers may see 

investment in this technology as a substitute for 

funding other more traditional initiatives focused 

on stabilizing the rural health infrastructure. 

reimbursing for some telemedicine 

services in 1997 but that coverage was 

limited to rural health professional 

shortage areas. Between January 1, 1999 

and September 30, 2000, HCFA paid 301 

claims for a total of $20,000.35 This total 

does not include teleradiology, which is 

paid for the same as any radiology service 

and is not considered a teleconsultation 

under Medicare. 

This limited number of teleconsultations 

may be due to several factors. Some rural 

advocates have complained that the 

payment methodology is too restrictive in 

terms of who can present the patient at 

the rural end and also in the range of 

services that are covered. Others believe 

there are still issues related to licensure 

and infrastructure that must be addressed 

to encourage more use of this 

technology.36 

Many of the concerns about the payment 

methodology were addressed in the 

legislation that passed late in the 106th

Congress.37 The other issues, however, 

have yet to be addressed and are beyond 

the scope of Medicare. 

To date, it has been difficult to gauge the 

effectiveness of telemedicine technology 

and its impact on Medicare beneficiaries, 

given the limited history of Medicare 

reimbursement in this area. No definitive 

national studies have been done on these 

 

35 Department of Health and Human Services, 

Health Resources and Services Administration. 

“2001 Telemedicine Report to Congress.” January 

10, 2001. 

36 U.S. Department of Commerce, in consultation 

with the U.S. Department of Health and Human 

Services. “1997 Telemedicine Report to 

Congress.” January 1997. 

37 Section 223 of the Medicare, Medicaid and SCHIP Beneficiary Improvement and Protection 

Act of 2000. 

issues, but further research may shed light 

on this topic. 

Post-Acute Care 

When rural beneficiaries are discharged 

from the hospital, they often face 

different choices than urban beneficiaries 

do in terms of access to specialized postacute care services. There are 208 

Medicare-certified rehabilitation hospitals 

across the country but only 21 in rural 

areas. Similarly, of the 245 Medicare longterm care hospitals, only 12 are in rural 

areas. Of the 520 Medicare psychiatric 

hospitals, 81 are located in rural areas.38 

This is not to say that rural Medicare 

beneficiaries do not have access to basic 

psychiatric, long-term care or 

rehabilitation services. Home health and 

skilled nursing facilities can often provide 

access to these services but they may not 

 

38 OSCAR File (January, 2000). 

15
be as specialized or immediate for 

beneficiaries in rural communities. There 

are 2,637 home health agencies in rural 

areas and 4,678 SNFs in rural areas and 

these entities serve as major access points 

for beneficiaries.39 In addition, rural 

hospitals also have the option to use 

swing beds through which they can 

provide skilled nursing care services in the 

acute-care setting for a limited time once 

the patient is discharged from acute care. 

Of these services, home health and swing 

beds have been the dominant access 

points to post-acute care services for rural 

beneficiaries. Rural areas, like the rest of 

the country, saw an explosive growth in 

the number of home health agencies 

during the 1990s. Medicare home health 

spending increased 29 percent from 1990 

to 1996, moving from $3.9 billion to $18.3 

billion. 

That growth prompted many of the 

changes in home health payment in the 

BBA that began with the imposition of 

the Interim Payment System (IPS) and, 

eventually, the creation of a home health 

prospective payment system. The IPS and 

its payment and beneficiary limits wreaked 

havoc with the home health care system, 

resulting not only in some agency closures 

but also in agencies turning away some 

high acuity patients. The impact on rural 

 

39OSCAR file (January 2000) and PPS 14. 

agencies has not been fully determined 

but there has been no apparent aggregate 

reduction of access to care according the 

General Accounting Office and others. 

Others dispute those findings and argue 

that those studies failed to account for 

situations in which agencies are approved 

to cover services for an entire county but 

pulled back under the IPS payment 

reductions to cover only the highly 

populated service areas. 

The home health studies to date have, 

however, shown some rural-urban 

differentials. The analysis indicates that 

rural beneficiaries used less physical and 

occupational therapy services and were 

more reliant on home health aide services 

than urban beneficiaries.40 The difference 

may be more dramatic regionally and 

questions remain about the long-term 

implications of beneficiaries’ access to 

care under the new PPS. 

Some rural advocates are concerned that 

the more strict eligibility requirements 

under the new payment system may result 

in fewer visits to isolated and frail home 

health patients. This creates concerns over 

re-hospitalizations and greater costs to the 

Medicare program down the line. It also 

speaks to a possible issue of quality for 

Medicare beneficiaries in these 

communities. Little, however, is know 

about the full impact of either the new 

home health PPS or the SNF PPS because 

these systems have not been in place long 

enough to provide a thorough analysis of 

their time impact. 

Policy Considerations 

During the past 15 years, Medicare policy 

has been driven by two overriding 

 

40 Sutton, J. “Characteristics of Rural Home Health 

Users and Implications for Payment Reform.” The 

Project Hope Walsh Center for Rural Health 

Analysis. March 2000. 

Access to Key Medicare Providers 

Rural Urban Total 

Short-Term Acute 2,187 2,859 5046 

Long-Term Care 12 233 245 

Psychiatric 81 520 601 

Rehabilitation 21 187 208 

Home Health 

Agencies 2,637 5,237 7,784 

Skilled Nursing 

Care 4,678 10,224 14,902 

Source: OSCAR File, 2000

16
concerns: controlling costs and ensuring 

access. There has been considerable 

dynamic tension between these two goals, 

particularly since the mid-1980s as 

Medicare began changing the way it pays 

for services in an effort to control rapidly 

escalating costs. 

The creation of the inpatient PPS system 

in 1983 helped Medicare rein in its costs 

by moving to a payment methodology 

based on set payments for individual 

services. That move, however, is often 

pointed to as a primary cause of a rash of 

rural hospital closings; by 1991, 193 

general, acute care rural hospitals closed 

their doors.41 

The loss of those facilities had an impact 

on access to care for Medicare 

beneficiaries in those communities. It also 

led to the creation of special payment 

policies (Sole Community Hospitals, 

Medicare Dependent Hospitals, etc.) to 

help ensure access to care for beneficiaries 

by ensuring some degree of financial 

viability.42

New concerns about rural beneficiaries 

have emerged in the wake of the Balanced 

Budget Act of 1997. This stems from the 

continuing reliance of rural providers on 

Medicare reimbursement and the 

numerous changes and reductions in 

Medicare payment that were part of the 

BBA.43 Assessing the rural implications is 

often hampered by the difficulty of 

gathering and evaluating data in a timely 

 

41 Office of the Inspector General . “Trends in 

Rural Hospital Closure: 1987-1991.” U.S. 

Department of Health and Human Services. July 

1993. 

42 Medicare Payment Advisory Commission. 

Report to the Congress: Medicare Payment Policy. 

MedPac. March 2000, p. 23. 

43 Medicare Payment Adviosry Commission. 

Report to the Congress: Medicare Payment Policy. 

MedPac. June 2000, Table C-16, p. 189. 

manner. This is due in part to the lag 

between providers submitting cost reports 

and the time the settled data are available 

from the fiscal intermediaries and carriers 

for analysis. 

Most of the assessment to date has only 

looked at the issue in the aggregate. For 

example, in FY 2000, in contrast to the 

Project Hope study, the Office of the 

Inspector General at the U.S. Department 

of Health and Human Services released 

reports on access to care for Medicare 

beneficiaries seeking placement in either 

home health or skilled nursing facilities. 

The reports, which were limited in scope, 

indicated that the payment cuts and 

changes from the BBA had not created a 

problem overall. One report did mention 

some isolated problems in placing some 

beneficiaries in skilled nursing facilities 

(SNFs), but provided little additional 

detail.44 45The reports failed to break the 

findings down either regionally or by 

urban and rural status, either one of which 

might have shed some light on the issue. 

Issues Discussed 

Access to care is not an isolated issue. It is 

tied to how the program is financed and 

to continuing problems with workforce, 

two issues that are discussed in detail 

elsewhere in this report. Consequently, the 

Committee discussed at length how 

efforts to strengthen the Medicare 

program overall will also serve to improve 

access to care. The extent of Medicare’s 

responsibility, however, prompted 

considerable discussion. 

 

44 Office of the Inspector General. “Medicare 

Beneficiary Access to Home Health Agencies: 

2000.” U.S. Department of Health and Human 

Services. (OEI-02-00-00320; 9/00). 

45 Office of the Inspector General. “Medicare 

Beneficiary Access to Skilled Nursing Facilities: 

2000.” U.S. Department of Health and Human 

Services. 

17
There was general agreement that current 

Medicare policy creates uneven access for 

beneficiaries and much of that is 

geographic. Some of it, however, is 

economic and deals with issues related to 

the ability of beneficiaries to cover copays and deductibles for all needed 

services. Others pointed to problems 

associated with Medicare’s one-size-fits-all 

approach to providing health care and 

how that works against local innovation 

that might address access problems. While 

some argue that Medicare’s main role is to 

pay a fair price for services for 

beneficiaries and nothing else, others felt 

the program had a deeper responsibility. 

They believe, for example, that Medicare 

has a responsibility to make sure that 

facilities that serve Medicare patients are 

adequately staffed and that this is 

particularly true in nursing homes, assisted 

living centers and with adult day-care 

services and that the program has failed to 

do that in many rural areas. 

Committee Consensus 

The Committee believes that all Medicare 

beneficiaries should have access to an 

equal benefit package regardless of where 

they live. That benefit package would 

include appropriate access to the full 

continuum of care. That range of care, 

however, need not all be local. Some have 

called for ensuring proximate access to 

care. Under this scenario, primary care, 

emergency care and basic chronic care 

management should all be available locally 

and through the existing local provider 

base. More specialized services could be 

available either through circuit-riding 

specialists or through telemedicine. 

The Committee believes that ensuring 

access for rural beneficiaries should be a 

driving force behind Medicare policy 

development. New legislation and 

regulation should be examined for its 

impact on the ability of all beneficiaries to 

receive care, but particularly for those in 

rural areas who already face daunting 

challenges in obtaining needed health care 

services. 

Recommendations 

The Secretary should: 

 Develop a standard benefit package 

that includes access to a reasonable 

prescription drug benefit under 

Medicare fee for service. 

 Provide demonstration waivers to 

rural communities for innovative 

models that improve access to care 

and that focus on chronic care, case 

management, and preventive care. 

 Examine the impact of the new 

prospective payment systems for 

home health, skilled nursing, and 

outpatient services to determine what 

impact these changes have had on 

access to care for rural Medicare 

beneficiaries. 

 Monitor closures of skilled nursing 

facilities and the impact of moving 

swing beds under skilled nursing 

facilities prospective payment to 

determine the impact on access to 

care for rural Medicare beneficiaries. 

18
Key Variables of 

Health Care Quality 

Location 

Resources 

Workforce 

Structure 

Education 

Technology 

Data 

Sample Size 

Accreditation 

Leadership 

Quality 

Background 

Health care quality has emerged as a key 

health policy issue in the past few years. 

This is driven, in part, by the expansion of 

managed care but also by a market place 

that emphasizes delivering cost-effective 

care that doesn’t compromise the quality 

of those services.46 

The Health Care Financing 

Administration, which administers the 

Medicare program, plays a lead role in 

assuring quality for Medicare services. All 

Medicare providers must meet certain 

quality standards in order to qualify for 

Medicare reimbursement. HCFA also 

strives to assure quality standards are 

maintained through its survey and 

certification activities, which are done in 

partnership with the states, and through 

enforcement activities that identify 

potential fraud and abuse situations. 

Medicare is currently in the process of 

finalizing new rules for the Conditions of 

Participation (CoP) for hospitals that were 

originally proposed in 1997. These new 

regulations will address issues related to 

quality and medical errors. The latter item 

has garnered a great deal of attention 

across the health care industry in the wake 

of a report by the Institute of Medicine 

(IOM) that highlighted patient injuries 

associated with medical mistakes.47 

Medicare, however, is not alone in setting 

quality standards. Hospitals and other 

health care providers can seek 

 

46 Moscovice, I and Rosenblatt, R. “Quality of 

Care Challenges for Rural Health.” January 1999 

47 Institute of Medicine, “To Err is Human: 

Building a Safer Healthcare System.” 1999. 

accreditation by the Joint Commission on 

Accreditation of Healthcare Organizations 

(JCAHO). The National Commission on 

Quality Assurance does the same service 

for health plans. 

The issue of quality, however, continues 

to have a subjective component, 

particularly when it comes to rural 

communities. While all rural facilities must 

comply with the Medicare quality 

standards, the JCAHO process is 

voluntary. Of the approximately 2,200 

rural hospitals, 58 percent are currently 

accredited by the JCAHO.48 The reasons 

for this moderately low participation rate 

are varied. The JCAHO process is 

expensive and time consuming. Rural 

facilities with minimal financial and 

staffing resources often opt not to seek 

JCAHO accreditation. Still other rural 

hospital administrators say the process is 

geared toward urban providers and 

therefore has little relevance for rural 

 

48 Medicare Payment Advisory Commission. 

Report to Congress: Selected Medicare Issues. 

MedPAC. June 2000, Table 2-2, p. 44. 

19
Defining Quality 

To define quality, one must evaluate both the 

technical aspects of the healthcare service being 

provided and the aspect of customer service. 

Quality can be viewed as effectiveness in 

achieving the intended health outcomes of the 

service provided. 

While this definition of quality is blind to resource 

consumption and efficiency, these components 

are inseparable because, without appropriate 

resources and their efficient application, quality 

cannot exist. The perception of the recipient of 

services, the customer, is the other aspect of 

quality. Service to the customer must be of such 

a character that the recipient will perceive it as 

being at least adequate and hopefully a positive 

experience. 

Less than this is unacceptable service and 

unacceptable quality. Quality cannot be 

meaningfully examined in isolation. Issues 

regarding the delivery system, technology, 

finance and resources, access, costs, and 

workforce all link, inescapably and vitally, to 

quality. 

providers. 

In 1997, JCAHO began an initiative 

named ORYX to build performancebased outcome measures into its 

accreditation process. While numerous 

vendors stepped forward to supply 

JCAHO-approved performance 

measurement systems, only a few catered 

to smaller rural facilities. JCAHO, 

however, has indicated an interest in 

working with rural providers to address 

their concerns and some progress has 

been made. In addition, JCAHO recently 

began a special initiative to work with 

Critical Access Hospitals (CAHs) on 

accreditation issues. 

Defining Quality 

The quality of health care in the United 

States needs improvement as reflected in 

the recent IOM report as well as the 

findings of the President’s Commission 

on Consumer Protection and Quality in 

the Health Care Industry. 

In the purest sense, quality health care is 

the same regardless of whether one is in a 

rural or an urban area. It consists of doing 

the right thing in the right way at the right 

time in the right place for the right reason 

for the right cost in a way that helps 

achieve health improvement goals. 

Unfortunately, there is a perception by 

some policymakers that rural care is often 

synonymous with a lower degree of 

quality. 

Their argument is based, in part, on the 

link between volume and performance. 

This premise assumes rural facilities, 

which are typically low volume, will fail to 

do enough of a wide range of procedures 

to achieve the proficiency needed to 

assure a certain level of quality. That 

perception, however, assumes that rural 

and urban facilities are doing the same 

types of procedures, which they are not. 

Rural hospitals focus more on short-term 

inpatient care, primary care and chronic 

care management. For these procedures, 

the concern about volume and 

performance is not the same issue. 

The questions arise in how far you extend 

that measure of quality. Is it based on the 

typical services rural hospitals provide, or 

is it based on an urban model measuring 

more specialized services that rural 

hospitals typically do not provide. While 

some research has been done in the 

volume-performance relationship, very 

little analysis has examined a rural-specific 

context. 

Rural advocates point out that the 

standard volume-performance analysis 

fails to take into account concerns about 

proximate access. Is it better for a rural 

facility not to offer some services at all 

because they don’t meet a certain volume 

threshold? That assumption could have a 

dramatically negative impact on access to 

20
Ingredients of the Rural Quality Mix

 Population-based Measures 

 Technology 

 Community Engagement 

 Local System Capacity 

 Quality Improvement Management 

Philosophy 

 Education of Health Professionals in 

Rural Settings 

 Quality Assurance 

care for rural beneficiaries who may not 

be able to travel to a distant urban center 

for certain services. 

Some rural advocates add another wrinkle 

to the traditional quality debate. They 

posit that quality of care may decline 

when that care is offered in urban centers 

remote from the rural population, 

requiring significant travel time. They 

argue that such arrangements may be 

clinically and culturally inappropriate 

unless the volume/quality/cost equation 

requires that the service be offered only in 

urban centers. This is particularly true for 

the elderly patient due to the loss of close 

support and encouragement of local 

family and friends. 

This issue cuts different ways based on 

the situation. For example, cardiac surgery 

is a procedure in which referral may be 

most appropriate. Short-term acute (or 

unspecialized) care and long-term care, 

however, are good examples of services 

that lose some quality characteristics as 

the distance of care from the home 

increases. 

The reality is that defining quality of care 

is variable. There is no single universal 

measurement system available that will 

gather, assess and provide proper context 

on all of the key questions regarding 

health care quality in rural settings. A 

quality model based on urban health care 

systems and demographic characteristics 

will be of little use and potentially 

destructive in a rural setting. 

Consequently, some rural policy advocates 

are pushing for increased flexibility in 

measuring and meeting quality standards. 

Key Rural Variables 

Any discussion of health care quality in 

rural areas requires an understanding of 

some of the key issues facing rural health 

care providers and the patients they serve. 

In rural areas, the lack of access to care 

plays a critical role in determining quality 

of care. 

Other issues are equally important in the 

rural environment, which is typically 

characterized by low volume of essential 

and appropriate services. This is coupled 

with a resulting high cost per unit of 

service due to distribution of fixed 

overhead costs across a limited number of 

cases. Other important issues include 

population density, distance and 

transportation variables. Another oft-cited 

concern has to do with denominator 

issues that affect performance 

measurement in small populations. Rural 

areas typically have low population density 

and this creates concerns about small 

sample sizes that may affect analysis. The 

use of standard urban-based measures in 

rural areas may not accurately measure the 

level of care in a given community. For 

example, infant mortality rates may not be 

a useful measure of the quality of care in a 

rural community with a small number of 

deliveries. 

Another quality challenge facing rural 

communities is the recruitment of 

qualified health professionals. Rural areas 

struggle to recruit health care providers, 

which may create a quality issue. 

Ultimately, chronic underservice has an 

impact on quality of care. 

In previous health quality discussions 

21
The Out-Migration Factor: 

A Quality Issue? 

Local perceptions of the quality of care have a 

significant impact on rural healthcare systems 

and upon the quality of care, which they are able 

to provide. Rural communities often face a 

phenomenon in which some residents perceive 

that the providers generally gravitate toward 

high tech urban health centers and bypass rural 

communities, except as a last choice. 

As a result of these perceptions, many 

consumers, particularly those covered by private 

health plans, choose to leave their local 

community and seek care in urban areas. This 

often creates a situation that becomes a selffulfilling prophecy of perceived low quality. 

there has been an assumption by some 

rural providers and advocates that there is 

an inevitable collision between the ability 

to provide care and the ability to measure 

healthcare quality in rural communities. 

That approach, however, misses a key 

point. The question is not whether rural 

services should exist, but how to 

maximize quality in the rural environment. 

While certain services may score better on 

quality indicators in urban rather than 

rural settings, that does not necessarily 

mean that those rural services should be 

eliminated if they are in rural areas. The 

challenge, and the requirement, is to 

define more effective approaches to rural 

quality improvement. 

As the debate on quality continues, the 

issue over how to account for the great 

variability within the health care system 

looms large. MedPAC recently noted that 

Medicare will have to account for two key 

issues in the future. The first deals with 

the emergence of continuous quality 

improvement (CQI), rather than simply 

quality assurance, as an approach for 

addressing quality of care. The second is 

the development of quality measures that 

are facility specific.49 Both of these 

developments could provide a more 

flexible framework for rural providers. 

While quality assurance tends to be 

retrospective, quality improvement is 

more process-oriented and focuses on 

developing systems that promote quality 

on a continual basis. 

Similarly, a facility-specific approach to 

addressing quality could help rural 

facilities. This would allow these facilities 

to measure their performance in a more 

 

49 Medicare Payment Advisory Commission. 

Report to the Congress: Selected Medicare Issues. 

June 2000. 

rural-appropriate context that takes into 

account concerns about volume, distance, 

access to care, service mix and provider 

mix. 

There is considerable sentiment that 

strengthening rural models of continuous 

quality improvement may serve as a 

springboard for rural communities to 

develop and implement quality 

improvement in rural America that 

focuses on improving the health status of 

the population. By expanding the focus to 

the entire community, there is no longer a 

concern about measuring population 

health status in a small population. 

Coronary artery bypass grafting is a 

perfect example. A quality health care 

system would measure its effectiveness in 

preventing coronary heart disease. Part of 

the evaluation of the associated surgical 

procedure would be a determination of 

whether the system failed in preventing 

disease progression to a point requiring 

surgical intervention. 

Whereas current quality measures tend to 

address management of complicated 

problems in the high-volume 

environment, rural quality is often 

determined in the primary care 

22
Essential Core Services 

 Emergency Services and Transportation

 Inpatient Care 

 Primary Care 

 Prevention and Public Health 

 Oral Health 

 Home Health 

 Mental Health 

 Prescriptions 

 Long Term Care 

 Some Specialty Care 

 Rehabilitation 

 Case Management 

ambulatory environment where problems 

that are common in the population are 

addressed. 

Issues Discussed 

The discussion about quality often centers 

initially on what measures of quality are 

used and how. The Committee, however, 

focused much of its initial discussion on 

more general issues that affect quality of 

care in rural areas. 

One of the issues that was examined is the 

lack of a clear continuum of care in rural 

communities. Some rural advocates have 

argued that improvements needed to be 

made in preventive care, case 

management, and disease management. 

Toward that end, the Committee 

identified a core set of essential services 

(see text box) that are essential in assuring 

access to quality care for all Medicare 

beneficiaries regardless of geographic 

location. 

The quality discussion, however, also 

looked at some of the more systematic 

concerns that affect health care delivery in 

rural areas. For example, some of the 

debate focused on the link between a 

properly trained workforce and the 

delivery of quality care. A quality health 

care environment requires a sufficient 

number of health care professionals to 

provide that care. 

Others pointed to how important it is to 

address community perceptions about 

quality. Losing patients to a distant health 

care provider for services that are 

available locally decreases local volume 

and revenue. This has a negative impact 

on the local community and the local 

economy. It can also serve to diminish 

esteem and perceived quality of local 

health care. That puts a premium on 

getting the local community engaged in 

any discussion of health quality. The goal 

of this community engagement is the 

development of a small population-based 

organized delivery system with an ongoing 

and continuous emphasis on quality of 

care. 

There was considerable attention to the 

issue of technology, which can play a key 

role helping rural communities improve 

their quality of care. State-of-the-art 

imaging and other diagnostic technology, 

information technology and 

communications capabilities are essential 

if disparities in health care for rural 

beneficiaries are to be eliminated (see text 

box). Still, policymakers need to also 

understand that there are very isolated 

areas in which some levels of technology 

may not be available and these areas 

shouldn’t be penalized as a result. 

Committee Consensus 

The Committee believes there should be 

no differential in quality between rural and 

urban areas. However, the process of 

measuring that quality requires different 

approaches given the very different 

healthcare environments between rural 

and urban areas. Consequently, the 

Committee calls for a more flexible 

approach toward measuring quality in 

rural areas. Such an approach would 

23
recognize that rural health care is more 

focused on primary and ambulatory care 

in an environment that is typified by low 

volume. This flexibility should be part of a 

new quality assessment framework that 

emphasizes continuous quality 

improvement and outcome assessment 

that is appropriate for the many different 

contexts of care. 

Recommendations 

The Secretary should: 

 Ensure that the core services (primary, 

preventive and chronic care 

management) and the full continuum 

of care are appropriately available for 

all Medicare beneficiaries. 

 Seek to amend the Medicare 

Conditions of Participation and 

provide resources through entities 

such as the Peer Review 

Organizations to develop quality 

improvement tools to fit the rural 

environment with appropriate 

flexibility and an emphasis on 

outcome standards. 

 Encourage the development of 

appropriate measures that take into 

account a rural environment that 

features low volume of primary care 

and ambulatory services. 

 Recognize the link between quality 

health care and the workforce by 

encouraging more training of health 

professionals for rural communities to 

ensure access to high-quality care for 

Medicare beneficiaries. 

 Support research that looks into issues 

related to volume and outcome in the 

rural context based on primary and 

ambulatory care. 

 

24
Major Sources of GME Support 

Program 

Graduate Health 

Professions Training 

Support 

1998 

Medicare $6.5 billion 

Medicaid $2.3 billion 

Veterans 

Administration* $428 million 

Title VII of PHS Act* $80 million 

National Health 

Service Corps (Title III 

of PHS Act) 

$75 million 

Note: Title VII of the Public Health Service Act is designed to 

expand the supply of primary health care providers, improve 

the geographic distribution of health professionals, and 

increase access to primary health care services in both urban 

and rural underserved areas. The NHSC provides scholarships 

and loans to health care providers in exchange for service 

commitments in underserved areas. 

*These figures include undergraduate training. 

Source: Council on Graduate Medical Education: 15th Report 

– Financing Graduate Medical Education in a Changing 

Health Care Environment.” December 2000.

Workforce 

Background 

Medicare, by its sheer size and scope, has 

a major influence on the health care 

workforce, both directly through its 

support of health care provider education 

and indirectly through policy decisions 

regarding reimbursement. While 

Medicare makes payments that support 

the training of a range of health care 

providers, the bulk of these payments, 

which run around $6 billion year, are for 

physician training. Medicare also supports 

the training of nurses and allied health 

professionals. In 1998, these payments 

totaled $222 million. 

The Committee realizes that rural 

workforce issues are not limited to 

physician training or Medicare’s graduate 

medical education (GME) funding. 

However, the physician training supported 

through Medicare GME payments dwarfs 

the other sources of training support. 

Consequently, this chapter will focus 

primarily on that aspect of Medicare 

policy. 

Medicare’s GME payments to teaching 

hospitals have been an important 

responsibility of the Medicare Trust Fund 

since its establishment in 1965. Medicare 

makes payments to hospitals, separate 

from the inpatient PPS, for costs incurred 

in connection with approved graduate 

medical education (GME) programs.50 

 

50 Graduate Medical Education (GME) payments 

are broken into two different payments. There are 

direct GME payments that are made directly to the 

hospital to cover the direct costs of training 

residents such as salary. There are also indirect 

GME payments that cover the indirect costs 

associated with training, such as extra time spent 

with patients, the ordering of more tests and other 

Medicare’s GME role has evolved into a 

multi-faceted policy tied to several key 

concerns. First, GME payments help 

cover the costs that teaching hospitals 

incur in training residents. Second, the 

payments also ensure that teaching 

programs have enough physicians and 

residents to provide care for Medicare 

beneficiaries. Finally, policymakers also 

wanted to ensure access to care for the 

populations served by the typical teaching 

hospital. There was a belief that teaching 

institutions that receive GME funding 

also provide care to the poor and other 

non-elderly populations. 

 

intangibles. Indirect IME payments are an 

adjustment to the DRG rate. 

25
Medicare’s Role: Workforce 

There are a variety of viewpoints about 

Medicare’s original justification for 

making GME payments. At the most 

basic level, there was report language that 

accompanied the legislation that created 

the Medicare program in 1965. This 

language says that when Congress 

established Medicare in 1965 it recognized 

that: 

Educational activities enhanced 

the quality of care in an 

institution, and it is intended, 

until the community undertakes 

to bear such education costs in 

some other way, that a part of 

the net cost of such activities 

(including stipends of trainees, 

as well as compensation of 

teachers and other costs) should 

be borne to an appropriate 

extent by the hospital insurance 

program.51

 

Over the years, other motivations have 

been attributed to Medicare’s support of 

physician training. Some have noted that 

one of the early goals behind Medicare 

GME payments was to increase the 

physician supply at a time of perceived 

workforce shortage. Policymakers 

recognized the potential for expanding 

and strengthening graduate medical 

education by augmenting Medicare 

payments to teaching hospitals. There was 

also the acknowledgement that, with the 

creation of Medicare and Medicaid, the 

demand for physician services would 

continue to grow and that the supply at 

that time would not necessarily meet the 

need. 

 

51 American Association of Medical Colleges. 

House Report Language 213, 89th Congress, First 

Session. 

Medicare has been successful in increasing 

the supply of physicians. Currently there 

are more than 700,000 physicians in the 

United States. In 1950, there were 142 

physicians per 100,000 population while in 

1998 there were 275 per 100,000. While 

this trend appears to indicate that 

Americans have greater access to 

physician services, the reality is that a 

disparity in distribution and specialty mix 

exists. This comes at a time when record 

numbers of medical graduates are entering 

the work force from U.S. and foreign 

medical schools. Yet medical resources are 

scarce in 2,682 of the over 3,300 counties 

in the United States. 52 

There is a definitive urban-rural disparity 

in physician distribution. Currently, 20% 

of the population lives in rural areas but 

only 9% of physicians practice there.53

The mix of disciplines is equally skewed. 

Nationally, shortages exist in the supply of 

primary care practitioners. Thirty percent 

of physicians practice primary care 

compared to the widely recommended 

50%. 

Some attribute the distribution and 

specialty mix vagaries to incentives with 

Medicare GME payment that encouraged 

expansion of residency programs with 

little control over whether it resulted in an 

equitable distribution of generalists versus 

specialists. In examining the distribution 

of residents according to the type of 

training ultimately completed, the GAO 

reported that 72% of direct medical 

education (DME) payments were 

 

52 Linking Rural Health Services Research with 

Health Policy Conference Report. Center for 

Health Policy Research and Ethics, George Mason 

University and RUPRI. November 2000. 

53 The NACRH recognized that other health 

professionals (nurse practitioners, physician 

assistants, dentists, etc.) have an impact on rural 

health. However, the focus of this paper is on the 

physician workforce. 

26
associated with non-primary care training 

while 28% of DME payments were 

associated with primary care.54 

Although the intent of GME payments 

was to create access for the elderly in all 

parts of the U.S., the system that has 

developed is one in which the vast 

majority of medical residency training 

programs are concentrated at academic 

medical centers located in urban areas. 

Critics point out that GME supplemental 

payments were open-ended, so any 

expansion of residents in any specialty was 

supported by Medicare payments. 

Rural advocates have never felt that 

Medicare GME policy did much to 

address rural workforce needs. Because 

Medicare GME payments are tied to 

hospitals, teaching programs have tended 

to be centered in larger urban facilities 

affiliated with medical schools. Medicare 

GME payments for urban hospitals 

totaled $6.5 billion in 1996 compared to 

$93.1 million for rural hospitals.55 More 

than one half of the residents in rural 

hospitals are accounted for by three 

institutions with very large programs.56

Studies show that physicians trained in 

rural areas are more likely to practice in 

those areas.57 Unfortunately, few rural 

 

54 “Medicare: Graduate Medical Education 

Payment Policy Needs to Be Reexamined” (Letter 

Report, 05/04/94, GAO/HEHS-94-33). 

55 From the PPS 13 Data Tape. The data for PPS 

14 had an error in it but PPS 13 figures related to 

GME spending were consistent with previous 

years. 

56 Slifkin, R; Popkin, B; Dalton, K. “Medicare 

Graduate Medical Education and Rural Hospitals.” 

Journal of Health Care for the Poor and 

Underserved. 2000, Vol. 11, No. 2. 

57Bowman, RC & Penrod, J. “Family practice 

residency programs and the graduation of rural 

family physicians.” Family Medicine. April 1998, 

Vol. 30, No. 4, p. 288-92. 

training opportunities exist. There are 

currently only 21 rural training tracks in 

which the residents spend the majority of 

their time training in rural areas under the 

1+2 model of one year in a teaching 

hospital with two years in a rural practice 

site.58 Of these, it is not known how many 

qualify for any Medicare GME funding. 

It is worth noting that the small number 

of rural training tracks is due to a variety 

of factors, only some of which are directly 

related to GME funding. There are issues 

regarding accreditation and resources that 

also figure heavily. 

The Changing Policy Landscape 

While Medicare has always played a strong 

workforce role, it has never been a very 

effective tool for addressing issues related 

to specialty mix or distribution. And there 

is wide-ranging debate about whether 

Medicare should, in fact, play a stronger 

role in this area. 

Some believe the market may be part of 

the solution to addressing concerns over 

the appropriate mix of providers. They 

point to the effect of managed care and its 

emphasis on primary care as a way to 

influence the specialty mix. While 

managed care has helped medical schools 

rediscover the benefit of producing 

primary care physicians it has done little 

 

58 Malaty, W. “Factors that Affect the Match Rate 

of Rural Training Tracks in Family Practice.” Draft 

unpublished report. 2001. 

GME Spending: Urban vs. Rural

1996

99%

1%

Urban

Rural

27
Key Rural GME Provisions 

From the BBA and the BBRA: 

The Balanced Budget Act of 1997

Sec. 4623: In calculating the FTE cap on 

residents, this provision gave the Secretary the 

authority to give special consideration to facilities 

that meet the needs of underserved rural areas. 

Sec. 4625: Allowed direct GME payments to 

qualified non-hospital providers (Federally 

qualified health centers, rural health clinics, 

Medicare + Choice organizations and such 

other providers (other than hospitals) as the 

Secretary determines to be appropriate. 

The Balanced Budget Refinement Act of 

1999 

Sec. 407: Hospitals located in rural areas are 

permitted to increase their resident limits by 30% 

for direct and indirect medical education 

payments. In addition, non-rural facilities that 

operate separately accredited rural training 

programs in rural areas, or that operate 

accredited training programs with integrated 

rural tracks, may receive direct graduate medical 

education and indirect medical education 

payments for cost reporting periods beginning 

on April 1, 2000 and for discharges occurring on 

or after April 1, 2000 respectively. 

to ensure that the physician workforce is 

evenly distributed. In fact, some believe 

managed care may exacerbate the situation 

given the limited penetration of managed 

care into rural areas and anecdotal 

evidence that urban managed care plans 

may be drawing providers away from rural 

areas. 

In its July 1999 report to Congress, the 

Medicare Payment Advisory Committee 

(MedPAC) asserts that Medicare GME 

policy should be strictly focused on how it 

relates to care for beneficiaries with no 

direct responsibility for larger workforce 

goals. The Commission believes 

workforce issues should be dealt with 

through other more direct means separate 

and apart from Medicare.59 

While some applauded the Commission’s 

recommendation, many disagreed with the 

recommendation. To date, the Congress 

has not made any legislative changes 

based on the MedPAC recommendations. 

Legislative Changes 

Medicare’s GME policy remained fairly 

static over the years until 1997 when 

Congress imposed several changes in the 

BBA. The most dramatic alteration was 

the imposition of a cap on the total 

number of residency positions. This was 

done to restrain the rapid expansion of 

residency slots, and the resulting increase 

in GME costs to the Medicare program, 

that had taken place over the previous 20 

years. 

The legislation also attempted to address 

some rural concerns by directing the 

Secretary to take into account the needs of 

underserved rural areas in establishing 

rules for implementing the residency 

cap.60 The intent of this provision was to 

create some flexibility to allow new 

programs in rural areas some relief under 

the residency cap. 

The BBA took one other step, although 

not rural in focus, to address workforce 

concerns by creating a program to 

encourage hospitals to reduce their 

reliance on residents.61 This was modeled 

after a demonstration project in New 

York in which hospitals received incentive 

 

59 Medicare Payment Advisory Commission. 

Report to the Congress: Rethinking Medicare’s 

Payment Policies for Graduate Medical 

Education and Teaching Hospitals. MedPac. 

August 1999. 

60 H.R. 2015, the Balanced Budget Act of 1997, 

Section 4623. 

61 H.R. 2015, the Balanced Budget Act of 1997. 

Section 4626 . 

28
An All-Payer Fund: 

A Workforce Solution? 

Over the years, there has been an ongoing 

discussion about whether an all-payer graduate 

medical education fund should be created to 

help address workforce issues and reduce 

pressure on the Medicare trust fund. 

Typically, an all-payer pool would ensure that 

both public and private beneficiaries contribute 

to subsidization of clinical education for 

physicians, advanced-practice nurses, and 

physician assistants. The proposed pool would 

be financed by a per-capita assessment on 

health plan enrollees and contributions from 

Medicare and other federal programs that 

subsidize GME. All entities that provide clinical 

education would be eligible for the all-payer 

payments. 

While numerous legislative proposals on this 

concept have been introduced, there has been 

little serious action on this issue. 

payments for voluntarily reducing their 

number of residents. 

The BBA also made other changes that 

may affect Medicare’s influence on 

workforce policy. Recognizing the 

importance of training in ambulatory care 

sites (especially for primary care 

residents), lawmakers allowed hospitals to 

include residents who rotate outside the 

hospital in their FTE count for direct 

GME payments. The legislation also 

allowed hospitals to receive IME funding 

(depending upon which institution 

sponsors the resident) when residents 

rotate through a non-hospital site. Prior to 

the BBA, IME payments only covered 

residents rotating through the inpatient 

portion of the hospital, which created a 

disincentive for allowing non-hospital 

resident training. 

Another BBA provision took a first step 

toward explicitly promoting communitybased training. The legislation allows 

non-hospital providers such as federally 

qualified health centers (FQHCs), rural 

health clinics (RHCs), and Medicare + 

Choice organizations to receive funding 

for direct costs of training residents. 

The Balanced Budget Refinement Act of 

1999 (BBRA) included several provisions 

designed to encourage more rural training. 

The legislation allowed rural hospitals a 

30% expansion of their resident FTE cap. 

The BBRA also added a provision that 

allowed non-rural hospitals operating a 

medical residency in a rural area or a 

program with an integrated rural track to 

receive an adjustment to the FTE cap. 

As outlined by HCFA regulations, urban 

hospitals that wish to count FTE residents 

in rural tracks, up to a rural track FTE 

limitation, must comply with several 

conditions related to how much time the 

resident actually spends in the rural 

training site during the course of the 

residency.62

The BBA and the BBRA legislative 

provisions represent a policy shift for 

Medicare GME funding. However, the 

true impact remains to be seen. Some 

rural advocates believe the benefits of 

these policies will be minimal at best. 

They cite the 30% expansion of residency 

slots for rural hospitals as an example. 

These hospitals tend to have small 

programs so the expansions in the 

aggregate pale in comparison to the size 

of a typical urban academic medical 

center. Moreover, with less than one 

percent of GME funding currently 

supporting rural training, these critics 

point out that even the thirty percent 

increment will not have a perceptible 

impact on an aggregate level. 

 

62 Federal Register. “Rules and Regulations.” 

Tuesday, August 01, 2000, Vol. 65, No. 148: 

47033-47035. 

29
Issues Discussed 

Rural advocates have never felt that 

Medicare has done much to support rural 

training or address its ongoing trouble in 

attracting providers. Rural areas have 

historically looked toward Federal 

programs apart from Medicare such as the 

National Health Service Corps and the 

various J1-Visa waiver programs 

sponsored by several Federal agencies and 

some states. While these programs have 

helped, they have failed to dramatically 

change the number of underserved 

communities in rural America during the 

past 30 years. As a result, some rural 

advocates have renewed the focus on 

Medicare GME policy and raised 

questions about why so few GME dollars 

support rural primary care training. 

This has gone on at the same time that a 

larger debate about Medicare GME policy 

has taken center stage following the 

release of a 1999 report from the 

Medicare Payment Advisory Commission 

(MedPac). The Report built upon a 

recommendation put forth by the 

Bipartisan Commission on the Future of 

Medicare that recommended doing away 

with DME payments from the Medicare 

trust fund and instead making them 

subject to annual appropriations. 

The Commission took that concept even 

further. It recommended that the DME 

and IME payments be combined into one 

payment stream that would be distributed 

to those teaching facilities that could 

provide evidence of "enhanced patient 

care" to Medicare beneficiaries and related 

increased costs to teaching hospitals. 

The Commission argued that Medicare 

was never intended to play such a strong 

workforce role. Medicare support for 

resident training and subsequent policy 

decisions eventually led to large 

expansions of hospital-based training that 

changed the system in ways that were, 

arguably, never intended. MedPAC’s 

recommendations were part of an effort 

to more properly define Medicare’s role in 

training physicians. 

Understandably, the Commission’s report 

garnered a great deal of attention and 

some strong opposition, particularly from 

the American Association of Medical 

Schools. Others were concerned that the 

Commission’s recommendations would, 

in effect, divest Medicare of its traditional 

workforce role. In fact, the Commission 

recognized this fact and said that the 

Federal government would continue to 

have a workforce role but that this role 

was beyond the scope of the Medicare 

program or its report. It recommended 

using existing resources such as Title VII 

or Title VIII grants to achieve workforce 

goals. 

That idea was not universally shared. 

Opponents charged that the reality is that 

Medicare cannot simply turn its back on 

its larger workforce role. Rural advocates 

were particularly concerned because 

MedPAC’s argument that Medicare plays 

no workforce role would prevent 

discussion of the more substantive 

concern about ensuring a provider base 

that can serve Medicare beneficiaries 

regardless of where they live. 

Those who opposed the MedPAC 

recommendations countered that GME 

reform must create a system that will 

support national workforce goals such as 

providing community relevant clinical 

training and supporting an appropriate 

physician specialty and geographic 

distribution. In a recent report on GME 

30
A Model That Works 

Rural training can make a difference, as the 

Committee learned in a July of 2000 site visit to 

Hazard, Kentucky. This eastern-Kentucky 

community, working with the University of 

Kentucky, offers at least a partial solution to the 

workforce dilemma common in rural 

communities. 

The UK Center for Rural Health operates a freestanding family practice residency, fully 

accredited master’ level nursing and physical 

therapy and other programs in a rural 

Appalachian community. However, the residency 

has not yet qualified for GME payments to help 

cover the cost for training its physicians and is 

now reliant on state and local funding to cover 

the costs. 

Still, the project’s success shows that rural 

training can pay dividends. Studies show 70 

percent of health professionals stay in rural 

communities if they train there. Moreover, the 

University estimates that a physician generates 

about $35 million in revenue over the span of his 

or her career and costs $6 million to train. 

financing,63 the Council on Graduate 

Medical Education (COGME) identified 

key issues in trying to align GME funding 

with workforce goals: 

1. Who should receive payments. 

2. How to allocate funds. 

3. How to establish accountability 

for funds. 

The Committee believes these are 

important questions that should be 

addressed in any redesign of the Medicare 

program. 

While the questions raised by MedPAC 

about Medicare GME payments focus on 

more global policy issues, the debate has 

ramifications for rural workforce. There 

are some advocates who believe that more 

equitable GME funding that emphasizes 

rural training of primary care physicians 

could help address long-standing rural 

 

63 COGME. “Financing Graduate Medical 

Education in a Changing Health Care 

Environment.” June 22, 2000 draft of 15th report. 

shortage issues. This, in turn, will help 

ensure an adequate provider base to 

ensure access to care for rural 

beneficiaries. 

Committee Consensus 

The Committee believes Medicare does, 

indeed, have a role to play in workforce. 

In fact, the Committee believes it should 

do more to encourage a more appropriate 

mix and distribution of physicians. This 

could be accomplished in several ways. 

Medicare could alter GME policy to 

provide more direct and indirect GME 

support to rural training sites. Medicare 

could also create incentives for the 

development of new primary care 

residencies in rural hospitals. Medicare 

could also explore the development of 

innovative demonstration projects that 

target specific workforce needs that could 

serve as models for future development. 

The recent changes to GME policy in the 

BBA and BBRA offer a first step toward 

achieving that goal. The Committee 

supports the use of using incentives to 

reward programs with positive track 

records for placing health professionals in 

places of genuine need. In addition, the 

Committee believes more could be done 

to retain physicians to serve the Medicare 

beneficiaries by offering tax credits or 

perhaps increasing the HPSA bonus 

payment.64

Recommendations 

The Secretary should: 

 Support changes to Medicare policy to 

provide exceptions to the residency 

cap for rural training programs and 

provide direct and indirect GME 

funding for these programs. 

 

64 The HPSA Bonus Payment pays a 10% bonus 

to physicians who practice in a health 

professional shortage area. 

31
 Support changes to Medicare policy 

that promote more community-based 

training of residents. 

 Support changes to Medicare policy so 

that residency programs receiving 

GME funding would be required to 

provide training in rural settings. 

 Support Rural GME demonstration 

projects that address workforce 

shortages in rural areas. 

 Expand the scope and focus of the 

Title VII and Title VII training grants 

to promote more rural training. 

 Increase funding for the National 

Health Service Corps to promote 

more placements of Corps clinicians 

in underserved rural areas to serve 

Medicare and Medicaid beneficiaries. 

32
Reform 

Background 

The Medicare program is vitally important 

to rural America and to the 8.9 million 

beneficiaries who live there. Medicare 

revenues provide a key source of revenue 

for the rural hospitals and rural providers 

that provide services to rural Medicare 

beneficiaries. Medicare, however, is not 

working as effectively as it should in rural 

areas and changes need to be made. The 

problems run the spectrum. There are 

concerns about a financing system that 

pays significantly less for services in rural 

areas compared to urban areas. There are 

problems over access to care for needed 

services for rural beneficiaries. Concerns 

are also growing about how Medicare 

assesses and measures quality of care in 

rural communities. Finally, many 

advocates are troubled by Medicare’s 

impact on the country’s healthcare 

workforce and the way it contributes to a 

maldistribution of providers and an overemphasis on specialty care that has 

troubling implications for rural 

beneficiaries. 

The Administration and the Congress 

now have the opportunity to make 

changes to the Medicare program and 

restructure it in a way that ensures 

continued access to high quality care for 

all beneficiaries regardless of where they 

live. This is a unique opportunity but the 

key will be not repeating the mistakes of 

the past and ensuring that rural concerns 

are a key part of the debate over how to 

reform the program. 

While proposals abound about how to restructure the Medicare program, little is 

known about how these proposals will 

affect the delivery of health care services 

in rural areas. Historically, these kinds of 

differential impacts have not been thought 

about prospectively but rather examined 

after the fact and often in response to a 

crisis. 

For example, after the introduction of 

prospective payment system (PPS) for 

Medicare inpatient services in 1983, there 

was a rash of small, rural hospital closings. 

Between 1987 and 1991, in particular, 193 

general, acute care rural hospitals closed.65

While all of these closings were not 

attributable solely to the change in 

Medicare payment, the impact of this 

payment change was nonetheless a 

deciding factor in all of the closings. 

In the past few years, HCFA has taken 

steps to try to avoid such problems. The 

agency now includes an impact statement 

in all of its proposed regulations that 

examines the impact of its rules on small 

rural hospitals. Since the passage of the 

Balanced Budget Act of 1997, the 

regulation teams charged with the creation 

of new prospective payment systems 

across the acute and post-acute care 

settings have worked to examine the 

potential impact on rural providers. 

Part of that charge has been to see if the 

data support the creation of any kind of 

special rural adjustments. Of the three 

main PPS programs (home health, skilled 

nursing and outpatient departments) that 

have been implemented from the BBA, 

none has a specific rural adjustment to 

compensate for the low-volume 

environment of rural health care. There 

 

65 Office of the Inspector General. “Trends in 

Rural Hospital Closure: 1987-1991.” U.S. 

Department of Health and Human Services. July 

1993. 

33
was, however, a rural adjustment in the 

proposed PPS for rehabilitation hospitals. 

In addition, Congress created a temporary 

hold-harmless provision for rural hospitals 

with less than 100 beds in the new 

outpatient prospective payment system.66

The early returns on the effectiveness of 

this provision indicate that some 

providers have experienced cash flow 

problems but the data on these claims is 

not yet available to determine how 

widespread the problem is. HCFA 

officials have met with the industry to 

assess any problems and to identify some 

potential solutions. This issue will bear 

watching over the next year. 

Despite these efforts, the lesson learned 

from the hospital closures of the 1980s 

continues to serve as a reminder of the 

unintended consequences of the legislative 

and regulatory processes. That remains 

especially true in consideration of any 

reform of the Medicare program. 

As the Administration and Congress 

examine the myriad of proposals for 

changing the financing system of the 

Medicare program it is important to take 

into account how each will affect the rural 

health care delivery system as it currently 

exists. 

Successful redesign of the Medicare 

program requires that key stakeholders 

reach some degree of consensus. The 

failure to reach out to those affected can 

threaten the viability of any proposal, 

which was one of the more valuable 

lessons learned from the 1994 health care 

reform debates. 

 

66 Section 202 of the Medicare, Medicaid, and State 

Children’s Health Insurance Program Balanced 

Budget Refinement Act of 1999 (Public Law 106– 

113). 

The key for policy makers will be 

redesigning the program in a way that 

includes enough flexibility to address the 

great degree of variability within rural 

communities. They must also create a new 

policy framework that assures that rural 

beneficiaries are treated equitably. The 

Committee urges policymakers to fully 

examine the impacts of different policy 

options on rural communities. This will 

ensure that urban and rural beneficiaries 

have equitable access to appropriate 

health care under any proposed redesign. 

Medicare Reform Options 

Given the parameters of the debate over 

the past year, it appears the new 

Administration and Congress have two 

options in redesigning the Medicare 

program. The first would be to try to 

refine current policy. This implies an 

incremental approach to reform and 

would continue Medicare as a 

government-administered benefit with 

two primary options: fee for service and 

Medicare + Choice. The second option is 

more dramatic and would make wholesale 

changes and dramatically redesign the 

Medicare program and moving toward a 

more market-driven model. 

The primary focus of the incremental 

reform approach is to address the larger 

problems within current service delivery. 

On the fee for service side this might 

include greater flexibility in how the 

services are delivered and could include 

options such primary care case 

management, disease and or chronic care 

management. Within the Medicare + 

Choice program, the incremental 

approach would favor using the policies 

previously used in competitive pricing 

demonstrations or expanded use of the 

private fee-for-service options or greater 

use of private sector strategies such as 

34
preferred provider organizations or 

provider service organizations. 

The primary focus of the more marketdriven approaches builds on the current 

Medicare + Choice program and attempts 

to use competition as a way to generate 

additional savings for the Medicare 

program while also providing for 

additional services such as prescription 

drugs and preventive services. The 

National Bipartisan Commission on the 

Future of Medicare and subsequent 

legislative proposals were based on a 

model of premium support. Under this 

model, beneficiaries would have a choice 

between a low-option plan with benefits 

similar to those included in the current fee 

for service (FFS) and a high-option plan 

that would require additional cost sharing 

on their behalf but provide additional 

benefits. 

Committee Consensus 

Redesigning and modernizing Medicare 

stands as a daunting challenge for 

policymakers but particularly so in today’s 

complex and ever-changing health care 

system. Still, the Committee believes this 

challenge is also an opportunity to create a 

Medicare system that serves all its 

beneficiaries more effectively. 

The Committee has concerns about both 

potential reform options. Under an 

incremental approach, there is the danger 

that past inequities will continue. Under a 

more market-driven approach, there is 

concern that the lack of competition in 

rural areas will put rural beneficiaries at a 

disadvantage in terms of equity of 

benefits. 

Under either reform approach, the 

Committee believes any changes to the 

payment system should be based on new 

measures of cost. These measures should 

not be tied solely to past expenditures but 

rather reflect the cost of providing care in 

today’s health care system. Past 

expenditures do not reflect costs incurred 

because of changing labor markets, new 

treatment modalities and capital 

investments. Further, the Committee 

believes new models of service delivery 

need to be explored to assess their 

viability for rural providers. 

The Committee urges policymakers to 

take into account several issues in 

considering Medicare reform proposals. 

First, fee-for-service Medicare will 

continue to be a foundation of the rural 

health care delivery system and therefore 

needs to be strengthened and adequately 

financed in order to ensure access to 

needed care for Medicare beneficiaries. 

Second, the conception of Medicare 

managed care in rural areas needs to be reexamined. Managed care in the current 

form of Medicare + Choice will likely 

never be a viable option for much of rural 

America. That is because the current form 

of managed care relies mostly upon 

competition as a tool for achieving 

budgetary savings and cost controls. This 

is predicated on an urban- and/or 

volume-based model of care. 

Clearly, rural and urban health care 

systems operate in vastly different 

markets. That is why one of the common 

complaints about reform models such as 

premium support is their reliance on 

competition as a means of financing 

enhanced benefits. Current experience 

with the Medicare + Choice program in 

rural areas indicates that rural areas are 

often at a disadvantage when competition 

between plans is used as the strategy for 

providing additional affordable benefits 

35
such as eye care or prescription drug 

coverage.67

While there are ways rural areas can 

compete and models that work, it is 

important to remember that the rural 

market is different from the urban market. 

For example, rural markets typically have 

fewer beneficiaries spread out over larger 

geographic areas. They also typically have 

a single hospital and a limited supply of 

health care providers heavily weighted 

toward primary care. The hospitals and 

other providers in these communities tend 

to operate on thinner Medicare margins 

than do urban providers. Consequently, 

plans cannot come in and rely on 

traditional competitive pressures to 

demand deep discounts. In addition, it is 

important that any changes in policy do 

not damage the current patchwork safety 

net of providers that now receive special 

treatment under Medicare. 

If the Medicare program moves toward 

more of a competitive market model, 

beneficiaries would be well served by 

making the proposals reflective of the 

difference between urban and rural 

markets. The Committee believes rural 

providers need to be adequately 

reimbursed for care. This alone would 

help ensure equity and access for all 

beneficiaries. 

Rural advocates have long focused on the 

lack of Medicare + Choice plans in rural 

areas. Policy changes in the BBA, BBRA 

and BIPA have attempted to create 

incentives for more plans to enter rural 

areas. The results thus far have not 

indicated much change. The debate about 

 

67 Coburn, A; Fluharty, C; Hart JP; MacKinney, 

AC; McBride, T; Mueller, K; Slifkin, R; Wakefield, 

M. “A Rural Assessment of the Leading Proposals 

to Redesign the Medicare Program.” RUPRI Rural 

Health Panel. May 31, 2000 (P2000-4). 

Medicare + Choice in rural areas, 

however, sometimes misses a critical 

point. The real policy issue is not about 

getting more managed care plans into 

rural counties but rather about equity of 

benefits for rural beneficiaries. The 

managed care plans, which often offer 

benefits such as prescription drugs and 

eye care, are merely the means to the 

larger end. 

The Committee urges policymakers to be 

mindful of the concern over equity of 

benefits. The ultimate goal would be to 

ensure that under both fee-for-service and 

managed care, rural beneficiaries would be 

treated the same as their urban 

counterparts. 

As the Administration and Congress 

debate how to reform the Medicare 

program, the Committee urges 

policymaker to consider the broad impact 

of any system changes. That assessment 

would look at issues related to qualify of 

care, financing, access and quality. All of 

these elements are tied together. The 

current Medicare program is doing, at 

best, the minimum in addressing concerns 

across these categories for rural 

beneficiaries. 

Ideally, a newly designed Medicare 

program would offer rural communities 

equal options to participate in the model 

that was most appropriate for each 

community. There might be some larger 

rural communities where the premium 

support model might work. There will be 

other communities, however, where it will 

be just as important to have a 

strengthened fee-for-service option that 

includes needed benefits such as 

preventive care and prescription drug 

coverage. The key is providing the kind of 

flexibility that takes into account the great 

variability in rural America and provides 

beneficiaries with comparable access to 

36
high-quality care regardless of geographic 

location. 

Recommendations 

The Secretary should:

 Protect and strengthen the Medicare 

Fee-For-Service service delivery 

option under any redesign or reform 

of the Medicare program. This should 

include an acknowledgment that 

Medicare + Choice in its present form 

is not a viable option for bringing 

managed care and equity of benefits to 

rural beneficiaries. Consequently, the 

Secretary should recognize that feefor-service delivery will continue to be 

the dominant service delivery 

mechanism for rural Medicare 

beneficiaries. 

 Ensure protections for key rural 

service providers (critical access 

hospitals, sole community hospitals, 

Medicare-dependent hospitals, rural 

referral centers, rural health clinics and 

federally qualified health centers) in 

any redesign of the Medicare program 

to ensure access to care for rural 

beneficiaries. 

 Explore the development of new 

service delivery models for rural 

beneficiaries that recognize the special 

circumstances of providing care in 

sparsely populated rural areas. 

Options such as coordinated care, 

primary care case-management and 

other forms of partial risk or 

capitation that emphasize local control 

and flexibility should be explored. 

37
Recommendations 

Finance 

The Secretary should: 

 Evaluate the need for a low-volume 

adjustment within all of the Medicare 

prospective payment systems (See 

National Advisory Committee 

recommendations, 1999). 

 Conduct research to determine the 

true cost of providing care to 

Medicare beneficiaries in rural areas 

that takes into account factors related 

to access, geographic isolation and 

volume. The results of this research 

should be used in redesigning the 

Medicare program to ensure equity of 

benefits for rural beneficiaries. 

 Continue collecting data on 

occupational mix and implement an 

adjustment to the wage index as soon 

as possible. 

 Collect wage data for both the skilled 

nursing and home health service areas 

and evaluate the impact of 

constructing an occupational mix 

adjustment within the wage index for 

both of these payment systems. 

 Continue to refine the methodology 

for the disproportionate share 

adjustment for hospitals to treat all 

hospitals equally.

Access 

The Secretary should: 

 Develop a standard benefit package 

that includes access to a reasonable 

prescription drug benefit under 

Medicare fee for service. 

 Provide demonstration waivers to 

rural communities for innovative 

models that improve access to care 

and that focus on chronic care, case 

management, and preventive care. 

 Examine the impact of the new 

prospective payment systems for 

home health, skilled nursing, and 

outpatient services to determine what 

impact these changes have had on 

access to care for rural Medicare 

beneficiaries. 

 Monitor closures of skilled nursing 

facilities and the impact of moving 

swing beds under skilled nursing 

facilities prospective payment to 

determine the impact on access to 

care for rural Medicare beneficiaries. 

Quality 

 Ensure that the core services (primary, 

preventive and chronic care 

management) and the full continuum 

of care are appropriately available for 

all Medicare beneficiaries. 

 Amend the Medicare Conditions of 

Participation and provide resources 

through entities such as the Peer 

Review Organizations to develop 

quality improvement tools to fit the 

rural environment with appropriate 

flexibility and an emphasis on 

outcome standards. 

 Encourage the development of 

appropriate measures that take into 

account a rural environment that 

features low volume of primary care 

and ambulatory services. 

 Recognize the link between quality 

health care and the workforce by 

encouraging more training of health 

professionals for rural communities to 

ensure access to high-quality care for 

Medicare beneficiaries. 

 Support research that looks into issues 

related to volume and outcome in the 

rural context based on primary and 

ambulatory care. 

38
Workforce 

The Secretary should: 

 Support changes to Medicare policy to 

provide exceptions to the residency 

cap for rural training programs and 

provide direct and indirect GME 

funding for these programs. 

 Support changes to Medicare policy 

that promote more community-based 

training of residents. 

 Support changes to Medicare policy so 

that residency programs receiving 

GME funding would be required to 

provide training in rural settings. 

 Support Rural GME demonstration 

projects that address workforce 

shortages in rural areas. 

 Expand the scope and focus of the 

Title VII and Title VII training grants 

to promote more rural training. 

 Increase funding for the National 

Health Service Corps to promote 

more placements of Corps clinicians 

in underserved rural areas to serve 

Medicare and Medicaid beneficiaries. 

Reform 

The Secretary should: 

 Protect and strengthen the Medicare 

Fee-For-Service service delivery 

option under any redesign or reform 

of the Medicare program. This should 

include an acknowledgment that 

Medicare + Choice in its present form 

is not a viable option for bringing 

managed care and equity of benefits to 

rural beneficiaries. Consequently, the 

Secretary should recognize that feefor-service delivery will continue to be 

the dominant service delivery 

mechanism for rural Medicare 

beneficiaries. 

 Ensure protections for key rural 

service providers (critical access 

hospitals, sole community hospitals, 

Medicare-dependent hospitals, rural 

referral centers, rural health clinics and 

federally qualified health centers) in 

any redesign of the Medicare program 

to ensure access to care for rural 

beneficiaries. 

 Explore the development of new 

service delivery models for rural 

beneficiaries that recognize the special 

circumstances of providing care in 

sparsely populated rural areas. 

Options such as coordinated care, 

primary care case-management and 

other forms of partial risk or 

capitation that emphasize local control 

and flexibility should be explored.. 

39

National Advisory Committee on Rural Health 

5600 Fishers Lane • Room 9A-55 • Rockville, MD 20857 

Phone: 301-443-0835 • Fax: 301-443-2803 

http://www.ruralhealth.hrsa.gov/nac.htm