Report to Congressional Committees 

United States General Accounting Office 

GAO 

September 2003 MEDICARE

Modest Eligibility 

Expansion for Critical 

Access Hospital 

Program Should Be 

Considered 

GAO-03-948 
Using fiscal year 1999 hospital cost report data, GAO identified 683 rural 

hospitals as “potential CAHs” based on their having an annual average of no 

more than 15 acute care patients per day. About 14 percent (93) of these 

potential CAHs operated an inpatient psychiatric or rehabilitation DPU, 

which they would have to close to convert to CAH status. Among existing 

CAHs, 25 previously operated a DPU but had to close it as part of becoming 

a CAH. Among the potential CAHs that operated a DPU, about half had a net 

loss on Medicare services, indicating they might benefit from CAH 

conversion. Officials in some hospitals expressed a reluctance to close their 

DPU, even if conversion would benefit the hospital financially, as they 

believe the DPU maintains the availability of services in their community. 

Because inpatient rehabilitation and psychiatric services are 

disproportionately located in urban areas, even a small number of rural DPU 

closures may exacerbate any disparities in the availability of these services. 

Using 1999 Medicare claims data, GAO found 129 potential CAHs that likely 

would have been able to meet the CAH census limit of no more than 15 acute 

care patients at any given time if not for a seasonal increase in their patient 

census. Seasonal increases in patient census were common among the 

hospitals GAO studied, generally occurring during the winter flu and 

pneumonia season. For most potential CAHs, their patient census was 

typically low enough that a small seasonal increase did not cause them to 

exceed CAH limits. For the 129 potential CAHs that would have had 

difficulty staying under the CAH limit due to seasonal variation, they could 

have accommodated their patient volume and had greater flexibility in the 

management of their patient census if the CAH census limit were changed 

from an absolute limit of 15 patients per day to an annual average of 15 

patients. 

Potential CAHs That May Otherwise Be Eligible to Conversion If Not for Seasonal Variation in 

Patient Stays or Because They Operate a DPU 

Critical Access Hospitals (CAHs) 

are small rural hospitals that 

receive payment for their 

reasonable costs of providing 

inpatient and outpatient services to 

Medicare beneficiaries, rather than 

being paid fixed amounts under 

Medicare’s prospective payment 

systems. Between fiscal years 1997 

and 2002, 681 hospitals have 

become CAHs. 

In the Medicare, Medicaid and 

SCHIP Benefits Improvement and 

Protection Act of 2000, GAO was 

directed to examine requirements 

for CAH eligibility, including the 

ban on inpatient psychiatric or 

rehabilitation distinct part units 

(DPUs) and limit on patient census, 

and to make recommendations on 

related program changes. 

GAO suggests that the Congress 

may wish to consider allowing 

hospitals with a DPU to convert to 

CAH status. GAO also suggests 

that the Congress may wish to 

consider changing the CAH limit on 

acute care patient census from an 

absolute limit of 15 patients to an 

annual average of 15 patients. The 

Department of Health and Human 

Services said that these 

modifications to CAH eligibility 

criteria would provide the needed 

flexibility for some additional 

facilities to consider conversion to 

CAH status, and emphasized the 

importance of maintaining financial 

incentives for efficiency as well as 

health and safety standards. 

www.gao.gov/cgi-bin/getrpt?GAO-03-948.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact A. Bruce 

Steinwald at (202) 512-7119. 

Highlights of GAO-03-948, a report to the 

Senate Committee on Finance, the House 

Committee on Ways and Means, and the 

House Committee on Energy and 

Commerce 

September 2003

MEDICARE

Modest Eligibility Expansion for Critical 

Access Hospital Program Should Be 

Considered 
Page i GAO-03-948 Critical Access Hospital Program 

Letter 1

Results in Brief 4

Background 6

Existing CAHs Had Fewer Beds and Patients and Lower Medicare 

Margins Than Potential CAHs 12

Ban on CAHs Operating DPUs May Have Contributed to 

Diminished Availability of Services in Rural Areas 14

Seasonal Variation in Patient Census Is Common and May Impede 

CAH Eligibility for Hospitals Near the CAH Limit 19

Conclusions 22

Matters for Congressional Consideration 24

Agency Comments and Our Evaluation 24

Appendix I Scope and Methodology 28 

Appendix II Comments from the Department of Health 

and Human Services 31 

Appendix III GAO Contact and Staff Acknowledgments 35 

GAO Contact 35

Acknowledgments 35

Tables 

Table 1: Selected Characteristics of Existing CAHs Prior to Their 

Conversion and Potential CAHs, Fiscal Year 1999 13

Table 2: Financial Performance of Existing CAHs Prior to Their 

Conversion and Potential CAHs, Fiscal Year 1999 14

Table 3: Financial Performance of Potential CAHs with DPUs, 

Fiscal Year 1999 16

Table 4: Medicare Margins for DPUs of Potential CAHs, Fiscal Year 

1999 17

Table 5: Seasonal Increase in Average Acute Care Patient Census 

among Potential CAHs, by Bedsize, 1999 20

Table 6: Potential CAHs with Estimated Seasonal Increases in 

Patient Census That Pushed Them over CAH Limit, 1999 21

Contents 
Page ii GAO-03-948 Critical Access Hospital Program 

Table 7: Financial Performance of Potential CAHs with a Seasonal 

Increase in Patient Census That Pushed Them over CAH 

Limit, Fiscal Year 1999 21

Table 8: Potential CAHs with Seasonal Increase in Medicare 

Patients’ Length of Stay That Pushed Them over the 4-day 

CAH Limit, 1999 22

Table 9: Summary of Site Visits and Interviews 30

Figures 

Figure 1: Major Eligibility Criteria for Critical Access Hospitals 7

Figure 2: Number of Critical Access Hospitals through Fiscal Year 

2002 8

Figure 3: Location of the 681 Critical Access Hospitals, September 

2002 9
Page iii GAO-03-948 Critical Access Hospital Program 

Abbreviations 

BBA Balanced Budget Act of 1997 

BIPA Medicare, Medicaid, and SCHIP Benefits Improvement and 

Protection Act of 2000 

CAH Critical Access Hospital 

CMS Centers for Medicare & Medicaid Services 

DPU distinct part unit 

EACH essential access community hospital 

EMS emergency medical services 

FORHP Federal Office of Rural Health Policy 

HHS Department of Health and Human Services 

HRSA Health Resources and Services Administration 

MSA metropolitan statistical area 

OMB Office of Management and Budget 

PPS prospective payment system 

RHFTP rural hospital flexibility tracking project 

RPCH rural primary care hospital 

SCHIP State Children’s Health Insurance Program 

TEFRA Tax Equity and Fiscal Responsibility Act of 1982 

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Page 1 GAO-03-948 Critical Access Hospital Program 

September 19, 2003 

Congressional Committees 

Medicare beneficiary access to hospital services in rural areas has been a 

source of concern for policymakers for many years. To bolster the 

financial stability of rural hospitals, the Congress approved several special 

payment provisions both before and after the implementation of the 

Medicare acute care inpatient prospective payment system (PPS)1

 in 1983. 

These provisions enhanced Medicare payments to certain groups of rural 

hospitals, such as those that are the only source of care in their 

community; larger hospitals that serve as referral sites for rural physicians 

and community hospitals; and hospitals highly dependent on Medicare 

payments. Many rural hospitals have, however, continued to experience 

financial difficulties. 

In the Balanced Budget Act of 1997 (BBA), the Congress established 

additional special payment provisions for Critical Access Hospitals 

(CAH).2

 When designated as a CAH, a hospital generally receives payment 

for its reasonable costs of providing inpatient and outpatient services to 

Medicare beneficiaries, rather than being paid the PPS fixed amount for 

those services. Thus, the CAH designation provides higher payments to 

hospitals whose reasonable costs are higher than their PPS payment. The 

CAH program has grown steadily to 681 CAHs at the end of fiscal year 

2002.3

The CAH designation is targeted to small rural hospitals with a low patient 

census and short patient stays. Statutory provisions specifying criteria for 

CAHs do not specifically exclude facilities with distinct part units (DPUs) 

—separate sections certified to provide inpatient rehabilitation or 

psychiatric care. However, statutory and regulatory provisions concerning 

 1

Under the PPS, hospitals are paid a fixed amount for each hospital discharge, based on 

national average costs, adjusted for such factors as local wage costs and type of illness 

treated. 

2

Pub. L. No. 105-33, § 4201(c), 111 Stat. 251, 373-374 (1997). 

3

CAH enrollment figures were provided by the Rural Hospital Flexibility Tracking Project 

(RHFTP), a federally funded national evaluation by a consortium of five rural health 

research centers and the Rural Policy Research Institute. 

United States General Accounting Office

Washington, DC 20548 
Page 2 GAO-03-948 Critical Access Hospital Program 

payment for such DPUs effectively require them to be operated by 

hospitals paid PPS rates. Thus, because CAHs are paid their reasonable 

costs, they are effectively banned from having DPUs. Some hospital 

officials have raised concerns that because CAHs cannot operate DPUs, it 

may be more difficult to ensure that rural beneficiaries have access to the 

kind of psychiatric and rehabilitation services these units provide, if 

hospitals choose to close their DPU as part of becoming a CAH. In 

addition, to be a CAH, a hospital must remain under CAH limits on the 

number of hospital beds (“bedsize”) and average patient length of stay, 

and can have no more than 15 acute care patients on any given day. Some 

hospitals may have difficulty remaining under CAH limits during the entire 

year because they may experience fluctuations in patient demand due to 

seasonal tourism or illnesses, like influenza or pneumonia, that are more 

prevalent at certain times of the year. 

In the Medicare, Medicaid, and SCHIP Benefits Improvement and 

Protection Act of 2000 (BIPA),4

 the Congress directed us to study CAH 

eligibility requirements including with respect to limitations on average 

length of stay, bedsize, and DPU operations, and to make related 

recommendations on program changes. As agreed with the committees of 

jurisdiction, we have examined (1) the characteristics of a group of 

hospitals prior to their designation as CAHs compared to a group of small 

rural hospitals that have not become CAHs, but were in a position to 

consider doing so based on their low patient census, (2) the impact that 

the effective ban on CAHs operating DPUs has had on the availability of 

psychiatric and rehabilitation services in rural areas and on rural hospitals’ 

decisions to seek CAH conversion, possible options for Medicare payment 

to DPUs and CAH eligibility requirements if CAHs were allowed to operate 

DPUs, and (3) the extent to which seasonal variation in patient census or 

length of stay prevents hospitals from being eligible for CAH status. 

To address these objectives, we analyzed Medicare hospital cost reports5

from fiscal year 1999, the most recently available audited cost report data, 

and Medicare inpatient claims data for 1999. We defined 683 rural 

hospitals that had not converted to CAH status as of January 1, 2003, as 

 4

Pub. L. No. 106-554, App. F, § 206, 114 Stat. 2763A-463, 2763A-483 (2000). 

5

The Medicare cost report is the financial document that hospitals are required to submit 

annually to the Centers for Medicare & Medicaid Services (CMS). The reports include 

information about Medicare inpatient and outpatient costs and payments, as well as 

information about payments from other revenue sources. 
Page 3 GAO-03-948 Critical Access Hospital Program 

“potential CAHs,” based on their having an annual average patient census 

of no more than 15 acute care patients.6

 We estimated how many of the 683 

potential CAHs might be prevented from converting to CAH status because 

they operate a DPU or experience seasonal variation in their patient 

census or average length of stay. We also examined the characteristics of 

620 hospitals that were not yet CAHs in fiscal year 1999 but have since 

converted to CAH status (“existing CAHs”) and compared their 

preconversion characteristics to those of potential CAHs in fiscal year 

1999. We evaluated how many potential CAHs and existing CAHs 

experienced financial losses under the Medicare PPS and likely could 

benefit from cost-based reimbursement. Since DPUs are paid under 

different payment methodologies from acute care hospitals, we evaluated 

how many of the DPUs operated by potential CAHs experienced financial 

gains or losses under the payment methodology that applied to them in 

fiscal year 1999 as well as the possible impact if cost-based reimbursement 

were extended to DPUs operated by CAHs. We also evaluated how many 

of the potential CAHs with DPUs could have met CAH bedsize and length 

of stay criteria in fiscal year 1999 if their DPU beds and lengths of stay 

were counted towards the limits. We interviewed officials with the Centers 

for Medicare & Medicaid Services (CMS) and the Federal Office of Rural 

Health Policy (FORHP), which administers a grant program supporting 

CAHs. We interviewed administrators of 24 CAHs and potential CAHs 

across 10 states, and made site visits to 7 of these hospitals in 3 states. We 

also interviewed state staff administering FORHP grants, and conducted 

an e-mail survey of state CAH coordinators.7

 We did our work in 

accordance with generally accepted government auditing standards from 

April 2001 through August 2003. A detailed discussion of our scope and 

methodology is in appendix I. 

 6

Most of the 683 potential CAHs (79 percent) exceeded the CAH bedsize limit. We did not 

exclude these hospitals from our definition of potential CAHs because hospitals have the 

option of reducing their bedsize in order to become eligible for CAH conversion. Our 

inclusion of hospitals with an average census up to 15 is likely a high estimate of the 

number of potential CAHs because hospitals with an annual average of 15 acute care 

patients per day may need more than 15 acute care beds to accommodate variation in their 

patient census that periodically causes them to exceed 15. 

7

New Jersey, Rhode Island, Delaware, and Washington D.C. do not participate in the CAH 

program. All but 5 state CAH coordinators participated in the e-mail survey or were 

interviewed. 
Page 4 GAO-03-948 Critical Access Hospital Program 

Existing CAHs averaged six fewer beds and about three fewer patients per 

day prior to their conversion than did potential CAHs. Existing CAHs had 

to make smaller operational changes to qualify for CAH status, such as 

reducing bedsize or length of stay, than potential CAHs would have had to 

make if they had chosen to convert. While both groups had a median loss 

on Medicare inpatient and outpatient services, existing CAHs tended to 

experience bigger losses prior to their conversion (8.9 percent) than did 

potential CAHs (0.8 percent). Existing CAHs also had a median loss on all 

sources of revenue of 0.3 percent before conversion, while potential CAHs 

had a median gain of 1.8 percent. 

The effective ban on CAHs operating DPUs may have contributed to the 

disparity between urban and rural areas in the availability of inpatient 

psychiatric and rehabilitation services in fiscal year 1999. While onequarter of Medicare beneficiaries reside in rural areas, only 8 percent of 

rehabilitation hospital and DPU beds and 17 percent of psychiatric 

hospital and DPU beds were in rural areas in fiscal year 1999. The 

subsequent closure of 25 DPUs by hospitals converting to CAH status may 

have exacerbated this difference in availability. Of the 93 potential CAHs 

that operated a DPU, about half lost money on Medicare inpatient and 

outpatient services, giving them a financial incentive to convert. If, 

however, the other financial benefits associated with the DPU exceeded 

their losses under the PPS, these potential CAHs would have a 

countervailing incentive to stay under the PPS rather than close their DPU 

and convert. Some rural hospital administrators told us that, even when it 

was financially advantageous to seek CAH status, they were reluctant to 

close their DPU because it is needed to maintain access to psychiatric or 

rehabilitation services in the community they serve. While allowing 

hospitals to convert to CAH status and retain their DPU would alleviate 

this concern, extending cost-based reimbursement to DPUs operated by 

CAHs diminishes the incentives for efficiency that are inherent in PPS 

payments. If DPU patient stays and beds were counted against current 

CAH limits without any adjustment, nearly all potential CAHs with DPUs 

would have exceeded the limits in fiscal year 1999. 

Among hospitals we studied, seasonal fluctuations in patient volume or 

length of stay were common, particularly during the winter. Such 

increases can be an obstacle for some hospitals considering CAH 

conversion if it causes them to exceed the CAH patient census limit of no 

more than 15 patients at any time or length of stay limit of an annual 

average of 4 days. We found 129 potential CAHs that likely would have 

been able to meet the CAH patient census limit in fiscal year 1999 if not for 

the seasonal increase in their patient census. While these 129 hospitals, as 

Results in Brief 
Page 5 GAO-03-948 Critical Access Hospital Program 

a group, averaged 13.2 patients per day over the entire year, their daily 

census increased to an estimated average of 16.9 during their high season. 

If the CAH patient census limit were changed from an absolute limit of 15 

acute care patients per day to an annual average of 15, these potential 

CAHs would have been able to remain under such a limit because they all 

had an annual average below 15. It would not be necessary to increase the 

number of acute care beds CAHs are allowed to maintain in order to 

implement this relaxation of the patient census limit, since more than 

three-quarters of existing CAHs and potential CAHs have swing beds8

which they could use to accommodate additional acute care patients 

beyond 15. About 40 percent of these 129 potential CAHs, however, had 

positive Medicare margins, meaning they would have had little financial 

incentive to switch from the PPS to the cost-based payment CAHs receive. 

In contrast to the CAH patient census limit, the patient length-of-stay limit 

gives CAHs the flexibility to keep some acute care patients beyond the 

limit because it is an average. 

We suggest that the Congress may wish to consider allowing hospitals 

with DPUs to convert to CAH status while making allowances for DPU 

beds, patients, and lengths-of-stay when determining CAH eligibility, and 

that CAH-affiliated DPUs be paid under the same formulas as other 

inpatient psychiatric or rehabilitation providers. We also suggest that the 

Congress may wish to consider changing the CAH limit on acute care 

patient census from an absolute limit of 15 acute care patients to an 

annual average of 15 in order to give CAHs greater flexibility in the 

management of their patient census. 

In commenting on a draft of this report, the Department of Health and 

Human Services said that these modifications to CAH eligibility criteria 

would provide the needed flexibility for some additional facilities to 

consider conversion to CAH status. The department also emphasized 

several considerations, including maintaining financial incentives for 

efficiency as well as health and safety standards for DPUs, if they are 

allowed to be operated by a CAH. 

 8

A hospital with swing beds can “swing” its beds between hospital and skilled nursing 

levels of care, on an as needed basis. 
Page 6 GAO-03-948 Critical Access Hospital Program 

CAHs are an outgrowth of the seven-state Essential Access Community 

Hospital/Rural Primary Care Hospital (EACH/RPCH) program established 

in 1989. The BBA replaced the EACH/RPCH program with the stateadministered Rural Hospital Flexibility Program (the “Flex” Program), 

which includes the CAH designation. The reimbursement component of 

the Flex Program is the responsibility of CMS. The Flex Program also 

includes a grant program that supports hospital participation in the 

program as well as state emergency medical services systems (EMS), and 

is the responsibility of the FORHP within the Health Resources and 

Services Administration (HRSA). 

The CAH program allows eligible rural hospitals to receive Medicare 

payments based on their reasonable costs rather than under a PPS. Under 

the Medicare inpatient PPS, hospitals are generally paid a fixed amount 

per patient discharge, providing an incentive for hospitals to control their 

costs to stay under this fixed amount because they can retain the 

difference between the PPS payment and their costs. Under cost-based 

reimbursement, hospitals are reimbursed for their reasonable costs, which 

does not provide the same incentive to control costs, but benefits hospitals 

whose Medicare costs exceed their PPS payments. 

In addition to receiving cost-based payment for inpatient services to 

Medicare beneficiaries, CAHs receive cost-based payment from Medicare 

for skilled nursing care provided in their swing beds and for outpatient 

care.9

 To become a CAH, a hospital must meet certain criteria with respect 

to its location, size, patient census, and patient length of stay (see figure 

1). CAHs are also subject to different health and safety regulations, known 

as “conditions of participation,” from other acute care hospitals.10

 9

Among 42 states responding to a RHFTP survey, 17 states provide enhanced Medicaid 

payments to CAHs, and 13 states provide enhanced reimbursement for outpatient services. 

1042 C.F.R. §§ 485.601 et seq. (2002). 

Background 
Page 7 GAO-03-948 Critical Access Hospital Program 

Figure 1: Major Eligibility Criteria for Critical Access Hospitals 

Note: The Office of Management and Budget (OMB) defines a metropolitan statistical area as a core 

area of at least 50,000 people together with adjacent areas having a high degree of economic and 

social integration with that core. Nonmetropolitan areas include all counties outside of a metropolitan 

area. 

a

The statutory provision outlining the certification exception does not specify the criteria for a hospital 

to be a necessary provider of services. 

Source: GAO. 

Day

Day Day

Day

1

2 3

4

Length of Stay

A CAH must 

maintain an annual 

average length of 

stay of no more 

than 4 days.

Rurality

A CAH must be located in a 

nonmetropolitan area, as defined 

by the U.S. Office of Management 

and Budget, or in a rural census 

tract of a metropolitan statistical 

area (MSA).

Proximity

A CAH must be more 

than 35 miles from the 

next nearest acute care 

hospital or be certified by 

the state as a necessary 

provider of servicesa.

Bedsize - Patient Census

A CAH can maintain up to 15 beds, 

or up to 25 beds if swing beds are 

included as long as no more than 

15 beds are used for acute care 

patients at any given time. A CAH's 

patient census is limited to no more 

than 15 acute care patients at any 

given time.

Hospital
Page 8 GAO-03-948 Critical Access Hospital Program 

Growth in the number of CAHs has been steady (see figure 2). There is a 

large concentration of CAHs in the central states, although 45 states had at 

least one CAH as of September, 2002 (see figure 3).11

Figure 2: Number of Critical Access Hospitals through Fiscal Year 2002 

 11Connecticut, Delaware, Maryland, New Jersey, and Rhode Island did not have CAHs as of 

September 2002. 

24 36

74

269

478

681

0

200

400

600

800

pre-1998 1998 1999 2000 2001 2002

Number of CAHS

Source: Rural Hospital Flexibility Tracking Project.
Page 9 GAO-03-948 Critical Access Hospital Program 

Figure 3: Location of the 681 Critical Access Hospitals, September 2002 

Note: Some Critical Access Hospitals may not be visible because they are obscured by state 

boundary lines. 

Source: Rural Hospital Flexibility Tracking Project.

CAHs (681)
Page 10 GAO-03-948 Critical Access Hospital Program 

Since the inception of the CAH program, two factors have been important 

in increasing the number of hospitals qualifying for the designation. First, 

the length-of stay criterion was changed. Until 1999, patient stays at CAHs 

were limited to 4 days, after which patients would have to be transferred 

to another health care facility or discharged. In 1999, the Congress relaxed 

the criterion to require that CAHs keep their annual average length of stay 

to no more than 4 days.12 Second, states have widely utilized their 

authority to designate hospitals as “necessary providers,” thereby 

exempting such hospitals from the otherwise applicable CAH criterion 

that they be more than 35 miles from the nearest hospital. According to the 

Rural Hospital Flexibility Tracking Project (RHFTP), a little more than half 

of all CAHs had qualified for the CAH program through state designation 

rather than by meeting the mileage and location requirements, as of 

September 2002.13

Hospitals considering CAH conversion weigh numerous factors in their 

decision, including the impact on hospital finances and community 

reaction. Financial impact studies are commonly used to estimate how a 

hospital’s reimbursement for services would change under CAH status. 

The financial impact may change as Medicare reimbursements to hospitals 

changes. For example, Medicare payment for hospital outpatient services 

shifted in 2000 from cost-based payment to a new PPS for outpatient 

services. Because CAHs are exempt from this PPS and continue to receive 

cost-based payment for outpatient services, potential CAHs may factor 

into their decision the impact of being paid reasonable costs, rather than a 

fixed PPS payment, for outpatient services. They may also consider the 

possible reaction from the community and from other health care 

providers to CAH conversion. Some communities have been reluctant to 

support a hospital’s conversion because they perceive it as the last step 

before closure. In other cases, hospital officials reported that their 

physicians expressed concern that if a hospital became a CAH, they would 

occasionally be unable to admit patients to it because this would bring the 

CAH over the patient limit. 

 12Medicare, Medicaid and SCHIP Balanced Budget Refinement Act of 1999, Pub. L. No. 106-

113, App. F, § 403(a), 113 Stat. 1501A-321, 1501A-370-372. 

13List of CAH conversions by state downloaded from www.rupri.org/rhfp-track on 

September 27, 2002. 
Page 11 GAO-03-948 Critical Access Hospital Program 

Clinical research has indicated better outcomes for patients who are 

appropriately treated in inpatient psychiatric or rehabilitation facilities, 

such as DPUs, rather than in general acute or post acute care settings. For 

example, one study concluded that elderly depressed patients who were 

treated in specialty psychiatric DPUs may have received better treatment 

for their depression than similar patients who were treated in general 

medical wards.14 Another study found better outcomes among stroke 

patients treated in rehabilitation facilities, such as DPUs, than those 

treated in nursing homes.15

As separate sections of hospitals, psychiatric and rehabilitation DPUs are 

subject to specific Medicare regulations regarding the types of patients 

they admit and the qualifications of their staff.16 Psychiatric DPUs may 

admit only patients whose condition requires inpatient hospital care and 

are described by a psychiatric principal diagnosis.17 Rehabilitation DPUs 

may treat only patients likely to benefit significantly from intensive 

therapy services, such as physical therapy, occupational therapy, or 

speech therapy. Both types of DPUs must provide a specified range of 

services and employ clinical staff with specialized training. 

 14G. Norquist et al. “Quality of Care for Depressed Elderly Patients Hospitalized in the 

Specialty Psychiatric Units or General Medical Wards,” Archives of General Psychiatry, 

vol. 52, no. 8 (1995). 

15R. L. Kane et al. ‘“Functional Outcomes of Posthospital Care for Stroke and Hip Fracture 

Patients under Medicare,” Journal of the American Geriatric Society, vol. 46, no. 12 

(1998). 

16For a hospital to establish a psychiatric DPU, Medicare regulations require that a hospital 

must furnish, through the use of qualified personnel, psychological services, social work, 

psychiatric nursing, occupational therapy and recreational therapy. Inpatient psychiatric 

services must be under the supervision of a clinical director, service chief, or equivalent 

who is qualified to provide the leadership required for an intensive treatment program, and 

who is board certified in psychiatry. The DPU must have a director of nursing who is a 

registered nurse with a master’s degree in psychiatric or mental health nursing or who is 

qualified by education and experience, and a director of social services. There also must be 

an adequate number of registered nurses to provide 24-hour-a-day coverage as well as 

licensed practical nurses and mental health workers. 42 C.F.R. § 412.27 (2002). For a 

hospital to establish a rehabilitation DPU, Medicare regulations require that a hospital must 

provide rehabilitation nursing, physical and occupational therapy, speech therapy, plus as 

needed, social services or psychological services and orthotics and prosthetics. The unit 

must have a director of rehabilitation who is experienced in rehabilitation and is a doctor 

of medicine or a doctor of osteopathy. 42 C.F.R. § 412.29 (2002). 

1742 C.F.R. § 412.27(a) (2002). Psychiatric principal diagnoses are listed in the Third Edition 

of the American Psychiatric Association Diagnostic and Statistical Manual and in chapter 5 

of the International Classification of Diseases, 9th Edition Clinical Modification (ICD-9-

CM). 

Distinct Part Units 
Page 12 GAO-03-948 Critical Access Hospital Program 

The Congress has required that CMS develop PPSs for both inpatient 

rehabilitation and inpatient psychiatric providers, including DPUs, to 

replace the payment methodology established by the Tax Equity and 

Fiscal Responsibility Act of 1982 (TEFRA). Under TEFRA, providers that 

had been exempted from the inpatient PPS, including inpatient 

rehabilitation and psychiatric hospitals and DPUs, receive the lesser of 

either their average cost per discharge or a provider-specific target 

amount.18 In 2002, a PPS was implemented for inpatient rehabilitation. 

Because a PPS for inpatient psychiatric providers has yet to be 

implemented, psychiatric DPUs continue to be paid under TEFRA. 

The financial incentives associated with TEFRA payments differ from 

those associated with cost-based payment. Under TEFRA, Medicare 

payments are capped by a provider’s target amount, giving hospitals an 

incentive to restrain costs. By contrast, hospitals such as CAHs, which are 

paid their reasonable costs, have less incentive to restrain costs because 

their payments can increase as their costs increase. 

Most existing CAHs prior to their conversion had more beds in fiscal year 

1999 than CAHs are allowed. Most were likely able to reduce their bedsize 

to 15 (or 25 with swing beds) to become CAHs without adjusting their 

patient volume because their average patient census of 4.8 was generally 

well below the CAH limit of 15 (see table 1). Likewise, potential CAHs, on 

average, exceeded CAH bedsize limits in fiscal year 1999 and had a patient 

census well below 15. To meet the CAH limit, existing CAHs, on average, 

had to reduce their bedsize by less than potential CAHs would have had to 

if they had sought CAH status. Most existing CAHs prior to their 

conversion and potential CAHs were below the CAH length-of-stay limit. 

 18TEFRA (Pub. L. No. 97-248, § 101(a)(1), 96 Stat. 324, 331-333) established this payment 

methodology for classes of hospitals deemed exempt from the PPS. The target amount is 

the PPS-exempt provider’s Medicare-allowable costs per patient stay in a designated base 

year, inflated to the current year by an annual update factor. 

Existing CAHs Had 

Fewer Beds and 

Patients and Lower 

Medicare Margins 

Than Potential CAHs 
Page 13 GAO-03-948 Critical Access Hospital Program 

Table 1: Selected Characteristics of Existing CAHs Prior to Their Conversion and Potential CAHs, Fiscal Year 1999 

 Total 

Average 

daily census

Average 

length of 

stay (days)

Average 

bedsize

Percentage 

with swing 

beds 

Percentage 

exceeding 

bedsize limit 

Percentage 

exceeding 

length-of-stay 

limit

Existing CAHsa 

(pre-conversion) 620 4.8 3.5 30 85 61 14

Potential CAHs 683 8.1 3.8 36 78 79 21

Source: Fiscal year 1999 Medicare hospital cost reports. 

a

Statistics on existing CAHs include CAH conversions reported through January 1, 2003, but do not 

include CAHs that had already converted to CAH status in fiscal year 1999 or for which cost report 

data were not available for fiscal year 1999. 

In fiscal year 1999, existing CAHs prior to their conversion generally 

experienced greater losses on their inpatient and outpatient Medicare 

services than did potential CAHs (see table 2), and therefore had greater 

financial incentive to seek conversion. A small majority, 55 percent, of 

existing CAHs experienced losses on inpatient Medicare services, while 

more than 60 percent of potential CAHs experienced gains. Nearly all 

hospitals in both groups experienced losses on their Medicare outpatient 

services. Across all revenue sources, existing CAHs prior to their 

conversion experienced a 0.3 percent median loss, while potential CAHs 

experienced a 1.8 percent median gain. 
Page 14 GAO-03-948 Critical Access Hospital Program 

Table 2: Financial Performance of Existing CAHs Prior to Their Conversion and Potential CAHs, Fiscal Year 1999 

 Median margina (percent) Hospitals with negative margins Hospitals with positive margins

Existing CAHs 

(preconversion) 

(n= 542) 

Potential 

CAHs 

(n= 683) 

Number 

(percent) of 

existing CAHs 

(preconversion) 

Number 

(percent) of 

potential 

CAHs 

Number (percent) 

of existing CAHs 

(preconversion) 

Number 

(percent) of 

potential 

CAHs 

Medicare inpatient -2.4 6.0 296 (55) 254 (37) 236 (44) 419 (62) 

Medicare outpatient -21.0 -19.6 523 (96) 649 (96) 11 (2) 14 (2) 

Medicare inpatient and 

outpatient -8.9 -0.8 398 (74) 343 (51) 136 (25) 322 (48) 

Total facility (all 

payers) -0.3 1.8 277 (51) 260 (38) 255 (47) 406 (60) 

Source: Fiscal year 1999 Medicare hospital cost reports. 

Notes: For each of the four calculations of hospital margins, a small number of hospitals were 

excluded because of incomplete data or because their margins were extreme outliers. Three to 17 

potential CAHs were excluded among the four calculations, and 2 to 10 existing CAHs were 

excluded. In addition, 78 existing CAHs do not have pre-conversion PPS margins statistics for fiscal 

year 1999 because they did not meet criteria used for the margins calculation. Results do not reflect 

the effects of the outpatient PPS, which was implemented in 2000. 

a

A margin is the difference between a hospital’s revenue and costs, divided by its revenues. 

The effective ban on CAHs operating DPUs may have contributed to the 

disparity between urban and rural areas in the availability of inpatient 

psychiatric and rehabilitation services in fiscal year 1999. Twenty-five 

existing CAHs had to close their DPU as part of becoming CAHs. Of the 93 

potential CAHs that operated a DPU (one-seventh of all potential CAHs), 

about half lost money on their Medicare inpatient and outpatient services, 

giving them a financial incentive to convert. If, however, the other 

financial benefits associated with the DPU exceeded their combined 

losses on inpatient and outpatient services, these potential CAHs would 

have had a countervailing incentive to stay under the PPS, rather than 

close their DPU and convert. Some rural hospital administrators told us 

that, even when it was financially advantageous to seek CAH status, they 

were reluctant to close their DPU because it was needed to maintain 

access to psychiatric or rehabilitation services in the community they 

serve. While allowing hospitals to convert to CAH status and retain their 

DPU would alleviate this concern, extending cost-based reimbursement to 

DPUs operated by CAHs diminishes the incentives for efficiency that are 

inherent in PPS payments. If DPU patient stays and beds were counted 

against current CAH limits without any adjustment, nearly all potential 

Ban on CAHs 

Operating DPUs May 

Have Contributed to 

Diminished 

Availability of 

Services in Rural 

Areas 
Page 15 GAO-03-948 Critical Access Hospital Program 

CAHs with DPUs would have exceeded either the bedsize or length of stay 

limit in fiscal year 1999. 

The closure of 25 DPUs by hospitals that needed to relinquish their DPU as 

part of becoming a CAH may have contributed to the lower availability of 

inpatient psychiatric and rehabilitation services in rural areas. Inpatient 

psychiatric and rehabilitation providers are concentrated in urban areas, 

and DPUs are least common among smaller rural hospitals. Only 8 percent 

of rehabilitation beds and 17 percent of psychiatric beds were located in 

rural areas in fiscal year 1999, while about 25 percent of Medicare 

beneficiaries live in rural areas. In fiscal year 1999, 14 percent (93) of 

potential CAHs operated a DPU.19 By comparison, 37 percent of larger 

rural hospitals operated a DPU, and 53 percent of urban hospitals 

operated a DPU. 

DPUs may be less common in rural areas due to the challenge of finding 

the resources needed to open a DPU. Hospital representatives and officials 

from rural health organizations said the difficulty in finding the specialized 

staff required to operate a DPU likely prevents many small rural hospitals 

from opening a DPU. 

In fiscal year 1999, nearly half the potential CAHs with a DPU experienced 

net gains on their combined inpatient and outpatient payments for 

Medicare services (see table 3). These potential CAHs had a financial 

incentive to continue under the PPS because this allowed them to 

continue receiving Medicare payments that were higher than their costs, 

rather than being paid only their reasonable costs as a CAH. The 47 

potential CAHs with DPUs that experienced losses on their combined 

inpatient and outpatient Medicare payments would more likely have a 

financial incentive to seek CAH status. 

 19Eighty-one of the 93 operated only a psychiatric DPU, 7 operated only a rehabilitation 

DPU, and 5 operated both types of DPUs. 

CAH Eligibility 

Requirements Led to DPU 

Closures in Rural 

Communities 

Many Potential CAHs Had 

No Financial Incentive to 

Close DPU 
Page 16 GAO-03-948 Critical Access Hospital Program 

Table 3: Financial Performance of Potential CAHs with DPUs, Fiscal Year 1999 

 

Median margina in 

percentages

 (n = 93)

Number (percent) 

of potential CAHs 

with negative 

margins 

Number 

(percent) of 

potential CAHs 

with positive 

margins

Medicare inpatient 3.9 35 (38) 56 (62)

Medicare outpatient -17.5 88 (97) 0 (0)

Medicare inpatient and 

outpatient -1.1 47 (53) 41 (47)

Total facility (all payers) 0.6 42 (46) 46 (51)

Source: Fiscal year 1999 Medicare hospital cost reports. 

Notes: For each of the four calculations of hospital margins, three or fewer hospitals were excluded 

because of incomplete data or because their margins were extreme outliers. Results do not reflect the 

effects of the outpatient PPS, which was implemented in 2000. 

a

A margin is the difference between a hospital’s revenue and costs, divided by its revenues. 

Potential CAHs with DPUs can compare the financial benefits of CAH 

conversion to the benefits of keeping their DPUs. Some that suffered 

losses on their inpatient and outpatient Medicare payments may lack a 

financial incentive to become a CAH because DPU revenues help offset 

those losses. If the projected increase in revenue under cost-based 

payment that a hospital would receive as a CAH is lower than the loss of 

revenue from having to close its DPU, the hospital may chose not to 

convert to CAH status. Just over half of the DPUs operated by potential 

CAHs had net gains on their Medicare payments (see table 4). A DPU may 

also provide a financial benefit to the hospital because it enables the 

hospital to spread its fixed costs over more services. Several 

administrators of potential CAHs with a DPU whom we interviewed stated 

that their DPU had contributed positively to the hospital’s financial 

situation, providing a revenue source they would be reluctant to relinquish 

to gain CAH status. 
Page 17 GAO-03-948 Critical Access Hospital Program 

Table 4: Medicare Margins for DPUs of Potential CAHs, Fiscal Year 1999 

DPUs of 

potential CAHs Number

Median 

Medicare 

margina

(percent) 

Number 

(percent) of 

DPUs with 

negative 

margins 

Number 

(percent) of 

DPUs with 

positive 

margins 

Psychiatric 86 0.9 28 (33) 47 (55) 

Rehabilitation 12 0.0 5 (42) 5 (42) 

All 98 0.9 33 (34) 52 (53) 

Source: Fiscal year 1999 Medicare hospital cost reports. 

Notes: Because 5 of the potential CAHs had both a psychiatric and rehabilitation DPU, there are a 

total of 98 DPUs among the 93 potential CAHs. Margin information is not included for 11 psychiatric 

DPUs and 2 rehabilitation DPUs due to incomplete data or the exclusion of units whose margins were 

at extreme outliers. Results do not reflect the effects of the inpatient rehabilitation PPS, which was 

implemented in January 2002. 

a

A margin is the difference between a hospital’s revenue and costs, divided by its revenues. 

While hospitals report that the projected financial impact is generally a 

key factor in the decision about whether to become a CAH,20 some 

potential CAHs with DPUs also consider how local access to services 

would be affected if the DPU were closed. Some rural hospital 

administrators told us that, even when it was financially advantageous to 

seek CAH status, they were reluctant to close their DPU because they 

believed it was needed to maintain access to psychiatric or rehabilitation 

services in their community. Several hospital administrators and state 

health officials emphasized the need for patients to be near their family 

during treatment and the difficulty that some families would have if they 

had to travel outside their community to visit family members receiving 

treatment. Other administrators said that if their DPU closed, alternative 

sources for these services could be as much as 165 miles away. We were 

also told of difficulties in several states with referring psychiatric patients 

to hospitals because of a lack of available beds or because referral 

hospitals prefer not to take patients with significant behavioral issues or 

believe that psychiatric services should be provided in smaller communitybased facilities. 

 20Rural Policy Research Institute, Rural Hospital Flexibility Program Tracking Project 

Year Two Report (Columbia, Mo. 1999). 

Hospitals with DPUs 

Expressed Reluctance to 

Seek CAH Conversion If 

Access to Care Could Be 

Jeopardized 
Page 18 GAO-03-948 Critical Access Hospital Program 

If potential CAHs were allowed to convert to CAH status while retaining 

their DPU, the payment methodology applied to the DPUs could remain 

unchanged or could be shifted to cost-based payment along with the acute 

care hospital services. Hospitals that have been able to keep their DPU 

costs below their Medicare payments under the current methodologies 

(rehabilitation PPS for rehabilitation DPUs or TEFRA payment for 

psychiatric DPUs) would likely prefer no change because they can 

continue to keep their net gains; hospitals that have DPU costs exceeding 

their current Medicare payments would likely prefer cost-based payment. 

If CAHs were allowed to have DPUs and the DPUs were shifted to costbased payment, diminished incentives for efficiency could result in higher 

costs per case. Under cost-based reimbursement, a hospital can receive 

higher payments if its costs increase. Under the rehabilitation PPS or 

TEFRA methodologies currently applied to DPUs, their payments cannot 

exceed a predetermined amount, creating pressure on them to operate 

efficiently. 

If CAHs were allowed to operate DPUs and the DPU beds and patients’ 

length of stay were counted against the CAH limits, only one of the 93 

potential CAHs with DPUs would have met both limits in fiscal year 1999. 

Among these 93 potential CAHs, the median bedsize of psychiatric DPUs 

was 11 and the median bedsize of rehabilitation DPUs was 13. If their DPU 

beds, acute care beds and swing beds were added together, 88 would have 

exceeded the CAH bedsize limit. Similarly, psychiatric inpatient stays at 

these potential CAHs averaged 11.8 days, and rehabilitation DPU inpatient 

stays averaged 13.7 days, both significantly longer than the CAH limit of an 

annual average of 4 days. About eighty percent of the potential CAHs with 

DPUs exceeded the CAH length-of-stay limit when the DPU length of stay 

and acute care length of stay were counted together. 

Paying DPUs Associated 

with CAHs Reasonable 

Costs Would Reduce 

Incentives to Operate 

Efficiently 

Most Potential CAHs with 

DPUs Exceeded CAH 

Bedsize and Length-of-Stay 

Limits When DPUs’ 

Patients Were Counted 
Page 19 GAO-03-948 Critical Access Hospital Program 

Hospitals we studied commonly experienced at least a small seasonal 

increase in their patient census, most often during winter. Such increases 

can be an obstacle for some hospitals considering CAH conversion if it 

causes them to exceed the CAH patient census limit of no more than 15 

patients at any time, or length of stay limit of an average of 4 days. We 

found 129 potential CAHs that likely would have been able to meet the 

patient census limit of 15 in 1999 if not for the seasonal increase in their 

patient census. About 40 percent of these 129 potential CAHs, however, 

had positive Medicare margins, meaning they would have little financial 

incentive to switch from the PPS to CAH cost-based payment. In contrast 

to the CAH patient census limit, the patient length of stay limit is an annual 

average, and gives CAHs the flexibility to occasionally keep some acute 

care patients longer than 4 days as long as the average remains below 4. 

Among hospitals we studied, seasonal fluctuations in patient volume were 

common. In 1999, over 80 percent of potential CAHs had an increase in 

their patient census averaging at least one additional patient per day 

during a 3-month period. To assess whether this finding is consistent with 

small and medium-size hospitals in general, we analyzed Medicare patient 

claims for 2,139 hospitals with an average census of no more than 50 

patients and found that about 90 percent had an increase in their patient 

census averaging at least one additional patient per day during a 3-month 

period of 1999. 

For nearly three-quarters of potential CAHs, the patient volume increase in 

1999 occurred during the winter. This pattern was consistent with reports 

from hospital officials that their patient census often increased during the 

winter due to a higher incidence of flu and pneumonia. The seasonal 

increase in patient census was greater for larger potential CAHs. For 

example, potential CAHs with 41 to 60 beds averaged 2.8 patients more per 

day during their peak 3-month period, while potential CAHs with no more 

than 15 beds averaged 1.3 patients more per day during this period (see 

table 5). 

Seasonal Variation in 

Patient Census Is 

Common and May 

Impede CAH 

Eligibility for 

Hospitals Near the 

CAH Limit 

Most Hospitals Experience 

Higher Patient Census 

during Winter 
Page 20 GAO-03-948 Critical Access Hospital Program 

Table 5: Seasonal Increase in Average Acute Care Patient Census among Potential 

CAHs, by Bedsize, 1999 

 Patient census 

Potential CAHs with a 

high season average 

census exceeding 

thresholds 

Bedsize 

Number of 

potential CAHs 

Estimated 

3-month high 

season average 

Annual 

average 

Exceeded 15 

acute care 

patients 

Exceeded 20 

acute care 

patients

1-15 45 3.5 2.2 0 0

16-25 124 7.2 5.5 3 0

26-40 284 10.5 8.3 40 2

41-60 195 13.2 10.4 72 3

>60 35 13.3 10.6 14 0

Total 683 10.4 8.1 129 5

Source: GAO analysis of Medicare inpatient claims. 

Note: Because this analysis was based on hospitalizations of Medicare patients, rather than all 

patients, we used the hospital’s annual ratio of all patients to Medicare patients to estimate each 

hospital’s total patient census by season. (See app. I for a description of our methodology.) 

There were 129 potential CAHs that had at least a slight seasonal increase 

in 1999 that pushed them over the CAH limit of 15 acute care patients per 

day for some portion of the year. These 129 potential CAHs had an average 

daily patient census of about 13.2, with none having an annual average 

above 15. But these potential CAHs had an estimated average acute care 

patient census of 16.9 during their peak season (see table 6), nearly two 

patients per day higher than the CAH limit. 

Because CAH Patient 

Census Limit Is Absolute, 

Potential CAHs Near the 

Limit May Have Difficulty 

Staying under It 
Page 21 GAO-03-948 Critical Access Hospital Program 

Table 6: Potential CAHs with Estimated Seasonal Increases in Patient Census That 

Pushed Them over CAH Limit, 1999 

Potential CAHs with a seasonal increase in patient census 129 

Estimated average increase in patients per day during seasonal increase 3.7 

Total annual average daily census 13.2 

Estimated total average daily census during seasonal increase 16.9 

Source: GAO analysis of Medicare inpatient claims. 

Note: Because this analysis was based on hospitalizations of Medicare patients, rather than all 

patients, we used the hospital’s annual ratio of all patients to Medicare patients to approximate each 

hospital’s total patient census by season. 

About 40 percent of the 129 potential CAHs with seasonal increases that 

pushed them over the CAH patient census limit had net gains on combined 

inpatient and outpatient payments for Medicare services (see table 7). 

These potential CAHs would have a financial incentive to remain under the 

PPS, where they can keep the difference between payments and their 

costs, rather than convert to CAH status, where they would be paid only 

their reasonable costs. 

Table 7: Financial Performance of Potential CAHs with a Seasonal Increase in 

Patient Census That Pushed Them over CAH Limit, Fiscal Year 1999 

 

Median 

marginsa

in 

percent (n=129)

Number 

(percent) 

of hospitals 

with negative 

margins

Number 

(percent) 

of hospitals 

with positive 

margins

Medicare inpatient 2.4 57 (44) 72 (56)

Medicare outpatient -19.3 122 (95) 5 (4)

Medicare inpatient and 

outpatient 

-2.7 75 (59) 52 (41)

Total facility (all payers) 2.5 47 (36) 82 (64)

Source: Fiscal year 1999 Medicare hospital cost reports. 

Note: For each of the four calculations of hospital margins, two or fewer hospitals were excluded due 

to incomplete data or because their margins were extreme outliers. Results do not reflect the effects 

of the outpatient PPS, which was implemented in 2000. 

a

A margin is the difference between a hospital’s revenue and costs, divided by its revenues. 

Significant Number of 

Potential CAHs with 

Seasonal Increase in 

Patient Census Have No 

Financial Incentive to 

Become a CAH 
Page 22 GAO-03-948 Critical Access Hospital Program 

Seasonal fluctuations in patient length of stay were also common among 

hospitals we studied. Among the 2,139 hospitals with a patient census of 

no more than 50, about three-fourths had a seasonal increase in their 

Medicare length of stay of at least one-third of a day. Sixty-five potential 

CAHs had an average Medicare patient length of stay below 4 days (3.8 

days) for 9 months of fiscal year 1999, but their average length of stay 

during the other 3 months was high enough (4.8 days) to push their 

Medicare annual average over the 4-day CAH limit, to 4.2 (see table 8). 

Among the 620 existing CAHs, 60 had an annual average length of stay 

greater than 4.2 days before they converted. These existing CAHs have 

been subject to the 4-day limit since they became CAHs, suggesting that 

potential CAHs with an annual average of 4.2 days would be able to remain 

under the limit if they converted. 

Table 8: Potential CAHs with Seasonal Increase in Medicare Patients’ Length of 

Stay That Pushed Them over the 4-day CAH Limit, 1999 

Potential CAHs with increase pushing them over the limit 65

Average Medicare length of stay during 9-month period (days) 3.8

Average Medicare length of stay during 3-month seasonal increase (days) 4.8

Annual average Medicare patient length of stay (days) 4.2

Source: GAO analysis of Medicare inpatient claims. 

The relaxation of the CAH length-of-stay limit in 1999 from an absolute 

limit of 4 days to an annual average of 4 days has made it easier to meet 

because hospitals are able to keep some patients for a longer period, as 

long as the hospital’s annual average remains below the limit. Examples of 

how a hospital can manage its length of stay during the course of a year 

include discharging longer-stay patients to skilled nursing care in the 

hospital’s swing beds or transferring them to referral facilities. 

Administrative staff of one rural hospital considering CAH conversion 

reported that its average length of stay dropped over 3 years from 5.3 to 

3.7 days. The decline, in their opinion, was due to factors such as 

utilization review, emphasis on community-based services, increased use 

of post-acute care, and education of staff. 

The ineligibility of hospitals with DPUs or with seasonal increases in 

patient stays that push them over a CAH limit impedes CAH conversion for 

some hospitals that might otherwise be able to become CAHs. The 

ineligibility of hospitals with DPUs may result in the loss of some rural 

DPU services if potential CAHs close their DPU as part of becoming a 

Remaining under Lengthof-Stay Limit Is 

Manageable Because It Is 

an Average 

Conclusions 
Page 23 GAO-03-948 Critical Access Hospital Program 

CAH. Hospitals seeking CAH status may occasionally need to transfer 

patients to stay under the CAH limit of 15 acute care patients if they 

otherwise periodically exceed 15 due to seasonal increases. 

Since inpatient rehabilitation and psychiatric services are less prevalent in 

rural areas, enabling rural DPUs to continue operating can help preserve 

the availability of services. In fiscal year 1999, 25 hospitals ceased 

operation of their DPU as part of becoming a CAH, and beneficiaries in the 

affected communities have lost a local provider of these services. Any of 

the 93 potential CAHs with a DPU may also relinquish it to convert to CAH 

status if hospital officials conclude that shifting to CAHs’ cost-based 

payment is the best way to maximize revenue and preserve the other 

services they offer. Among these 93 potential CAHs, 47 had net losses on 

Medicare services in fiscal year 1999, indicating they might benefit from 

CAH conversion. 

Because it is generally difficult for rural hospitals to staff and maintain a 

DPU, it is unlikely that allowing CAHs to operate DPUs would result in 

many existing CAHs opening new DPUs, as long as the DPUs continue to 

be paid under PPS and TEFRA. If DPUs operated by CAHs were paid their 

reasonable costs, however, DPUs would have less financial incentive to 

operate efficiently. The experience of rural DPUs under the new 

rehabilitation PPS or the forthcoming psychiatric PPS may provide 

information about whether Medicare payments under these PPSs will be 

appropriate for rural DPUs. 

If CAHs were allowed to operate DPUs, they would generally not be able 

to stay under the limits on bedsize, length of stay, and patient census if the 

DPU beds and patient stays were counted against current limits. Relaxing 

the limits for CAHs with DPUs or not counting the DPU beds or patient 

stays for purposes of determining whether the CAH meets the limits would 

enable some or all potential CAHs with DPUs to convert to CAH status. 

Relaxing the CAH census limit to an annual average of 15 acute care 

patients rather than an absolute limit of 15 would accommodate the 129 

potential CAHs that exceeded the current limit due to a seasonal increase 

as they all had an annual average census below 15. Such a change would 

provide CAHs greater flexibility in their management of patient census, 

just as the relaxation of the length of stay limit in 1999 to an annual 

average of 4 days provided CAHs greater flexibility in their management of 

patients’ length of stay. CAHs would then not be required to transfer 

patients whenever they would otherwise exceed the limit, as long as they 

manage their census so that their annual average is below the limit. It 
Page 24 GAO-03-948 Critical Access Hospital Program 

would not be necessary to increase the number of acute care beds CAHs 

are allowed to maintain in order to implement this relaxation of the 

patient census limit. More than three-quarters of existing CAHs and 

potential CAHs have swing beds which they could use to accommodate 

additional acute care patients beyond 15, since the limit is 25 beds for 

CAHs with acute and swing beds. Among the 129 potential CAHs, about 60 

percent had net losses on Medicare services in fiscal year 1999, indicating 

they might benefit from CAH conversion, while the 40 percent with net 

gains would less likely have the financial incentive to convert. 

Many potential CAHs that decide to seek CAH status would need to adjust 

their bedsize or length of stay to become CAHs, just as about 60 percent of 

existing CAHs needed to reduce their bedsize and 14 percent needed to 

reduce their length of stay in fiscal year 1999. CAH status and the costbased reimbursement that goes with it have proven to be attractive enough 

that hospitals have been willing to make the necessary adjustments. 

We suggest that the Congress may wish to consider allowing hospitals 

with DPUs to convert to CAH status while making allowances for DPU 

beds, patients, and lengths-of-stay when determining CAH eligibility, and 

that CAH-affiliated DPUs be paid under the same formulas as other 

inpatient psychiatric or rehabilitation providers. We also suggest that the 

Congress may wish to consider changing the CAH limit on acute care 

patient census from an absolute limit of 15 acute care patients to an 

annual average of 15 to give CAHs greater flexibility in the management of 

their patient census. 

In commenting on a draft of this report, the Department of Health and 

Human Services said that these modifications to CAH eligibility criteria 

would provide the needed flexibility for some additional facilities to 

consider conversion to CAH status. It stated that the key is to provide the 

proper incentives for facilities to convert when they meet the statutory 

requirements and when it is the right thing to do for a particular 

community. 

HHS suggested that we further emphasize several issues regarding CAH 

eligibility and payment. (See app. II for the full text of HHS’s written 

comments.) HHS pointed out that it is important to consider that the 

financial incentives for efficiency under TEFRA payments to psychiatric 

DPUs or rehabilitation PPS payments to rehabilitation DPUs would not be 

preserved if CAHs were able to claim cost-based reimbursement for their 

Matters for 

Congressional 

Consideration 

Agency Comments 

and Our Evaluation 
Page 25 GAO-03-948 Critical Access Hospital Program 

DPUs, and therefore HHS said such DPUs should continue to be paid 

separately from the CAH. The department also emphasized that CAHs are 

required to meet more limited health and safety standards compared to 

other acute care hospitals and raised concerns that any DPUs operated by 

CAHs would likewise be subject to more limited health and safety 

standards unless the Congress acted to maintain standards currently in 

place for DPUs. Furthermore, HHS suggested that we analyze the extent to 

which inpatient rehabilitation and psychiatric services are available to 

rural residents beyond their local hospitals in order to determine whether 

such services are more or less accessible to rural residents than other 

specialty services. The department expressed concern that non-CAH 

hospitals that are within close proximity to CAHs may perceive unfair 

treatment if such CAHs are allowed to operate DPUs. Finally, in 

commenting on the relaxation of the CAH acute care patient census limit 

to an annual average of 15, HHS proposed that we consider suggesting 

corresponding changes to the CAH bedsize limit. 

As we noted in the draft report, incentives for efficiency that exist under 

the current payment systems for inpatient psychiatric and rehabilitation 

services would not be preserved under cost-based reimbursement. We 

revised the matters for congressional consideration to specifically suggest 

that CAH-affiliated DPUs be paid under the same formulas as other 

inpatient psychiatric or rehabilitation providers. We also agree with HHS 

that there are differences in conditions of participation between hospitals 

and CAHs and that appropriate health and safety standards should be 

maintained for CAH-affiliated DPUs, and we modified the report 

accordingly. However, determining what health and safety standards 

should be applied to the DPUs of CAHs was beyond the scope of this 

report. While we noted differences in the availability of inpatient 

rehabilitation and psychiatric services between rural and urban areas in 

the draft report, measuring in detail the level of access rural residents have 

to various specialty services was beyond the scope of this report. We 

believe that the close proximity of non-CAH hospitals to CAHs with DPUs 

would only present a fairness issue if such CAH-affiliated DPUs are paid 

cost-based reimbursement or if they are subject to less stringent 

regulations. If such DPUs operate under the same payment methodologies 

and regulations as other DPUs, this would not be an issue. A detailed 

examination of the levels of competition between CAH and non-CAH 

hospitals was beyond the scope of this report. We clarified in the report 

that we are not suggesting any changes to the CAH limits of 15 acute care 

beds or 25 total beds when swing beds are included, since most CAHs 

have swing beds that could be used when the acute care patient census 
Page 26 GAO-03-948 Critical Access Hospital Program 

exceeds 15. HHS also provided technical comments, which we have 

incorporated as appropriate. 

We are sending copies of this report to the Secretary of Health and Human 

Services and interested congressional committees. We will also make 

copies available to others upon request. In addition this report is available 

at no charge on the GAO Web site at http://www.gao.gov. 

If you have any questions about this report, please call me at (202) 512-

7119. Other major contributors are listed in appendix III. 

A. Bruce Steinwald 

Director, Health Care – Economic 

 and Payment Issues 
Page 27 GAO-03-948 Critical Access Hospital Program 

List of Committees 

The Honorable Charles E. Grassley, Jr. 

Chairman 

The Honorable Max Baucus 

Ranking Minority Member 

Committee on Finance 

United States Senate 

The Honorable Bill Thomas 

Chairman 

The Honorable Charles B. Rangel 

Ranking Minority Member 

Committee on Ways and Means 

House of Representatives 

The Honorable W.J. “Billy” Tauzin 

Chairman 

The Honorable John D. Dingell 

Ranking Minority Member 

Committee on Energy and Commerce 

House of Representatives 
Appendix I: Scope and Methodology 

Page 28 GAO-03-948 Critical Access Hospital Program 

To identify potential Critical Access Hospitals (CAHs), we selected rural, 

non-CAH hospitals with an annual average patient census of 15 or fewer 

acute care patients, based on patient census figures reported in fiscal year 

1999 Medicare cost reports.1 Any hospital that had converted to CAH 

status as of January 1, 2003 was excluded from the list of potential CAHs. 

We defined potential CAHs based on their annual average census, rather 

than by bedsize, because average census better represents the bed 

capacity a hospital would need to support its current demand for services. 

If potential CAHs have more beds than necessary to meet their patient 

demand, they can decertify beds in order to meet CAH eligibility criteria. 

Our inclusion of hospitals with an average census up to 15 is likely a high 

estimate of the number of potential CAHs. Hospitals with an annual 

average of 15 acute care patients per day may need more than 15 acute 

care beds to accommodate variations in their patient census that 

periodically cause them to exceed 15. 

From the resulting list of 683 potential CAHs, we identified hospitals 

operating rehabilitation or psychiatric distinct part units (DPUs), as well 

as those with seasonal variation in patient census or length of stay that 

caused them to exceed CAH limits. For our analysis of seasonal variation 

in patient census, we used the volume of Medicare patients as a proxy for 

total patient volume because national data on day-to-day variation 

inpatient admissions were only available for Medicare patients. We 

calculated from hospital cost reports the Medicare share of each hospital’s 

total acute care patient volume, and for each hospital multiplied the CAH 

limit of 15 acute care patients by its Medicare share in order to define a 

comparable limit based on Medicare patient stays. For example, if a 

hospital’s Medicare share of patients was 67 percent in fiscal year 1999, 

then a Medicare census of about 10 acute care patients was considered to 

be equivalent to a total census of 15 acute care patients. Using Medicare 

inpatient claims data for 1999, we defined seasonal variation in daily 

census as having a period of 3 consecutive months with an average census 

greater than the estimated limit, with the remaining nine months’ census 

averaging below the estimated limit. We identified 129 potential CAHs as 

having a seasonal increase that caused them to exceed the limit for a 3-

month period, while staying under for the remaining 9 months. To estimate 

total patient census for these hospitals for each season, we multiplied their 

 1

Medicare cost report data for fiscal year 1999 were used because they were the most 

current complete data available. There is typically a several year delay between the start of 

a fiscal year and the point at which a complete set of audited hospital cost report data are 

available for that year. 

Appendix I: Scope and Methodology 
Appendix I: Scope and Methodology 

Page 29 GAO-03-948 Critical Access Hospital Program 

Medicare census by their ratio of total patients to Medicare patients. We 

defined seasonal variation in length of stay as having a period of 3 

consecutive months with an average Medicare length of stay greater than 4 

days with an average for the remaining 9 months of less than 4 days. In 

addition, we identified only those hospitals for which their seasonal 

increase in length of stay caused them to exceed the CAH limit of an 

average of 4 days. 

Because we used Medicare utilization to estimate hospitals’ total patient 

utilization for each season, the hospitals we identified as having seasonal 

variation that causes them to exceed CAH limits may not be precisely the 

same set of hospitals that would have been identified if claims data for all 

patients had been available. Rather, our analysis provides an estimate of 

the proportion of potential CAHs so affected. By broadly defining seasonal 

variation, we captured all the hospitals that have census or length of stay 

fluctuations around the CAH limits, regardless of the magnitude of the 

fluctuation. 

We calculated Medicare margins and total facility margins using fiscal year 

1999 Medicare hospital cost report data, using methods developed jointly 

by the Centers for Medicare & Medicare Services (CMS) Office of the 

Actuary and the Medicare Payment Advisory Commission. The reported 

median margins are hospital-weighted, meaning that each hospital counts 

equally in the calculation of the median, regardless of differences in 

hospital size or total revenues. 

We interviewed officials at CMS, at the Federal Office of Rural Health 

Policy, and state staff administering Flex Program grants in 11 states 

(table 9). To get a comprehensive perspective of how current and potential 

CAHs are affected by CAH eligibility criteria, we also conducted an e-mail 

survey of all state CAH coordinators, and received e-mail responses or 

directly interviewed 42 out of 47. In addition, we interviewed researchers 

with the Rural Hospital Flexibility Tracking Project, an evaluation of the 

Flex Program funded by the FORHP. We interviewed administrators of 24 

CAHs and potential CAHs across 10 states, and made site visits to 7 of 

these hospitals in 3 states. These 10 states were selected based on having 

significant CAH enrollment or potential enrollment, and representing 

different regions of the country. 
Appendix I: Scope and Methodology 

Page 30 GAO-03-948 Critical Access Hospital Program 

Table 9: Summary of Site Visits and Interviews 

State 

Interviewed state 

staff 

administering 

Flex Program 

grants 

Hospital 

site visit 

Interviewed 

hospital 

administrators 

Number of 

administrators 

of existing and 

potential CAHs 

interviewed 

Alabama X 1 

Indiana X X X 2 

Iowa X X 2 

Kansas X X 2 

Mississippi X X X 5 

Montana X X 1 

Nebraska X 

North Carolina X X X 2 

South Dakota X 

Texas X X 2 

Vermont X X 1 

Washington X X 6 

Total 11 3 10 24 

Source: GAO. 
Appendix II: Comments from the Department of Health and Human Services 

Page 31 GAO-03-948 Critical Access Hospital Program 

Appendix II: Comments from the Department 

of Health and Human Services 
Appendix II: Comments from the Department of Health and Human Services 

Page 32 GAO-03-948 Critical Access Hospital Program 
Appendix II: Comments from the Department of Health and Human Services 

Page 33 GAO-03-948 Critical Access Hospital Program 
Appendix II: Comments from the Department of Health and Human Services 

Page 34 GAO-03-948 Critical Access Hospital Program 
Appendix III: GAO Contact and Staff 

Acknowledgments 

Page 35 GAO-03-948 Critical Access Hospital Program 

A. Bruce Steinwald, (202) 512-7119 

Jean Chung, Chris DeMars, Michael Rose, Margaret Smith, and Kara Sokol 

made key contributions to this report. 

Appendix III: GAO Contact and Staff 

Acknowledgments 

GAO Contact 

Acknowledgments 

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