Medicare: Modest Eligibility Expansion for Critical Access Hospital Program Should Be Considered
Published: 2003-09-19T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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.
section_title: What GAO Found
paragraphs: 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.

section_title: Letter
paragraphs: 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) 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). 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.
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  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), 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 reports  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  “potential CAHs,” based on their having an annual average patient census  of no more than 15 acute care patients. 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. 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.
subsections: section_title: Background
paragraphs: 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 state- administered 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. 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.
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).
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. 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.
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.
subsections: section_title: Distinct Part Units
paragraphs: 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. Another study found better outcomes among stroke  patients treated in rehabilitation facilities, such as DPUs, than those  treated in nursing homes.
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. Psychiatric DPUs may  admit only patients whose condition requires inpatient hospital care and  are described by a psychiatric principal diagnosis. 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.
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. 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.
section_title: Existing CAHs Had Fewer Beds and Patients and Lower Medicare Margins Than Potential CAHs
paragraphs: 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.
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.
section_title: Ban on CAHs Operating DPUs May Have Contributed to Diminished Availability of Services in Rural Areas
paragraphs: 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  CAHs with DPUs would have exceeded either the bedsize or length of stay  limit in fiscal year 1999.
subsections: section_title: CAH Eligibility Requirements Led to DPU Closures in Rural Communities
paragraphs: 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. 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.
section_title: Many Potential CAHs Had No Financial Incentive to Close DPU
paragraphs: 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.
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.
section_title: Hospitals with DPUs Expressed Reluctance to Seek CAH Conversion If Access to Care Could Be Jeopardized
paragraphs: While hospitals report that the projected financial impact is generally a  key factor in the decision about whether to become a CAH, 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 community- based facilities.
section_title: Paying DPUs Associated with CAHs Reasonable Costs Would Reduce Incentives to Operate Efficiently
paragraphs: 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 cost- based 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.
section_title: Most Potential CAHs with DPUs Exceeded CAH Bedsize and Length-of-Stay Limits When DPUs’ Patients Were Counted
paragraphs: 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.
section_title: Seasonal Variation in Patient Census Is Common and May Impede CAH Eligibility for Hospitals Near the CAH Limit
paragraphs: 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.
subsections: section_title: Most Hospitals Experience Higher Patient Census during Winter
paragraphs: 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).
section_title: Because CAH Patient Census Limit Is Absolute, Potential CAHs Near the Limit May Have Difficulty Staying under It
paragraphs: 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.
section_title: Significant Number of Potential CAHs with Seasonal Increase in Patient Census Have No Financial Incentive to Become a CAH
paragraphs: 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.
section_title: Remaining under Length- of-Stay Limit Is Manageable Because It Is an Average
paragraphs: 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.
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.
section_title: Conclusions
paragraphs: 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  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  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 cost- based reimbursement that goes with it have proven to be attractive enough  that hospitals have been willing to make the necessary adjustments.
section_title: Matters for Congressional Consideration
paragraphs: 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.
section_title: Agency Comments and Our Evaluation
paragraphs: 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  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  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.
section_title: Appendix I: Scope and Methodology
paragraphs: 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. 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  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.
section_title: Appendix II: Comments from the Department of Health and Human Services
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgments
paragraphs: Jean Chung, Chris DeMars, Michael Rose, Margaret Smith, and Kara Sokol  made key contributions to this report.