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. 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. 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. 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. 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. 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. 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. 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. 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. 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). 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. 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. 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. 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. 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 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. 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. Jean Chung, Chris DeMars, Michael Rose, Margaret Smith, and Kara Sokol made key contributions to this report.

Summary:
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. 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.