The IPPS provides incentives for hospitals to operate efficiently by paying a predetermined, standardized amount for an entire inpatient episode of a given type rather than the actual costs incurred in providing the care. CMS calculates IPPS payments through a series of adjustments applied to separate national base payment rates covering operating and capital expenses. Specifically, the agency adjusts the base payment rates for patients in different diagnosis-related groups, assuming that cases falling into a particular grouping address similar clinical problems that are expected to require similar amounts of hospital services.applies an area wage index to account for geographic differences in labor costs. Finally, CMS determines whether supplemental Medicare payments or other types of special treatment, such as those provided to certain rural hospitals, are applicable. CMS adjusts hospital payments under IPPS using the area wage index, to account for variation in labor costs across the country, as these costs are largely beyond any individual hospital's ability to control. The wage index reflects how average hospital wages in each geographic area compare to average hospital wages nationally, set as 1.0. Thus, Medicare payment to a hospital in an area with lower wages is generally below the national average payment and the payment to a hospital in a higher wage area is generally above the national average. CMS considers each distinct urban area as a single labor market, but it considers all rural areas within a state as a single labor market and therefore assigns them the same wage index. If its wage index does not fully account for its relative labor costs, a hospital may qualify to be reclassified to a higher wage index area in order to receive higher Medicare payments. To request a reclassification to another geographic area, hospitals may apply to the Medicare Geographic Classification Review Board (the Board), an entity established by Congress. Among various criteria for reclassification, a hospital must demonstrate close proximity to the area for which it is seeking redesignation. Medicare reimburses teaching hospitals and academic medical centers for both the direct and indirect costs of their residency training programs. Direct graduate medical education payments cover the direct costs of resident training, such as salaries and benefits. The indirect medical education (IME) adjustment--a percentage add-on to IPPS rates-- reflects the higher patient care costs associated with resident education. The size of the IME adjustment depends on the hospital's teaching intensity, which is generally measured by a hospital's number of residents per bed. The Medicare disproportionate share hospital (DSH) adjustment generally provides supplemental payments to hospitals that treat a disproportionate number of low-income patients. To qualify for this payment adjustment, a hospital's disproportionate patient percentage (DPP)--the share of low-income patients treated by the hospital--must generally equal or exceed a specific threshold level determined by a statutory formula.amount of Medicare DSH payment adjustment varies by hospital location and size. Rural hospitals may qualify for special treatment in determining payment rates under IPPS, although some urban hospitals may also qualify, through three programs: sole community hospitals (SCH), rural referral In some centers (RRC), and Medicare-dependent hospitals (MDH).cases, hospitals may qualify for more than one of these rural provider types, allowing them to receive multiple adjustments to their IPPS payment rates. We identified 16 statutory provisions enacted between 1997 and 2012 that modified Medicare payment for inpatient services in a way that benefitted a subset of hospitals. These provisions allow hospitals to receive adjustments to their wage index, alter classification criteria for supplemental payments or other special treatment, or exclude hospitals from the IPPS. Most of the provisions we identified targeted rural hospitals for increased payment. We identified seven statutory provisions that have enabled hospitals to receive Medicare payment under a higher or nearby wage index. Some provisions moved hospitals in specific, named counties into different wage index areas, or set a minimum wage index for hospitals meeting certain criteria. Other provisions allow hospitals to reclassify from an urban to a rural area. Still others enable rural hospitals near urban areas to qualify for the higher wage index of the nearby area. Section 4410 of BBA established a rural floor by requiring that the area wage index for a hospital in an urban area of a state could not be less than the area wage indexes for hospitals in that state's rural area. The provision applied to patient discharges beginning in fiscal year 1998, and specified that the implementation of the rural floor must be budget neutral--that is, any changes in the wage index for hospitals subject to the floor may not increase or decrease aggregate Medicare payments for the operating costs of inpatient services. Initially, this upwards adjustment only applied in states with at least one rural IPPS hospital. The rural floor provision increased the wage index for hospitals in urban areas that had been paid under a lower wage index than the rural areas of that state. In order to compensate for the increased wage indexes of urban hospitals receiving the rural floor, CMS initially applied a nationwide budget-neutrality adjustment to account for the additional payment to these hospitals. In fiscal year 2009, CMS changed this policy and began phasing in a revised rural floor budget-neutrality adjustment that would be calculated and applied on a state-by-state basis instead of on a nationwide basis. To do so, the agency blended the nationwide and state-by-state budget neutrality formulas for fiscal year 2009 and fiscal year 2010.within each state, some hospitals' wage index increased, while other hospitals' wage index decreased, in order to ensure that total Medicare payments to hospitals in that state remained the same. As a result, Section 3141 of PPACA reversed this policy by requiring that any adjustments to the wage index must be applied on a budget-neutral basis through a uniform national adjustment beginning in fiscal year 2011. The application of the national budget-neutrality requirement has resulted in a transfer of Medicare payments from hospitals in states where no hospitals qualified for the rural floor to hospitals in states where at least one hospital qualified for this adjustment. (For information on the impact of this provision by state, see app. I.) In fiscal year 2012, the effect of this PPACA provision was that hospitals in seven states (Alaska, California, Colorado, Connecticut, Massachusetts, New Hampshire, and New Jersey) and Puerto Rico received increased hospital payments; hospitals in Massachusetts received the largest increase in payments--nearly $275 million--five times greater than New Jersey, the next largest recipient; to pay for the rural floor in these states, hospital payments in other states were adjusted downward by as much as 0.5 percent, with a median state reduction of $7.3 million; and hospitals in five states saw declines of over $20 million: New York ($47.5 million), Texas ($34 million), Florida ($29 million), Illinois ($26 million), and Michigan ($21 million). Specific County and Area Reclassifications (Expired) Section 152 of BBRA reclassified hospitals in seven named counties or areas, deeming them to be located in specifically named large metropolitan areas, thus enabling them to qualify for the wage index of that area. This provision benefitted hospitals in these counties that competed for labor with nearby hospitals in higher wage areas. The BBRA limited this reclassification to discharges during fiscal year 2000 and fiscal year 2001. Hospitals in the following specified counties were reclassified: Iredell County, North Carolina, was deemed to be located in the Charlotte-Gastonia-Rock Hill, North Carolina-South Carolina metropolitan statistical area (MSA); Orange County, New York, was deemed to be part of the large urban area of New York, New York; Lake County, Indiana, was deemed to be located in the Chicago, Lee County, Illinois, was deemed to be located in the Chicago, Illinois Hamilton- Middletown, Ohio, was deemed to be located in the Cincinnati, Ohio-Kentucky-Indiana MSA; Brazoria County, Texas, was deemed to be located in the Houston, Chittenden County, Vermont, was deemed to be located in the Boston-Worcester-Lawrence-Lowell-Brockton, Massachusetts-New Hampshire MSA. Section 401 of BBRA allowed certain urban hospitals, beginning January 1, 2000, to request to be reclassified as rural hospitals for payment purposes under the IPPS. Generally, these hospitals may seek a lower wage index in a rural area in order to receive higher payments as a rural provider type, such as an SCH. According to CMS, the provision benefits hospitals that are within an urban area, but are isolated from the metropolitan core by distance or physical features. Under the BBRA provision, to qualify for this reclassification, a hospital must submit an application and meet one of the following criteria: be located in a rural portion of an MSA or an area defined as rural by be designated as a rural hospital by the state; would qualify as a rural, regional, or national referral center, or as an SCH if the hospital was located in a rural area; or meet other criteria established by CMS. By fiscal year 2013, 46 urban hospitals, comprising 1.3 percent of IPPS hospitals, had been reclassified by CMS as rural under this provision. Seven states--California, Florida, Missouri, New York, Pennsylvania, Texas, and Virginia--had more than two qualifying hospitals. Section 505 of MMA required that HHS establish a process, beginning in fiscal year 2005, by which the agency may increase the wage index for hospitals located in counties where potential employees commute to higher wage index areas. The provision benefits hospitals located in counties where a higher than average percentage of hospital employees reside in that county but work in another county that has a higher wage index. Hospitals in qualifying counties receive an average of the differences between the higher and lower wage indexes, weighted by the percentage of hospital workers in the qualifying county who work in the higher-wage areas. In the first year of implementation, fiscal year 2005, the wage index increased for 555 eligible hospitals, representing nearly 14 percent of IPPS hospitals; eligible hospitals had an average of 140 beds; California, Texas, and Michigan had the most eligible hospitals with 89, 44, and 40 hospitals, respectively; Massachusetts, Michigan, and Connecticut had the most qualifying hospitals as a percentage of all hospitals in the state with 45, 31, and 29 percent, respectively; and Utah, Minnesota, and Georgia benefited from the largest Medicare payment adjustment as a result of their qualifying status. Onetime Appeal of Wage Index Reclassification by the Board (Expired) Section 508 of MMA required HHS to establish a process by January 1, 2004, so that a hospital denied a request to be reclassified to the wage index of another area in its state could submit a onetime appeal to the Board. The provision required the Board to grant appeals of and reclassify qualifying hospitals, defined as those hospitals that did not originally qualify for reclassification on the basis of distance or commuting requirements but met other criteria such as quality factors, as specified by HHS. The provision limited reclassifications to a three-year period for appeals filed by February 15, 2004. The provision also capped additional Medicare expenditures resulting from these reclassifications to $900 million over the initial 3-year period. We found that, in its first year of implementation, 130 hospitals, or approximately 3 percent of all IPPS hospitals, qualified for this adjustment; and four states--Connecticut, Michigan, North Dakota, and Pennsylvania--had at least 10 qualifying hospitals each. While originally enacted as a onetime and time-limited provision, Congress extended reclassifications made under this provision numerous times until they expired on March 31, 2012. Section 10324 of PPACA established a hospital wage index floor adjustment, beginning with discharges as of fiscal year 2011, for hospitals The provision defined a frontier state as one in located in frontier states.which at least 50 percent of counties have a population of fewer than 6 people per square mile and set the wage index in these areas at no lower than 1.0. In other words, while the wage index for all other states is a ratio of the average hourly hospital wage in the area to the national average, if the wage index of a frontier state is lower than the national average--or less than 1.0--this provision adjusts the wage index to 1.0. Prior to implementation, CMS projected that five states would meet the criteria to be designated as a frontier state: Montana, Nevada, North Dakota, South Dakota, and Wyoming; 48 out of 82 IPPS hospitals in those states would be eligible for a modified wage index that is at least 1.0; and IPPS payments would increase by approximately $50 million in the first year. We identified five statutory provisions that have affected the number of hospitals that qualify for IPPS supplemental payments or other types of special treatment. Most of these provisions modified the classification criteria for payment adjustments, thereby expanding the number of hospitals that qualify for higher payments. Section 211 of BIPA revised the Medicare threshold criteria for DSH, resulting in an increased number of hospitals qualifying for a payment adjustment. Effective for discharges as of April 1, 2001, this provision allowed hospitals, regardless of location and size, to receive a DSH adjustment with a DPP of 15 percent or greater. Originally, different types of hospitals qualified for a DSH adjustment on the basis of varying DPP thresholds. For instance, urban hospitals with 100 or more beds qualified for a DSH payment with a minimum DPP of 15 percent, whereas urban hospitals with fewer than 100 beds qualified for a DSH payment adjustment with a minimum DPP of 40 percent. CMS reported that this adjustment of the DPP qualifying threshold added 1,191 primarily rural and small urban hospitals to those already receiving a DSH adjustment; for example, 351 additional rural hospitals with fewer than 100 beds and 244 additional urban hospitals with fewer than 100 beds started receiving a DSH adjustment after implementation; would increase Medicare spending by $60 million from fiscal year 2001 through fiscal year 2002; and would not negatively affect any hospitals. Section 402 of MMA modified the formulas used to calculate the DSH payment adjustment for certain hospitals, thereby increasing payments to these hospitals. Specifically, effective with discharges as of April 1, 2004, the DSH adjustment formula used for large urban hospitals was applied to other types of hospitals, including SCHs, RRCs, other rural hospitals with fewer than 500 beds, and urban hospitals with fewer than 100 beds. In addition, this provision capped this DSH payment adjustment at 12 percent of the hospital's IPPS rate, while exempting RRCs from this cap. For instance, an urban hospital with fewer than 100 beds that qualifies for a DSH payment adjustment of 18.1 percent is capped at the maximum 12 percent payment adjustment. Section 406 of MMA established a new payment adjustment for low- volume hospitals beginning in fiscal year 2005 that accounts for the higher costs per discharge at hospitals that admit a relatively small number of patients. To qualify, hospitals had to be located more than 25 miles from another hospital and have fewer than 800 total discharges annually. The provision required CMS to determine, on the basis of empirical data, applicable percentage increases, not to exceed 25 percent, in payments for qualifying low-volume hospitals. CMS explained in issuing the final rule implementing this MMA provision that the agency analyzed data and determined that hospitals with fewer than 200 discharges a year have sufficiently higher costs relative to payments to justify receiving a payment adjustment, but that hospitals with 200 to 800 discharges a year did not. CMS provided the maximum 25 percent payment adjustment only to those qualifying hospitals that were located more than 25 miles from another hospital and had fewer than 200 discharges in a given year. CMS reported that CBO estimated this provision would increase Medicare program expenditures by less than $50 million annually, and only three hospitals--one located in Florida and two located in South Dakota--received a low-volume payment adjustment in fiscal year 2005. All were small (30 or fewer beds) rural hospitals classified as SCHs. Section 3125, as amended by section 10314, of PPACA temporarily revised the qualifying criteria for a low-volume hospital designation making it easier for hospitals to receive the payment adjustment. Effective for fiscal year 2011 and fiscal year 2012, this provision decreased the required distance from the nearest hospital from 25 miles to 15 miles. In addition, it changed the maximum number of annual discharges allowed from 800 total patients to 1,600 Medicare Part A beneficiaries. The provision also required that payment adjustments for qualifying low-volume hospitals be calculated using a continuous sliding scale, paying up to an additional 25 percent to hospitals with 200 or fewer annual Medicare Part A discharges. As a result of these changes, both the number of hospitals receiving the low-volume payment adjustment and the estimated Medicare expenditures rose substantially. CMS reported that over the 2-year period, fiscal year 2011 and fiscal year 2012, the provision was estimated to cost Medicare approximately $880 million; and the number of hospitals that received a payment adjustment rose to approximately 645--or about 18 percent of IPPS hospitals--in fiscal year 2011 from 3 hospitals the year before. We found that, in fiscal year 2011, at least 40 percent of IPPS hospitals in each of 6 states received a low-volume adjustment: Wyoming (67 percent), Vermont (50 percent), New Mexico (43 percent), Minnesota (42 percent), Alabama (41 percent), and Mississippi (41 percent); and recipient hospitals were relatively small,rural areas, and likely to also receive a DSH payment adjustment. Section 212 of BIPA modified one aspect of the MDH classification criteria. Effective for cost reporting periods beginning April 1, 2001, it changed the data source used to determine whether at least 60 percent of a hospital's discharges were Medicare beneficiaries. This provision allowed a hospital to base this determination on two of the three most recently audited fiscal year cost reporting periods. Prior to this change, discharge data were based on cost reporting periods beginning in 1987. This provision did not initially have a significant effect on the number of qualifying hospitals or on Medicare payments. CMS estimated that a total of 139 hospitals--all of which had previously been designated as MDHs--would qualify as an MDH using this revised data source. The agency further estimated that Medicare would spend an additional $10 million in the first year of implementation. It is likely that this provision had a greater effect on the number of hospitals qualifying for an MDH classification in later years because it allowed hospitals to use recent, rather than outdated, cost reports. In 1997, Congress established the Critical Access Hospital (CAH) program, under which qualifying small rural hospitals are excluded from the IPPS and receive Medicare payment based on the reasonable costs of providing services. In effect, CAHs receive higher payments for providing services to Medicare beneficiaries than they would under the IPPS. Specifically, section 4201 of BBA allowed states to apply for approval to create a Medicare Rural Hospital Flexibility program (Flex Program), under which states must designate at least one hospital as a To be designated as a CAH, hospitals had to meet the following CAH.qualifying criteria: type of organization: nonprofit or public hospital; services: must provide 24-hour emergency services deemed necessary for ensuring access in each area served by the CAH; location: rural county or other rural area in states with approved Flex Programs; size: no more than 15 acute care inpatient beds; average inpatient stay: no more than 4 days (subject to certain exceptions) patient access: (a) located either more than 35 miles from the nearest hospital or CAH or more than 15 miles in areas with mountainous terrain or only secondary roads, or (b) designated by the state as a necessary provider of health care services to residents in the area. Prior to implementation, CMS reported that approximately 51 facilities in seven states--those participating in the demonstration program that preceded the CAH program--would be eligible to become CAHs. While the CAH program was expected to grow, CMS was not able to estimate reliably how many additional states would choose to participate or the potential cost of the CAH program to Medicare. Section 403 of BBRA made a number of changes to qualifying criteria for the CAH program. First, the provision changed the inpatient length of stay requirement from a maximum of 4 days to an annual average of 4 days. Second, the provision removed the requirement that eligible hospitals must be nonprofit or public, allowing for-profit hospitals to qualify as CAHs, if so approved by their state. Third, the provision permitted a state to designate as a CAH not only a currently operating hospital, but closed facilities or facilities that were previously hospitals but currently operate as a state-licensed health clinic or health center, if the facilities Data indicate that in the 2 years following the meet all other criteria.enactment of BBRA in 1999, 411 hospitals were newly designated as CAHs. See MMA, Pub. L. No. 108-173, SS 405(e), (g), (h), 117 Stat. at 2266 (codified, as amended, at 42 U.S.C. SS 1395i-4(c)(2), (h)). reasonable cost basis).eliminated the ability of a state to designate a hospital as a necessary provider, so that states could no longer waive the 35-mile distance requirement to designate a hospital as a CAH. However, the provision grandfathered all CAHs that had already received their CAH status by being designated as a necessary provider. Third, effective January 1, 2006, the provision CBO estimated that these changes to the CAH program under this provision would increase Medicare program expenditures by approximately $100 million annually, according to CMS. Data show that in 2004 and 2005, the 2 years following enactment of MMA, 422 new CAHs joined the program. However, the number of new CAH designations dropped sharply in 2006 with the elimination of the necessary provider designation. (See fig. 4.) The CAH program has grown to a total of 1,328 hospitals as of 2012. The majority of CAHs have the maximum 25 inpatient beds. In addition, CAHs are largely concentrated in the central states, although all but five states have at least one CAH. We found that the states with the largest percentage of hospitals designated as CAHs are North Dakota and Montana, with about 84 percent and 79 percent, respectively. (See fig. 5.) Furthermore, according to MedPAC, 17 percent of CAHs are 35 or more miles from the nearest hospital, 67 percent are between 15 miles and 35 miles from the nearest hospital, and 16 percent of CAHs are fewer than 15 miles from the nearest hospital. These data indicate that not all CAHs meet current qualifying criteria. Section 1109 of HCERA authorized $400 million in Medicare payments to qualifying hospitals in low-spending counties over 2 years, fiscal year 2011 and fiscal year 2012. This provision defined qualifying hospitals as acute care hospitals located in a county that ranked within the lowest quartile of age, sex, and race adjusted spending per beneficiary enrolled in fee-for-service Medicare parts A and B. CMS allocated the additional payments to each qualifying hospital in proportion to its share of Medicare inpatient payments for all qualifying hospitals, based on fiscal year 2009 IPPS payments for operating expenses. In implementing this provision, CMS made payments to about 400 hospitals, which accounted for 11 percent of all IPPS hospitals and approximately 8 percent of IPPS beds; Medicare expenditures increased $150 million in fiscal year 2011 and $250 million in fiscal year 2012; on average, qualifying hospitals had 135 to 137 beds; half of qualifying hospitals were in urban areas and half were in rural states with the most hospitals receiving this payment were New York (50 hospitals), Wisconsin (40 hospitals), Virginia (31 hospitals), Oregon (21 hospitals), and Iowa (20 hospitals). We found that, in 2012, payment adjustments to, or exclusions from, the IPPS affected nearly all of the 4,783 hospitals in our review. Of these hospitals--IPPS hospitals and CAHs--91 percent were subject to a payment adjustment under the IPPS or were excluded from the IPPS entirely. Specifically, 3,039 hospitals, or over 63 percent, qualified for at least one of the following four types of payment adjustments under the IPPS: a DSH adjustment, an IME adjustment, a wage index adjustment, or a rural provider type adjustment for an RRC, SCH, or MDH designation; 1,328 hospitals, or about 28 percent, qualified as CAHs, excluding them from the IPPS; and 416 hospitals, or about 9 percent, received IPPS payments that were unadjusted for the modifications included in our review. Among the 3,455 IPPS hospitals, the vast majority qualified for one of the four categories of upward payment adjustment in 2012. The DSH adjustment had the broadest reach, affecting payments to about 4 in 5 of IPPS hospitals. Nearly 1 in 3 hospitals qualified for an IME adjustment, 1 in 3 qualified for a wage index adjustment, and almost 1 in 5 received a rural provider type adjustment. Each of these categories of increased payment benefited hospitals in both urban and rural areas. The DSH and IME adjustments applied mostly to urban hospitals' payments, whereas the wage index adjustment was applied to more rural hospitals' payments. Although rural provider type adjustments generally supported payment to rural hospitals, about 20 percent of recipients were urban hospitals. (See table 1.) Among the 3,039 IPPS hospitals receiving additional payment, the majority qualified for more than one category of payment adjustment. In 2012, roughly half of IPPS hospitals received two forms of adjustments and 13 percent qualified for three forms of adjustments. Two percent of IPPS hospitals qualified for four forms of adjustments, but no state had more than 10 hospitals qualifying for four forms of increased payment. The remaining IPPS hospitals, almost a third of the total, qualified for a DSH adjustment alone. By location, we found that most hospitals in urban areas qualified for one or two forms of increased payment, whereas most hospitals in rural areas qualified for two or more forms of additional pay. (See fig. 6.) Of the 416 hospitals that did not qualify for IPPS payment adjustments, nearly all were in urban areas and were distributed across most states. Generally, they were substantially smaller than the average urban hospital, typically having 98 beds compared to 224 beds. The multiple types of adjustments to Medicare payments vary in their financial effect, and can substantially affect a hospital's revenue. Take, for example, a beneficiary who undergoes coronary bypass surgery with angioplasty and has a major complication or comorbidity. When this surgery is performed at a teaching hospital in a large urban area that treats a high percentage of low-income patients, the total operating payment from Medicare comes to about $63,600. Specifically, in fiscal year 2013, the IPPS operating base rate for that case, adjusted for the local wage index, is approximately $41,500. Added to that amount is about $14,100 for IME and roughly $8,000 for Medicare DSH. Thus, the two payment adjustments increase the amount this hospital would receive for this discharge by more than 50 percent. The IPPS streamlines how Medicare pays hospitals and gives hospitals an incentive to economize by paying a fixed amount, set in advance. Over time, however, numerous statutory provisions have been enacted that provide, grandfather, or extend additional payments to IPPS hospitals or exclude a substantial number of hospitals from the IPPS altogether. This piecemeal approach to modifying the original IPPS--a patchwork of individual "fixes"--has had the cumulative effect of most hospitals receiving modifications and add-ons to the basic payment formula that increase Medicare spending. In fact, over 90 percent of hospitals were subject to either IPPS payment adjustments or exemptions in 2012. These changes address characteristics of the hospital market such as competition for labor, challenges to rural hospitals, and the need to support Medicare-participating hospitals in certain markets. In addition, organizations such as IOM and MedPAC have recently made recommendations to strengthen the data used in geographic adjustments, and to hone the targeting of rural special payment adjustments. Taken together, these findings and recommendations suggest that, 30 years after the IPPS was implemented, the way Medicare currently pays hospitals may no longer ensure that the goals of the payment system-- cost control, efficiency, and access--are being met. HHS reviewed a draft of this report and did not have any general comments. The agency provided technical comments, which we incorporated where appropriate. As we agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from its date. We will send copies of this report to the Secretary of Health and Human Services. The report will also be available at no charge on our website at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-7114 or cosgrovej@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. In addition to the contact named above, Rosamond Katz, Assistant Director; Alexander Galuten; Katherine Perry; Kathryn Richter; and Hemi Tewarson made key contributions to this report.

Summary:
To help control the growth of hospital spending, give hospitals an incentive to provide care efficiently, and ensure beneficiary access, Congress created the IPPS in 1983. Yet, Congress can enhance Medicare payments to certain hospitals by changing the qualifying criteria for IPPS payment categories, creating and extending exceptions to IPPS rules, or by exempting certain types of hospitals from the IPPS. The Institute of Medicine and the Medicare Payment Advisory Commission have stated that such practices undermine the integrity of the IPPS. GAO was asked to review legislation that altered payments to certain hospitals. In this report, GAO (1) identified provisions of law that enhanced Medicare payments for only a subset of hospitals and (2) examined the extent to which hospitals qualified for adjustments to the IPPS or exemptions from the IPPS in 2012. To conduct this work, GAO reviewed provisions enacted from 1997 to 2012 to identify those that adjusted payments to a subset of IPPS hospitals or exempted hospitals from the IPPS. GAO analyzed data to learn the number, location, and size of hospitals affected by these provisions and budgetary estimates for the first year of implementation, where available. GAO also analyzed 2012 data on 4,783 general hospitals to determine the number and types of adjustments they received, the extent to which they qualified for multiple adjustments, and the number exempted from the IPPS. The Department of Health and Human Services reviewed a draft of this report, and provided technical comments, which we incorporated as appropriate. Over time, Congress has modified how Medicare reimburses certain hospitals under the inpatient prospective payment system (IPPS), which pays hospitals a flat fee per stay, set in advance, with different amounts for each type of condition. GAO identified numerous statutory provisions that individually increased Medicare payments to a subset of hospitals. Seven provisions enabled hospitals to be paid under a different geographic wage index, which is used to address variation in labor costs. Five provisions modified the classification criteria allowing IPPS hospitals to qualify for supplemental payments through the Medicare disproportionate share hospital (DSH) program or other types of special treatment. Three provisions created and modified criteria for classifying small rural providers as Critical Access Hospitals (CAH), which are exempt from IPPS and instead are paid under an alternative methodology. In general, while such provisions were designed to affect only a subset of hospitals, nearly all of the 4,783 hospitals in GAO's review qualified for an adjustment or exemption from the IPPS in 2012. About 91 percent were subject to an IPPS payment adjustment or were excluded from the IPPS entirely. Most hospitals, over 63 percent, qualified for at least one of four categories of increased payment, with DSH payments being the most common. Under the CAH program, 28 percent of hospitals were exempt from the IPPS. The remaining hospitals, 9 percent, received IPPS payments that were unadjusted for the modifications included in GAO's review. Moreover, many IPPS hospitals qualified for multiple categories of payment adjustments. These findings suggest that the way Medicare currently pays hospitals may no longer ensure that the goals of the IPPS--cost control, efficiency, and access--are being met.