The Omnibus Budget Reconciliation Act of 1989 (P.L. 101-239, Dec. 19, 1989) authorized Medicare payment to RPCHs for inpatient and outpatient services. Program participation was limited to seven states and HCFA selected California, Colorado, Kansas, New York, North Carolina, South Dakota, and West Virginia. California has no certified RPCHs. RPCHs had to be located in rural counties and were limited to six inpatient acute care beds. Initially, RPCH inpatient stays were limited to a 72-hour maximum, but section 102 of the Social Security Act Amendments of 1994 (P.L. 103-432, Oct. 31, 1994) changed the requirement to an average of 72 hours during a cost-reporting year for periods beginning on or after October 1, 1995. RPCHs employ midlevel practitioners—physician assistants and nurse practitioners—working under the supervision of a physician, who is not required to be located at the RPCH. RPCHs are not allowed to provide surgery requiring general anesthesia but may perform surgeries normally done under local anesthesia on an outpatient basis at a hospital or ambulatory surgical center. We found few surgical procedures being performed at RPCHs during 1993-96. In September 1993, the first RPCH, located in South Dakota, was certified to participate in Medicare. As shown in table 1, there were 38 certified RPCHs as of August 1997. In addition to RPCHs, the Congress authorized a demonstration program for the operation of limited-service hospitals that was implemented by Montana. Under this program, Medicare was authorized to pay for basic emergency care, outpatient services, and limited inpatient care (maximum stay of 96 hours) provided at these limited-service hospitals, known as medical assistance facilities (MAF). In our October 1995 report, we found that the MAFs were important sources of emergency and primary care for their communities. MAFs primarily served patients with urgent but uncomplicated conditions and stabilized patients with more complicated needs before transferring them to full-service hospitals. Moreover, Medicare’s costs for inpatient care at MAFs were lower than if the care had been furnished in rural hospitals. While full-service hospitals normally are paid under Medicare’s PPS, both RPCHs and MAFs are paid on a cost reimbursement basis, as are CAHs, the replacement program for them. Like MAFs, CAHs are limited to 96-hour inpatient stays but can have 15 beds rather than the 6 for RPCHs. Both types of limited-service hospitals are scheduled to make the transition into CAHs by October 1, 1998. As envisioned when the program was authorized, most RPCH inpatients have less complex illnesses that do not require intensive or high-technology care. Patients with more extensive health needs who go to RPCHs are generally stabilized and transferred to larger acute care hospitals, another important service to the community. In addition, RPCHs often serve as the source of primary care for residents in their areas. The average stay for the 1,708 inpatients treated by RPCHs between September 1993 and May 1996 was 2.85 days. They were assigned to 137 different DRGs—9 surgical DRGs covering 11 cases and 128 medical DRGs covering 1,697 cases. Ten of the eleven surgical cases were from one RPCH located in South Dakota. A state official confirmed that this RPCH performs surgeries like those performed in ambulatory surgery centers that do not require general anesthesia. As we found when we reviewed services provided by MAFs in Montana, the three medical conditions most commonly treated by the RPCHs were pneumonia (247 cases), heart failure and shock (141 cases), and inflammation of the digestive canal (99 cases). Together these three conditions accounted for 29 percent of the 1,708 cases, which is similar to the 28 percent they represented in MAFs. Conditions classified as respiratory, circulatory, and digestive disorders accounted for 1,107 cases (65 percent) and 48 of the DRGs (35 percent) treated at RPCHs. (See app. II for a summary of inpatient DRGs treated at RPCHs.) During the period covered by our review, 163 of the 1,708 inpatients (9.5 percent) were transferred from an RPCH to an acute-care hospital. The average RPCH stay for these patients was 1.9 days. During calendar years 1993 through 1996, about 5.6 percent of Medicare inpatients at other rural hospitals in Kansas, North Carolina, South Dakota, and West Virginia were transferred to another hospital. The percentage of RPCH patients transferred is 4 percentage points higher because one function of an RPCH is to stabilize patients and prepare them for transfer to a facility if the treatment they need is beyond the scope of RPCH services. In addition to providing inpatient care, RPCHs provide local primary care for many Medicare beneficiaries. The 13 RPCHs treated more than 6,700 different Medicare beneficiaries during their latest available cost-reporting period and submitted more than 28,000 outpatient claims for services for these patients (see table 2). Outpatient services included visits with physicians and physician assistants, laboratory tests, influenza shots, colonoscopies, electrocardiograms, diagnostic radiology services, and emergency care. Medicare paid about $4.9 million for these outpatient services (see app. III for a summary of Medicare outpatient costs by RPCH by cost-reporting year). Medicare payments for the 1,545 beneficiaries who received all their inpatient care from an RPCH totaled about $4.6 million, a little over $1,000 per day (see app. III). The average length of stay for these beneficiaries was 2.95 days. As we found when we made a similar comparison for MAF inpatient costs, these costs compared favorably with the amount Medicare would have paid if those patients had been treated at rural PPS hospitals. Table 3 shows by RPCH and cost-reporting year the difference in payments to RPCHs comparing the payments that would have been made to rural and urban PPS hospitals. Overall costs at the 12 RPCHs covering 17 cost-reporting periods were about $404,000 more than the amount Medicare would have paid rural PPS hospitals. However, payments for treatment at the 12 RPCHs were about $207,000 less than the amount Medicare would have paid for treating the same conditions at urban hospitals. (See app. IV for individual RPCH cost comparisons to PPS payments.) Although RPCH costs are slightly higher (8.8 percent) than PPS payments to rural hospitals, RPCH costs would have been lower if claims included in our review had complied with the 72-hour maximum length-of-stay requirement in effect when these admissions occurred. About 21 percent of the 1,545 stays exceeded the 72-hour limit and had 630 inpatient days incurred after the third day. These days cost the Medicare program an estimated $612,000. Because of the way cost reimbursement works, not all the cost of these days would be saved by eliminating them. The fixed costs allocated to the days would be reallocated to the remaining days of care and paid by Medicare. However, variable costs should be reduced if hospitals complied with the 72-hour limit and should result in lower overall Medicare costs. We believe the effect of this would result in RPCH inpatient costs being less than similar inpatient costs in rural PPS hospitals. Under a 96-hour limit, which CAHs have under BBA, the costs associated with longer stays would still have been significant. About 8 percent of 1,545 inpatient stays included in our analysis would have exceeded the 96-hour limit. These stays had a total of 304 covered inpatient days after the fourth day. Payments for those days totaled an estimated $295,000. Turning to the cost to Medicare for patients who are transferred from RPCHs, regardless of what kind of hospital makes the transfer, all transfers result in higher cost to Medicare because two facilities receive payment for the same patient. Under PPS, the transferring hospital receives a per diem payment determined by dividing the PPS payment by the geometric mean length of stay associated with the patient’s DRG. The hospital from which the patient is finally discharged receives the full PPS payment for the patient’s DRG. When patients are transferred from RPCHs, the RPCH receives cost-based reimbursement for the patient, and the hospital from which the patient is finally discharged receives the full PPS payment. Medicare RPCH payments for the 163 beneficiaries who were initially treated at an RPCH and transferred to a full-service PPS hospital totaled about $322,000 (see app. III). These RPCH stays averaged 1.9 days. We estimate that these costs were about $148,000 (about $910 per case) greater than the amount Medicare would have paid an acute-care hospital in per diem payments if the patient had first gone to an acute-care PPS hospital for the same length of time. Appendix V lists the hospitals where patients were transferred. As of August 1997, 51 limited-service hospitals (38 RPCHs and 13 MAFs) were authorized to treat Medicare patients. Effective October 1, 1997, these limited-service hospitals were to start making a transition into a new nationwide program—the Medicare Rural Hospital Flexibility Program—and to be renamed CAHs. As the number of CAHs increase, it will become more important for HCFA to monitor the inpatient stay and physician certification requirements established by the Congress. HCFA had no established way of ensuring that RPCHs complied with the 72-hour length of stay limitation when it was in effect or to assess whether cases outside the limit met one of the allowable exceptions. As a result, HCFA did not know whether RPCHs complied with this requirement. As our work illustrates, when lengths of stay exceeded the limit, Medicare costs tended to be higher than if patients had gone to a rural PPS hospital.