Change in Profitability and Financial Distress of Critical Access Hospitals from Loss of Cost-Based Reimbursement
About this project
This brief is part of a series of three briefs providing information for policy makers and stakeholders as policy changes for Critical Access Hospitals (CAHs) are considered. This one focuses on the projected financial impact that a reduction in Medicare payments might have on CAHs. The others focus on the potential increases in beneficiary travel distance if financially -vulnerable CAHs close, and the rural-urban differences in inpatient costs and use among Medicare beneficiaries.
Background
Concerns about the use of the Medicare Prospective Payment System (PPS) for rural hospitals arose in the 1990s. Rural and small hospitals face factors, such as diseconomies of scale, which could hinder financial performance in comparison to urban and larger hospitals. For these reasons, federal law makers created special payment classifications under the Medicare program, recognizing that many rural hospitals are the only health facility in their community, and their survival is vital to ensure access to health care. One of these classifications was created under the Medicare Rural Hospital Flexibility Program: Critical Access Hospital (CAH).
CAHs can have no more than 25 beds and must be: 1) at least 15 miles by secondary road or mountainous terrain OR 2) 35 miles by primary road from the nearest hospital OR 3) declared a “necessary provider” by the state’s governor. Unlike traditional hospitals that are paid under PPS, Medicare pays CAHs based on each hospital’s reported costs. Each CAH receives 101%1 of its Medicare allowable costs for outpatient, inpatient, laboratory and therapy services, as well as post-acute care in the hospital’s swing beds. By nearly all accounts, financial performance and condition improved after hospitals converted to CAH status,2 accompanied by a commensurate decrease in the closure rate of small rural hospitals.
3 Several recent proposals to reduce federal spending have targeted CAHs for cuts to Medicare reimbursement: 1. Reducing CAH payments from 101% to 100% of reasonable costs.4 2. Eliminating the CAH designation for hospitals that are less than 10 miles from the nearest hospital.4 3. Eliminating the CAH program altogether and converting all CAHs to PPS.5 4. Removing Necessary Provider CAHs’ permanent exemption from the distance requirement.