Do Current Medicare Rural Hospital Payment Systems Align with Cost Determinants?
Background
The financial performance of small, rural hospitals has long been a concern to federal and state agencies. Federal law makers have enacted legislation authorizing the Medicare program to develop reimbursement methods that provide higher payments to hospitals that serve rural communities.1 The Medicare Payment Advisory Commission (MedPAC) describes rural hospitals as follows.
Critical Access Hospital (CAH) (61% of rural hospitals). To qualify for the CAH designation, a hospital must have 25 or fewer beds, be located at least 15 miles by secondary road and 35 miles by primary road from the nearest hospital, or be declared a “necessary provider” by the state. Sole Community Hospital (SCH) (17% of rural hospitals). To qualify for SCH designation, a hospital must be located at least 35 miles from the nearest like hospital (excluding CAHs), or meet other federal criteria for being deemed a community’s sole source of care. Medicare-Dependent Hospital (MDH) (8% of rural hos- pitals). To qualify for MDH designation, a hospital must be located in a rural area, have no more than 100 beds, not be classified as an SCH, and have at least 60% of inpatient days or discharges attributable to Medicare patients. Standard Prospective Payment System (PPS) (15% of rural hospitals). Standard PPS refers to hospitals paid under traditional PPS payment rates and includes rural referral centers (RRC) that are not SCHs or MDHs.
Current payment methods reflect legislative changes that have occurred since the rural hospital Medicare payment classifications were created. As a result, current rural hospital payment methods differ in eligibility criteria, adjustment factors, formulae, and timeliness of data. These differences may contribute to the variation in financial condition that has been found across the four types of rural hospitals. For example, Holmes et al state that “It is inaccurate to characterize all rural hospitals as being under financial pressure; rather it appears that some types have many hospitals under a lot of pressure (CAHs, MDHs and PPS hospitals), some have some hospitals under pressure (SCHs), and some have few hospitals under pressure (RRCs and RRC/SCHs). The hospitals under a lot of pressure should be of greater concern to policy makers and those concerned with access to hospital care by people who live in rural America.”3 More recently, there have been several proposals to change the eligibility criteria of CAHs and to eliminate the MDH classification altogether.4 These proposed policy changes suggests that it is an opportune time to reexamine rural hospital payment methods and assess the feasibility of simplifying and rationalizing them.