Unbiased Analysis of Today's Healthcare Issues

Medicare Payments for Hospitals in Under-served Areas

Written By: Jason Shafrin - Jan• 23•12

One of the goals of Medicare is to provide its beneficiaries access to quality care regardless of where they live.  Thus, the Medicare program provides financial incentives to providers located in these remote areas.

Whereas most Medicare pays most hospitals through the inpatient prospective payment system (IPPS), it pays certain rural hospitals based on their reported costs.  Medicare pays Critical Access Hospitals (CAH), for instance, 101 percent of its report cost for inpatient, outpatient, laboratory, and therapy services.  It also pays this providers 101 percent of their cost for post-acute care for CAH beds are “swing beds” (which are beds that can be used for either acute or post-acute care).

However, how should Medicare define ‘critical’? The simplest definition is just whether a hospital is in a rural (i.e., non-metropolitan) area. However, there are various gradations of ‘rural’. A rural hospital on the outskirts of a big city would be far less ‘critical’ then one very far from distant areas. One could define ‘critical’ based on facility volume. If the low volume is due to poor quality, however, defining these hospitals as critical could just reward poor hospitals. Third, could define a hospital as isolated based on its distance from other facilities who could provide comparable care. Alternatively, one could identify critical hospitals based on demographic factors such as population density in the surrounding areas.

Below, I provide more information on other types of types of rural hospital designations in Medicare.

Not all rural hospitals are CAH’s however.  CAHs are limited to 25 beds and primarily operate in rural areas. Medicare also can designate a hospital as a sole community hospital (SCH) or a Medicare-dependent hospitals (MDHs). According to MedPAC, “SCHs receive the higher of either (a) standard inpatient prospective payment rates or (b) payments based on the hospital’s costs in a base year updated to the current year and adjusted for changes in their case mix. MDHs are similar to SCHs, but they
are eligible for a prospective payment rate based on a blend of current PPS rates (25 percent) and their historical costs (75 percent).”

Below is a breakdown by the number of rural hospitals.

Some provisions in health reform which affect rural hospitals include:

  • A low-volume adjustment for hospitals with under 1,600 discharges
  • A wage index floor of 1.0 for certain frontier states
  • $400 in funding for hospitals in low-spending urban and rural areas

Source: MedPAC Payment Basics, Critical Access Hospitals.

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