Has Medicare Been a ‘Bad Deal’ for Rural Hospitals?

Understanding the links between Medicare involvement and financial performance in rural hospitals is important for evaluating reimbursement policy under Medicare's prospective payment system (PPS). While simple comparisons between urban and rural hospitals suggest that the latter have lower PPS profit margins on average, there is little multivariate evidence on how Medicare involvement affects financial performance in rural hospitals and whether this relationship differs between rural and urban hospitals. Existing multivariate evidence suggests that Medicare involvement improves PPS profits in both rural and urban hospitals after controlling for other hospital- and market-specific factors. By contrast, the present analysis considers the relationship between Medicare involvement and broader measures of profitability than PPS profits. This provides insight into whether Medicare reimbursement is adequate relative to other forms of third-party payment. The results indicate that Medicare involvement has a markedly different effect on the profitability of rural versus urban hospitals. Greater Medicare involvement is associated with lower patient care profitability in rural hospitals but has a strong positive and significant effect on both patient care and overall (i.e., patient and nonpatient) profitability in urban ones. Medicare involvement is not significantly related to overall profitability in rural hospitals, however, suggesting that these hospitals may be able to mitigate patient care revenue shortfalls from greater Medicare involvement by increasing their nonpatient care revenue sources.     

Medicare prospective payment without separate urban and rural rates

The elimination of urban-rural differences in the Medicare prospective payment system (PPS) standard rates implies a need to re-examine all the PPS payment adjustments. Refinements for case mix, outliers, and the wage index can make a significant contribution to avoiding payment disparities in a single-rate system. However, changes in the adjustments for teaching and disproportionate-share (DSH) hospitals are also needed. The typically urban location of these hospitals makes it difficult to balance PPS payments and costs among major groups of urban and rural hospitals without some form of higher payment for all hospitals located in large urban areas.     

What affects rural beneficiaries use of urban and rural hospitals?

Analysis of the Medicare provider analysis record (MEDPAR) data during fiscal years 1984 through 1989 indicates that the proportion of rural Medicare beneficiaries hospitalized in urban hospitals has remained constant during the prospective payment system (PPS). Much of the use of urban hospitals by rural beneficiaries during this period was to obtain specialized care or surgery, as suggested by the analysis, and is consistent with historical patterns of referral of rural patients. Thus, the bypassing of rural hospitals by rural beneficiaries for treatment in urban hospitals has probably not increased during PPS.     

The Role of Critical Access Hospital Status in Mitigating the Effects of New Prospective Payment Systems Under Medicare

This article examines rural hospitals that potentially qualify as critical access hospitals (CAH) and identifies facilities at substantial financial risk as a result of Medicare's expansion of prospective payment systems (PPS) to nonacute settings. Using Health Care Financing Administration (HCFA) cost reports from the federal year ending Sept. 30, 1996, combined with county-level sociodemographic data from the Area Resource File (ARF), characteristics of potential CAHs were identified and their finances analyzed to determine whether they could benefit from the cost-based reimbursement rules applicable to CAH status. Rural hospitals were identified as potential CAHs if they met a combination of federal and state criteria for necessary providers. Rural facilities were classified as "at risk" if they had poor financial ratios in conjunction with high levels of dependence on outpatient, home-care or skilled nursing services. Almost 30 percent of all rural hospitals were identified as potential CAHs. Ninety percent of potential CAH facilities were identified as "at risk" by at least one of five possible risk criteria, and one-third were identified by at least three. Of those classified "at risk," 48 percent might not benefit from conversion to CAH because their inpatient Medicare reimbursement would likely be less under CAH payment rules than under their current PPS payment rules. Many potential CAHs were doing well under inpatient PPS because they were sole community hospitals (SCH) and were therefore eligible for special adjustments to the PPS rates. The Rural Hospital Flexibility Act would be more beneficial to the population of isolated rural hospitals if those eligible for both CAH and SCH status were given the option of retaining their SCH inpatient payment arrangements while still qualifying for outpatient cost-based reimbursement.     

Urban and rural hospitals: how do they differ?

When the Health Care Financing Administration implemented the Medicare prospective payment system (PPS), the payment rates for inpatient hospital operating costs were derived on an urban and rural basis within each region. The rates were also adjusted for area wage levels and other factors affecting hospital costs. The effect of PPS on rural hospitals is of widespread interest. This article provides data on rural and urban hospital facilities, utilization, and charges, as of April 1985. Almost 48 percent of the 5,821 short stay hospitals included in the PPS recalibration file for Federal fiscal year 1984 are located in rural areas. Rural and urban areas are designated by the Executive Office of Management and Budget or, in some instances by regulation.     

Rural Implications of Medicare''s Post-Acute-Care Transfer Payment Policy

CONTEXT: Under the Medicare post-acute-care (PAC) transfer policy, acute-care hospitals are reimbursed under a per-diem formula whenever beneficiaries are discharged from selected diagnosis-related groups (DRGs) to a skilled nursing facility, home health care, or a prospective payment system (PPS)-excluded facility. Total per-diem payments are below the full DRG payment only when the patient's length of stay (LOS) is short relative to the geometric mean LOS for the DRG; otherwise, the full DRG payment is received. This policy originally applied to 10 DRGs beginning in fiscal year 1999 and was expanded to additional DRGs in FY2004. The Secretary may include other DRGs and types of PAC settings in future expansions. PURPOSE: This article examines how the initial policy change affected rural and urban hospitals and investigates the likely impact of the FY2004 expansion and other possible future expansions. METHODS: The authors used 1998-2001 Medicare Provider Analysis and Review (MEDPAR) data to investigate changes in hospital discharge patterns after the original policy was implemented, compute the change in Medicare revenue resulting from the payment change, and simulate the expected revenue reductions under expansions to additional DRGs and swing-bed discharges. FINDINGS: Neither rural nor urban hospitals appear to have made a sustained change in their discharge behavior so as to limit their exposure to the transfer policy. Financial impacts from the initial policy were similar in relative terms for both types of hospitals and would be expected to be fairly similar for an expansion to additional DRGs. On average, including swing-bed discharges in the transfer policy would have a very small financial impact on small rural hospitals; only hospitals that make extensive use of swing beds after a short inpatient stay might expect large declines in total Medicare revenue. CONCLUSION: Rural hospitals are not disproportionately harmed by the PAC transfer policy. An expanded policy may even benefit rural hospitals by recognizing their lower use of post-acute-care and readjusting DRG weights so that they are paid more appropriately when providing the full course of inpatient care.     

A decade of Medicare's prospective payment system--success or failure?

The growth in Medicare spending for inpatient hospital services slowed following the implementation of the prospective payment system (PPS) due to a decline in admission rates and limits on payment increases. Hospital costs, however, have increased faster than payments. Rather than reducing costs further, hospitals responded by charging privately insured patients more than the costs of their care and developing new revenue sources. PPS also redistributed Medicare payments across hospitals and was associated with increased spending in other settings. The PPS experience leaves policymakers with some immediate challenges and provides insights for the development of health care reform initiatives.     

Are rural referral centers as costly as urban hospitals?

This article evaluates the claim that rural referral centers (RRCs), identified by HCFA criteria for special treatment under Medicare's prospective payment system, have average costs similar to urban hospitals. Multivariate analysis led us to conclude that RRC Medicare costs were 13 percent higher than those of other rural hospitals in 1984, holding constant Medicare case mix, teaching activity, and relative wages. However, RRCs were 9 percent ($200) less costly per case than urban hospitals. Outliers explained most of the cost difference between RRCs and urban hospitals, while transfers were more important in explaining differences between RRCs and other rural hospitals. Given that bed size alone explained all of the RRC-other rural cost difference, paying RRCs the urban rate results in an indirect way of paying them based on bed size. It also gives them an average excess of payment over Medicare cost well above the national rural and urban average.     

Hospital and Medicare financial performance under PPS, 1985-90

Although an increasing number of hospitals are reporting net losses from the Medicare prospective payment system (PPS) for inpatient care, overall hospital facility profit rates remain stable. Hospitals that reported net profits in the Medicare inpatient PPS sector in PPS 7 (1990) had smaller increases in Medicare expenses than hospitals that reported PPS losses in PPS 7. Medicare PPS inpatient net losses in PPS 7 were more than offset by non-Medicare net profits. Even though Medicare PPS revenues grew more slowly than the gross domestic product from 1985 to 1990, other hospital revenues grew more rapidly.     

Organizational and market factors associated with Medicare dependence in inpatient rehabilitation hospitals.

Rehabilitation hospitals in the USA have been excluded from the Medicare Prospective Payment System (PPS) system since 1982, and have received cost-based reimbursement. However, the 1997 Balanced Budget Act mandated a PPS for inpatient rehabilitation, to be implemented by the end of 2002. This study assesses rehabilitation hospitals' dependency on Medicare. Findings show that not-for-profit hospitals, facilities with fewer services, facilities with lower staffing levels, and hospitals with lower operating expenses and profits, have a higher proportion of their inpatient revenue coming from Medicare. These facilities may be vulnerable to the new PPS payment system.     

Achieving Equity in Medicare Disproportionate Share Payments to Rural Hospitals: An Assessment of the Financial Impact of Recent and Proposed Changes to the Disproportionate Share Hospital Payment Formula

Historically, the Medicare Disproportionate Share Hospital (DSH) payment program has been less favorable to rural hospitals: eligibility thresholds were higher and the payment adjustment was smaller for rural than for urban hospitals. Although the Medicare, Medicaid, and SCHIP Benefit Improvement and Protection Act (BIPA) of 2000 established a uniform low-income threshold and increased the magnitude of the adjustment for certain small and rural hospitals as a means to promote payment equity, the DSH distribution formula continues to vary by location. This study examines how the DSH revisions mandated under BIPA are likely to affect rural hospitals' financial performance and simulates the financial impact of implementing a uniform DSH payment adjustment. Using data from the 1998 Medicare cost report and impact files, this study found that two-thirds of both rural and urban hospitals would have qualified for DSH payments following BIPA compared with only one-fifth of rural hospitals and one-half of urban hospitals prior to BIPA. Although the impact of BIPA revisions on rural hospitals' total margins were found to be modest, the financial impact of a uniform payment adjustment would be somewhat greater: rural hospitals' average total margins would have increased by 1.6 percentage points. Importantly, 20% of rural hospitals with negative total margins would have been "in the black" if rural and urban hospitals were reimbursed using the same DSH formula. These findings suggest that elimination of rural and urban disparities in DSH payment could strengthen the rural health care safety net.     

Medicare dependent hospitals: who depends on whom?

Small rural hospitals with a large proportion of Medicare patients currently receive special treatment as Medicare dependent hospitals (MDHs) under the prospective payment system (PPS). Other high Medicare hospitals (HMHs)--both urban and rural--have sought to have the additional per case payments extended to them. Current utilization patterns, the availability of alternative facilities, and the socioeconomic and demographic characteristics of the service areas were examined to determine whether either the current MDH or alternative HMH targeting criteria identify hospitals whose closure might impair access to care for Medicare beneficiaries residing in their service areas. Neither MDHs nor HMHs are substantially different from other hospitals in terms of providing access. While some individual MDHs or HMHs might be considered essential access facilities, alternate criteria should be developed to identify these facilities regardless of the proportion of their patients attributable to the Medicare program.     

The Payment Error Prevention Program (PEPP): reducing Medicare payment errors in prospective payment system hospitals

Peer Review Organizations (PROs) are charged by the Health Care Financing Administration (HCFA) to assist in protecting the integrity and solvency of the Medicare program. Recent audits of the Medicare program from the Office of Inspector General (OIG) revealed that more than $12 billion Medicare dollars in 1998 were spent in improper payments, with more than 25% attributed to prospective payment system (PPS) hospitals. The Payment Error Prevention Program (PEPP) is an initiative designed by HCFA in 1999 to assist PROs in meeting the goal of reducing payment errors in PPS hospitals. PEPP is implemented through the development of quality improvement (QI) methodologies. These projects are designed to achieve measurable improvements in processes and outcomes of payment errors. PEPP works to reduce payment errors at PPS hospitals through cooperative efforts with Ohio agencies and licensing boards, federal law enforcement organizations, HCFA contractors, hospital medical staffs, and medical and osteopathic associations.     

Cost allocation patterns between hospital inpatient and outpatient departments.

OBJECTIVE. This study examines changes in hospitals' cost allocation patterns between inpatient and outpatient departments in response to the implementation of the prospective payment system. DATA SOURCES AND STUDY SETTINGS. The analysis was carried out using data for 3,961 hospitals obtained from the Medicare Cost Reports and from the American Hospital Association for the years 1984 through 1988. STUDY DESIGN. A total operating cost function was estimated on the two outputs of discharges and outpatient visits. The estimation results were instrumental in disaggregating costs into inpatient and outpatient components. This was done cross-sectionally for each of the five years. PRINCIPAL FINDINGS. Comparison of this cost breakdown with that of hospital revenue provides evidence of distinct patterns in which nonteaching, rural, and small hospitals increasingly allocated greater costs to outpatient departments than did large, urban, and teaching hospitals. CONCLUSIONS. The results suggest that small rural hospitals turned to the outpatient side in the face of tough economic challenges over the period of study. Because differences in cost allocation patterns occur by particular hospital category, analyses that rely on accounting cost or revenue data in order to identify cost differences among those same categories may come to erroneous conclusions. In particular, because teaching hospitals apportion costs more heavily on the inpatient side, cost allocation differences cause upward bias in the PPS medical education adjustment.     

An analysis of the Prospective Payment System''s labor-nonlabor share by diagnosis-related group.

When Congress in 1983 legislated a new Prospective Payment System (PPS) for Medicare hospital payment, the payment algorithm was founded on a simplifying assumption of a constant 80-20 percentage share of labor and nonlabor costs across all diagnosis-related groups (DRGs). Using Medicare claims data and hospital cost reports, this study examines the accuracy of this assumption. While a few DRGs are found to vary significantly from the norm, a systematic cancelling out of high and low labor-intensive DRGs results in no material PPS payment bias at the hospital level. Indeed, rural hospitals, if anything, benefit by the assumption. A very small number of outlier DRGs and hospitals are troublesome, nonetheless, implying fine-tuning of the algorithm.     

It was 20 years ago today ... some say it's complex and vulnerable to political whims, but Medicare's PPS has helped impose order on hospital finances

In October 1983, Medicare launched a new payment system that would no longer write hospitals a blank check. It was called the prospective payment system and became known simply as the PPS. With its 20-year anniversary looming, the program's fundamental strengths and weaknesses have become apparent. Although some say it's vulnerable to politics, most agree it has imposed order on hospital finances.     

The impact of transfer patients on Medicare inpatient cost per discharge

The cost of inpatient transfer cases has concerned hospitals as well as rate-setters. Reform of transfer payment in Medicare's Prospective Payment System has been suggested to ensure access and adequate treatment for these cases in a period where inpatient revenue has been declining. This analysis indicates that both transfer cases received and cases transferred to other hospitals have above average costs per case but their impact on Medicare inpatient cost per discharge is smaller than that of variables such as case-mix, area wages and resident/bed ratio which are used directly in PPS payment. Evidence is provided indicating the desirability of reform of PPS payment methods for transfer cases.     

Effects of Payment Changes on Urgent/Emergent Admissions in Rural and Urban Communities

Reimbursement changes during the 1980s, particularly Medicare diagnosis-related group (DRG) reform and the growth of managed care, have squeezed hospital revenues available for cross-subsidizing care for uninsured patients and patients for whom marginal costs exceed marginal revenues. This study uses logistic regression with time and residence interactions to explore the impact of payment changes on rural versus urban patients' admission status (urgent versus nonurgent). Findings show that uninsured rural patients had a significantly higher probability in 1987 than they did in 1983 of being admitted to hospitals in an urgent/emergent condition. Findings also show incrementally higher probabilities for Medicare and Medicaid rural patients in 1987. Results are consistent with the view that cross-subsidization is no longer effective for covering uninsured rural care and that more direct subsidies may be necessary.     

Does planning pay off? A look at the experience of New Mexico's rural hospitals

When Medicare's prospective payment system (PPS) was implemented, hospitals faced the prospect of diminishing reimbursement. Added to other fundamental changes involving medical practice, consumerism, competition, and medical technology, hospitals had significant incentives to focus more attention on strategic planning. This article examines how rural hospitals altered their strategic planning in response to PPS and the extent to which planning is related to better performance. It presents results from a case study of rural New Mexico hospitals. The implications of these results for other hospitals are discussed by the authors.