The Medicare Modernization Act of 2003 includes a host of financial incentives for rural providers -- some yet to kick in -- but rural advocates are still careful about praising the law.
They point out that the Medicare act, enacted in December 2003, was touted as a law that would increase spending to rural providers by $20 billion over 10 years, according to the Congressional Budget Office. Much of that money will end up going to urban providers, however, because some provisions include benefits for hospitals in both rural and urban areas. They also say some of the provisions are hurting rather than helping rural hospitals, and changes such as the raising of the disproportionate-share cap and increasing payments to critical-access hospitals could have gone further.
John Sheehan, a consultant who works with rural and urban hospitals for BKD Health Care Group, says that while the financial incentives involve a large spending increase, the money is divided up over so many providers that the changes amount to small financial gains for most hospitals -- both rural or urban.
"The MMA had a small impact on a huge number of hospitals and a large impact on a few," Sheehan says.
Rural hospitals that got the largest benefit were those that were able to qualify for the critical-access program, which allows low-volume rural hospitals to receive cost-based payments. Among other changes, the law increased the number of acute-care beds that a critical-access hospital could operate to 25 from 15 (May 24, 2004, p. 22).
"It really helped those hospitals that didn't see the benefits of PPS (the prospective payment system) but couldn't get down to 15 beds," Sheehan says.
The critical-access provisions were expected to cost the federal government $900 million over 10 years, according to CBO estimates. The Medicare act increased critical-access reimbursements to 101% of reasonable costs for services to Medicare patients, up from 100% of costs. The rural lobby argued for the increase because Medicare payments are supposed to cover some capital depreciation expenses, so by exceeding hospitals' costs, the extra payments help counter the effects of inflation.
Rural advocates were hoping for a larger increase -- up to 5 percentage points above costs -- but the extra percentage point approved could still mean the difference between profit and loss. Richard Failing, chief executive officer of Kittson Memorial Healthcare Center, Hallock, Minn., estimates that the extra percentage point gives his 15-bed hospital an extra $25,000 annually, but he says that's a lot of money for his facility since it operates close to the break-even point.
Hurting, not helping
The Medicare act also included a Jan. 1, 2006 sunset on the "necessary provider" provision, which allows hospitals to enter the critical-access program no matter what their proximity to other hospitals as long as they meet length-of-stay, bed-count and emergency-care services criteria. Without the necessary-provider provision, hospitals have to be at least 35 miles away from another hospital or at least 15 miles away in mountainous terrain or in an area with only secondary roads.
Many believe the end of that provision was included in the law to curtail the growth of the critical-access program, which has ballooned to about 1,100 hospitals, about half of the rural hospitals in the country. In December 1999 there were as few as 100 hospitals in the critical-access program, which was created by the Balanced Budget Act of 1997.
Rural advocates aren't happy with the sunset of the provision because they say that while some hospitals may not have a need for the cost-based payments now, they could in the future.
The deadline ending the necessary-provider provision became even more significant because the CMS proposed a rule that would mean the necessary providers would lose their critical-access status if they built a replacement facility more than 250 yards from their existing campus (May 23, p. 17). The proposed rule says that necessary providers will be grandfathered in only if they can demonstrate they had construction plans in place before the Medicare act was signed.
Keith Mueller, policy analysis director for the Rural Policy Research Institute, says the CMS could have limited the program's growth by not approving all necessary-provider waivers and establishing a federal definition for necessary providers. The Medicare Payment Advisory Commission said at an April meeting that the majority of critical-access hospitals used the necessary-provider provision.
CMS officials say they approved every waiver because the agency believed it was Congress' intention to give the states control of the waiver. Mueller disagrees with the CMS' thinking.
Rural advocates argue there isn't a need to limit the growth of the program because it accounts for a small piece of the Medicare budget. The CMS estimates spending on the critical-access hospitals will total $1.5 billion in fiscal 2005, or 1.3%, of the $119.4 billion total for Medicare inpatient spending. In fiscal 2000, Medicare spending on critical-access hospitals accounted for just 0.1% of total Medicare inpatient spending (See chart).
Mueller contends that efforts to limit the critical-access program came about because the PPS is viewed as a "gold standard." He says the thinking is: "Why did we let so many hospitals get away from a good payment system?" -- allowing more facilities to receive cost-based reimbursement.
However, there does seem to be some evidence that there's been a failure to adequately police how critical-access hospitals are designated. MedPAC said at its April meeting that it identified 151 critical-access hospitals that are 15 miles or less from another provider. According to MedPAC, 17% of critical-access payments go to these hospitals and most of these hospitals aren't truly critical to patient access. It concluded that patients could benefit if some of the low-volume hospitals merged.
Medicare Advantage, the managed-care program established by the Medicare act that took effect in March 2004, also appears to have some unexpected consequences for rural hospitals that won't guarantee critical-access hospitals receive cost-based payments. The act included incentives to commercial insurers to offer Medicare Advantage plans, but Failing is concerned the Medicare Advantage plans will be offering PPS prices and won't be reimbursing critical-access hospitals at 101% of cost as Medicare now does.
Failing already has seen payments from Medicare Advantage plans that were lower than the cost-based payment. For example, over two days in October 2004 a Medicare Advantage patient at his hospital needed laboratory tests, and the private plan paid the hospital about $120, substantially less than the nearly $300 the government would have paid the hospital under the cost-based reimbursement. Failing spoke to this payer and others about the discrepancies. So far he's had some positive results.
"We have had some plans acknowledge that payment should be at 101% of cost," he says. "In some cases we've negotiated more than 101%."
Failing, however, is worried that negotiating will become more difficult and wants other critical-access hospitals to be aware that Medicare Advantage plans aren't required to pay at 101% of cost. Rep. Ron Kind (D-Wis.) has introduced a bill that would require the plans to pay at least 101%, and that bill has been referred to the House health committee.
If the critical-access hospitals aren't successful in their negotiations, there is no process in place for them to petition for cost-based payments. The only hospitals that can petition are essential hospitals -- those the CMS requires regional Medicare Advantage plans to include in their network -- which must prove that the cost of service exceeds a plan's rates and the rates are below the Medicare fee-for-service payment. Critical-access hospitals are excluded from the essential hospital list, and CMS officials say there is nothing in place to guarantee that those facilities receive cost-based payments under Medicare Advantage.
Moreover, even if Medicare Advantage plans are required to pay the higher payments, rural advocates are concerned that the plans will require higher copayments from beneficiaries if they go to a critical-access hospital and not a PPS hospital. This concerns Failing because he fears critical-access hospitals could lose volume and it could become a public relations problem for the facilities.
Under the Medicare act's rural provisions, the two largest provider payment enhancements -- equalizing base payments to hospitals and changes to the wage index -- increased payments to rural hospitals and some urban hospitals. From 70% to 80% of the $12.8 billion projected to be spent over 10 years from these provisions will go to urban hospitals, Sheehan says.
The main reason the urban hospitals are receiving such a large portion is because they have much greater size and volume. The fact that much of the money is going to urban hospitals shouldn't be a surprise to rural advocates, because changes to base payments and the wage index were exactly what they lobbied for, Mueller says. Despite the gains in urban areas, rural facilities will still see about $4 billion in increases over 10 years as a result of the changes.
The law made permanent a stipulation that increased the base payments to hospitals in rural areas and those in an area with a population of less than 1 million. The equalizing of the base rates increases payments for all hospitals -- boosting rural hospital payments by $2.3 billion over 10 years -- except for hospitals in an urban area with a population of more than 1 million.
Changes in the wage index, which factors geographic variances in wages into base payments, also helped both rural and urban hospitals. The index is used to compensate providers in high-wage areas, and it subtracts a percentage of the payment from lower-wage areas.
The Medicare act lowered-to 62% from 71% -- the percentage subtracted from payments in lower-wage areas. The net result for rural hospitals is an increase in the base PPS payments by about $1.6 billion over 10 years. The changes also increased payments in such urban areas as Omaha, Neb., and St. Louis by more than $3.6 billion during the same period. Since the urban hospitals have more volume, they stand to receive the majority of new money from the wage-index changes.
Caps have effect
Rural advocates also didn't get everything they wanted on changes to disproportionate-share payments, which are given to hospitals that provide services to a high number of low-income Medicare and Medicaid patients. Those facilities are given extra payments to help offset costs of care provided without payment from another source.
The disproportionate-share payments are capped for rural hospitals but not for rural referral centers or large urban hospitals. The rural lobby was seeking to eliminate the cap, but instead the Medicare act raised it to 12% from 5.25%. That percentage is derived from a formula that factors a hospital's ratio of low-income patient days to total patient days and the percentage is multiplied by inpatient operating reimbursement to determine the dollar amount of add-on payments. The higher cap resulted in a projected increase of $2.7 billion over 10 years for rural hospitals, according to the CBO.
Although Sheehan says he expects few hospitals will hit the 12% cap, those that do can stand to lose substantial amounts, he says. Mueller says the caps are likely in place because of budgetary limits, but rural lobbyists say they will continue to fight for their removal.
Even if they are successful, however, Sheehan doesn't expect the rural advocates to rest. "There's not going to be one thing that fixes all rural hospitals' woes," he says.