Aug. 15—More than 800 rural hospitals could lose supplemental Medicare payments under proposals from a federal watchdog agency. The proposed changes alarmed hospital advocates, who urged caution to avoid serious impacts on rural providers. 

The Office of Inspector General (OIG) issued an Aug. 15 report urging the Centers for Medicare & Medicaid Services (CMS) to tighten access to Medicare’s critical access hospital (CAH) designation. The proposed restrictions could cut off 849, or 64 percent, of the 1,329 CAH designated facilities. 

Taking a Closer Look

The CAH program, which reimburses hospitals for 101 percent of their “reasonable inpatient and outpatient costs,” was created in 1997 in response to a wave of rural hospital closures. Hospitals could qualify only if they were rural and located 15 to 35 miles from another hospital. But governors had the discretion—up until 2006—to expand access to the program to more closely concentrated hospitals designated as a “necessary provider.”

At least 40 states have utilized the special designation to qualify more than 75 percent of CAH designated facilities, according to the OIG. And given the higher cost of CAH payments, officials at the watchdog agency think CMS should scrap the state-provided designation.

“Because the designation means increased spending for both Medicare and beneficiaries, we recommend that CMS periodically check if each critical access hospital still provides services that rural beneficiaries can't easily get somewhere else, and therefore deserves the increased financial support from Medicare and beneficiaries,” Brian Jordan, an analyst at OIG, said in an agency podcast. “We also recommend that necessary providers be required to meet the distance requirement.”

For example, returning half of the hospitals with CAH designations to the traditional Medicare rates set by prospective payment systems and fee schedules would have saved $373 million in 2011, the OIG report estimated.

To keep all 849 hospitals from losing their CAH designation, the agency recommended that CMS create alternative eligibility criteria, such as locations with high poverty rates.

Legislation is needed to tighten access to the CAH program, wrote CMS Administrator Marilyn Tavenner. But CMS favored a more limited restriction eliminating CAH designations for hospitals within 10 miles of each other and cutting payments to 100 percent of costs, as proposed by President Barack Obama since 2011. Such changes would reduce the program’s cost by an estimated $1.4 billion over 10 years.

“The CMS believes this proposal preserves beneficiary access to care while promoting payment efficiency,” Tavenner wrote to the OIG.

Reaction Mixed

The OIG’s proposed changes drew concern and calls for caution from hospital advocates.

“The OIG’s focus on the distance requirement does not take into account the reasons why many CAHs were designated as necessary providers by the states, or the extent to which these reasons continue to justify CAH status,” said James H. Landman, director of thought leadership initiatives at HFMA. “Before any action is taken that may limit CAH designation, policy makers will need a better understanding of the extent to which necessary provider CAHs do in fact continue to provide needed access to care, regardless of their distance from another hospital.”

The National Rural Health Association (NRHA), which opposed the earlier CAH cuts proposed by Obama, said the OIG changes could endanger the viability of many of the facilities that provide care to 64 million Americans.

“This report would seek to kill rural health care,” said NRHA CEO Alan Morgan. “If the full report were implemented, it would result in shutting down up to 70 percent of a state’s rural hospitals.”

Such changes to the CAH designation could close hospitals, agreed Gail Wilensky, a senior fellow at Project HOPE and former administrator of CMS’s predecessor agency. But the loss of hospitals located relatively close to other healthcare facilities would not impact care, she said in an interview. 

“Making sure the beneficiaries can reasonably have access to the services is an important function; providing a source of employment is not an important function,” said Wilensky, who was a strong proponent of the CAH.

Congress could consider the CAH changes as early as the fall, Wilensky said. Following an August recess, Congress is expected begin searching for savings to pay for high-profile policies, such as the must-pass federal budget and replacement of Medicare’s physician payment formula.

Publication Date: Thursday, August 15, 2013