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MedPAC Payment Basics Critical Access Hospitals Payment System


									  CRITICAL ACCESS HOSPITALS                                                                                  paymentbasics

Revised:                       Medicare beneficiaries can receive care in     state. Because states could waive the
October 2010                   approximately 1,300 small hospitals called     distance requirement, the CAH program
                               critical access hospitals (CAHs). CAHs are     became an option for almost all small
                               limited to 25 beds and primarily operate       rural hospitals, as opposed to being
                               in rural areas. Unlike traditional hospitals   limited to helping isolated hospitals.
                               (which are paid under prospective              Approximately 65 percent of CAHs are
                               payment systems), Medicare pays CAHs           between 15 and 35 miles from the nearest
                               based on each hospital’s reported costs.       hospital. However, some are less than
                               Each CAH receives 101 percent of its costs     5 road miles from another hospital and
                               for outpatient, inpatient, laboratory and      others (approximately 20 percent of CAHs)
                               therapy services, as well as post-acute care   are more than 35 road miles from an
                               in the hospital’s swing beds.1                 alternative source of emergency care.

                               In addition to 25 acute beds, CAHs are         The Medicare Prescription Drug,
                               allowed to have distinct-part skilled          Improvement, and Modernization Act of
                               nursing facilities, 10-bed psychiatric         2003 eliminated states’ ability to declare
                               units, 10-bed rehabilitation units, and        additional hospitals “necessary providers”
                               home health agencies. However, these           starting in January 2006. As a result, CMS
                               departments of the CAH are paid through        has authorized few additional CAHs since
                               Medicare’s prospective systems and are         2006 because most hospitals that meet
                               not eligible for cost-based reimbursement.     the distance and size criteria have already
                                                                              converted to CAH status. Current CAHs
                                                                              will retain their CAH status, even if they
                               History of the CAH program
                                                                              do not meet the distance criteria.
                               In 1988, the Montana Hospital Research
                               and Education Foundation designed a
                                                                              Defining the care that Medicare buys
                               demonstration of a type of hospital called
                                                                              from CAHs
                               a medical assistance facility (MAF) that
                               received cost-based reimbursement from         Medicare pays for the same services
                               Medicare. MAFs were isolated, limited-         from CAHs as from other acute care
                               service hospitals that could admit patients    hospitals (e.g., inpatient stays, outpatient
                               for no more than a four-day length of stay.    visits, laboratory tests, and post-acute
                               In 1989, the Congress authorized the Rural     skilled nursing days). However, CAHs’
                               Primary Care Hospital (RPCH) program,          payments are not based on the type of
                               a second demonstration program whereby         service provided or the number of services
This document does not
                               small, rural hospitals would receive cost-     provided. Payments are based on each
reflect proposed legislation   based payments from Medicare. In 1997,         CAH’s costs and the share of those costs
or regulatory actions.         the Balanced Budget Act of 1997 merged         that are allocated to Medicare patients.
                               the MAF and RPCH programs into a new
                               category of hospitals called critical access
                                                                              Computing Medicare payments
                               hospitals. CAHs would receive cost-based
                               inpatient and outpatient payments from         Medicare pays CAHs 101 percent of their
601 New Jersey Ave., NW        Medicare.                                      allowable costs for most services. The cost
Suite 9000
                                                                              of treating Medicare patients is estimated
Washington, DC 20001           To qualify for the CAH program, a
                                                                              using cost accounting data from Medicare
ph: 202-220-3700               hospital had to be at least 15 miles by
                                                                              cost reports. CMS’s cost accounting
fax: 202-220-3759              secondary road and 35 miles by primary
                                                                              methodology allocates costs among patients                 road from the nearest hospital or be
                                                                              based on a combination of factors such as
                               declared a “necessary provider” by the
            1                                             Share of hospitals and inpatient payments by rural hospital type
     Figure 1 Share of hospitals and Medicare payments by rural hospital type

                          Share of rural hospitals                                                               Share of rural Medicare payments

             Standard PPS
                   17%                                                                                                                                         CAH
                                                                                                  Standard PPS

                                                                                                                    9%                                  SCH

    Note:   CAH (critical access hospital), SCH (sole community hospital), MDH (Medicare-dependent hospital), PPS (prospective payment system). Payments are from 2008
            Medicare cost reports. Standard PPS refers to hospitals paid under the traditional PPS payment rates and includes rural referral centers that are not SCHs or MDHs.
            Percentages may not add to 100 percent due to rounding.

                                       the number of days a patient stays in the                                methodology differs in two significant
                                       hospital and the dollar value of charges the                             ways from CAH cost-based payments.
                                       patient incurs for ancillary services.                                   First, SCHs and MDHs only receive cost-
                                                                                                                based payments for inpatient care; CAHs
                                       Medicare’s cost-based payments to CAHs
                                                                                                                receive cost-based payments for inpatient,
                                       were over $7 billion in 2008, representing
                                                                                                                outpatient, lab, therapy, and post-acute
                                       5 percent of all Medicare inpatient and
                                                                                                                services in swing beds. Second, SCHs’ and
                                       outpatient payments to hospitals.
                                                                                                                MDHs’ payments are based on historical
                                                                                                                costs trended forward. Therefore, if a
                                       Differences between CAH, SCH, and                                        SCH or MDH increases its expenditures
                                       MDH Medicare payments                                                    per patient, its payments will not be
                                                                                                                affected. In contrast, if a CAH increases
                                       As Figure 1 illustrates, most rural hospitals
                                                                                                                its expenditures per patient, Medicare
                                       are either CAHs (57 percent), sole
                                                                                                                payments increase accordingly.
                                       community hospitals (SCHs) (17 percent),
                                       or Medicare-dependent hospitals (MDHs)                                   To qualify for the SCH program, a hospital
                                       (8 percent). These hospitals receive a                                   must be located at least 35 miles from the
                                       majority of rural inpatient Medicare                                     nearest like hospital (excluding CAHs),
                                       payments. “Cost-based payments”                                          or meet other federal criteria for being
                                       provided to CAHs differ from “cost-based                                 deemed a community’s sole source of care.
                                       payments” paid to SCHs and MDHs. SCHs                                    To qualify for MDH designation, a facility
                                       receive the higher of either (a) standard                                must be located in a rural area, have no
                                       inpatient prospective payment rates or                                   more than 100 beds, not be classified as
                                       (b) payments based on the hospital’s costs                               an SCH, and have at least 60 percent of
                                       in a base year updated to the current year                               inpatient days or discharges attributable
                                       and adjusted for changes in their case                                   to Medicare patients. ■
                                       mix. MDHs are similar to SCHs, but they
                                       are eligible for a prospective payment
                                                                                                                1    Most CAH beds are “swing beds”, which can be used
                                       rate based on a blend of current PPS rates                                    for acute or post-acute care. In some states, these beds
                                       (25 percent) and their historical costs (75                                   can also be used for long-term care of Medicaid patients.

                                       percent). The SCH and MDH payment

2   Critical access hospitals payment system                                                                                                                        paymentbasics

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