Medicare
Modest Eligibility Expansion for Critical Access Hospital Program Should Be Considered Gao ID: GAO-03-948 September 19, 2003Critical Access Hospitals (CAHs) are small rural hospitals that receive payment for their reasonable costs of providing inpatient and outpatient services to Medicare beneficiaries, rather than being paid fixed amounts under Medicare's prospective payment systems. Between fiscal years 1997 and 2002, 681 hospitals have become CAHs. In the Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of 2000, GAO was directed to examine requirements for CAH eligibility, including the ban on inpatient psychiatric or rehabilitation distinct part units (DPUs) and limit on patient census, and to make recommendations on related program changes.
Using fiscal year 1999 hospital cost report data, GAO identified 683 rural hospitals as "potential CAHs" based on their having an annual average of no more than 15 acute care patients per day. About 14 percent (93) of these potential CAHs operated an inpatient psychiatric or rehabilitation DPU, which they would have to close to convert to CAH status. Among existing CAHs, 25 previously operated a DPU but had to close it as part of becoming a CAH. Among the potential CAHs that operated a DPU, about half had a net loss on Medicare services, indicating they might benefit from CAH conversion. Officials in some hospitals expressed a reluctance to close their DPU, even if conversion would benefit the hospital financially, as they believe the DPU maintains the availability of services in their community. Because inpatient rehabilitation and psychiatric services are disproportionately located in urban areas, even a small number of rural DPU closures may exacerbate any disparities in the availability of these services. Using 1999 Medicare claims data, GAO found 129 potential CAHs that likely would have been able to meet the CAH census limit of no more than 15 acute care patients at any given time if not for a seasonal increase in their patient census. Seasonal increases in patient census were common among the hospitals GAO studied, generally occurring during the winter flu and pneumonia season. For most potential CAHs, their patient census was typically low enough that a small seasonal increase did not cause them to exceed CAH limits. For the 129 potential CAHs that would have had difficulty staying under the CAH limit due to seasonal variation, they could have accommodated their patient volume and had greater flexibility in the management of their patient census if the CAH census limit were changed from an absolute limit of 15 patients per day to an annual average of 15 patients.
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Director: Team: Phone:GAO-03-948, Medicare: Modest Eligibility Expansion for Critical Access Hospital Program Should Be Considered
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Report to Congressional Committees:
United States General Accounting Office:
GAO:
September 2003:
Medicare:
Modest Eligibility Expansion for Critical Access Hospital Program
Should Be Considered:
Critical Access Hospital Program:
GAO-03-948:
GAO Highlights:
Highlights of GAO-03-948, a report to the Senate Committee on Finance,
the House Committee on Ways and Means, and the House Committee on
Energy and Commerce
Why GAO Did This Study:
Critical Access Hospitals (CAHs) are small rural hospitals that
receive payment for their reasonable costs of providing inpatient and
outpatient services to Medicare beneficiaries, rather than being paid
fixed amounts under Medicare‘s prospective payment systems. Between
fiscal years 1997 and 2002, 681 hospitals have become CAHs.
In the Medicare, Medicaid and SCHIP Benefits Improvement and
Protection Act of 2000, GAO was directed to examine requirements for
CAH eligibility, including the ban on inpatient psychiatric or
rehabilitation distinct part units (DPUs) and limit on patient census,
and to make recommendations on related program changes.
What GAO Found:
Using fiscal year 1999 hospital cost report data, GAO identified 683
rural hospitals as ’potential CAHs“ based on their having an annual
average of no more than 15 acute care patients per day. About 14
percent (93) of these potential CAHs operated an inpatient psychiatric
or rehabilitation DPU, which they would have to close to convert to
CAH status. Among existing CAHs, 25 previously operated a DPU but had
to close it as part of becoming a CAH. Among the potential CAHs that
operated a DPU, about half had a net loss on Medicare services,
indicating they might benefit from CAH conversion. Officials in some
hospitals expressed a reluctance to close their DPU, even if
conversion would benefit the hospital financially, as they believe the
DPU maintains the availability of services in their community. Because
inpatient rehabilitation and psychiatric services are
disproportionately located in urban areas, even a small number of
rural DPU closures may exacerbate any disparities in the availability
of these services.
Using 1999 Medicare claims data, GAO found 129 potential CAHs that
likely would have been able to meet the CAH census limit of no more
than 15 acute care patients at any given time if not for a seasonal
increase in their patient census. Seasonal increases in patient census
were common among the hospitals GAO studied, generally occurring
during the winter flu and pneumonia season. For most potential CAHs,
their patient census was typically low enough that a small seasonal
increase did not cause them to exceed CAH limits. For the 129
potential CAHs that would have had difficulty staying under the CAH
limit due to seasonal variation, they could have accommodated their
patient volume and had greater flexibility in the management of their
patient census if the CAH census limit were changed from an absolute
limit of 15 patients per day to an annual average of 15 patients.
What GAO Recommends:
GAO suggests that the Congress may wish to consider allowing hospitals
with a DPU to convert to CAH status. GAO also suggests that the
Congress may wish to consider changing the CAH limit on acute care
patient census from an absolute limit of 15 patients to an annual
average of 15 patients. The Department of Health and Human Services
said that these modifications to CAH eligibility criteria would
provide the needed flexibility for some additional facilities to
consider conversion to CAH status, and emphasized the importance of
maintaining financial incentives for efficiency as well as health and
safety standards.
www.gao.gov/cgi-bin/getrpt?GAO-03-948.
To view the full product, including the scope
and methodology, click on the link above.
For more information, contact A. Bruce Steinwald at (202) 512-7119.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Existing CAHs Had Fewer Beds and Patients and Lower Medicare Margins
Than Potential CAHs:
Ban on CAHs Operating DPUs May Have Contributed to Diminished
Availability of Services in Rural Areas:
Seasonal Variation in Patient Census Is Common and May Impede CAH
Eligibility for Hospitals Near the CAH Limit:
Conclusions:
Matters for Congressional Consideration:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Comments from the Department of Health and Human Services:
Appendix III: GAO Contact and Staff Acknowledgments:
GAO Contact:
Acknowledgments:
Tables:
Table 1: Selected Characteristics of Existing CAHs Prior to Their
Conversion and Potential CAHs, Fiscal Year 1999:
Table 2: Financial Performance of Existing CAHs Prior to Their
Conversion and Potential CAHs, Fiscal Year 1999:
Table 3: Financial Performance of Potential CAHs with DPUs, Fiscal Year
1999:
Table 4: Medicare Margins for DPUs of Potential CAHs, Fiscal Year 1999:
Table 5: Seasonal Increase in Average Acute Care Patient Census among
Potential CAHs, by Bedsize, 1999:
Table 6: Potential CAHs with Estimated Seasonal Increases in Patient
Census That Pushed Them over CAH Limit, 1999:
Table 7: Financial Performance of Potential CAHs with a Seasonal
Increase in Patient Census That Pushed Them over CAH Limit, Fiscal Year
1999:
Table 8: Potential CAHs with Seasonal Increase in Medicare Patients'
Length of Stay That Pushed Them over the 4-day CAH Limit, 1999:
Table 9: Summary of Site Visits and Interviews:
Figures:
Figure 1: Major Eligibility Criteria for Critical Access Hospitals:
Figure 2: Number of Critical Access Hospitals through Fiscal Year 2002:
Figure 3: Location of the 681 Critical Access Hospitals, September
2002:
Abbreviations:
BBA: Balanced Budget Act of 1997:
BIPA: Medicare, Medicaid, and SCHIP Benefits Improvement and Protection
Act of 2000:
CAH: Critical Access Hospital:
CMS: Centers for Medicare & Medicaid Services:
DPU: distinct part unit:
EACH: essential access community hospital:
EMS: emergency medical services:
FORHP: Federal Office of Rural Health Policy:
HHS: Department of Health and Human Services:
HRSA: Health Resources and Services Administration:
MSA: metropolitan statistical area:
OMB: Office of Management and Budget:
PPS: prospective payment system:
RHFTP: rural hospital flexibility tracking project:
RPCH: rural primary care hospital:
SCHIP: State Children's Health Insurance Program:
TEFRA: Tax Equity and Fiscal Responsibility Act of 1982:
United States General Accounting Office:
Washington, DC 20548:
September 19, 2003:
Congressional Committees:
Medicare beneficiary access to hospital services in rural areas has
been a source of concern for policymakers for many years. To bolster
the financial stability of rural hospitals, the Congress approved
several special payment provisions both before and after the
implementation of the Medicare acute care inpatient prospective payment
system (PPS)[Footnote 1] in 1983. These provisions enhanced Medicare
payments to certain groups of rural hospitals, such as those that are
the only source of care in their community; larger hospitals that serve
as referral sites for rural physicians and community hospitals; and
hospitals highly dependent on Medicare payments. Many rural hospitals
have, however, continued to experience financial difficulties.
In the Balanced Budget Act of 1997 (BBA), the Congress established
additional special payment provisions for Critical Access Hospitals
(CAH).[Footnote 2] When designated as a CAH, a hospital generally
receives payment for its reasonable costs of providing inpatient and
outpatient services to Medicare beneficiaries, rather than being paid
the PPS fixed amount for those services. Thus, the CAH designation
provides higher payments to hospitals whose reasonable costs are higher
than their PPS payment. The CAH program has grown steadily to 681 CAHs
at the end of fiscal year 2002.[Footnote 3]
The CAH designation is targeted to small rural hospitals with a low
patient census and short patient stays. Statutory provisions specifying
criteria for CAHs do not specifically exclude facilities with distinct
part units (DPUs) --separate sections certified to provide inpatient
rehabilitation or psychiatric care. However, statutory and regulatory
provisions concerning payment for such DPUs effectively require them to
be operated by hospitals paid PPS rates. Thus, because CAHs are paid
their reasonable costs, they are effectively banned from having DPUs.
Some hospital officials have raised concerns that because CAHs cannot
operate DPUs, it may be more difficult to ensure that rural
beneficiaries have access to the kind of psychiatric and rehabilitation
services these units provide, if hospitals choose to close their DPU as
part of becoming a CAH. In addition, to be a CAH, a hospital must
remain under CAH limits on the number of hospital beds ("bedsize") and
average patient length of stay, and can have no more than 15 acute care
patients on any given day. Some hospitals may have difficulty remaining
under CAH limits during the entire year because they may experience
fluctuations in patient demand due to seasonal tourism or illnesses,
like influenza or pneumonia, that are more prevalent at certain times
of the year.
In the Medicare, Medicaid, and SCHIP Benefits Improvement and
Protection Act of 2000 (BIPA),[Footnote 4] the Congress directed us to
study CAH eligibility requirements including with respect to
limitations on average length of stay, bedsize, and DPU operations, and
to make related recommendations on program changes. As agreed with the
committees of jurisdiction, we have examined (1) the characteristics of
a group of hospitals prior to their designation as CAHs compared to a
group of small rural hospitals that have not become CAHs, but were in a
position to consider doing so based on their low patient census, (2)
the impact that the effective ban on CAHs operating DPUs has had on the
availability of psychiatric and rehabilitation services in rural areas
and on rural hospitals' decisions to seek CAH conversion, possible
options for Medicare payment to DPUs and CAH eligibility requirements
if CAHs were allowed to operate DPUs, and (3) the extent to which
seasonal variation in patient census or length of stay prevents
hospitals from being eligible for CAH status.
To address these objectives, we analyzed Medicare hospital cost
reports[Footnote 5] from fiscal year 1999, the most recently available
audited cost report data, and Medicare inpatient claims data for 1999.
We defined 683 rural hospitals that had not converted to CAH status as
of January 1, 2003, as "potential CAHs," based on their having an
annual average patient census of no more than 15 acute care
patients.[Footnote 6] We estimated how many of the 683 potential CAHs
might be prevented from converting to CAH status because they operate a
DPU or experience seasonal variation in their patient census or average
length of stay. We also examined the characteristics of 620 hospitals
that were not yet CAHs in fiscal year 1999 but have since converted to
CAH status ("existing CAHs") and compared their preconversion
characteristics to those of potential CAHs in fiscal year 1999. We
evaluated how many potential CAHs and existing CAHs experienced
financial losses under the Medicare PPS and likely could benefit from
cost-based reimbursement. Since DPUs are paid under different payment
methodologies from acute care hospitals, we evaluated how many of the
DPUs operated by potential CAHs experienced financial gains or losses
under the payment methodology that applied to them in fiscal year 1999
as well as the possible impact if cost-based reimbursement were
extended to DPUs operated by CAHs. We also evaluated how many of the
potential CAHs with DPUs could have met CAH bedsize and length of stay
criteria in fiscal year 1999 if their DPU beds and lengths of stay were
counted towards the limits. We interviewed officials with the Centers
for Medicare & Medicaid Services (CMS) and the Federal Office of Rural
Health Policy (FORHP), which administers a grant program supporting
CAHs. We interviewed administrators of 24 CAHs and potential CAHs
across 10 states, and made site visits to 7 of these hospitals in 3
states. We also interviewed state staff administering FORHP grants, and
conducted an e-mail survey of state CAH coordinators.[Footnote 7] We
did our work in accordance with generally accepted government auditing
standards from April 2001 through August 2003. A detailed discussion of
our scope and methodology is in appendix I.
Results in Brief:
Existing CAHs averaged six fewer beds and about three fewer patients
per day prior to their conversion than did potential CAHs. Existing
CAHs had to make smaller operational changes to qualify for CAH status,
such as reducing bedsize or length of stay, than potential CAHs would
have had to make if they had chosen to convert. While both groups had a
median loss on Medicare inpatient and outpatient services, existing
CAHs tended to experience bigger losses prior to their conversion (8.9
percent) than did potential CAHs (0.8 percent). Existing CAHs also had
a median loss on all sources of revenue of 0.3 percent before
conversion, while potential CAHs had a median gain of 1.8 percent.
The effective ban on CAHs operating DPUs may have contributed to the
disparity between urban and rural areas in the availability of
inpatient psychiatric and rehabilitation services in fiscal year 1999.
While one-quarter of Medicare beneficiaries reside in rural areas, only
8 percent of rehabilitation hospital and DPU beds and 17 percent of
psychiatric hospital and DPU beds were in rural areas in fiscal year
1999. The subsequent closure of 25 DPUs by hospitals converting to CAH
status may have exacerbated this difference in availability. Of the 93
potential CAHs that operated a DPU, about half lost money on Medicare
inpatient and outpatient services, giving them a financial incentive to
convert. If, however, the other financial benefits associated with the
DPU exceeded their losses under the PPS, these potential CAHs would
have a countervailing incentive to stay under the PPS rather than close
their DPU and convert. Some rural hospital administrators told us that,
even when it was financially advantageous to seek CAH status, they were
reluctant to close their DPU because it is needed to maintain access to
psychiatric or rehabilitation services in the community they serve.
While allowing hospitals to convert to CAH status and retain their DPU
would alleviate this concern, extending cost-based reimbursement to
DPUs operated by CAHs diminishes the incentives for efficiency that are
inherent in PPS payments. If DPU patient stays and beds were counted
against current CAH limits without any adjustment, nearly all potential
CAHs with DPUs would have exceeded the limits in fiscal year 1999.
Among hospitals we studied, seasonal fluctuations in patient volume or
length of stay were common, particularly during the winter. Such
increases can be an obstacle for some hospitals considering CAH
conversion if it causes them to exceed the CAH patient census limit of
no more than 15 patients at any time or length of stay limit of an
annual average of 4 days. We found 129 potential CAHs that likely would
have been able to meet the CAH patient census limit in fiscal year 1999
if not for the seasonal increase in their patient census. While these
129 hospitals, as a group, averaged 13.2 patients per day over the
entire year, their daily census increased to an estimated average of
16.9 during their high season. If the CAH patient census limit were
changed from an absolute limit of 15 acute care patients per day to an
annual average of 15, these potential CAHs would have been able to
remain under such a limit because they all had an annual average below
15. It would not be necessary to increase the number of acute care beds
CAHs are allowed to maintain in order to implement this relaxation of
the patient census limit, since more than three-quarters of existing
CAHs and potential CAHs have swing bed[Footnote 8]s which they could
use to accommodate additional acute care patients beyond 15. About 40
percent of these 129 potential CAHs, however, had positive Medicare
margins, meaning they would have had little financial incentive to
switch from the PPS to the cost-based payment CAHs receive. In contrast
to the CAH patient census limit, the patient length-of-stay limit gives
CAHs the flexibility to keep some acute care patients beyond the limit
because it is an average.
We suggest that the Congress may wish to consider allowing hospitals
with DPUs to convert to CAH status while making allowances for DPU
beds, patients, and lengths-of-stay when determining CAH eligibility,
and that CAH-affiliated DPUs be paid under the same formulas as other
inpatient psychiatric or rehabilitation providers. We also suggest that
the Congress may wish to consider changing the CAH limit on acute care
patient census from an absolute limit of 15 acute care patients to an
annual average of 15 in order to give CAHs greater flexibility in the
management of their patient census.
In commenting on a draft of this report, the Department of Health and
Human Services said that these modifications to CAH eligibility
criteria would provide the needed flexibility for some additional
facilities to consider conversion to CAH status. The department also
emphasized several considerations, including maintaining financial
incentives for efficiency as well as health and safety standards for
DPUs, if they are allowed to be operated by a CAH.
Background:
CAHs are an outgrowth of the seven-state Essential Access Community
Hospital/Rural Primary Care Hospital (EACH/RPCH) program established in
1989. The BBA replaced the EACH/RPCH program with the state-
administered Rural Hospital Flexibility Program (the "Flex" Program),
which includes the CAH designation. The reimbursement component of the
Flex Program is the responsibility of CMS. The Flex Program also
includes a grant program that supports hospital participation in the
program as well as state emergency medical services systems (EMS), and
is the responsibility of the FORHP within the Health Resources and
Services Administration (HRSA).
The CAH program allows eligible rural hospitals to receive Medicare
payments based on their reasonable costs rather than under a PPS. Under
the Medicare inpatient PPS, hospitals are generally paid a fixed amount
per patient discharge, providing an incentive for hospitals to control
their costs to stay under this fixed amount because they can retain the
difference between the PPS payment and their costs. Under cost-based
reimbursement, hospitals are reimbursed for their reasonable costs,
which does not provide the same incentive to control costs, but
benefits hospitals whose Medicare costs exceed their PPS payments.
In addition to receiving cost-based payment for inpatient services to
Medicare beneficiaries, CAHs receive cost-based payment from Medicare
for skilled nursing care provided in their swing beds and for
outpatient care.[Footnote 9] To become a CAH, a hospital must meet
certain criteria with respect to its location, size, patient census,
and patient length of stay (see figure 1). CAHs are also subject to
different health and safety regulations, known as "conditions of
participation," from other acute care hospitals.[Footnote 10]
Figure 1: Major Eligibility Criteria for Critical Access Hospitals:
[See PDF for image]
Note: The Office of Management and Budget (OMB) defines a metropolitan
statistical area as a core area of at least 50,000 people together with
adjacent areas having a high degree of economic and social integration
with that core. Nonmetropolitan areas include all counties outside of a
metropolitan area.
[A] The statutory provision outlining the certification exception does
not specify the criteria for a hospital to be a necessary provider of
services.
[End of figure]
Growth in the number of CAHs has been steady (see figure 2). There is a
large concentration of CAHs in the central states, although 45 states
had at least one CAH as of September, 2002 (see figure 3).[Footnote 11]
Figure 2: Number of Critical Access Hospitals through Fiscal Year 2002:
[See PDF for image]
[End of figure]
Figure 3: Location of the 681 Critical Access Hospitals, September
2002:
[See PDF for image]
Note: Some Critical Access Hospitals may not be visible because they
are obscured by state boundary lines.
[End of figure]
Since the inception of the CAH program, two factors have been important
in increasing the number of hospitals qualifying for the designation.
First, the length-of stay criterion was changed. Until 1999, patient
stays at CAHs were limited to 4 days, after which patients would have
to be transferred to another health care facility or discharged. In
1999, the Congress relaxed the criterion to require that CAHs keep
their annual average length of stay to no more than 4 days.[Footnote
12] Second, states have widely utilized their authority to designate
hospitals as "necessary providers," thereby exempting such hospitals
from the otherwise applicable CAH criterion that they be more than 35
miles from the nearest hospital. According to the Rural Hospital
Flexibility Tracking Project (RHFTP), a little more than half of all
CAHs had qualified for the CAH program through state designation rather
than by meeting the mileage and location requirements, as of September
2002.[Footnote 13]
Hospitals considering CAH conversion weigh numerous factors in their
decision, including the impact on hospital finances and community
reaction. Financial impact studies are commonly used to estimate how a
hospital's reimbursement for services would change under CAH status.
The financial impact may change as Medicare reimbursements to hospitals
changes. For example, Medicare payment for hospital outpatient services
shifted in 2000 from cost-based payment to a new PPS for outpatient
services. Because CAHs are exempt from this PPS and continue to receive
cost-based payment for outpatient services, potential CAHs may factor
into their decision the impact of being paid reasonable costs, rather
than a fixed PPS payment, for outpatient services. They may also
consider the possible reaction from the community and from other health
care providers to CAH conversion. Some communities have been reluctant
to support a hospital's conversion because they perceive it as the last
step before closure. In other cases, hospital officials reported that
their physicians expressed concern that if a hospital became a CAH,
they would occasionally be unable to admit patients to it because this
would bring the CAH over the patient limit.
Distinct Part Units:
Clinical research has indicated better outcomes for patients who are
appropriately treated in inpatient psychiatric or rehabilitation
facilities, such as DPUs, rather than in general acute or post acute
care settings. For example, one study concluded that elderly depressed
patients who were treated in specialty psychiatric DPUs may have
received better treatment for their depression than similar patients
who were treated in general medical wards.[Footnote 14] Another study
found better outcomes among stroke patients treated in rehabilitation
facilities, such as DPUs, than those treated in nursing homes.[Footnote
15]
As separate sections of hospitals, psychiatric and rehabilitation DPUs
are subject to specific Medicare regulations regarding the types of
patients they admit and the qualifications of their staff.[Footnote 16]
Psychiatric DPUs may admit only patients whose condition requires
inpatient hospital care and are described by a psychiatric principal
diagnosis.[Footnote 17] Rehabilitation DPUs may treat only patients
likely to benefit significantly from intensive therapy services, such
as physical therapy, occupational therapy, or speech therapy. Both
types of DPUs must provide a specified range of services and employ
clinical staff with specialized training.
The Congress has required that CMS develop PPSs for both inpatient
rehabilitation and inpatient psychiatric providers, including DPUs, to
replace the payment methodology established by the Tax Equity and
Fiscal Responsibility Act of 1982 (TEFRA). Under TEFRA, providers that
had been exempted from the inpatient PPS, including inpatient
rehabilitation and psychiatric hospitals and DPUs, receive the lesser
of either their average cost per discharge or a provider-specific
target amount.[Footnote 18] In 2002, a PPS was implemented for
inpatient rehabilitation. Because a PPS for inpatient psychiatric
providers has yet to be implemented, psychiatric DPUs continue to be
paid under TEFRA.
The financial incentives associated with TEFRA payments differ from
those associated with cost-based payment. Under TEFRA, Medicare
payments are capped by a provider's target amount, giving hospitals an
incentive to restrain costs. By contrast, hospitals such as CAHs, which
are paid their reasonable costs, have less incentive to restrain costs
because their payments can increase as their costs increase.
Existing CAHs Had Fewer Beds and Patients and Lower Medicare Margins
Than Potential CAHs:
Most existing CAHs prior to their conversion had more beds in fiscal
year 1999 than CAHs are allowed. Most were likely able to reduce their
bedsize to 15 (or 25 with swing beds) to become CAHs without adjusting
their patient volume because their average patient census of 4.8 was
generally well below the CAH limit of 15 (see table 1). Likewise,
potential CAHs, on average, exceeded CAH bedsize limits in fiscal year
1999 and had a patient census well below 15. To meet the CAH limit,
existing CAHs, on average, had to reduce their bedsize by less than
potential CAHs would have had to if they had sought CAH status. Most
existing CAHs prior to their conversion and potential CAHs were below
the CAH length-of-stay limit.
Table 1: Selected Characteristics of Existing CAHs Prior to Their
Conversion and Potential CAHs, Fiscal Year 1999:
Existing CAHs[A] (pre-conversion); Total: 620; Average daily census:
4.8; Average length of stay (days): 3.5; Average bedsize: 30;
Percentage with swing beds: 85; Percentage exceeding bedsize limit: 61;
Percentage exceeding length-of-stay limit: 14.
Potential CAHs; Total: 683; Average daily census: 8.1; Average length
of stay (days): 3.8; Average bedsize: 36; Percentage with swing beds:
78; Percentage exceeding bedsize limit: 79; Percentage exceeding
length-of-stay limit: 21.
Source: Fiscal year 1999 Medicare hospital cost reports.
[A] Statistics on existing CAHs include CAH conversions reported
through January 1, 2003, but do not include CAHs that had already
converted to CAH status in fiscal year 1999 or for which cost report
data were not available for fiscal year 1999.
[End of table]
In fiscal year 1999, existing CAHs prior to their conversion generally
experienced greater losses on their inpatient and outpatient Medicare
services than did potential CAHs (see table 2), and therefore had
greater financial incentive to seek conversion. A small majority, 55
percent, of existing CAHs experienced losses on inpatient Medicare
services, while more than 60 percent of potential CAHs experienced
gains. Nearly all hospitals in both groups experienced losses on their
Medicare outpatient services. Across all revenue sources, existing CAHs
prior to their conversion experienced a 0.3 percent median loss, while
potential CAHs experienced a 1.8 percent median gain.
Table 2: Financial Performance of Existing CAHs Prior to Their
Conversion and Potential CAHs, Fiscal Year 1999:
Medicare inpatient; Median margin[A] (percent): Existing CAHs
(preconversion) (n= 542): -2.4; Median margin[A] (percent): Potential
CAHs (n= 683): 6.0; Hospitals with negative margins: Number
(percent) of existing CAHs (preconversion): 296 (55); Hospitals with
negative margins: Number (percent) of potential CAHs: 254 (37);
Hospitals with positive margins: Number (percent) of existing
CAHs (preconversion): 236 (44); Hospitals with positive margins: Number
(percent) of potential CAHs: 419 (62).
Medicare outpatient; Median margin[A] (percent): Existing CAHs
(preconversion) (n= 542): -21.0; Median margin[A] (percent): Potential
CAHs (n= 683): -19.6; Hospitals with negative margins: Number
(percent) of existing CAHs (preconversion): 523 (96); Hospitals with
negative margins: Number (percent) of potential CAHs: 649 (96);
Hospitals with positive margins: Number (percent) of existing
CAHs (preconversion): 11 (2); Hospitals with positive margins: Number
(percent) of potential CAHs: 14 (2).
Medicare inpatient and outpatient; Median margin[A] (percent):
Existing CAHs (preconversion) (n= 542): -8.9; Median margin[A]
(percent): Potential CAHs (n= 683): -0.8; Hospitals with
negative margins: Number (percent) of existing CAHs (preconversion):
398 (74); Hospitals with negative margins: Number (percent) of
potential CAHs: 343 (51); Hospitals with positive margins:
Number (percent) of existing CAHs (preconversion): 136 (25); Hospitals
with positive margins: Number (percent) of potential CAHs: 322 (48).
Total facility (all payers); Median margin[A] (percent): Existing
CAHs (preconversion) (n= 542): -0.3; Median margin[A] (percent):
Potential CAHs (n= 683): 1.8; Hospitals with negative margins:
Number (percent) of existing CAHs (preconversion): 277 (51); Hospitals
with negative margins: Number (percent) of potential CAHs: 260 (38);
Hospitals with positive margins: Number (percent) of existing
CAHs (preconversion): 255 (47); Hospitals with positive margins: Number
(percent) of potential CAHs: 406 (60).
Source: Fiscal year 1999 Medicare hospital cost reports.
Notes: For each of the four calculations of hospital margins, a small
number of hospitals were excluded because of incomplete data or because
their margins were extreme outliers. Three to 17 potential CAHs were
excluded among the four calculations, and 2 to 10 existing CAHs were
excluded. In addition, 78 existing CAHs do not have pre-conversion PPS
margins statistics for fiscal year 1999 because they did not meet
criteria used for the margins calculation. Results do not reflect the
effects of the outpatient PPS, which was implemented in 2000.
[A] A margin is the difference between a hospital's revenue and costs,
divided by its revenues.
[B] an on CAHs Operating DPUs May Have Contributed to Diminished
Availability of Services in Rural Areas:
[End of table]
The effective ban on CAHs operating DPUs may have contributed to the
disparity between urban and rural areas in the availability of
inpatient psychiatric and rehabilitation services in fiscal year 1999.
Twenty-five existing CAHs had to close their DPU as part of becoming
CAHs. Of the 93 potential CAHs that operated a DPU (one-seventh of all
potential CAHs), about half lost money on their Medicare inpatient and
outpatient services, giving them a financial incentive to convert. If,
however, the other financial benefits associated with the DPU exceeded
their combined losses on inpatient and outpatient services, these
potential CAHs would have had a countervailing incentive to stay under
the PPS, rather than close their DPU and convert. Some rural hospital
administrators told us that, even when it was financially advantageous
to seek CAH status, they were reluctant to close their DPU because it
was needed to maintain access to psychiatric or rehabilitation services
in the community they serve. While allowing hospitals to convert to CAH
status and retain their DPU would alleviate this concern, extending
cost-based reimbursement to DPUs operated by CAHs diminishes the
incentives for efficiency that are inherent in PPS payments. If DPU
patient stays and beds were counted against current CAH limits without
any adjustment, nearly all potential CAHs with DPUs would have exceeded
either the bedsize or length of stay limit in fiscal year 1999.
CAH Eligibility Requirements Led to DPU Closures in Rural Communities:
The closure of 25 DPUs by hospitals that needed to relinquish their DPU
as part of becoming a CAH may have contributed to the lower
availability of inpatient psychiatric and rehabilitation services in
rural areas. Inpatient psychiatric and rehabilitation providers are
concentrated in urban areas, and DPUs are least common among smaller
rural hospitals. Only 8 percent of rehabilitation beds and 17 percent
of psychiatric beds were located in rural areas in fiscal year 1999,
while about 25 percent of Medicare beneficiaries live in rural areas.
In fiscal year 1999, 14 percent (93) of potential CAHs operated a
DPU.[Footnote 19] By comparison, 37 percent of larger rural hospitals
operated a DPU, and 53 percent of urban hospitals operated a DPU.
DPUs may be less common in rural areas due to the challenge of finding
the resources needed to open a DPU. Hospital representatives and
officials from rural health organizations said the difficulty in
finding the specialized staff required to operate a DPU likely prevents
many small rural hospitals from opening a DPU.
Many Potential CAHs Had No Financial Incentive to Close DPU:
In fiscal year 1999, nearly half the potential CAHs with a DPU
experienced net gains on their combined inpatient and outpatient
payments for Medicare services (see table 3). These potential CAHs had
a financial incentive to continue under the PPS because this allowed
them to continue receiving Medicare payments that were higher than
their costs, rather than being paid only their reasonable costs as a
CAH. The 47 potential CAHs with DPUs that experienced losses on their
combined inpatient and outpatient Medicare payments would more likely
have a financial incentive to seek CAH status.
Table 3: Financial Performance of Potential CAHs with DPUs, Fiscal Year
1999:
Medicare inpatient; Median margin[A] in percentages (n = 93): 3.9;
Number (percent) of potential CAHs with negative margins: 35 (38);
Number (percent) of potential CAHs with positive margins: 56 (62).
Medicare outpatient; Median margin[A] in percentages (n = 93): -
17.5; Number (percent) of potential CAHs with negative margins: 88
(97); Number (percent) of potential CAHs with positive margins: 0 (0).
Medicare inpatient and outpatient; Median margin[A] in percentages
(n = 93): -1.1; Number (percent) of potential CAHs with negative
margins: 47 (53); Number (percent) of potential CAHs with positive
margins: 41 (47).
Total facility (all payers); Median margin[A] in percentages (n =
93): 0.6; Number (percent) of potential CAHs with negative margins: 42
(46); Number (percent) of potential CAHs with positive margins: 46
(51).
Source: Fiscal year 1999 Medicare hospital cost reports.
Notes: For each of the four calculations of hospital margins, three or
fewer hospitals were excluded because of incomplete data or because
their margins were extreme outliers. Results do not reflect the effects
of the outpatient PPS, which was implemented in 2000.
[A] A margin is the difference between a hospital's revenue and costs,
divided by its revenues.
[End of table]
Potential CAHs with DPUs can compare the financial benefits of CAH
conversion to the benefits of keeping their DPUs. Some that suffered
losses on their inpatient and outpatient Medicare payments may lack a
financial incentive to become a CAH because DPU revenues help offset
those losses. If the projected increase in revenue under cost-based
payment that a hospital would receive as a CAH is lower than the loss
of revenue from having to close its DPU, the hospital may chose not to
convert to CAH status. Just over half of the DPUs operated by potential
CAHs had net gains on their Medicare payments (see table 4). A DPU may
also provide a financial benefit to the hospital because it enables the
hospital to spread its fixed costs over more services. Several
administrators of potential CAHs with a DPU whom we interviewed stated
that their DPU had contributed positively to the hospital's financial
situation, providing a revenue source they would be reluctant to
relinquish to gain CAH status.
Table 4: Medicare Margins for DPUs of Potential CAHs, Fiscal Year 1999:
DPUs of potential CAHs: Psychiatric; Number: 86; Median Medicare
margin[A] (percent): 0.9; Number (percent) of DPUs with negative
margins: 28 (33); Number (percent) of DPUs with positive margins: 47
(55).
DPUs of potential CAHs: Rehabilitation; Number: 12; Median Medicare
margin[A] (percent): 0.0; Number (percent) of DPUs with negative
margins: 5 (42); Number (percent) of DPUs with positive margins: 5
(42).
DPUs of potential CAHs: All; Number: 98; Median Medicare margin[A]
(percent): 0.9; Number (percent) of DPUs with negative margins: 33
(34); Number (percent) of DPUs with positive margins: 52 (53).
Source: Fiscal year 1999 Medicare hospital cost reports.
Notes: Because 5 of the potential CAHs had both a psychiatric and
rehabilitation DPU, there are a total of 98 DPUs among the 93 potential
CAHs. Margin information is not included for 11 psychiatric DPUs and 2
rehabilitation DPUs due to incomplete data or the exclusion of units
whose margins were at extreme outliers. Results do not reflect the
effects of the inpatient rehabilitation PPS, which was implemented in
January 2002.
[A] A margin is the difference between a hospital's revenue and costs,
divided by its revenues.
[End of table]
Hospitals with DPUs Expressed Reluctance to Seek CAH Conversion If
Access to Care Could Be Jeopardized:
While hospitals report that the projected financial impact is generally
a key factor in the decision about whether to become a CAH,[Footnote
20] some potential CAHs with DPUs also consider how local access to
services would be affected if the DPU were closed. Some rural hospital
administrators told us that, even when it was financially advantageous
to seek CAH status, they were reluctant to close their DPU because they
believed it was needed to maintain access to psychiatric or
rehabilitation services in their community. Several hospital
administrators and state health officials emphasized the need for
patients to be near their family during treatment and the difficulty
that some families would have if they had to travel outside their
community to visit family members receiving treatment. Other
administrators said that if their DPU closed, alternative sources for
these services could be as much as 165 miles away. We were also told of
difficulties in several states with referring psychiatric patients to
hospitals because of a lack of available beds or because referral
hospitals prefer not to take patients with significant behavioral
issues or believe that psychiatric services should be provided in
smaller community-based facilities.
Paying DPUs Associated with CAHs Reasonable Costs Would Reduce
Incentives to Operate Efficiently:
If potential CAHs were allowed to convert to CAH status while retaining
their DPU, the payment methodology applied to the DPUs could remain
unchanged or could be shifted to cost-based payment along with the
acute care hospital services. Hospitals that have been able to keep
their DPU costs below their Medicare payments under the current
methodologies (rehabilitation PPS for rehabilitation DPUs or TEFRA
payment for psychiatric DPUs) would likely prefer no change because
they can continue to keep their net gains; hospitals that have DPU
costs exceeding their current Medicare payments would likely prefer
cost-based payment.
If CAHs were allowed to have DPUs and the DPUs were shifted to cost-
based payment, diminished incentives for efficiency could result in
higher costs per case. Under cost-based reimbursement, a hospital can
receive higher payments if its costs increase. Under the rehabilitation
PPS or TEFRA methodologies currently applied to DPUs, their payments
cannot exceed a predetermined amount, creating pressure on them to
operate efficiently.
Most Potential CAHs with DPUs Exceeded CAH Bedsize and Length-of-Stay
Limits When DPUs' Patients Were Counted:
If CAHs were allowed to operate DPUs and the DPU beds and patients'
length of stay were counted against the CAH limits, only one of the 93
potential CAHs with DPUs would have met both limits in fiscal year
1999. Among these 93 potential CAHs, the median bedsize of psychiatric
DPUs was 11 and the median bedsize of rehabilitation DPUs was 13. If
their DPU beds, acute care beds and swing beds were added together, 88
would have exceeded the CAH bedsize limit. Similarly, psychiatric
inpatient stays at these potential CAHs averaged 11.8 days, and
rehabilitation DPU inpatient stays averaged 13.7 days, both
significantly longer than the CAH limit of an annual average of 4 days.
About eighty percent of the potential CAHs with DPUs exceeded the CAH
length-of-stay limit when the DPU length of stay and acute care length
of stay were counted together.
Seasonal Variation in Patient Census Is Common and May Impede CAH
Eligibility for Hospitals Near the CAH Limit:
Hospitals we studied commonly experienced at least a small seasonal
increase in their patient census, most often during winter. Such
increases can be an obstacle for some hospitals considering CAH
conversion if it causes them to exceed the CAH patient census limit of
no more than 15 patients at any time, or length of stay limit of an
average of 4 days. We found 129 potential CAHs that likely would have
been able to meet the patient census limit of 15 in 1999 if not for the
seasonal increase in their patient census. About 40 percent of these
129 potential CAHs, however, had positive Medicare margins, meaning
they would have little financial incentive to switch from the PPS to
CAH cost-based payment. In contrast to the CAH patient census limit,
the patient length of stay limit is an annual average, and gives CAHs
the flexibility to occasionally keep some acute care patients longer
than 4 days as long as the average remains below 4.
Most Hospitals Experience Higher Patient Census during Winter:
Among hospitals we studied, seasonal fluctuations in patient volume
were common. In 1999, over 80 percent of potential CAHs had an increase
in their patient census averaging at least one additional patient per
day during a 3-month period. To assess whether this finding is
consistent with small and medium-size hospitals in general, we analyzed
Medicare patient claims for 2,139 hospitals with an average census of
no more than 50 patients and found that about 90 percent had an
increase in their patient census averaging at least one additional
patient per day during a 3-month period of 1999.
For nearly three-quarters of potential CAHs, the patient volume
increase in 1999 occurred during the winter. This pattern was
consistent with reports from hospital officials that their patient
census often increased during the winter due to a higher incidence of
flu and pneumonia. The seasonal increase in patient census was greater
for larger potential CAHs. For example, potential CAHs with 41 to 60
beds averaged 2.8 patients more per day during their peak 3-month
period, while potential CAHs with no more than 15 beds averaged 1.3
patients more per day during this period (see table 5).
Table 5: Seasonal Increase in Average Acute Care Patient Census among
Potential CAHs, by Bedsize, 1999:
Bedsize: 1-15; Number of potential CAHs: 45; Estimated 3-month high
season average: 3.5; Patient census: Annual average: 2.2; Annual
average: Potential CAHs with a high season average census
exceeding thresholds: Exceeded 15 acute care patients: 0; Potential
CAHs with a high season average census exceeding thresholds: Exceeded
20 acute care patients: 0.
Bedsize: 16-25; Number of potential CAHs: 124; Estimated 3-month high
season average: 7.2; Patient census: Annual average: 5.5; Annual
average: Potential CAHs with a high season average census
exceeding thresholds: Exceeded 15 acute care patients: 3; Potential
CAHs with a high season average census exceeding thresholds: Exceeded
20 acute care patients: 0.
Bedsize: 26-40; Number of potential CAHs: 284; Estimated 3-month high
season average: 10.5; Patient census: Annual average: 8.3; Annual
average: Potential CAHs with a high season average census
exceeding thresholds: Exceeded 15 acute care patients: 40; Potential
CAHs with a high season average census exceeding thresholds: Exceeded
20 acute care patients: 2.
Bedsize: 41-60; Number of potential CAHs: 195; Estimated 3-month high
season average: 13.2; Patient census: Annual average: 10.4; Annual
average: Potential CAHs with a high season average census
exceeding thresholds: Exceeded 15 acute care patients: 72; Potential
CAHs with a high season average census exceeding thresholds: Exceeded
20 acute care patients: 3.
Bedsize: >60; Number of potential CAHs: 35; Estimated 3-month high
season average: 13.3; Patient census: Annual average: 10.6; Annual
average: Potential CAHs with a high season average census
exceeding thresholds: Exceeded 15 acute care patients: 14; Potential
CAHs with a high season average census exceeding thresholds: Exceeded
20 acute care patients: 0.
Bedsize: Total; Number of potential CAHs: 683; Estimated 3-month high
season average: 10.4; Patient census: Annual average: 8.1; Annual
average: Potential CAHs with a high season average census
exceeding thresholds: Exceeded 15 acute care patients: 129; Potential
CAHs with a high season average census exceeding thresholds: Exceeded
20 acute care patients: 5.
[End of table]
Source: GAO analysis of Medicare inpatient claims.
Note: Because this analysis was based on hospitalizations of Medicare
patients, rather than all patients, we used the hospital's annual ratio
of all patients to Medicare patients to estimate each hospital's total
patient census by season. (See app. I for a description of our
methodology.):
Because CAH Patient Census Limit Is Absolute, Potential CAHs Near the
Limit May Have Difficulty Staying under It:
There were 129 potential CAHs that had at least a slight seasonal
increase in 1999 that pushed them over the CAH limit of 15 acute care
patients per day for some portion of the year. These 129 potential CAHs
had an average daily patient census of about 13.2, with none having an
annual average above 15. But these potential CAHs had an estimated
average acute care patient census of 16.9 during their peak season (see
table 6), nearly two patients per day higher than the CAH limit.
Table 6: Potential CAHs with Estimated Seasonal Increases in Patient
Census That Pushed Them over CAH Limit, 1999:
Potential CAHs with a seasonal increase in patient census: Estimated
average increase in patients per day during seasonal increase; 129:
3.7.
Potential CAHs with a seasonal increase in patient census: Total annual
average daily census; 129: 13.2.
Potential CAHs with a seasonal increase in patient census: Estimated
total average daily census during seasonal increase; 129: 16.9.
Source: GAO analysis of Medicare inpatient claims.
Note: Because this analysis was based on hospitalizations of Medicare
patients, rather than all patients, we used the hospital's annual ratio
of all patients to Medicare patients to approximate each hospital's
total patient census by season.
[End of table]
Significant Number of Potential CAHs with Seasonal Increase in Patient
Census Have No Financial Incentive to Become CAHs:
About 40 percent of the 129 potential CAHs with seasonal increases that
pushed them over the CAH patient census limit had net gains on combined
inpatient and outpatient payments for Medicare services (see table 7).
These potential CAHs would have a financial incentive to remain under
the PPS, where they can keep the difference between payments and their
costs, rather than convert to CAH status, where they would be paid only
their reasonable costs.
Table 7: Financial Performance of Potential CAHs with a Seasonal
Increase in Patient Census That Pushed Them over CAH Limit, Fiscal Year
1999:
Medicare inpatient; Median margins[A] in percent (n=129): 2.4;
Number (percent) of hospitals with negative margins: 57 (44); Number
(percent) of hospitals with positive margins: 72 (56).
Medicare outpatient; Median margins[A] in percent (n=129): -19.3;
Number (percent) of hospitals with negative margins: 122 (95); Number
(percent) of hospitals with positive margins: 5 (4).
Medicare inpatient and outpatient; Median margins[A] in percent
(n=129): -2.7; Number (percent) of hospitals with negative margins: 75
(59); Number (percent) of hospitals with positive margins: 52 (41).
Total facility (all payers); Median margins[A] in percent (n=129):
2.5; Number (percent) of hospitals with negative margins: 47 (36);
Number (percent) of hospitals with positive margins: 82 (64).
Source: Fiscal year 1999 Medicare hospital cost reports.
Note: For each of the four calculations of hospital margins, two or
fewer hospitals were excluded due to incomplete data or because their
margins were extreme outliers. Results do not reflect the effects of
the outpatient PPS, which was implemented in 2000.
[A] A margin is the difference between a hospital's revenue and costs,
divided by its revenues.
[End of table]
Remaining under Length-of-Stay Limit Is Manageable Because It Is an
Average:
Seasonal fluctuations in patient length of stay were also common among
hospitals we studied. Among the 2,139 hospitals with a patient census
of no more than 50, about three-fourths had a seasonal increase in
their Medicare length of stay of at least one-third of a day. Sixty-
five potential CAHs had an average Medicare patient length of stay
below 4 days (3.8 days) for 9 months of fiscal year 1999, but their
average length of stay during the other 3 months was high enough (4.8
days) to push their Medicare annual average over the 4-day CAH limit,
to 4.2 (see table 9). Among the 620 existing CAHs, 60 had an annual
average length of stay greater than 4.2 days before they converted.
These existing CAHs have been subject to the 4-day limit since they
became CAHs, suggesting that potential CAHs with an annual average of
4.2 days would be able to remain under the limit if they converted.
Table 8: Potential CAHs with Seasonal Increase in Medicare Patients'
Length of Stay That Pushed Them over the 4-day CAH Limit, 1999:
Potential CAHs with increase pushing them over the limit: 65.
Average Medicare length of stay during 9-month period (days): 3.8.
Average Medicare length of stay during 3-month seasonal increase
(days): 4.8.
Annual average Medicare patient length of stay (days): 4.2.
Source: GAO analysis of Medicare inpatient claims.
[End of table]
The relaxation of the CAH length-of-stay limit in 1999 from an absolute
limit of 4 days to an annual average of 4 days has made it easier to
meet because hospitals are able to keep some patients for a longer
period, as long as the hospital's annual average remains below the
limit. Examples of how a hospital can manage its length of stay during
the course of a year include discharging longer-stay patients to
skilled nursing care in the hospital's swing beds or transferring them
to referral facilities. Administrative staff of one rural hospital
considering CAH conversion reported that its average length of stay
dropped over 3 years from 5.3 to 3.7 days. The decline, in their
opinion, was due to factors such as utilization review, emphasis on
community-based services, increased use of post-acute care, and
education of staff.
Conclusions:
The ineligibility of hospitals with DPUs or with seasonal increases in
patient stays that push them over a CAH limit impedes CAH conversion
for some hospitals that might otherwise be able to become CAHs. The
ineligibility of hospitals with DPUs may result in the loss of some
rural DPU services if potential CAHs close their DPU as part of
becoming a CAH. Hospitals seeking CAH status may occasionally need to
transfer patients to stay under the CAH limit of 15 acute care patients
if they otherwise periodically exceed 15 due to seasonal increases.
Since inpatient rehabilitation and psychiatric services are less
prevalent in rural areas, enabling rural DPUs to continue operating can
help preserve the availability of services. In fiscal year 1999, 25
hospitals ceased operation of their DPU as part of becoming a CAH, and
beneficiaries in the affected communities have lost a local provider of
these services. Any of the 93 potential CAHs with a DPU may also
relinquish it to convert to CAH status if hospital officials conclude
that shifting to CAHs' cost-based payment is the best way to maximize
revenue and preserve the other services they offer. Among these 93
potential CAHs, 47 had net losses on Medicare services in fiscal year
1999, indicating they might benefit from CAH conversion.
Because it is generally difficult for rural hospitals to staff and
maintain a DPU, it is unlikely that allowing CAHs to operate DPUs would
result in many existing CAHs opening new DPUs, as long as the DPUs
continue to be paid under PPS and TEFRA. If DPUs operated by CAHs were
paid their reasonable costs, however, DPUs would have less financial
incentive to operate efficiently. The experience of rural DPUs under
the new rehabilitation PPS or the forthcoming psychiatric PPS may
provide information about whether Medicare payments under these PPSs
will be appropriate for rural DPUs.
If CAHs were allowed to operate DPUs, they would generally not be able
to stay under the limits on bedsize, length of stay, and patient census
if the DPU beds and patient stays were counted against current limits.
Relaxing the limits for CAHs with DPUs or not counting the DPU beds or
patient stays for purposes of determining whether the CAH meets the
limits would enable some or all potential CAHs with DPUs to convert to
CAH status.
Relaxing the CAH census limit to an annual average of 15 acute care
patients rather than an absolute limit of 15 would accommodate the 129
potential CAHs that exceeded the current limit due to a seasonal
increase as they all had an annual average census below 15. Such a
change would provide CAHs greater flexibility in their management of
patient census, just as the relaxation of the length of stay limit in
1999 to an annual average of 4 days provided CAHs greater flexibility
in their management of patients' length of stay. CAHs would then not be
required to transfer patients whenever they would otherwise exceed the
limit, as long as they manage their census so that their annual average
is below the limit. It would not be necessary to increase the number of
acute care beds CAHs are allowed to maintain in order to implement this
relaxation of the patient census limit. More than three-quarters of
existing CAHs and potential CAHs have swing beds which they could use
to accommodate additional acute care patients beyond 15, since the
limit is 25 beds for CAHs with acute and swing beds. Among the 129
potential CAHs, about 60 percent had net losses on Medicare services in
fiscal year 1999, indicating they might benefit from CAH conversion,
while the 40 percent with net gains would less likely have the
financial incentive to convert.
Many potential CAHs that decide to seek CAH status would need to adjust
their bedsize or length of stay to become CAHs, just as about 60
percent of existing CAHs needed to reduce their bedsize and 14 percent
needed to reduce their length of stay in fiscal year 1999. CAH status
and the cost-based reimbursement that goes with it have proven to be
attractive enough that hospitals have been willing to make the
necessary adjustments.
Matters for Congressional Consideration:
We suggest that the Congress may wish to consider allowing hospitals
with DPUs to convert to CAH status while making allowances for DPU
beds, patients, and lengths-of-stay when determining CAH eligibility,
and that CAH-affiliated DPUs be paid under the same formulas as other
inpatient psychiatric or rehabilitation providers. We also suggest that
the Congress may wish to consider changing the CAH limit on acute care
patient census from an absolute limit of 15 acute care patients to an
annual average of 15 to give CAHs greater flexibility in the management
of their patient census.
Agency Comments and Our Evaluation:
In commenting on a draft of this report, the Department of Health and
Human Services said that these modifications to CAH eligibility
criteria would provide the needed flexibility for some additional
facilities to consider conversion to CAH status. It stated that the key
is to provide the proper incentives for facilities to convert when they
meet the statutory requirements and when it is the right thing to do
for a particular community.
HHS suggested that we further emphasize several issues regarding CAH
eligibility and payment. (See app. II for the full text of HHS's
written comments.) HHS pointed out that it is important to consider
that the financial incentives for efficiency under TEFRA payments to
psychiatric DPUs or rehabilitation PPS payments to rehabilitation DPUs
would not be preserved if CAHs were able to claim cost-based
reimbursement for their DPUs, and therefore HHS said such DPUs should
continue to be paid separately from the CAH. The department also
emphasized that CAHs are required to meet more limited health and
safety standards compared to other acute care hospitals and raised
concerns that any DPUs operated by CAHs would likewise be subject to
more limited health and safety standards unless the Congress acted to
maintain standards currently in place for DPUs. Furthermore, HHS
suggested that we analyze the extent to which inpatient rehabilitation
and psychiatric services are available to rural residents beyond their
local hospitals in order to determine whether such services are more or
less accessible to rural residents than other specialty services. The
department expressed concern that non-CAH hospitals that are within
close proximity to CAHs may perceive unfair treatment if such CAHs are
allowed to operate DPUs. Finally, in commenting on the relaxation of
the CAH acute care patient census limit to an annual average of 15, HHS
proposed that we consider suggesting corresponding changes to the CAH
bedsize limit.
As we noted in the draft report, incentives for efficiency that exist
under the current payment systems for inpatient psychiatric and
rehabilitation services would not be preserved under cost-based
reimbursement. We revised the matters for congressional consideration
to specifically suggest that CAH-affiliated DPUs be paid under the same
formulas as other inpatient psychiatric or rehabilitation providers. We
also agree with HHS that there are differences in conditions of
participation between hospitals and CAHs and that appropriate health
and safety standards should be maintained for CAH-affiliated DPUs, and
we modified the report accordingly. However, determining what health
and safety standards should be applied to the DPUs of CAHs was beyond
the scope of this report. While we noted differences in the
availability of inpatient rehabilitation and psychiatric services
between rural and urban areas in the draft report, measuring in detail
the level of access rural residents have to various specialty services
was beyond the scope of this report. We believe that the close
proximity of non-CAH hospitals to CAHs with DPUs would only present a
fairness issue if such CAH-affiliated DPUs are paid cost-based
reimbursement or if they are subject to less stringent regulations. If
such DPUs operate under the same payment methodologies and regulations
as other DPUs, this would not be an issue. A detailed examination of
the levels of competition between CAH and non-CAH hospitals was beyond
the scope of this report. We clarified in the report that we are not
suggesting any changes to the CAH limits of 15 acute care beds or 25
total beds when swing beds are included, since most CAHs have swing
beds that could be used when the acute care patient census exceeds 15.
HHS also provided technical comments, which we have incorporated as
appropriate.
We are sending copies of this report to the Secretary of Health and
Human Services and interested congressional committees. We will also
make copies available to others upon request. In addition this report
is available at no charge on the GAO Web site at http://www.gao.gov.
If you have any questions about this report, please call me at (202)
512-7119. Other major contributors are listed in appendix III.
A. Bruce Steinwald
Director, Health Care - Economic and Payment Issues:
Signed by A. Bruce Steinwald:
List of Committees:
The Honorable Charles E. Grassley, Jr.
Chairman
The Honorable Max Baucus
Ranking Minority Member
Committee on Finance
United States Senate:
The Honorable Bill Thomas
Chairman
The Honorable Charles B. Rangel
Ranking Minority Member
Committee on Ways and Means
House of Representatives:
The Honorable W.J. "Billy" Tauzin
Chairman
The Honorable John D. Dingell
Ranking Minority Member
Committee on Energy and Commerce
House of Representatives:
[End of section]
Appendix I: Scope and Methodology:
To identify potential Critical Access Hospitals (CAHs), we selected
rural, non-CAH hospitals with an annual average patient census of 15 or
fewer acute care patients, based on patient census figures reported in
fiscal year 1999 Medicare cost reports.[Footnote 21] Any hospital that
had converted to CAH status as of January 1, 2003 was excluded from the
list of potential CAHs. We defined potential CAHs based on their annual
average census, rather than by bedsize, because average census better
represents the bed capacity a hospital would need to support its
current demand for services. If potential CAHs have more beds than
necessary to meet their patient demand, they can decertify beds in
order to meet CAH eligibility criteria. Our inclusion of hospitals with
an average census up to 15 is likely a high estimate of the number of
potential CAHs. Hospitals with an annual average of 15 acute care
patients per day may need more than 15 acute care beds to accommodate
variations in their patient census that periodically cause them to
exceed 15.
From the resulting list of 683 potential CAHs, we identified hospitals
operating rehabilitation or psychiatric distinct part units (DPUs), as
well as those with seasonal variation in patient census or length of
stay that caused them to exceed CAH limits. For our analysis of
seasonal variation in patient census, we used the volume of Medicare
patients as a proxy for total patient volume because national data on
day-to-day variation inpatient admissions were only available for
Medicare patients. We calculated from hospital cost reports the
Medicare share of each hospital's total acute care patient volume, and
for each hospital multiplied the CAH limit of 15 acute care patients by
its Medicare share in order to define a comparable limit based on
Medicare patient stays. For example, if a hospital's Medicare share of
patients was 67 percent in fiscal year 1999, then a Medicare census of
about 10 acute care patients was considered to be equivalent to a total
census of 15 acute care patients. Using Medicare inpatient claims data
for 1999, we defined seasonal variation in daily census as having a
period of 3 consecutive months with an average census greater than the
estimated limit, with the remaining nine months' census averaging below
the estimated limit. We identified 129 potential CAHs as having a
seasonal increase that caused them to exceed the limit for a 3-month
period, while staying under for the remaining 9 months. To estimate
total patient census for these hospitals for each season, we multiplied
their Medicare census by their ratio of total patients to Medicare
patients. We defined seasonal variation in length of stay as having a
period of 3 consecutive months with an average Medicare length of stay
greater than 4 days with an average for the remaining 9 months of less
than 4 days. In addition, we identified only those hospitals for which
their seasonal increase in length of stay caused them to exceed the CAH
limit of an average of 4 days.
Because we used Medicare utilization to estimate hospitals' total
patient utilization for each season, the hospitals we identified as
having seasonal variation that causes them to exceed CAH limits may not
be precisely the same set of hospitals that would have been identified
if claims data for all patients had been available. Rather, our
analysis provides an estimate of the proportion of potential CAHs so
affected. By broadly defining seasonal variation, we captured all the
hospitals that have census or length of stay fluctuations around the
CAH limits, regardless of the magnitude of the fluctuation.
We calculated Medicare margins and total facility margins using fiscal
year 1999 Medicare hospital cost report data, using methods developed
jointly by the Centers for Medicare & Medicare Services (CMS) Office of
the Actuary and the Medicare Payment Advisory Commission. The reported
median margins are hospital-weighted, meaning that each hospital counts
equally in the calculation of the median, regardless of differences in
hospital size or total revenues.
We interviewed officials at CMS, at the Federal Office of Rural Health
Policy, and state staff administering Flex Program grants in 11 states
(table 9). To get a comprehensive perspective of how current and
potential CAHs are affected by CAH eligibility criteria, we also
conducted an e-mail survey of all state CAH coordinators, and received
e-mail responses or directly interviewed 42 out of 47. In addition, we
interviewed researchers with the Rural Hospital Flexibility Tracking
Project, an evaluation of the Flex Program funded by the FORHP. We
interviewed administrators of 24 CAHs and potential CAHs across 10
states, and made site visits to 7 of these hospitals in 3 states. These
10 states were selected based on having significant CAH enrollment or
potential enrollment, and representing different regions of the
country.
Table 9: Summary of Site Visits and Interviews:
State: Alabama; Interviewed state staff administering Flex Program
grants: No; Hospital site visit: No; Interviewed hospital
administrators: Yes; Number of administrators of existing and potential
CAHs interviewed: 1.
State: Indiana; Interviewed state staff administering Flex Program
grants: Yes; Hospital site visit: Yes; Interviewed hospital
administrators: Yes; Number of administrators of existing and
potential CAHs interviewed: 2.
State: Iowa; Interviewed state staff administering Flex Program grants:
Yes; Hospital site visit: No; Interviewed hospital administrators:
Yes; Number of administrators of existing and potential CAHs
interviewed: 2.
State: Kansas; Interviewed state staff administering Flex Program
grants: Yes; Hospital site visit: No; Interviewed hospital
administrators: Yes; Number of administrators of existing and potential
CAHs interviewed: 2.
State: Mississippi; Interviewed state staff administering Flex Program
grants: Yes; Hospital site visit: Yes; Interviewed hospital
administrators: Yes; Number of administrators of existing and
potential CAHs interviewed: 5.
State: Montana; Interviewed state staff administering Flex Program
grants: Yes; Hospital site visit: No; Interviewed hospital
administrators: Yes; Number of administrators of existing and potential
CAHs interviewed: 1.
State: Nebraska; Interviewed state staff administering Flex Program
grants: Yes; Hospital site visit: No; Interviewed hospital
administrators: No; Number of administrators of existing and
potential CAHs interviewed: No.
State: North Carolina; Interviewed state staff administering Flex
Program grants: Yes; Hospital site visit: Yes; Interviewed hospital
administrators: Yes; Number of administrators of existing and potential
CAHs interviewed: 2.
State: South Dakota; Interviewed state staff administering Flex Program
grants: Yes; Hospital site visit: No; Interviewed hospital
administrators: No; Number of administrators of existing and
potential CAHs interviewed: No.
State: Texas; Interviewed state staff administering Flex Program
grants: Yes; Hospital site visit: No; Interviewed hospital
administrators: Yes; Number of administrators of existing and potential
CAHs interviewed: 2.
State: Vermont; Interviewed state staff administering Flex Program
grants: Yes; Hospital site visit: No; Interviewed hospital
administrators: Yes; Number of administrators of existing and potential
CAHs interviewed: 1.
State: Washington; Interviewed state staff administering Flex Program
grants: Yes; Hospital site visit: No; Interviewed hospital
administrators: Yes; Number of administrators of existing and potential
CAHs interviewed: 6.
State: Total; Interviewed state staff administering Flex Program
grants: 11; Hospital site visit: 3; Interviewed hospital
administrators: 10; Number of administrators of existing and potential
CAHs interviewed: 24.
Source: GAO.
[End of table]
[End of section]
Appendix II: Comments from the Department of Health and Human Services:
DEPARTMENT OF HEALTH & HUMAN SERVICES Office of Inspector General:
AUG 27 2003:
Mr. A. Bruce Steinwald:
Director, Health Care - Economic and Payment Issues:
United States General Accounting Office Washington, D.C. 20548:
Dear Mr. Steinwald:
Enclosed are the Department's comments on your draft report entitled,
"Medicare: Modest Eligibility Expansion for Critical Access Hospital
Program Should Be Considered." The comments represent the tentative
position of the Department and are subject to reevaluation when the
final version of this report is received.
The Department also provided several technical comments directly to
your staff.
The Department appreciates the opportunity to comment on this draft
report before its publication.
Sincerely,
Signed for:
Dara Corrigan:
Acting Principal Deputy Inspector General:
Enclosure:
The Office of Inspector General (OIG) is transmitting the Department's
response to this draft report in our capacity as the Department's
designated focal point and coordinator for General Accounting Office
reports. OIG has not conducted an independent assessment of these
comments and therefore expresses no opinion on them.
Comments of the Department of Health and Human Services on the General
Accounting Office's Draft Report, "Medicare: Modest Eligibility
Expansion for Critical Access Hospital Program Should Be Considered"
(GAO-03-948):
The Department of Health and Human Services (Department) appreciates
the opportunity to review the General Accounting Office's (GAO) draft
report entitled, Medicare: Modest Eligibility Expansion for Critical
Access Hospital Program Should Be Considered. GAO suggests that
Congress may wish to consider allowing hospitals with distinct part
units (DPUs) to convert to critical access hospital (CAH) status. GAO
also suggests that Congress may wish to consider changing the CAH limit
on acute care patient census from an absolute limit of 15 patients to
an annual average of 15 patients.
The Department commends GAO for conducting a thorough review of an
issue that has raised concerns since the creation of the CAH
designation in 1997. The report shows that GAO investigators understand
the unique role played by CAHs in serving as key access points in
isolated rural communities and the need to balance access to essential
services with program integrity concerns for the Medicare program. The
Department believes the DPUs should continue to be paid separately from
the CAH, and therefore remain either under the rehabilitation
prospective payment system (PPS) or the soon-to-be-implemented
psychiatric hospital PPS.
The Department also agrees that the minor modifications recommended by
GAO will provide needed flexibility for some additional facilities to
consider conversion to CAH status. The key is to provide the proper
incentives for facilities to convert when they meet the statutory
requirements and when it is the right thing to do for a particular
community.
General Comments:
The Department has continued to monitor the appropriateness of current
Medicare policy toward rural providers, including critical access
hospitals (CAHs). Where appropriate, and when permitted by current law,
the Department has implemented administrative changes to reduce
provider burden and increase provider payments. For example, last year,
we issued an instruction waiving a previous requirement that CAHs
complete the Minimum Data Set (MDS) patient assessment for swing bed
patients. We realized that the collected MDS data was not being used by
the Department, and therefore acted to eliminate a costly
administrative burden on rural providers. We appreciate your
consideration of program improvements that would require a change in
statute.
Throughout the report, CAHs are described as facilities that differ
from other hospitals only in their payment method, bed size, and length
of stay. The report does not mention that CAHs are a separate provider
type from hospitals under the Medicare law, and have their own health
and safety standards, known as conditions of participation (COPS). The
CAHs, in keeping with their original status as small, limited service
providers, are required to meet only the much more limited COPS. One
possible statutory change not:
described in the report would be to link any change allowing CAHs to
open specialty facilities with the adoption of more stringent rules to
protect the health and safety of patients in such specialized
facilities. This issue is described in more detail in the section on
patient health and safety.
We are providing the following observations on the issues the report
raises:
Impact of Cost Reimbursement for Specialty Units:
The report recommends that Congress consider allowing CAHs to operate
psychiatric and rehabilitation DPUs and seems to assume that these
units would continue to be paid based on the Tax Equity and Fiscal
Responsibility Act of 1982 (TEFRA) payment policies and the inpatient
rehabilitation facility (IRF) PPS. As the report notes, the TEFRA
limits on payment to psychiatric units and the IRF PPS both include
incentives for efficient operation. These incentives would not be
preserved if CAHs were able to claim cost reimbursement for specialty
units. This factor should be considered in deciding whether to allow
cost reimbursement for specialty units of CAHs.
Current law permits CAHs which provide only acute services to
inpatients to maintain no more than 15 acute beds, while CABs with
swing-bed agreements may have up to 25 beds, as long as no more than 15
are used at any one time for acute inpatient care. The GAO recommends
changing the CAH acute care census limit from an absolute 15 patients
to an annual average of 15 patients. The GAO may want to consider
whether to recommend an appropriate adjustment to the bed count to
accommodate an average of 15 patients.
Health and Safety of Patients:
Throughout the report, CAHs are described as facilities that differ
from other hospitals only in their payment method, bed size, and length
of stay. The report does not mention that CAHs are a separate provider
type from hospitals under the Medicare law, and have their own health
and safety standards, known as conditions of participation (COPs).
Medicare hospitals, including those operating PPS-excluded units, are
subject to COPs including patient rights and discharge planning, that
can be especially important to psychiatric and rehabilitation patients.
The CAHs, in keeping with their original status as small, limited
service providers, are subject to the much more limited COPS. The PPS-
excluded hospital units also have to meet specific exclusion
requirements including requirements for psychiatric medical direction,
medical direction of rehabilitation services, and provision of
specialized psychiatric or rehabilitation nursing. These special
staffing requirements do not apply to CAHs.
It has been documented that it is difficult for rural hospitals to find
and maintain specialized staff to operate a DPU. We believe this
difficulty would extend to DPUs in CAHs and would eventually affect
patient safety. We suggest that the GAO consider:
whether additional health and safety COPS be added to the existing CAH
regulations to provide the same level of protection that exists for
patients served in DPUs of hospitals.
If Congress wishes to allow CAHs to open specialty units, it may also
want to consider removing the hospital/CAH distinction in connection
with COPS, so that hospital COPs would apply to CAHs. Congress may also
want to consider requiring that CAH specialty units meet the same
exclusion criteria now applicable to PPS hospitals.
Availability of Specialty Care in Rural Areas:
The report expresses concern that current CAH requirements may lead to
closure of some PPS-excluded psychiatric or rehabilitation units, but
does not indicate the extent to which such care might be available from
other sources, including PPS-excluded hospitals and units in nearby
communities. The GAO may want to consider investigating the volume of
services provided by the DPUs and the distance to, or capacity of, the
next closest facility providing these services. Residents of rural areas
may also travel voluntarily to larger but more distant facilities to
obtain psychiatric or rehabilitation services. Analysis of such factors
would help determine whether psychiatric and rehabilitation care is
more or less accessible to rural residents than other types of
specialty care.
Competition with Full-Service Hospitals:
Because of the extent to which States have given "necessary provider"
status to CAHs, many CAHs are far closer to other hospitals than
envisioned by the mileage limit in the CAH statute. Allowing CAHs to
develop specialty units may result in rural hospitals that have not
converted to CAH status claiming that CMS is creating an uneven playing
field.
[End of section]
Appendix III: GAO Contact and Staff Acknowledgments:
GAO Contact:
A. Bruce Steinwald, (202) 512-7119:
Acknowledgments:
Jean Chung, Chris DeMars, Michael Rose, Margaret Smith, and Kara Sokol
made key contributions to this report.
FOOTNOTES
[1] Under the PPS, hospitals are paid a fixed amount for each hospital
discharge, based on national average costs, adjusted for such factors
as local wage costs and type of illness treated.
[2] Pub. L. No. 105-33, § 4201(c), 111 Stat. 251, 373-374 (1997).
[3] CAH enrollment figures were provided by the Rural Hospital
Flexibility Tracking Project (RHFTP), a federally funded national
evaluation by a consortium of five rural health research centers and
the Rural Policy Research Institute.
[4] Pub. L. No. 106-554, App. F, § 206, 114 Stat. 2763A-463, 2763A-483
(2000).
[5] The Medicare cost report is the financial document that hospitals
are required to submit annually to the Centers for Medicare & Medicaid
Services (CMS). The reports include information about Medicare
inpatient and outpatient costs and payments, as well as information
about payments from other revenue sources.
[6] Most of the 683 potential CAHs (79 percent) exceeded the CAH
bedsize limit. We did not exclude these hospitals from our definition
of potential CAHs because hospitals have the option of reducing their
bedsize in order to become eligible for CAH conversion. Our inclusion
of hospitals with an average census up to 15 is likely a high estimate
of the number of potential CAHs because hospitals with an annual
average of 15 acute care patients per day may need more than 15 acute
care beds to accommodate variation in their patient census that
periodically causes them to exceed 15.
[7] New Jersey, Rhode Island, Delaware, and Washington D.C. do not
participate in the CAH program. All but 5 state CAH coordinators
participated in the e-mail survey or were interviewed.
[8] A hospital with swing beds can "swing" its beds between hospital
and skilled nursing levels of care, on an as needed basis.
[9] Among 42 states responding to a RHFTP survey, 17 states provide
enhanced Medicaid payments to CAHs, and 13 states provide enhanced
reimbursement for outpatient services.
[10] 42 C.F.R. §§ 485.601 et seq. (2002).
[11] Connecticut, Delaware, Maryland, New Jersey, and Rhode Island did
not have CAHs as of September 2002.
[12] Medicare, Medicaid and SCHIP Balanced Budget Refinement Act of
1999, Pub. L. No. 106-113, App. F, § 403(a), 113 Stat. 1501A-321,
1501A-370-372.
[13] List of CAH conversions by state downloaded from www.rupri.org/
rhfp-track on September 27, 2002.
[14] G. Norquist et al., "Quality of Care for Depressed Elderly
Patients Hospitalized in the Specialty Psychiatric Units or General
Medical Wards," Archives of General Psychiatry, vol. 52, no. 8 (1995).
[15] R. L. Kane et al., '"Functional Outcomes of Posthospital Care for
Stroke and Hip Fracture Patients under Medicare," Journal of the
American Geriatric Society, vol. 46, no. 12 (1998).
[16] For a hospital to establish a psychiatric DPU, Medicare
regulations require that a hospital must furnish, through the use of
qualified personnel, psychological services, social work, psychiatric
nursing, occupational therapy and recreational therapy. Inpatient
psychiatric services must be under the supervision of a clinical
director, service chief, or equivalent who is qualified to provide the
leadership required for an intensive treatment program, and who is
board certified in psychiatry. The DPU must have a director of nursing
who is a registered nurse with a master's degree in psychiatric or
mental health nursing or who is qualified by education and experience,
and a director of social services. There also must be an adequate
number of registered nurses to provide 24-hour-a-day coverage as well
as licensed practical nurses and mental health workers. 42 C.F.R. §
412.27 (2002). For a hospital to establish a rehabilitation DPU,
Medicare regulations require that a hospital must provide
rehabilitation nursing, physical and occupational therapy, speech
therapy, plus as needed, social services or psychological services and
orthotics and prosthetics. The unit must have a director of
rehabilitation who is experienced in rehabilitation and is a doctor of
medicine or a doctor of osteopathy. 42 C.F.R. § 412.29 (2002).
[17] 42 C.F.R. § 412.27(a) (2002). Psychiatric principal diagnoses are
listed in the Third Edition of the American Psychiatric Association
Diagnostic and Statistical Manual and in chapter 5 of the International
Classification of Diseases, 9th Edition Clinical Modification (ICD-9-
CM).
[18] TEFRA (Pub. L. No. 97-248, § 101(a)(1), 96 Stat. 324, 331-333)
established this payment methodology for classes of hospitals deemed
exempt from the PPS. The target amount is the PPS-exempt provider's
Medicare-allowable costs per patient stay in a designated base year,
inflated to the current year by an annual update factor.
[19] Eighty-one of the 93 operated only a psychiatric DPU, 7 operated
only a rehabilitation DPU, and 5 operated both types of DPUs.
[20] Rural Policy Research Institute, Rural Hospital Flexibility
Program Tracking Project Year Two Report (Columbia, Mo. 1999.).
[21] Medicare cost report data for fiscal year 1999 were used because
they were the most current complete data available. There is typically
a several year delay between the start of a fiscal year and the point
at which a complete set of audited hospital cost report data are
available for that year.
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