Choosing to convert to critical access hospital status

Health Care Financing Review, Fall, 2003 by Kathleen Dalton, Rebecca Slifkin, Stephanie Poley, Melissa Fruhbeis

INTRODUCTION

CAHs are a new class of Medicare providers, introduced through the Medicare Rural Hospital Flexibility Program (Flex Program) as part of the Balanced Budget Act (BBA) of 1997. Recognizing that many of the smallest rural hospitals were finding it difficult to recover their Medicare costs under the prospective payment system (PPS) rates, policymakers created the new designation of CAH, under which small, isolated facilities could meet Medicare's conditions of participation as a hospital with slightly less stringent staffing and service requirements, and could receive cost-based reimbursement for inpatient and outpatient services delivered to Medicare beneficiaries. Under cost-based reimbursement these facilities would be paid an interim rate throughout the year, based on each hospital's expected costs per inpatient day or the allowable outpatient cost-to-charge. After the close of their fiscal year (FY) they would receive retrospective settlements from the Medicare Program for the difference between interim payments received and total allowable cost as documented on the Medicare Cost Report.

States were required to develop comprehensive rural health plans and submit them for CMS approval before any of their hospitals could become eligible for CAH designation. Federal legislation also made new grant monies available to the rural health agencies that are managing Flex Programs, including 824 million per year for 5 years, to help underwrite the costs of developing and implementing these plans, with some additional startup grant funding for eligible States (Public Law 105-33; Federal Register, 1997; 1998).

CAHs are described as limited service hospitals, permitted to operate no more than 15 acute-care beds, plus an additional 10 if these are used as swing beds for long-term care (LTC) patients. In the original 1997 legislation, individual patient stays were limited to 96 hours. To qualify for CAH status a hospital needed to be classified as non-metropolitan for Medicare PPS payment purposes, be under government or not-for-profit control, and be located at least 35 road miles (15, in mountainous areas) from the nearest short-term general hospital. Individual States could, however, override the distance criterion by defining their own class of "necessary provider" using criteria set forth in their approved rural health plan. The Balanced Budget Refinement Act of 1999 subsequently expanded CAH eligibility by allowing for-profit hospitals to participate, and by including facilities that were identified as rural by their own State regulations, even if they were located in counties contained within metropolitan statistical areas (MSAs). The 1999 legislation also replaced the patient-level 96-hour length of stay (LOS) limit with a much less restrictive requirement, that the annual average LOS could be no more than 4 days.

CAHs were designed to expand on two earlier limited-service hospital models that had been permitted as Medicare demonstration programs in eight rural States, called Montana Medical Assistance Facilities (MAFs) and rural primary care hospitals (RPCHs). The requirements for participation in the earlier programs were more restrictive, as RPCHs were permitted a maximum of only 6 acute care beds (12 if they were approved for swing bed use), and their patients had either to be discharged or stabilized and transferred within 72 hours of admission (Federal Register, 1993). As with the Flex Program, MAFs and RPCHs were cost reimbursed. After the BBA was passed, former demonstration hospitals were allowed to convert to CAH status at the time that their respective State rural health plans were approved, and the State's demonstration programs were discontinued.

CAH status has proven to be a very popular option among qualifying hospitals. By the end of 2001, 545 hospitals in 43 States had received this designation--1 of every 9 non-Federal, short-stay hospitals in the Medicare Program. By the end of 2002 this number had risen to 723, or about 1 of every 7 hospitals, and nearly 1 of every 3 hospitals located in non-metropolitan areas. Although the number of CAH conversions has grown more rapidly than may have been expected by lawmakers, the participants are, by design, among the smallest hospitals in the country. In 1998 the converting facilities profiled in this article accounted for no more than 2 percent of the acute care bed complement and 1 percent of Medicare-covered acute days of care.

CAH status is voluntary, and the advantages are chiefly reimbursement related. From the pool of small, isolated hospitals that are potentially eligible as CAHs, the program incentives are such that conversion is likely to be most attractive to hospitals with higher than expected costs, given their case mix and wage levels. Because of the small size of the CAH participants, the resulting changes in Medicare payments will have little impact on the Medicare budget, but the program alters the reimbursement incentives for a substantial portion of rural providers. This could have a strong influence on rural hospital management and finances.