Washington takes steps to help rural hospitals - column

Healthcare Financial Management, April, 1990 by Joseph A. Kuchler

Since the beginning of Medicare's prospective payment system (PPS), rural hospitals have been a problem area that called attention to certain basic inequities in the design of the system.

In recent years, the rural "problem" turned into a crisis, as operating margins for rural hospitals plummeted and rural facilities closed in disproportionately large numbers.

Rural hospitals' financial distress attracted the attention of policy makers in Congress and the Health Care Financing Administration (HCFA). The two most recent Federal budget laws, the Omnibus Budget Reconciliation Act of 1987 (OBRA'87) and OBRA'89 contain extensive revisions designed to provide financial relief to rural hospitals.

HCFA also has promulgated regulatory changes designed to help rural hospitals. Further adjustments are recommended by the Prospective Payment Assessment Commission (ProPAC), the entity Congress created to monitor the performance of PPS and make recommendations for fine tuning the system. PPS difficulties

Rural hospitals' problems with PPS date back to the start of the program in 1983. In developing PPS, Congress decided to pay rural hospitals on a fundamentally different basis from urban hospitals.

Reflecting historical cost report data that showed hospitals' cost of operation to be lower in rural areas, Congress directed HCFA to calculate separate standardized amounts for urban and rural hospitals. When PPS was enacted, this "urban/rural differential" was 20.2 percent.

As legislative changes have been enacted in an attempt to increase payments to rural hospitals, the differential has been reduced. Currently, ProPAC places the differential at 7.8 percent. The standardized amount differential does not tell the whole story on urban-rural payment differences, however.

ProPAC estimates that rural hospitals' Medicare operating costs per case are about 40 percent lower than their urban counterparts.

ProPAC recently determined that, since PPS was enacted, actual per case payments to rural hospitals have been about 45 percent lower than payments to urban hospitals rather than 40 percent lower as originally believed. This finding prompted ProPAC to recommend that rural standardized amounts be increased, over a three-year period, to the same level as standardized amounts for other urban" hospitals.

Rural hospitals often are more dependent on Medicare than urban hospitals. Medicare accounted for an average 41 percent of rural hospitals' patient revenues in 1985, compared to 38 percent for urban hospitals, according to the American Hospital Association (AHA). For 30 percent of rural hospitals, Medicare represented half or more of their patient revenues.

Despite their dependence on Medicare, however, rural hospitals have been unable to generate enough discharges to make up for payment shortfalls on some cases through positive margins on their remaining Medicare cases. Congress fine tunes PPS

In 1987, Congress took steps to reduce payment differences between urban and rural hospitals and to study the unique problems of rural facilities. The most important change enacted under OBRA '87 revised the system for updating PPS rates.

Previously, rates for urban and rural facilities increased by the same update factor. Under OBRA '87, Congress established separate update factors for hospitals in three categories: hospitals in large urban areas (more than I million population), other urban hospitals, and rural hospitals. Under the legislation, rural hospitals received the largest increase-3 percent.

Congress continued to address rural hospital concerns in OBRA '89, the recently enacted FY90 budget bill. Rural hospitals will receive their greatest financial assistance through OBRA'89 updates in PPS payment rates. While urban hospitals receive below-market basket increases, rural hospitals are given a rate increase of market basket plus 3 percent.

OBRA '89 contains a number of other provisions affecting rural hospitals.

The legislation requires U.S. Department of Health and Human Services (HHS) to develop a legislative proposal to eliminate the use of separate standardized amounts for rural, other urban, and large urban area hospitals. The proposal must provide for a three-year phase-in to a single rate, beginning in FY92.

Another provision extends for three years the classification of all hospitals designated as regional referral centers as of Sept. 30, 1989.

OBRA '89 also broadens sole community hospital (SCH) criteria to define an SCH as any hospital that is more than 35 road miles from another hospital or that meets certain other criteria established by the HHS Secretary.

All SCHs will be paid the higher of three rates: a target amount based on the hospital's 1982 costs; a target amount based on the hospital's 1987 costs; or the Federal PPS rate. The change applies to cost reporting periods beginning on or after April 1, 1990.

For a two-year period, OBRA'89 also applies the new SCH payment provisions to rural hospitals that are not SCHS, but that have 100 or fewer beds and depend on Medicare for at least 60 percent of their patient days or discharges. The legislation also establishes a Medicare geographic classification board to rule on applications by hospitals to change their statuses from rural to urban, to switch from one urban area to another, or to change their county wage index.