Geographic reclassification can increase payment - for now - Medicare prospective payment

Healthcare Financial Management, August, 1991 by Richard A. Dudgeon, Laurie J. Harmon

Most of the nation's 958 Medicare providers that successfully applied for geographic reclassification in Federal FY92 will see their prospective payment system (PPS) payments significantly increased. Reclassification decisions for FY92 were issued in March and April and were based on the Sept. 6, 1990, interim final rule.

For FY93, a PPS provider that meets required criteria and has filed its application by Oct. 1, 1991, with the Medicare Geographic Classification Review Board (MGCRB) may be approved to use the Medicare wage index or average standard payment amounts for PPS providers pertaining to an adjacent metropolitan statistical area (MSA) or rural county.

In future years, however, annual updates to the Medicare wage index may make benefits from geographical reclassification more difficult to determine.

Geography and PPS

Arthur Owens, chairman of the MGCRB, reports that the MGCRB decided on 1,135 applications in 1991, with approximately 84 percent of them approved. Owens said the "vast majority of applications were from rural providers seeking reclassification to urban or large urban areas." Exhibit 1 shows the MGCRB's statisticsk on its reclassification decisions effective for discharges occurring in FY 92.

Although estimates are not available on overall payment effects of the approvals, reclassification approvals gained on behalf of 14 PPS providers throughout California ranged from $9,000 to more than $2 million in additional payments, with an average of approximately $300,000. Examples of payment effects of geographic reclassification on providers' PPS payments are shown in Exhibit 2.

Since Medicare's PPS system began, a provider's level of payment largely has depended on the geographic location of its hospital campus. Standard payment amounts for labor and non-labor are applied through large urban, urban, and rural rates. Wage index values are based on similar labor market areas. Large urban, urban, and rural areas are defined by Section 1886(d)(2)(D) of the Social Security Act and are determined by the Secretary of the Department of Health and Human Services (HHS) with Bureau of the Census data.

Many providers think their PPS rates should be made more equitable with a neighboring urban or large urban area, particularly in locations where a rural county is near an urban area. Costs of providing services may be similar if providers compete in the same labor and vendor markets.

The Omnibus Budget Reconciliation Act of 1987 (OBRA '87) and the Medicare Catastrophic Coverage Act of 1988 gave the HHS Secretary authority to treat a rural county as urban if certain demographic conditions of population and commuting patterns are met. Entire rural counties were reclassified, and decisions were based on U.S. census

EXHIBIT 1: FY92 reclassifications

Number of applications received                      1,779
Voluntary withdrawals                                  110
Dismissed (incomplete) applications                    534
Hospital withdrawals after MGCRB decision                5
Total cases heard by the Medicare Geographic
Classification Review Board (MGCRB)                  1,130
Approved applications                                  864  77%
Denied applications                                    172  15%
Partially approved applications                         94   8%
                                                     1,130
Number requesting reclassification for wage index      735
  Wage index requests approved                         617  84%
  Wage index requests denied                           118  16%
 umber requesting reclassification for standard amounts 88
  Standard amount requests approved                     69  78%
  Standard amount requests denied                       19  22%
Number requesting reclassification for wage index and
standard amounts                                        307
  Approved for wage index and standard amount           172 56%
  Denied for wage index and standard amount              35 11%
  Wage index approved for two years, standard
  amount approved for one year                           6   2%
  Wage index approved, standard amount denied           43  14%
  Wage index denied, standard amount approved           39  13%
  Wage index approved for two years, standard amount
  denied                                                12   4%
  Source: MGCRB statistics

data. This application of Congressional intent, however, gave reclassification only to a limited number of hospitals.

In response to providers' requests for individual reclassification, Congress established the MGCRB in OBRA '89 to consider geographic reclassification for purposes of the Medicare wage index, standard labor and non-labor payment amounts for PPS providers, or both. The MGCRB's first regulations were published as an interim final rule with comment period on Sept. 6, 1990, (a) and required a filing of intent to apply by Oct. 1, 1990, with a complete application due by Nov. 6, 1990. A final rule with comment period was published on June 4. (b)