Vulnerability of Rural Hospitals to Medicare Outpatient Payment Reform
Mohr, Penny E., Franco, Sheila J., Blanchfield, Bonnie B., Cheng, C. Michael, Evans, William N., Health Care Financing Review
Under the BBA, a PPS for Medicare hospital outpatient services was to be implemented in 1999. (However, HCFA has recently announced that updating information systems to be compliant with the year 2000 will delay the implementation of outpatient PPS.) The move from a quasi-retrospective cost-based system to a PPS for outpatient services may constrain the ability of hospitals to generate revenue from these services. Although outpatient services have become an increasingly important source of revenue for acute care hospitals in general, these services may be critical to the survival of some rural hospitals. A major concern is that Medicare outpatient prospective payment reform could further harm rural hospitals that are already struggling to remain financially viable.
To evaluate the potential impact of Medicare outpatient payment reform on rural hospitals, we address the following research questions:
* How dependent are rural hospitals on revenue from outpatient services in general and on revenue from outpatient services provided to Medicare beneficiaries? How has this changed over time? How does this compare with urban hospitals?
* Are rural hospitals 'more likely than urban hospitals to be vulnerable to the effects of Medicare outpatient payment reform?
* What types of rural hospitals will be most vulnerable to the effects of Medicare outpatient payment reform?
When Congress enacted a PPS for inpatient services, analysts were concerned that rural hospitals would be more adversely affected than urban hospitals (Rosko and Broyles, 1984; Sheingold, 1986). These concerns were partly realized in the years immediately following inpatient PPS. Rural hospitals had substantially lower margins on Medicare services than urban hospitals, and 10 percent of rural hospitals closed in the 1980s (Congressional Budget Office, 1991).
Although one study showed that greater Medicare involvement was associated with reduced patient profitability in rural hospitals (Rizzo, 1991), others have shown that Medicare payment was not a primary reason for the poor financial condition of rural hospitals during this period (Prospective Payment Assessment Commission, 1990; Guterman et al., 1990). Among other factors, declining rural populations, dramatic reductions in admissions, and disproportionately increased per case costs contributed to declining margins in rural hospitals (Prospective Payment Assessment Commission, 1990; U.S. Department of Health and Human Services, 1989; Hendricks et al., 1989).
Over the years, concerns about access in rural areas has led Congress to design a number of programs to assist financially vulnerable rural hospitals (Buto, 1996). Three of these programs, the Sole Community Hospital (SCH) Program, implemented in 1972, the Essential Access Community Hospital/Rural Primary Care Hospital Program, implemented in 1993, and the Medicare Dependent Small Rural Hospital Program, operating between 1990 and 1993, allow selected rural hospitals to receive cost-based reimbursement. Also introduced was a program that classified large rural hospitals that were providing more complex and diverse services than their rural counterparts as rural referral centers. These hospitals were paid a PPS rate using the standardized amount given to hospitals in "other urban" locations, rather than that paid to rural hospitals, increasing their average payment rate. Until 1995, when HCFA equalized payment rates for these two locations, rural referral centers benefited substantially from this designation. Rural referral centers still qualify for disproportionate-share payments and, potentially, higher wage indexes than other rural facilities.
These programs have played a major role in improving the rural hospital's fiscal condition. By 1991, more than one-half of rural hospitals qualified for one or more of these special payment categories (Congressional Budget Office, 1991). …