ENSURING THE SURVIVAL OF CRITICAL ACCESS HOSPITALS:
THE NEW MEDICARE RURAL HOSPITAL FLEXIBILITY PROGRAM
AND THE IMPORTANT ROLE FOR STATES
January 2000
| For More Information: | Tim Henderson, NCSL @ 202/624-3573 |
| Jerry Coopey, Federal Office of Rural Health Policy @ 301/443-0835 |
BACKGROUND
While the overall financial performance of the nation’s rural hospitals has improved in the 1990s, small rural hospitals (those having 50 beds or less) continue to be at risk of financial instability and closure. Representing about half of all rural hospitals, small hospitals as a group report substantial negative operating margins and are highly dependent on Medicare as a source of payment.
Declining volume of inpatient acute care and reductions in Medicare payments spurred by the 1997 Balanced Budget Act and other factors often have had the greatest impact on small rural hospitals. These facilities, like many rural hospitals, also suffer financially because they are often bypassed for larger, more urban hospitals that have better technology and specialized services. Such pressures are forcing many small rural hospitals to change the way they operate.
Limited Service Rural Hospitals
Recognizing the special plight of these rural facilities, states and the federal government as early as the middle 1980s began experimenting with new regulations and payments targeted to small rural hospitals. In Montana, the legislature in 1987 created a new licensure category of acute care hospitals called Medical Assistance Facilities (MAFs). MAFs were licensed to allow former small general hospitals in isolated rural areas to provide emergency care and short term, low-intensity inpatient service. The category provides for flexible staffing requirements. The federal Health Care Financing Administration (HCFA) provided demonstration funds to support the initiative and eventually granted the program critical approval for these facilities to receive cost-based Medicare and Medicaid reimbursement.
In the early 1990s, the federal government applied the principles of the Montana program to a demonstration program for rural hospitals in seven additional states. The Essential Access Community Hospital (EACH) program, established by Congress in 1989, was an attempt to assure the availability of primary care services, emergency services, and limited acute care patient services in rural areas that could no longer maintain full service hospitals. EACH created a new category of limited service rural hospital under Medicare called the Rural Primary Care Hospital (RPCH). The law required RPCHs to establish a network and referral arrangement with a larger EACH facility and directed states to establish a plan for designating and licensing these facilities.
THE NEW MEDICARE RURAL HOSPITAL FLEXIBILITY PROGRAM
Lessons learned from these earlier initiatives served as a catalyst for the creation in 1997 of a new nationwide limited service rural hospital project entitled the Medicare Rural Hospital Flexibility Program. Created by Congress under the Balanced Budget Act, the so-called ‘FLEX’ program establishes a permanent hospital payment classification certified for Medicare reimbursement called critical access hospitals (CAHs). Similar to MAFs and EACHs, CAHs are limited service facilities with flexible staffing and service requirements. In order to qualify as a CAH, a hospital must:
In late 1999, Congress made some improvements to the FLEX program. Specifically, the legislation:
CAH designation will be attractive to many small rural hospitals because qualified hospitals are reimbursed on a reasonable cost basis for all in and outpatient services provided to Medicare beneficiaries. In addition, CAHs gain from the potential reduction of overall operating costs by providing only limited acute care, and from the relaxed staffing requirements.
The Role of States
In order to take advantage of the benefits of having CAHs, states must establish a process for designating local hospitals as CAHs. States are directed to encourage rural hospitals considering conversion to conduct financial feasibility studies; educate physicians, hospital staff and the community about the idea of conversion; and partner with a fiscal intermediary that understands the CAH system and can assist with claims filing. Studies have found that potential CAHs have significantly lower operating margins than other rural hospitals. CAHs in each state are designated after the state’s designation process is approved by the federal Health Care Financing Administration (HCFA). Two states—New Jersey and Rhode Island—are ineligible for FLEX participation because they have no designated non-metropolitan areas.
As of December 1999, 38 states had HCFA-approved state rural health plans, including the seven states that were part of the EACH/RPCH demonstration. To date, over 100 CAHs have been designated, including former EACH/RPCH and MAF facilities, in 22 states.
Grants Available to States
Importantly, Congress authorizes the distribution of grants under FLEX to states to help small rural hospitals and their communities stabilize and improve the delivery of health services. Federal funds also enable states to identify and establish CAHs in needy rural communities. For federal FY 1999, Congress appropriated $25 million. These funds are administered by the federal Office of Rural Health Policy (ORHP) of the Health Resources and Services Administration.
In September 1999, ORHP under the FLEX program awarded approximately $24 million to 43 states. Grants awarded to states by ORHP can be used to:
Specifically, states must develop policies and procedures in a number of areas, including legislative and regulatory changes regarding antitrust restraints affecting hospital networks, facility/professions licensure, etc.; payment issues and education of the fiscal intermediary; definition of outcomes for community needs assessments; and development of roles/responsibilities of network partners. States also are required to design and conduct a performance evaluation.
ISSUES FOR STATES
The impact of the new Medicare Rural Hospital Flexibility Program is significant for most states and their rural hospitals. Reports indicate that nationwide over 800 small rural hospitals are potentially eligible for CAH designation. A large majority of designated CAHs (prior to conversion) and those hospitals seeking designation are located in federally designated Health Professional Shortage Areas and have average occupancy rates of less than 40 percent. Over half of these hospitals are public hospitals.
Importantly for states, the process for developing rural health and CAH designation plans is quite flexible. While the work for states is significant and ongoing, the task is manageable and implementation in most states is well underway. To be successful in implementing FLEX, states should consider particularly the following issues:
Assure broad participation in CAH development. Efforts to develop a rural health plan by states receiving FLEX grant funds should involve collaboration between several stakeholders, including the state office of rural health, state hospital association, state office of emergency medical services and rural hospitals.
Spur development of rural community networks and assure integration of CAHs in the local health system. Developed rural community networks should include a CAH or other essential health care provider as well as integrate CAHs with other key health services. In general, states should provide ample support to rural network development.
Implement cost-based payment system for CAHs under Medicaid. The cost based reimbursement CAHs receive for Medicare does not automatically extend to Medicaid payments. Some hospitals believe that this could reduce the attractiveness of the conversion option. Under statute, CAHs are reimbursed for Medicaid services but not on a cost-based system.
Adjust regulations governing non-physician scope of practice. For certain non-physicians, such regulations may need to be altered to allow them to practice with different levels of supervision and to write prescriptions, if not already permitted.