oversight

Medicare: Modest Eligibility Expansion for Critical Access Hospital Program Should Be Considered

Published by the Government Accountability Office on 2003-09-19.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                 United States General Accounting Office

GAO              Report to Congressional Committees




September 2003
                 MEDICARE

                 Modest Eligibility
                 Expansion for Critical
                 Access Hospital
                 Program Should Be
                 Considered




GAO-03-948
                                                September 2003


                                                MEDICARE

                                                Modest Eligibility Expansion for Critical
Highlights of GAO-03-948, a report to the       Access Hospital Program Should Be
Senate Committee on Finance, the House
Committee on Ways and Means, and the            Considered
House Committee on Energy and
Commerce




Critical Access Hospitals (CAHs)
                                                Using fiscal year 1999 hospital cost report data, GAO identified 683 rural
are small rural hospitals that
receive payment for their                       hospitals as “potential CAHs” based on their having an annual average of no
reasonable costs of providing                   more than 15 acute care patients per day. About 14 percent (93) of these
inpatient and outpatient services to            potential CAHs operated an inpatient psychiatric or rehabilitation DPU,
Medicare beneficiaries, rather than             which they would have to close to convert to CAH status. Among existing
being paid fixed amounts under                  CAHs, 25 previously operated a DPU but had to close it as part of becoming
Medicare’s prospective payment                  a CAH. Among the potential CAHs that operated a DPU, about half had a net
systems. Between fiscal years 1997              loss on Medicare services, indicating they might benefit from CAH
and 2002, 681 hospitals have                    conversion. Officials in some hospitals expressed a reluctance to close their
become CAHs.                                    DPU, even if conversion would benefit the hospital financially, as they
                                                believe the DPU maintains the availability of services in their community.
In the Medicare, Medicaid and
                                                Because inpatient rehabilitation and psychiatric services are
SCHIP Benefits Improvement and
Protection Act of 2000, GAO was                 disproportionately located in urban areas, even a small number of rural DPU
directed to examine requirements                closures may exacerbate any disparities in the availability of these services.
for CAH eligibility, including the
ban on inpatient psychiatric or                 Using 1999 Medicare claims data, GAO found 129 potential CAHs that likely
rehabilitation distinct part units              would have been able to meet the CAH census limit of no more than 15 acute
(DPUs) and limit on patient census,             care patients at any given time if not for a seasonal increase in their patient
and to make recommendations on                  census. Seasonal increases in patient census were common among the
related program changes.                        hospitals GAO studied, generally occurring during the winter flu and
                                                pneumonia season. For most potential CAHs, their patient census was
                                                typically low enough that a small seasonal increase did not cause them to
GAO suggests that the Congress                  exceed CAH limits. For the 129 potential CAHs that would have had
may wish to consider allowing                   difficulty staying under the CAH limit due to seasonal variation, they could
hospitals with a DPU to convert to              have accommodated their patient volume and had greater flexibility in the
CAH status. GAO also suggests                   management of their patient census if the CAH census limit were changed
that the Congress may wish to                   from an absolute limit of 15 patients per day to an annual average of 15
consider changing the CAH limit on              patients.
acute care patient census from an
absolute limit of 15 patients to an
                                                Potential CAHs That May Otherwise Be Eligible to Conversion If Not for Seasonal Variation in
annual average of 15 patients. The              Patient Stays or Because They Operate a DPU
Department of Health and Human
Services said that these
modifications to CAH eligibility
criteria would provide the needed
flexibility for some additional
facilities to consider conversion to
CAH status, and emphasized the
importance of maintaining financial
incentives for efficiency as well as
health and safety standards.


www.gao.gov/cgi-bin/getrpt?GAO-03-948.

To view the full product, including the scope
and methodology, click on the link above.
For more information, contact A. Bruce
Steinwald at (202) 512-7119.
Contents


Letter                                                                                      1
               Results in Brief                                                             4
               Background                                                                   6
               Existing CAHs Had Fewer Beds and Patients and Lower Medicare
                 Margins Than Potential CAHs                                              12
               Ban on CAHs Operating DPUs May Have Contributed to
                 Diminished Availability of Services in Rural Areas                       14
               Seasonal Variation in Patient Census Is Common and May Impede
                 CAH Eligibility for Hospitals Near the CAH Limit                         19
               Conclusions                                                                22
               Matters for Congressional Consideration                                    24
               Agency Comments and Our Evaluation                                         24

Appendix I     Scope and Methodology                                                      28



Appendix II    Comments from the Department of Health
               and Human Services                                                         31



Appendix III   GAO Contact and Staff Acknowledgments                                      35
               GAO Contact                                                                35
               Acknowledgments                                                            35


Tables
               Table 1: Selected Characteristics of Existing CAHs Prior to Their
                        Conversion and Potential CAHs, Fiscal Year 1999                   13
               Table 2: Financial Performance of Existing CAHs Prior to Their
                        Conversion and Potential CAHs, Fiscal Year 1999                   14
               Table 3: Financial Performance of Potential CAHs with DPUs,
                        Fiscal Year 1999                                                  16
               Table 4: Medicare Margins for DPUs of Potential CAHs, Fiscal Year
                        1999                                                              17
               Table 5: Seasonal Increase in Average Acute Care Patient Census
                        among Potential CAHs, by Bedsize, 1999                            20
               Table 6: Potential CAHs with Estimated Seasonal Increases in
                        Patient Census That Pushed Them over CAH Limit, 1999              21




               Page i                             GAO-03-948 Critical Access Hospital Program
          Table 7: Financial Performance of Potential CAHs with a Seasonal
                   Increase in Patient Census That Pushed Them over CAH
                   Limit, Fiscal Year 1999                                            21
          Table 8: Potential CAHs with Seasonal Increase in Medicare
                   Patients’ Length of Stay That Pushed Them over the 4-day
                   CAH Limit, 1999                                                    22
          Table 9: Summary of Site Visits and Interviews                              30


Figures
          Figure 1: Major Eligibility Criteria for Critical Access Hospitals            7
          Figure 2: Number of Critical Access Hospitals through Fiscal Year
                   2002                                                                 8
          Figure 3: Location of the 681 Critical Access Hospitals, September
                   2002                                                                 9




          Page ii                             GAO-03-948 Critical Access Hospital Program
Abbreviations

BBA               Balanced Budget Act of 1997
BIPA              Medicare, Medicaid, and SCHIP Benefits Improvement and
                  Protection Act of 2000
CAH               Critical Access Hospital
CMS               Centers for Medicare & Medicaid Services
DPU               distinct part unit
EACH              essential access community hospital
EMS               emergency medical services
FORHP             Federal Office of Rural Health Policy
HHS               Department of Health and Human Services
HRSA              Health Resources and Services Administration
MSA               metropolitan statistical area
OMB               Office of Management and Budget
PPS               prospective payment system
RHFTP             rural hospital flexibility tracking project
RPCH              rural primary care hospital
SCHIP             State Children’s Health Insurance Program
TEFRA             Tax Equity and Fiscal Responsibility Act of 1982



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Page iii                                    GAO-03-948 Critical Access Hospital Program
United States General Accounting Office
Washington, DC 20548




                                   September 19, 2003

                                   Congressional Committees

                                   Medicare beneficiary access to hospital services in rural areas has been a
                                   source of concern for policymakers for many years. To bolster the
                                   financial stability of rural hospitals, the Congress approved several special
                                   payment provisions both before and after the implementation of the
                                   Medicare acute care inpatient prospective payment system (PPS)1 in 1983.
                                   These provisions enhanced Medicare payments to certain groups of rural
                                   hospitals, such as those that are the only source of care in their
                                   community; larger hospitals that serve as referral sites for rural physicians
                                   and community hospitals; and hospitals highly dependent on Medicare
                                   payments. Many rural hospitals have, however, continued to experience
                                   financial difficulties.

                                   In the Balanced Budget Act of 1997 (BBA), the Congress established
                                   additional special payment provisions for Critical Access Hospitals
                                   (CAH).2 When designated as a CAH, a hospital generally receives payment
                                   for its reasonable costs of providing inpatient and outpatient services to
                                   Medicare beneficiaries, rather than being paid the PPS fixed amount for
                                   those services. Thus, the CAH designation provides higher payments to
                                   hospitals whose reasonable costs are higher than their PPS payment. The
                                   CAH program has grown steadily to 681 CAHs at the end of fiscal year
                                   2002.3

                                   The CAH designation is targeted to small rural hospitals with a low patient
                                   census and short patient stays. Statutory provisions specifying criteria for
                                   CAHs do not specifically exclude facilities with distinct part units (DPUs)
                                   —separate sections certified to provide inpatient rehabilitation or
                                   psychiatric care. However, statutory and regulatory provisions concerning



                                   1
                                    Under the PPS, hospitals are paid a fixed amount for each hospital discharge, based on
                                   national average costs, adjusted for such factors as local wage costs and type of illness
                                   treated.
                                   2
                                    Pub. L. No. 105-33, § 4201(c), 111 Stat. 251, 373-374 (1997).
                                   3
                                    CAH enrollment figures were provided by the Rural Hospital Flexibility Tracking Project
                                   (RHFTP), a federally funded national evaluation by a consortium of five rural health
                                   research centers and the Rural Policy Research Institute.



                                   Page 1                                         GAO-03-948 Critical Access Hospital Program
payment for such DPUs effectively require them to be operated by
hospitals paid PPS rates. Thus, because CAHs are paid their reasonable
costs, they are effectively banned from having DPUs. Some hospital
officials have raised concerns that because CAHs cannot operate DPUs, it
may be more difficult to ensure that rural beneficiaries have access to the
kind of psychiatric and rehabilitation services these units provide, if
hospitals choose to close their DPU as part of becoming a CAH. In
addition, to be a CAH, a hospital must remain under CAH limits on the
number of hospital beds (“bedsize”) and average patient length of stay,
and can have no more than 15 acute care patients on any given day. Some
hospitals may have difficulty remaining under CAH limits during the entire
year because they may experience fluctuations in patient demand due to
seasonal tourism or illnesses, like influenza or pneumonia, that are more
prevalent at certain times of the year.

In the Medicare, Medicaid, and SCHIP Benefits Improvement and
Protection Act of 2000 (BIPA),4 the Congress directed us to study CAH
eligibility requirements including with respect to limitations on average
length of stay, bedsize, and DPU operations, and to make related
recommendations on program changes. As agreed with the committees of
jurisdiction, we have examined (1) the characteristics of a group of
hospitals prior to their designation as CAHs compared to a group of small
rural hospitals that have not become CAHs, but were in a position to
consider doing so based on their low patient census, (2) the impact that
the effective ban on CAHs operating DPUs has had on the availability of
psychiatric and rehabilitation services in rural areas and on rural hospitals’
decisions to seek CAH conversion, possible options for Medicare payment
to DPUs and CAH eligibility requirements if CAHs were allowed to operate
DPUs, and (3) the extent to which seasonal variation in patient census or
length of stay prevents hospitals from being eligible for CAH status.

To address these objectives, we analyzed Medicare hospital cost reports5
from fiscal year 1999, the most recently available audited cost report data,
and Medicare inpatient claims data for 1999. We defined 683 rural
hospitals that had not converted to CAH status as of January 1, 2003, as



4
Pub. L. No. 106-554, App. F, § 206, 114 Stat. 2763A-463, 2763A-483 (2000).
5
 The Medicare cost report is the financial document that hospitals are required to submit
annually to the Centers for Medicare & Medicaid Services (CMS). The reports include
information about Medicare inpatient and outpatient costs and payments, as well as
information about payments from other revenue sources.




Page 2                                       GAO-03-948 Critical Access Hospital Program
“potential CAHs,” based on their having an annual average patient census
of no more than 15 acute care patients.6 We estimated how many of the 683
potential CAHs might be prevented from converting to CAH status because
they operate a DPU or experience seasonal variation in their patient
census or average length of stay. We also examined the characteristics of
620 hospitals that were not yet CAHs in fiscal year 1999 but have since
converted to CAH status (“existing CAHs”) and compared their
preconversion characteristics to those of potential CAHs in fiscal year
1999. We evaluated how many potential CAHs and existing CAHs
experienced financial losses under the Medicare PPS and likely could
benefit from cost-based reimbursement. Since DPUs are paid under
different payment methodologies from acute care hospitals, we evaluated
how many of the DPUs operated by potential CAHs experienced financial
gains or losses under the payment methodology that applied to them in
fiscal year 1999 as well as the possible impact if cost-based reimbursement
were extended to DPUs operated by CAHs. We also evaluated how many
of the potential CAHs with DPUs could have met CAH bedsize and length
of stay criteria in fiscal year 1999 if their DPU beds and lengths of stay
were counted towards the limits. We interviewed officials with the Centers
for Medicare & Medicaid Services (CMS) and the Federal Office of Rural
Health Policy (FORHP), which administers a grant program supporting
CAHs. We interviewed administrators of 24 CAHs and potential CAHs
across 10 states, and made site visits to 7 of these hospitals in 3 states. We
also interviewed state staff administering FORHP grants, and conducted
an e-mail survey of state CAH coordinators.7 We did our work in
accordance with generally accepted government auditing standards from
April 2001 through August 2003. A detailed discussion of our scope and
methodology is in appendix I.




6
 Most of the 683 potential CAHs (79 percent) exceeded the CAH bedsize limit. We did not
exclude these hospitals from our definition of potential CAHs because hospitals have the
option of reducing their bedsize in order to become eligible for CAH conversion. Our
inclusion of hospitals with an average census up to 15 is likely a high estimate of the
number of potential CAHs because hospitals with an annual average of 15 acute care
patients per day may need more than 15 acute care beds to accommodate variation in their
patient census that periodically causes them to exceed 15.
7
 New Jersey, Rhode Island, Delaware, and Washington D.C. do not participate in the CAH
program. All but 5 state CAH coordinators participated in the e-mail survey or were
interviewed.




Page 3                                     GAO-03-948 Critical Access Hospital Program
                   Existing CAHs averaged six fewer beds and about three fewer patients per
Results in Brief   day prior to their conversion than did potential CAHs. Existing CAHs had
                   to make smaller operational changes to qualify for CAH status, such as
                   reducing bedsize or length of stay, than potential CAHs would have had to
                   make if they had chosen to convert. While both groups had a median loss
                   on Medicare inpatient and outpatient services, existing CAHs tended to
                   experience bigger losses prior to their conversion (8.9 percent) than did
                   potential CAHs (0.8 percent). Existing CAHs also had a median loss on all
                   sources of revenue of 0.3 percent before conversion, while potential CAHs
                   had a median gain of 1.8 percent.

                   The effective ban on CAHs operating DPUs may have contributed to the
                   disparity between urban and rural areas in the availability of inpatient
                   psychiatric and rehabilitation services in fiscal year 1999. While one-
                   quarter of Medicare beneficiaries reside in rural areas, only 8 percent of
                   rehabilitation hospital and DPU beds and 17 percent of psychiatric
                   hospital and DPU beds were in rural areas in fiscal year 1999. The
                   subsequent closure of 25 DPUs by hospitals converting to CAH status may
                   have exacerbated this difference in availability. Of the 93 potential CAHs
                   that operated a DPU, about half lost money on Medicare inpatient and
                   outpatient services, giving them a financial incentive to convert. If,
                   however, the other financial benefits associated with the DPU exceeded
                   their losses under the PPS, these potential CAHs would have a
                   countervailing incentive to stay under the PPS rather than close their DPU
                   and convert. Some rural hospital administrators told us that, even when it
                   was financially advantageous to seek CAH status, they were reluctant to
                   close their DPU because it is needed to maintain access to psychiatric or
                   rehabilitation services in the community they serve. While allowing
                   hospitals to convert to CAH status and retain their DPU would alleviate
                   this concern, extending cost-based reimbursement to DPUs operated by
                   CAHs diminishes the incentives for efficiency that are inherent in PPS
                   payments. If DPU patient stays and beds were counted against current
                   CAH limits without any adjustment, nearly all potential CAHs with DPUs
                   would have exceeded the limits in fiscal year 1999.

                   Among hospitals we studied, seasonal fluctuations in patient volume or
                   length of stay were common, particularly during the winter. Such
                   increases can be an obstacle for some hospitals considering CAH
                   conversion if it causes them to exceed the CAH patient census limit of no
                   more than 15 patients at any time or length of stay limit of an annual
                   average of 4 days. We found 129 potential CAHs that likely would have
                   been able to meet the CAH patient census limit in fiscal year 1999 if not for
                   the seasonal increase in their patient census. While these 129 hospitals, as


                   Page 4                               GAO-03-948 Critical Access Hospital Program
a group, averaged 13.2 patients per day over the entire year, their daily
census increased to an estimated average of 16.9 during their high season.
If the CAH patient census limit were changed from an absolute limit of 15
acute care patients per day to an annual average of 15, these potential
CAHs would have been able to remain under such a limit because they all
had an annual average below 15. It would not be necessary to increase the
number of acute care beds CAHs are allowed to maintain in order to
implement this relaxation of the patient census limit, since more than
three-quarters of existing CAHs and potential CAHs have swing beds8
which they could use to accommodate additional acute care patients
beyond 15. About 40 percent of these 129 potential CAHs, however, had
positive Medicare margins, meaning they would have had little financial
incentive to switch from the PPS to the cost-based payment CAHs receive.
In contrast to the CAH patient census limit, the patient length-of-stay limit
gives CAHs the flexibility to keep some acute care patients beyond the
limit because it is an average.

We suggest that the Congress may wish to consider allowing hospitals
with DPUs to convert to CAH status while making allowances for DPU
beds, patients, and lengths-of-stay when determining CAH eligibility, and
that CAH-affiliated DPUs be paid under the same formulas as other
inpatient psychiatric or rehabilitation providers. We also suggest that the
Congress may wish to consider changing the CAH limit on acute care
patient census from an absolute limit of 15 acute care patients to an
annual average of 15 in order to give CAHs greater flexibility in the
management of their patient census.

In commenting on a draft of this report, the Department of Health and
Human Services said that these modifications to CAH eligibility criteria
would provide the needed flexibility for some additional facilities to
consider conversion to CAH status. The department also emphasized
several considerations, including maintaining financial incentives for
efficiency as well as health and safety standards for DPUs, if they are
allowed to be operated by a CAH.




8
 A hospital with swing beds can “swing” its beds between hospital and skilled nursing
levels of care, on an as needed basis.




Page 5                                      GAO-03-948 Critical Access Hospital Program
             CAHs are an outgrowth of the seven-state Essential Access Community
Background   Hospital/Rural Primary Care Hospital (EACH/RPCH) program established
             in 1989. The BBA replaced the EACH/RPCH program with the state-
             administered Rural Hospital Flexibility Program (the “Flex” Program),
             which includes the CAH designation. The reimbursement component of
             the Flex Program is the responsibility of CMS. The Flex Program also
             includes a grant program that supports hospital participation in the
             program as well as state emergency medical services systems (EMS), and
             is the responsibility of the FORHP within the Health Resources and
             Services Administration (HRSA).

             The CAH program allows eligible rural hospitals to receive Medicare
             payments based on their reasonable costs rather than under a PPS. Under
             the Medicare inpatient PPS, hospitals are generally paid a fixed amount
             per patient discharge, providing an incentive for hospitals to control their
             costs to stay under this fixed amount because they can retain the
             difference between the PPS payment and their costs. Under cost-based
             reimbursement, hospitals are reimbursed for their reasonable costs, which
             does not provide the same incentive to control costs, but benefits hospitals
             whose Medicare costs exceed their PPS payments.

             In addition to receiving cost-based payment for inpatient services to
             Medicare beneficiaries, CAHs receive cost-based payment from Medicare
             for skilled nursing care provided in their swing beds and for outpatient
             care.9 To become a CAH, a hospital must meet certain criteria with respect
             to its location, size, patient census, and patient length of stay (see figure
             1). CAHs are also subject to different health and safety regulations, known
             as “conditions of participation,” from other acute care hospitals.10




             9
              Among 42 states responding to a RHFTP survey, 17 states provide enhanced Medicaid
             payments to CAHs, and 13 states provide enhanced reimbursement for outpatient services.
             10
                 42 C.F.R. §§ 485.601 et seq. (2002).




             Page 6                                     GAO-03-948 Critical Access Hospital Program
Figure 1: Major Eligibility Criteria for Critical Access Hospitals

   Proximity                       Rurality                                         Bedsize - Patient Census                     Length of Stay
   A CAH must be more              A CAH must be located in a                       A CAH can maintain up to 15 beds,            A CAH must
   than 35 miles from the          nonmetropolitan area, as defined                 or up to 25 beds if swing beds are           maintain an annual
   next nearest acute care         by the U.S. Office of Management                 included as long as no more than             average length of
   hospital or be certified by     and Budget, or in a rural census                 15 beds are used for acute care              stay of no more
   the state as a necessary        tract of a metropolitan statistical              patients at any given time. A CAH's          than 4 days.
   provider of servicesa.          area (MSA).                                      patient census is limited to no more
                                                                                    than 15 acute care patients at any
                                                                                    given time.




                                                                                                                      Day Day
                                                                                                                                        Day
                                                                                                              Day          2    3
                                                                                                                                         4
                                                                                                              1

                                                                         Hospit
                                                                               al




Source: GAO.

                                              Note: The Office of Management and Budget (OMB) defines a metropolitan statistical area as a core
                                              area of at least 50,000 people together with adjacent areas having a high degree of economic and
                                              social integration with that core. Nonmetropolitan areas include all counties outside of a metropolitan
                                              area.
                                              a
                                               The statutory provision outlining the certification exception does not specify the criteria for a hospital
                                              to be a necessary provider of services.




                                              Page 7                                                GAO-03-948 Critical Access Hospital Program
Growth in the number of CAHs has been steady (see figure 2). There is a
large concentration of CAHs in the central states, although 45 states had at
least one CAH as of September, 2002 (see figure 3).11

Figure 2: Number of Critical Access Hospitals through Fiscal Year 2002

800 Number of CAHS


                                                                        681

600


                                                               478

400


                                                        269

200


                                        74
            24           36
     0
         pre-1998     1998           1999               2000   2001     2002
 Source: Rural Hospital Flexibility Tracking Project.




11
 Connecticut, Delaware, Maryland, New Jersey, and Rhode Island did not have CAHs as of
September 2002.




Page 8                                                         GAO-03-948 Critical Access Hospital Program
Figure 3: Location of the 681 Critical Access Hospitals, September 2002




                                                                                                                                              CAHs (681)
Source: Rural Hospital Flexibility Tracking Project.

                                                       Note: Some Critical Access Hospitals may not be visible because they are obscured by state
                                                       boundary lines.




                                                       Page 9                                          GAO-03-948 Critical Access Hospital Program
Since the inception of the CAH program, two factors have been important
in increasing the number of hospitals qualifying for the designation. First,
the length-of stay criterion was changed. Until 1999, patient stays at CAHs
were limited to 4 days, after which patients would have to be transferred
to another health care facility or discharged. In 1999, the Congress relaxed
the criterion to require that CAHs keep their annual average length of stay
to no more than 4 days.12 Second, states have widely utilized their
authority to designate hospitals as “necessary providers,” thereby
exempting such hospitals from the otherwise applicable CAH criterion
that they be more than 35 miles from the nearest hospital. According to the
Rural Hospital Flexibility Tracking Project (RHFTP), a little more than half
of all CAHs had qualified for the CAH program through state designation
rather than by meeting the mileage and location requirements, as of
September 2002.13

Hospitals considering CAH conversion weigh numerous factors in their
decision, including the impact on hospital finances and community
reaction. Financial impact studies are commonly used to estimate how a
hospital’s reimbursement for services would change under CAH status.
The financial impact may change as Medicare reimbursements to hospitals
changes. For example, Medicare payment for hospital outpatient services
shifted in 2000 from cost-based payment to a new PPS for outpatient
services. Because CAHs are exempt from this PPS and continue to receive
cost-based payment for outpatient services, potential CAHs may factor
into their decision the impact of being paid reasonable costs, rather than a
fixed PPS payment, for outpatient services. They may also consider the
possible reaction from the community and from other health care
providers to CAH conversion. Some communities have been reluctant to
support a hospital’s conversion because they perceive it as the last step
before closure. In other cases, hospital officials reported that their
physicians expressed concern that if a hospital became a CAH, they would
occasionally be unable to admit patients to it because this would bring the
CAH over the patient limit.




12
 Medicare, Medicaid and SCHIP Balanced Budget Refinement Act of 1999, Pub. L. No. 106-
113, App. F, § 403(a), 113 Stat. 1501A-321, 1501A-370-372.
13
 List of CAH conversions by state downloaded from www.rupri.org/rhfp-track on
September 27, 2002.




Page 10                                   GAO-03-948 Critical Access Hospital Program
Distinct Part Units   Clinical research has indicated better outcomes for patients who are
                      appropriately treated in inpatient psychiatric or rehabilitation facilities,
                      such as DPUs, rather than in general acute or post acute care settings. For
                      example, one study concluded that elderly depressed patients who were
                      treated in specialty psychiatric DPUs may have received better treatment
                      for their depression than similar patients who were treated in general
                      medical wards.14 Another study found better outcomes among stroke
                      patients treated in rehabilitation facilities, such as DPUs, than those
                      treated in nursing homes.15

                      As separate sections of hospitals, psychiatric and rehabilitation DPUs are
                      subject to specific Medicare regulations regarding the types of patients
                      they admit and the qualifications of their staff.16 Psychiatric DPUs may
                      admit only patients whose condition requires inpatient hospital care and
                      are described by a psychiatric principal diagnosis.17 Rehabilitation DPUs
                      may treat only patients likely to benefit significantly from intensive
                      therapy services, such as physical therapy, occupational therapy, or
                      speech therapy. Both types of DPUs must provide a specified range of
                      services and employ clinical staff with specialized training.


                      14
                       G. Norquist et al. “Quality of Care for Depressed Elderly Patients Hospitalized in the
                      Specialty Psychiatric Units or General Medical Wards,” Archives of General Psychiatry,
                      vol. 52, no. 8 (1995).
                      15
                       R. L. Kane et al. ‘“Functional Outcomes of Posthospital Care for Stroke and Hip Fracture
                      Patients under Medicare,” Journal of the American Geriatric Society, vol. 46, no. 12
                      (1998).
                      16
                        For a hospital to establish a psychiatric DPU, Medicare regulations require that a hospital
                      must furnish, through the use of qualified personnel, psychological services, social work,
                      psychiatric nursing, occupational therapy and recreational therapy. Inpatient psychiatric
                      services must be under the supervision of a clinical director, service chief, or equivalent
                      who is qualified to provide the leadership required for an intensive treatment program, and
                      who is board certified in psychiatry. The DPU must have a director of nursing who is a
                      registered nurse with a master’s degree in psychiatric or mental health nursing or who is
                      qualified by education and experience, and a director of social services. There also must be
                      an adequate number of registered nurses to provide 24-hour-a-day coverage as well as
                      licensed practical nurses and mental health workers. 42 C.F.R. § 412.27 (2002). For a
                      hospital to establish a rehabilitation DPU, Medicare regulations require that a hospital must
                      provide rehabilitation nursing, physical and occupational therapy, speech therapy, plus as
                      needed, social services or psychological services and orthotics and prosthetics. The unit
                      must have a director of rehabilitation who is experienced in rehabilitation and is a doctor
                      of medicine or a doctor of osteopathy. 42 C.F.R. § 412.29 (2002).
                      17
                       42 C.F.R. § 412.27(a) (2002). Psychiatric principal diagnoses are listed in the Third Edition
                      of the American Psychiatric Association Diagnostic and Statistical Manual and in chapter 5
                      of the International Classification of Diseases, 9th Edition Clinical Modification (ICD-9-
                      CM).




                      Page 11                                       GAO-03-948 Critical Access Hospital Program
                      The Congress has required that CMS develop PPSs for both inpatient
                      rehabilitation and inpatient psychiatric providers, including DPUs, to
                      replace the payment methodology established by the Tax Equity and
                      Fiscal Responsibility Act of 1982 (TEFRA). Under TEFRA, providers that
                      had been exempted from the inpatient PPS, including inpatient
                      rehabilitation and psychiatric hospitals and DPUs, receive the lesser of
                      either their average cost per discharge or a provider-specific target
                      amount.18 In 2002, a PPS was implemented for inpatient rehabilitation.
                      Because a PPS for inpatient psychiatric providers has yet to be
                      implemented, psychiatric DPUs continue to be paid under TEFRA.

                      The financial incentives associated with TEFRA payments differ from
                      those associated with cost-based payment. Under TEFRA, Medicare
                      payments are capped by a provider’s target amount, giving hospitals an
                      incentive to restrain costs. By contrast, hospitals such as CAHs, which are
                      paid their reasonable costs, have less incentive to restrain costs because
                      their payments can increase as their costs increase.


                      Most existing CAHs prior to their conversion had more beds in fiscal year
Existing CAHs Had     1999 than CAHs are allowed. Most were likely able to reduce their bedsize
Fewer Beds and        to 15 (or 25 with swing beds) to become CAHs without adjusting their
                      patient volume because their average patient census of 4.8 was generally
Patients and Lower    well below the CAH limit of 15 (see table 1). Likewise, potential CAHs, on
Medicare Margins      average, exceeded CAH bedsize limits in fiscal year 1999 and had a patient
                      census well below 15. To meet the CAH limit, existing CAHs, on average,
Than Potential CAHs   had to reduce their bedsize by less than potential CAHs would have had to
                      if they had sought CAH status. Most existing CAHs prior to their
                      conversion and potential CAHs were below the CAH length-of-stay limit.




                      18
                        TEFRA (Pub. L. No. 97-248, § 101(a)(1), 96 Stat. 324, 331-333) established this payment
                      methodology for classes of hospitals deemed exempt from the PPS. The target amount is
                      the PPS-exempt provider’s Medicare-allowable costs per patient stay in a designated base
                      year, inflated to the current year by an annual update factor.




                      Page 12                                     GAO-03-948 Critical Access Hospital Program
Table 1: Selected Characteristics of Existing CAHs Prior to Their Conversion and Potential CAHs, Fiscal Year 1999

                                                                                                                                              Percentage
                                                                              Average                          Percentage       Percentage     exceeding
                                                              Average        length of          Average        with swing        exceeding length-of-stay
                                                   Total daily census      stay (days)          bedsize              beds      bedsize limit         limit
 Existing CAHsa
 (pre-conversion)                                    620           4.8               3.5               30                 85               61                14
 Potential CAHs                                      683           8.1               3.8               36                 78               79                21

Source: Fiscal year 1999 Medicare hospital cost reports.
                                                            a
                                                             Statistics on existing CAHs include CAH conversions reported through January 1, 2003, but do not
                                                            include CAHs that had already converted to CAH status in fiscal year 1999 or for which cost report
                                                            data were not available for fiscal year 1999.


                                                            In fiscal year 1999, existing CAHs prior to their conversion generally
                                                            experienced greater losses on their inpatient and outpatient Medicare
                                                            services than did potential CAHs (see table 2), and therefore had greater
                                                            financial incentive to seek conversion. A small majority, 55 percent, of
                                                            existing CAHs experienced losses on inpatient Medicare services, while
                                                            more than 60 percent of potential CAHs experienced gains. Nearly all
                                                            hospitals in both groups experienced losses on their Medicare outpatient
                                                            services. Across all revenue sources, existing CAHs prior to their
                                                            conversion experienced a 0.3 percent median loss, while potential CAHs
                                                            experienced a 1.8 percent median gain.




                                                            Page 13                                          GAO-03-948 Critical Access Hospital Program
Table 2: Financial Performance of Existing CAHs Prior to Their Conversion and Potential CAHs, Fiscal Year 1999

                                           Median margina (percent)               Hospitals with negative margins            Hospitals with positive margins
                                                                                            Number             Number                                      Number
                                             Existing CAHs         Potential            (percent) of       (percent) of       Number (percent)         (percent) of
                                           (preconversion)            CAHs           existing CAHs            potential       of existing CAHs            potential
                                                    (n= 542)        (n= 683)       (preconversion)               CAHs          (preconversion)               CAHs
 Medicare inpatient                                         -2.4           6.0              296 (55)           254 (37)                   236 (44)           419 (62)
 Medicare outpatient                                       -21.0        -19.6               523 (96)           649 (96)                      11 (2)            14 (2)
 Medicare inpatient and
 outpatient                                                 -8.9          -0.8              398 (74)           343 (51)                   136 (25)           322 (48)
 Total facility (all
 payers)                                                    -0.3           1.8              277 (51)           260 (38)                   255 (47)           406 (60)

Source: Fiscal year 1999 Medicare hospital cost reports.

                                                              Notes: For each of the four calculations of hospital margins, a small number of hospitals were
                                                              excluded because of incomplete data or because their margins were extreme outliers. Three to 17
                                                              potential CAHs were excluded among the four calculations, and 2 to 10 existing CAHs were
                                                              excluded. In addition, 78 existing CAHs do not have pre-conversion PPS margins statistics for fiscal
                                                              year 1999 because they did not meet criteria used for the margins calculation. Results do not reflect
                                                              the effects of the outpatient PPS, which was implemented in 2000.
                                                              a
                                                               A margin is the difference between a hospital’s revenue and costs, divided by its revenues.




                                                              The effective ban on CAHs operating DPUs may have contributed to the
Ban on CAHs                                                   disparity between urban and rural areas in the availability of inpatient
Operating DPUs May                                            psychiatric and rehabilitation services in fiscal year 1999. Twenty-five
                                                              existing CAHs had to close their DPU as part of becoming CAHs. Of the 93
Have Contributed to                                           potential CAHs that operated a DPU (one-seventh of all potential CAHs),
Diminished                                                    about half lost money on their Medicare inpatient and outpatient services,
                                                              giving them a financial incentive to convert. If, however, the other
Availability of                                               financial benefits associated with the DPU exceeded their combined
Services in Rural                                             losses on inpatient and outpatient services, these potential CAHs would
Areas                                                         have had a countervailing incentive to stay under the PPS, rather than
                                                              close their DPU and convert. Some rural hospital administrators told us
                                                              that, even when it was financially advantageous to seek CAH status, they
                                                              were reluctant to close their DPU because it was needed to maintain
                                                              access to psychiatric or rehabilitation services in the community they
                                                              serve. While allowing hospitals to convert to CAH status and retain their
                                                              DPU would alleviate this concern, extending cost-based reimbursement to
                                                              DPUs operated by CAHs diminishes the incentives for efficiency that are
                                                              inherent in PPS payments. If DPU patient stays and beds were counted
                                                              against current CAH limits without any adjustment, nearly all potential




                                                              Page 14                                           GAO-03-948 Critical Access Hospital Program
                            CAHs with DPUs would have exceeded either the bedsize or length of stay
                            limit in fiscal year 1999.


CAH Eligibility             The closure of 25 DPUs by hospitals that needed to relinquish their DPU as
Requirements Led to DPU     part of becoming a CAH may have contributed to the lower availability of
Closures in Rural           inpatient psychiatric and rehabilitation services in rural areas. Inpatient
                            psychiatric and rehabilitation providers are concentrated in urban areas,
Communities                 and DPUs are least common among smaller rural hospitals. Only 8 percent
                            of rehabilitation beds and 17 percent of psychiatric beds were located in
                            rural areas in fiscal year 1999, while about 25 percent of Medicare
                            beneficiaries live in rural areas. In fiscal year 1999, 14 percent (93) of
                            potential CAHs operated a DPU.19 By comparison, 37 percent of larger
                            rural hospitals operated a DPU, and 53 percent of urban hospitals
                            operated a DPU.

                            DPUs may be less common in rural areas due to the challenge of finding
                            the resources needed to open a DPU. Hospital representatives and officials
                            from rural health organizations said the difficulty in finding the specialized
                            staff required to operate a DPU likely prevents many small rural hospitals
                            from opening a DPU.


Many Potential CAHs Had     In fiscal year 1999, nearly half the potential CAHs with a DPU experienced
No Financial Incentive to   net gains on their combined inpatient and outpatient payments for
Close DPU                   Medicare services (see table 3). These potential CAHs had a financial
                            incentive to continue under the PPS because this allowed them to
                            continue receiving Medicare payments that were higher than their costs,
                            rather than being paid only their reasonable costs as a CAH. The 47
                            potential CAHs with DPUs that experienced losses on their combined
                            inpatient and outpatient Medicare payments would more likely have a
                            financial incentive to seek CAH status.




                            19
                             Eighty-one of the 93 operated only a psychiatric DPU, 7 operated only a rehabilitation
                            DPU, and 5 operated both types of DPUs.




                            Page 15                                     GAO-03-948 Critical Access Hospital Program
Table 3: Financial Performance of Potential CAHs with DPUs, Fiscal Year 1999

                                                                                           Number
                                                                  Number (percent)     (percent) of
                                                               a
                                                 Median margin in of potential CAHs potential CAHs
                                                     percentages      with negative   with positive
                                                         (n = 93)           margins        margins
    Medicare inpatient                                         3.9            35 (38)         56 (62)
    Medicare outpatient                                      -17.5            88 (97)            0 (0)
    Medicare inpatient and
    outpatient                                                -1.1            47 (53)         41 (47)
    Total facility (all payers)                                0.6            42 (46)         46 (51)

Source: Fiscal year 1999 Medicare hospital cost reports.

Notes: For each of the four calculations of hospital margins, three or fewer hospitals were excluded
because of incomplete data or because their margins were extreme outliers. Results do not reflect the
effects of the outpatient PPS, which was implemented in 2000.
a
A margin is the difference between a hospital’s revenue and costs, divided by its revenues.


Potential CAHs with DPUs can compare the financial benefits of CAH
conversion to the benefits of keeping their DPUs. Some that suffered
losses on their inpatient and outpatient Medicare payments may lack a
financial incentive to become a CAH because DPU revenues help offset
those losses. If the projected increase in revenue under cost-based
payment that a hospital would receive as a CAH is lower than the loss of
revenue from having to close its DPU, the hospital may chose not to
convert to CAH status. Just over half of the DPUs operated by potential
CAHs had net gains on their Medicare payments (see table 4). A DPU may
also provide a financial benefit to the hospital because it enables the
hospital to spread its fixed costs over more services. Several
administrators of potential CAHs with a DPU whom we interviewed stated
that their DPU had contributed positively to the hospital’s financial
situation, providing a revenue source they would be reluctant to relinquish
to gain CAH status.




Page 16                                                    GAO-03-948 Critical Access Hospital Program
                          Table 4: Medicare Margins for DPUs of Potential CAHs, Fiscal Year 1999

                                                                                                       Number            Number
                                                                                       Median      (percent) of      (percent) of
                                                                                     Medicare       DPUs with         DPUs with
                                                                                              a
                              DPUs of                                                  margin         negative           positive
                              potential CAHs                      Number             (percent)        margins           margins
                              Psychiatric                                  86              0.9          28 (33)           47 (55)
                              Rehabilitation                               12              0.0           5 (42)            5 (42)
                              All                                          98              0.9          33 (34)           52 (53)

                          Source: Fiscal year 1999 Medicare hospital cost reports.

                          Notes: Because 5 of the potential CAHs had both a psychiatric and rehabilitation DPU, there are a
                          total of 98 DPUs among the 93 potential CAHs. Margin information is not included for 11 psychiatric
                          DPUs and 2 rehabilitation DPUs due to incomplete data or the exclusion of units whose margins were
                          at extreme outliers. Results do not reflect the effects of the inpatient rehabilitation PPS, which was
                          implemented in January 2002.
                          a
                          A margin is the difference between a hospital’s revenue and costs, divided by its revenues.




Hospitals with DPUs       While hospitals report that the projected financial impact is generally a
Expressed Reluctance to   key factor in the decision about whether to become a CAH,20 some
Seek CAH Conversion If    potential CAHs with DPUs also consider how local access to services
                          would be affected if the DPU were closed. Some rural hospital
Access to Care Could Be   administrators told us that, even when it was financially advantageous to
Jeopardized               seek CAH status, they were reluctant to close their DPU because they
                          believed it was needed to maintain access to psychiatric or rehabilitation
                          services in their community. Several hospital administrators and state
                          health officials emphasized the need for patients to be near their family
                          during treatment and the difficulty that some families would have if they
                          had to travel outside their community to visit family members receiving
                          treatment. Other administrators said that if their DPU closed, alternative
                          sources for these services could be as much as 165 miles away. We were
                          also told of difficulties in several states with referring psychiatric patients
                          to hospitals because of a lack of available beds or because referral
                          hospitals prefer not to take patients with significant behavioral issues or
                          believe that psychiatric services should be provided in smaller community-
                          based facilities.




                          20
                           Rural Policy Research Institute, Rural Hospital Flexibility Program Tracking Project
                          Year Two Report (Columbia, Mo. 1999).




                          Page 17                                                    GAO-03-948 Critical Access Hospital Program
Paying DPUs Associated       If potential CAHs were allowed to convert to CAH status while retaining
with CAHs Reasonable         their DPU, the payment methodology applied to the DPUs could remain
Costs Would Reduce           unchanged or could be shifted to cost-based payment along with the acute
                             care hospital services. Hospitals that have been able to keep their DPU
Incentives to Operate        costs below their Medicare payments under the current methodologies
Efficiently                  (rehabilitation PPS for rehabilitation DPUs or TEFRA payment for
                             psychiatric DPUs) would likely prefer no change because they can
                             continue to keep their net gains; hospitals that have DPU costs exceeding
                             their current Medicare payments would likely prefer cost-based payment.

                             If CAHs were allowed to have DPUs and the DPUs were shifted to cost-
                             based payment, diminished incentives for efficiency could result in higher
                             costs per case. Under cost-based reimbursement, a hospital can receive
                             higher payments if its costs increase. Under the rehabilitation PPS or
                             TEFRA methodologies currently applied to DPUs, their payments cannot
                             exceed a predetermined amount, creating pressure on them to operate
                             efficiently.


Most Potential CAHs with     If CAHs were allowed to operate DPUs and the DPU beds and patients’
DPUs Exceeded CAH            length of stay were counted against the CAH limits, only one of the 93
Bedsize and Length-of-Stay   potential CAHs with DPUs would have met both limits in fiscal year 1999.
                             Among these 93 potential CAHs, the median bedsize of psychiatric DPUs
Limits When DPUs’            was 11 and the median bedsize of rehabilitation DPUs was 13. If their DPU
Patients Were Counted        beds, acute care beds and swing beds were added together, 88 would have
                             exceeded the CAH bedsize limit. Similarly, psychiatric inpatient stays at
                             these potential CAHs averaged 11.8 days, and rehabilitation DPU inpatient
                             stays averaged 13.7 days, both significantly longer than the CAH limit of an
                             annual average of 4 days. About eighty percent of the potential CAHs with
                             DPUs exceeded the CAH length-of-stay limit when the DPU length of stay
                             and acute care length of stay were counted together.




                             Page 18                              GAO-03-948 Critical Access Hospital Program
                            Hospitals we studied commonly experienced at least a small seasonal
Seasonal Variation in       increase in their patient census, most often during winter. Such increases
Patient Census Is           can be an obstacle for some hospitals considering CAH conversion if it
                            causes them to exceed the CAH patient census limit of no more than 15
Common and May              patients at any time, or length of stay limit of an average of 4 days. We
Impede CAH                  found 129 potential CAHs that likely would have been able to meet the
                            patient census limit of 15 in 1999 if not for the seasonal increase in their
Eligibility for             patient census. About 40 percent of these 129 potential CAHs, however,
Hospitals Near the          had positive Medicare margins, meaning they would have little financial
CAH Limit                   incentive to switch from the PPS to CAH cost-based payment. In contrast
                            to the CAH patient census limit, the patient length of stay limit is an annual
                            average, and gives CAHs the flexibility to occasionally keep some acute
                            care patients longer than 4 days as long as the average remains below 4.


Most Hospitals Experience   Among hospitals we studied, seasonal fluctuations in patient volume were
Higher Patient Census       common. In 1999, over 80 percent of potential CAHs had an increase in
during Winter               their patient census averaging at least one additional patient per day
                            during a 3-month period. To assess whether this finding is consistent with
                            small and medium-size hospitals in general, we analyzed Medicare patient
                            claims for 2,139 hospitals with an average census of no more than 50
                            patients and found that about 90 percent had an increase in their patient
                            census averaging at least one additional patient per day during a 3-month
                            period of 1999.

                            For nearly three-quarters of potential CAHs, the patient volume increase in
                            1999 occurred during the winter. This pattern was consistent with reports
                            from hospital officials that their patient census often increased during the
                            winter due to a higher incidence of flu and pneumonia. The seasonal
                            increase in patient census was greater for larger potential CAHs. For
                            example, potential CAHs with 41 to 60 beds averaged 2.8 patients more per
                            day during their peak 3-month period, while potential CAHs with no more
                            than 15 beds averaged 1.3 patients more per day during this period (see
                            table 5).




                            Page 19                               GAO-03-948 Critical Access Hospital Program
                            Table 5: Seasonal Increase in Average Acute Care Patient Census among Potential
                            CAHs, by Bedsize, 1999

                                                                                                      Potential CAHs with a
                                                                                                      high season average
                                                                                                       census exceeding
                                                                         Patient census                    thresholds
                                                         Estimated                                  Exceeded 15 Exceeded 20
                                         Number of    3-month high                         Annual     acute care  acute care
                             Bedsize potential CAHs season average                        average       patients    patients
                             1-15                               45                 3.5       2.2                0                 0
                             16-25                            124                  7.2       5.5                3                 0
                             26-40                            284                 10.5       8.3               40                 2
                             41-60                            195                 13.2      10.4               72                 3
                             >60                                35                13.3      10.6               14                 0
                             Total                            683                 10.4       8.1             129                  5

                            Source: GAO analysis of Medicare inpatient claims.

                            Note: Because this analysis was based on hospitalizations of Medicare patients, rather than all
                            patients, we used the hospital’s annual ratio of all patients to Medicare patients to estimate each
                            hospital’s total patient census by season. (See app. I for a description of our methodology.)




Because CAH Patient         There were 129 potential CAHs that had at least a slight seasonal increase
Census Limit Is Absolute,   in 1999 that pushed them over the CAH limit of 15 acute care patients per
Potential CAHs Near the     day for some portion of the year. These 129 potential CAHs had an average
                            daily patient census of about 13.2, with none having an annual average
Limit May Have Difficulty   above 15. But these potential CAHs had an estimated average acute care
Staying under It            patient census of 16.9 during their peak season (see table 6), nearly two
                            patients per day higher than the CAH limit.




                            Page 20                                                 GAO-03-948 Critical Access Hospital Program
                         Table 6: Potential CAHs with Estimated Seasonal Increases in Patient Census That
                         Pushed Them over CAH Limit, 1999

                             Potential CAHs with a seasonal increase in patient census                                       129
                             Estimated average increase in patients per day during seasonal increase                          3.7
                             Total annual average daily census                                                               13.2
                             Estimated total average daily census during seasonal increase                                   16.9

                         Source: GAO analysis of Medicare inpatient claims.

                         Note: Because this analysis was based on hospitalizations of Medicare patients, rather than all
                         patients, we used the hospital’s annual ratio of all patients to Medicare patients to approximate each
                         hospital’s total patient census by season.


Significant Number of    About 40 percent of the 129 potential CAHs with seasonal increases that
Potential CAHs with      pushed them over the CAH patient census limit had net gains on combined
Seasonal Increase in     inpatient and outpatient payments for Medicare services (see table 7).
                         These potential CAHs would have a financial incentive to remain under the
Patient Census Have No   PPS, where they can keep the difference between payments and their
Financial Incentive to   costs, rather than convert to CAH status, where they would be paid only
Become a CAH             their reasonable costs.

                         Table 7: Financial Performance of Potential CAHs with a Seasonal Increase in
                         Patient Census That Pushed Them over CAH Limit, Fiscal Year 1999

                                                                                                      Number            Number
                                                                                                     (percent)         (percent)
                                                                                      Median      of hospitals      of hospitals
                                                                                  marginsa in    with negative     with positive
                                                                              percent (n=129)         margins           margins
                             Medicare inpatient                                           2.4           57 (44)          72 (56)
                             Medicare outpatient                                        -19.3          122 (95)             5 (4)
                             Medicare inpatient and                                      -2.7           75 (59)          52 (41)
                             outpatient
                             Total facility (all payers)                                  2.5           47 (36)          82 (64)

                         Source: Fiscal year 1999 Medicare hospital cost reports.

                         Note: For each of the four calculations of hospital margins, two or fewer hospitals were excluded due
                         to incomplete data or because their margins were extreme outliers. Results do not reflect the effects
                         of the outpatient PPS, which was implemented in 2000.
                         a
                         A margin is the difference between a hospital’s revenue and costs, divided by its revenues.




                         Page 21                                                      GAO-03-948 Critical Access Hospital Program
Remaining under Length-    Seasonal fluctuations in patient length of stay were also common among
of-Stay Limit Is           hospitals we studied. Among the 2,139 hospitals with a patient census of
Manageable Because It Is   no more than 50, about three-fourths had a seasonal increase in their
                           Medicare length of stay of at least one-third of a day. Sixty-five potential
an Average                 CAHs had an average Medicare patient length of stay below 4 days (3.8
                           days) for 9 months of fiscal year 1999, but their average length of stay
                           during the other 3 months was high enough (4.8 days) to push their
                           Medicare annual average over the 4-day CAH limit, to 4.2 (see table 8).
                           Among the 620 existing CAHs, 60 had an annual average length of stay
                           greater than 4.2 days before they converted. These existing CAHs have
                           been subject to the 4-day limit since they became CAHs, suggesting that
                           potential CAHs with an annual average of 4.2 days would be able to remain
                           under the limit if they converted.

                           Table 8: Potential CAHs with Seasonal Increase in Medicare Patients’ Length of
                           Stay That Pushed Them over the 4-day CAH Limit, 1999

                            Potential CAHs with increase pushing them over the limit                                    65
                            Average Medicare length of stay during 9-month period (days)                                3.8
                            Average Medicare length of stay during 3-month seasonal increase (days)                     4.8
                            Annual average Medicare patient length of stay (days)                                       4.2

                           Source: GAO analysis of Medicare inpatient claims.



                           The relaxation of the CAH length-of-stay limit in 1999 from an absolute
                           limit of 4 days to an annual average of 4 days has made it easier to meet
                           because hospitals are able to keep some patients for a longer period, as
                           long as the hospital’s annual average remains below the limit. Examples of
                           how a hospital can manage its length of stay during the course of a year
                           include discharging longer-stay patients to skilled nursing care in the
                           hospital’s swing beds or transferring them to referral facilities.
                           Administrative staff of one rural hospital considering CAH conversion
                           reported that its average length of stay dropped over 3 years from 5.3 to
                           3.7 days. The decline, in their opinion, was due to factors such as
                           utilization review, emphasis on community-based services, increased use
                           of post-acute care, and education of staff.


                           The ineligibility of hospitals with DPUs or with seasonal increases in
Conclusions                patient stays that push them over a CAH limit impedes CAH conversion for
                           some hospitals that might otherwise be able to become CAHs. The
                           ineligibility of hospitals with DPUs may result in the loss of some rural
                           DPU services if potential CAHs close their DPU as part of becoming a


                           Page 22                                              GAO-03-948 Critical Access Hospital Program
CAH. Hospitals seeking CAH status may occasionally need to transfer
patients to stay under the CAH limit of 15 acute care patients if they
otherwise periodically exceed 15 due to seasonal increases.

Since inpatient rehabilitation and psychiatric services are less prevalent in
rural areas, enabling rural DPUs to continue operating can help preserve
the availability of services. In fiscal year 1999, 25 hospitals ceased
operation of their DPU as part of becoming a CAH, and beneficiaries in the
affected communities have lost a local provider of these services. Any of
the 93 potential CAHs with a DPU may also relinquish it to convert to CAH
status if hospital officials conclude that shifting to CAHs’ cost-based
payment is the best way to maximize revenue and preserve the other
services they offer. Among these 93 potential CAHs, 47 had net losses on
Medicare services in fiscal year 1999, indicating they might benefit from
CAH conversion.

Because it is generally difficult for rural hospitals to staff and maintain a
DPU, it is unlikely that allowing CAHs to operate DPUs would result in
many existing CAHs opening new DPUs, as long as the DPUs continue to
be paid under PPS and TEFRA. If DPUs operated by CAHs were paid their
reasonable costs, however, DPUs would have less financial incentive to
operate efficiently. The experience of rural DPUs under the new
rehabilitation PPS or the forthcoming psychiatric PPS may provide
information about whether Medicare payments under these PPSs will be
appropriate for rural DPUs.

If CAHs were allowed to operate DPUs, they would generally not be able
to stay under the limits on bedsize, length of stay, and patient census if the
DPU beds and patient stays were counted against current limits. Relaxing
the limits for CAHs with DPUs or not counting the DPU beds or patient
stays for purposes of determining whether the CAH meets the limits would
enable some or all potential CAHs with DPUs to convert to CAH status.

Relaxing the CAH census limit to an annual average of 15 acute care
patients rather than an absolute limit of 15 would accommodate the 129
potential CAHs that exceeded the current limit due to a seasonal increase
as they all had an annual average census below 15. Such a change would
provide CAHs greater flexibility in their management of patient census,
just as the relaxation of the length of stay limit in 1999 to an annual
average of 4 days provided CAHs greater flexibility in their management of
patients’ length of stay. CAHs would then not be required to transfer
patients whenever they would otherwise exceed the limit, as long as they
manage their census so that their annual average is below the limit. It


Page 23                               GAO-03-948 Critical Access Hospital Program
                     would not be necessary to increase the number of acute care beds CAHs
                     are allowed to maintain in order to implement this relaxation of the
                     patient census limit. More than three-quarters of existing CAHs and
                     potential CAHs have swing beds which they could use to accommodate
                     additional acute care patients beyond 15, since the limit is 25 beds for
                     CAHs with acute and swing beds. Among the 129 potential CAHs, about 60
                     percent had net losses on Medicare services in fiscal year 1999, indicating
                     they might benefit from CAH conversion, while the 40 percent with net
                     gains would less likely have the financial incentive to convert.

                     Many potential CAHs that decide to seek CAH status would need to adjust
                     their bedsize or length of stay to become CAHs, just as about 60 percent of
                     existing CAHs needed to reduce their bedsize and 14 percent needed to
                     reduce their length of stay in fiscal year 1999. CAH status and the cost-
                     based reimbursement that goes with it have proven to be attractive enough
                     that hospitals have been willing to make the necessary adjustments.


                     We suggest that the Congress may wish to consider allowing hospitals
Matters for          with DPUs to convert to CAH status while making allowances for DPU
Congressional        beds, patients, and lengths-of-stay when determining CAH eligibility, and
                     that CAH-affiliated DPUs be paid under the same formulas as other
Consideration        inpatient psychiatric or rehabilitation providers. We also suggest that the
                     Congress may wish to consider changing the CAH limit on acute care
                     patient census from an absolute limit of 15 acute care patients to an
                     annual average of 15 to give CAHs greater flexibility in the management of
                     their patient census.


                     In commenting on a draft of this report, the Department of Health and
Agency Comments      Human Services said that these modifications to CAH eligibility criteria
and Our Evaluation   would provide the needed flexibility for some additional facilities to
                     consider conversion to CAH status. It stated that the key is to provide the
                     proper incentives for facilities to convert when they meet the statutory
                     requirements and when it is the right thing to do for a particular
                     community.

                     HHS suggested that we further emphasize several issues regarding CAH
                     eligibility and payment. (See app. II for the full text of HHS’s written
                     comments.) HHS pointed out that it is important to consider that the
                     financial incentives for efficiency under TEFRA payments to psychiatric
                     DPUs or rehabilitation PPS payments to rehabilitation DPUs would not be
                     preserved if CAHs were able to claim cost-based reimbursement for their


                     Page 24                              GAO-03-948 Critical Access Hospital Program
DPUs, and therefore HHS said such DPUs should continue to be paid
separately from the CAH. The department also emphasized that CAHs are
required to meet more limited health and safety standards compared to
other acute care hospitals and raised concerns that any DPUs operated by
CAHs would likewise be subject to more limited health and safety
standards unless the Congress acted to maintain standards currently in
place for DPUs. Furthermore, HHS suggested that we analyze the extent to
which inpatient rehabilitation and psychiatric services are available to
rural residents beyond their local hospitals in order to determine whether
such services are more or less accessible to rural residents than other
specialty services. The department expressed concern that non-CAH
hospitals that are within close proximity to CAHs may perceive unfair
treatment if such CAHs are allowed to operate DPUs. Finally, in
commenting on the relaxation of the CAH acute care patient census limit
to an annual average of 15, HHS proposed that we consider suggesting
corresponding changes to the CAH bedsize limit.

As we noted in the draft report, incentives for efficiency that exist under
the current payment systems for inpatient psychiatric and rehabilitation
services would not be preserved under cost-based reimbursement. We
revised the matters for congressional consideration to specifically suggest
that CAH-affiliated DPUs be paid under the same formulas as other
inpatient psychiatric or rehabilitation providers. We also agree with HHS
that there are differences in conditions of participation between hospitals
and CAHs and that appropriate health and safety standards should be
maintained for CAH-affiliated DPUs, and we modified the report
accordingly. However, determining what health and safety standards
should be applied to the DPUs of CAHs was beyond the scope of this
report. While we noted differences in the availability of inpatient
rehabilitation and psychiatric services between rural and urban areas in
the draft report, measuring in detail the level of access rural residents have
to various specialty services was beyond the scope of this report. We
believe that the close proximity of non-CAH hospitals to CAHs with DPUs
would only present a fairness issue if such CAH-affiliated DPUs are paid
cost-based reimbursement or if they are subject to less stringent
regulations. If such DPUs operate under the same payment methodologies
and regulations as other DPUs, this would not be an issue. A detailed
examination of the levels of competition between CAH and non-CAH
hospitals was beyond the scope of this report. We clarified in the report
that we are not suggesting any changes to the CAH limits of 15 acute care
beds or 25 total beds when swing beds are included, since most CAHs
have swing beds that could be used when the acute care patient census



Page 25                               GAO-03-948 Critical Access Hospital Program
exceeds 15. HHS also provided technical comments, which we have
incorporated as appropriate.


We are sending copies of this report to the Secretary of Health and Human
Services and interested congressional committees. We will also make
copies available to others upon request. In addition this report is available
at no charge on the GAO Web site at http://www.gao.gov.

If you have any questions about this report, please call me at (202) 512-
7119. Other major contributors are listed in appendix III.




A. Bruce Steinwald
Director, Health Care – Economic
 and Payment Issues




Page 26                              GAO-03-948 Critical Access Hospital Program
List of Committees

The Honorable Charles E. Grassley, Jr.
Chairman
The Honorable Max Baucus
Ranking Minority Member
Committee on Finance
United States Senate

The Honorable Bill Thomas
Chairman
The Honorable Charles B. Rangel
Ranking Minority Member
Committee on Ways and Means
House of Representatives

The Honorable W.J. “Billy” Tauzin
Chairman
The Honorable John D. Dingell
Ranking Minority Member
Committee on Energy and Commerce
House of Representatives




Page 27                             GAO-03-948 Critical Access Hospital Program
             Appendix I: Scope and Methodology
Appendix I: Scope and Methodology


             To identify potential Critical Access Hospitals (CAHs), we selected rural,
             non-CAH hospitals with an annual average patient census of 15 or fewer
             acute care patients, based on patient census figures reported in fiscal year
             1999 Medicare cost reports.1 Any hospital that had converted to CAH
             status as of January 1, 2003 was excluded from the list of potential CAHs.
             We defined potential CAHs based on their annual average census, rather
             than by bedsize, because average census better represents the bed
             capacity a hospital would need to support its current demand for services.
             If potential CAHs have more beds than necessary to meet their patient
             demand, they can decertify beds in order to meet CAH eligibility criteria.
             Our inclusion of hospitals with an average census up to 15 is likely a high
             estimate of the number of potential CAHs. Hospitals with an annual
             average of 15 acute care patients per day may need more than 15 acute
             care beds to accommodate variations in their patient census that
             periodically cause them to exceed 15.

             From the resulting list of 683 potential CAHs, we identified hospitals
             operating rehabilitation or psychiatric distinct part units (DPUs), as well
             as those with seasonal variation in patient census or length of stay that
             caused them to exceed CAH limits. For our analysis of seasonal variation
             in patient census, we used the volume of Medicare patients as a proxy for
             total patient volume because national data on day-to-day variation
             inpatient admissions were only available for Medicare patients. We
             calculated from hospital cost reports the Medicare share of each hospital’s
             total acute care patient volume, and for each hospital multiplied the CAH
             limit of 15 acute care patients by its Medicare share in order to define a
             comparable limit based on Medicare patient stays. For example, if a
             hospital’s Medicare share of patients was 67 percent in fiscal year 1999,
             then a Medicare census of about 10 acute care patients was considered to
             be equivalent to a total census of 15 acute care patients. Using Medicare
             inpatient claims data for 1999, we defined seasonal variation in daily
             census as having a period of 3 consecutive months with an average census
             greater than the estimated limit, with the remaining nine months’ census
             averaging below the estimated limit. We identified 129 potential CAHs as
             having a seasonal increase that caused them to exceed the limit for a 3-
             month period, while staying under for the remaining 9 months. To estimate
             total patient census for these hospitals for each season, we multiplied their


             1
              Medicare cost report data for fiscal year 1999 were used because they were the most
             current complete data available. There is typically a several year delay between the start of
             a fiscal year and the point at which a complete set of audited hospital cost report data are
             available for that year.




             Page 28                                      GAO-03-948 Critical Access Hospital Program
Appendix I: Scope and Methodology




Medicare census by their ratio of total patients to Medicare patients. We
defined seasonal variation in length of stay as having a period of 3
consecutive months with an average Medicare length of stay greater than 4
days with an average for the remaining 9 months of less than 4 days. In
addition, we identified only those hospitals for which their seasonal
increase in length of stay caused them to exceed the CAH limit of an
average of 4 days.

Because we used Medicare utilization to estimate hospitals’ total patient
utilization for each season, the hospitals we identified as having seasonal
variation that causes them to exceed CAH limits may not be precisely the
same set of hospitals that would have been identified if claims data for all
patients had been available. Rather, our analysis provides an estimate of
the proportion of potential CAHs so affected. By broadly defining seasonal
variation, we captured all the hospitals that have census or length of stay
fluctuations around the CAH limits, regardless of the magnitude of the
fluctuation.

We calculated Medicare margins and total facility margins using fiscal year
1999 Medicare hospital cost report data, using methods developed jointly
by the Centers for Medicare & Medicare Services (CMS) Office of the
Actuary and the Medicare Payment Advisory Commission. The reported
median margins are hospital-weighted, meaning that each hospital counts
equally in the calculation of the median, regardless of differences in
hospital size or total revenues.

We interviewed officials at CMS, at the Federal Office of Rural Health
Policy, and state staff administering Flex Program grants in 11 states
(table 9). To get a comprehensive perspective of how current and potential
CAHs are affected by CAH eligibility criteria, we also conducted an e-mail
survey of all state CAH coordinators, and received e-mail responses or
directly interviewed 42 out of 47. In addition, we interviewed researchers
with the Rural Hospital Flexibility Tracking Project, an evaluation of the
Flex Program funded by the FORHP. We interviewed administrators of 24
CAHs and potential CAHs across 10 states, and made site visits to 7 of
these hospitals in 3 states. These 10 states were selected based on having
significant CAH enrollment or potential enrollment, and representing
different regions of the country.




Page 29                              GAO-03-948 Critical Access Hospital Program
Appendix I: Scope and Methodology




Table 9: Summary of Site Visits and Interviews

                  Interviewed state                                        Number of
                         staff                                        administrators
                    administering                   Interviewed       of existing and
                    Flex Program      Hospital        hospital        potential CAHs
 State                  grants        site visit   administrators         interviewed
 Alabama                                                 X                          1
 Indiana                 X                X              X                          2
 Iowa                    X                               X                          2
 Kansas                  X                               X                          2
 Mississippi             X                X              X                          5
 Montana                 X                               X                          1
 Nebraska                X
 North Carolina          X                X              X                          2
 South Dakota            X
 Texas                   X                               X                          2
 Vermont                 X                               X                          1
 Washington              X                               X                          6
 Total                   11               3             10                         24

Source: GAO.




Page 30                                    GAO-03-948 Critical Access Hospital Program
             Appendix II: Comments from the Department of Health and Human Services
Appendix II: Comments from the Department
of Health and Human Services




             Page 31                                  GAO-03-948 Critical Access Hospital Program
Appendix II: Comments from the Department of Health and Human Services




Page 32                                  GAO-03-948 Critical Access Hospital Program
Appendix II: Comments from the Department of Health and Human Services




Page 33                                  GAO-03-948 Critical Access Hospital Program
Appendix II: Comments from the Department of Health and Human Services




Page 34                                  GAO-03-948 Critical Access Hospital Program
                  Appendix III: GAO Contact and Staff
Appendix III: GAO Contact and Staff
                  Acknowledgments



Acknowledgments

                  A. Bruce Steinwald, (202) 512-7119
GAO Contact
                  Jean Chung, Chris DeMars, Michael Rose, Margaret Smith, and Kara Sokol
Acknowledgments   made key contributions to this report.




(290053)
                  Page 35                               GAO-03-948 Critical Access Hospital Program
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