Eliminate the Critical Access Hospital, Medicare-Dependent Hospital, and Sole Community Hospital Programs in Medicare

Hospitals designated as critical access hospitals (CAHs), Medicare-dependent hospitals (MDHs), and sole community hospitals (SCHs) are exempt from the Inpatient Prospective Payment System (IPPS) through which Medicare pays for services provided by most acute care hospitals. Eligibility for the CAH, MDH, and SCH designations is based on several factors, including size and location. Most of the hospitals exempt from the IPPS are small, rural facilities. Some of those hospitals receive payments equal to 101 percent of the costs of providing care, while others receive payments based on a blend of IPPS rates and their costs. Hospitals benefiting from the special adjustments for CAHs, MDHs, and SCHs are paid about 25 percent more, on average, for inpatient and outpatient services than the payments that would otherwise apply. Currently, one-third of hospitals benefit from those designations and account for about 10 percent of total Medicare spending for hospital inpatient services.

This option would eliminate the CAH, MDH, and SCH programs and end the higher Medicare payments made to those facilities. Instead, payment to those hospitals, as with other hospitals paid through the IPPS, would be determined prospectively on the basis of the following: patients' diagnoses and the severity of their illness or injury; geographic variations in hospital "input" costs (for example, for professional labor or medical supplies); and certain other hospital- and patient-specific factors, such as the hospital's teaching status and Medicaid caseload. By eliminating the CAH, MDH, and SCH programs and the higher payments to hospitals participating in those programs, this option would reduce federal outlays by $23 billion over the 2012-2016 period and by approximately $62 billion over the 2012-2021 period.

An argument in favor of eliminating the CAH, MDH, and SCH programs is that doing so would move Medicare toward a payment structure that compensates all hospitals in a consistent manner. Smaller rural hospitals would no longer be able to participate in programs that compensated them at relatively higher rates. Additionally, this option might improve efficiency in the health care system. IPPS payments are intended to encourage efficiency by compensating hospitals for the costs that reasonably efficient providers would incur in furnishing high-quality care (including adjustments for local input costs). By placing CAHs, MDHs, and SCHs under the IPPS, those hospitals would face greater incentives to provide efficient care.

A potential drawback of this option is that the special payments currently made to the CAHs, MDHs, and SCHs may offset the higher costs of operating smaller facilities in rural areas. If those hospitals are not able to reduce their costs under the IPPS, the increased financial pressure resulting from the elimination of special payments to CAHs, MDHs, and SCHs might force some of those hospitals to convert to outpatient facilities or even to close. To the extent that occurred, patients who reside in those areas might have difficulty getting access to care.