    Rural Health Clinics: Rising Program Expenditures Not Focused on
    Improving Care in Isolated Areas (Letter Report, 11/22/96,
    GAO/HEHS-97-24).

    Pursuant to a congressional request, GAO reviewed the Rural Health
    Clinic (RHC) Program, focusing on: (1) whether the RHC program is
    serving a Medicare and Medicaid population that would otherwise have
    difficulty obtaining primary care; (2) whether there are controls in
    place to ensure that costs claimed for reimbursement are reasonable and
    to target the cost-reimbursement benefit of the program to clinics
    needing it for financial viability.

    GAO found that: (1) the RHC program is generally not focused on serving
    Medicare and Medicaid populations having difficulty obtaining primary
    care in isolated rural areas; (2) the additional Medicare and Medicaid
    payments provided to RHCs increasingly benefit well-staffed, financially
    viable clinics in suburban areas that already have extensive health care
    delivery systems in place; (3) most RHCs are conversions of existing
    physician practices that generally do not need or use the benefits under
    the program to enlarge the size of the practice or take other actions to
    expand care provided to underserved portions of the area's population;
    (4) contributing to this problem are the extraordinarily high
    reimbursements that RHC providers receive for each patient visit for
    Medicare and Medicaid services at many clinics, the program's broad
    eligibility criteria, and the requirement that the Health Care Financing
    Administration (HCFA) reimburse all RHCs at cost, even if they are
    already financially viable; (5) HCFA is not using its authority to set
    maximum payment limits for nearly half of the RHCs that are operated as
    a part of a hospital or other facility or implementing screens necessary
    to determine whether claimed costs at independent or facility-based RHCs
    are reasonable; and (6) once certified, RHCs remain eligible for cost
    reimbursement indefinitely, even if the area they serve no longer
    qualifies as rural or underserved.

    --------------------------- Indexing Terms -----------------------------

     REPORTNUM:  HEHS-97-24
         TITLE:  Rural Health Clinics: Rising Program Expenditures Not
                 Focused on Improving Care in Isolated Areas
          DATE:  11/22/96
       SUBJECT:  Community health services
                 Health resources utilization
                 Health centers
                 Medical services rates
                 Eligibility criteria
                 Economically depressed areas
                 Health care programs
                 Health care cost control
    IDENTIFIER:  HHS Health Professional Shortage Area System
                 HHS Rural Health Clinic Services Program
                 Medicare Program
                 Medicaid Program
                 Alabama
                 Kansas
                 New Hampshire
                 Washington
                 Florida

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    Cover
    ================================================================ COVER

    Report to the Chairman, Subcommittee on Human Resources and
    Intergovernmental Relations, Committee on Government Reform and
    Oversight, House of Representatives

    November 1996

    RURAL HEALTH CLINICS - RISING
    PROGRAM EXPENDITURES NOT FOCUSED
    ON IMPROVING CARE IN ISOLATED
    AREAS

    GAO/HEHS-97-24

    Rural Health Clinics

    (108254)

    Abbreviations
    =============================================================== ABBREV

      FQHC - federally qualified health center
      HCFA - Health Care Financing Administration
      HHS - Department of Health and Human Services
      HPSA - health professional shortage area
      MUA - medically underserved area
      RHC - rural health clinic

    Letter
    =============================================================== LETTER

    B-270103

    November 22, 1996

    The Honorable Christopher Shays
    Chairman, Subcommittee on Human Resources and
     Intergovernmental Relations
    Committee on Government Reform and Oversight
    House of Representatives

    Dear Mr.  Chairman:

    Two decades ago, the Rural Health Clinic (RHC) program was
    established to provide Medicare and Medicaid reimbursement to health
    clinics in underserved rural communities.  Today, Medicare and
    Medicaid continue to reimburse RHC providers on the basis of their
    actual costs for providing care.  Most other providers treating
    Medicare and Medicaid patients generally receive lower payments that
    are limited by set fee schedules.  Since the fee schedules were
    established in 1989, the number of clinics participating in the RHC
    program has grown by over 30 percent a year to nearly 3,000.
    Combined Medicare and Medicaid payments to them are expected to be
    over $1 billion annually by the year 2000.  This trend has raised
    questions about the benefits that program expenditures are providing
    to underserved Medicare and Medicaid populations.

    In response to your request, we studied the following questions:

      -- Is the RHC program serving a Medicare and Medicaid population
         that would otherwise have difficulty obtaining primary care?

      -- Are controls in place to ensure that costs claimed for
         reimbursement are reasonable and to target the
         cost-reimbursement benefit of the program to clinics needing it
         for financial viability?

    Our review was performed using available national statistics and
    information from our own detailed analysis of RHCs in four states--
    Alabama, Kansas, New Hampshire, and Washington.  Our detailed
    analysis included such matters as where clinics were located, how
    many Medicare and Medicaid beneficiaries they served, the amounts and
    types of costs they claimed for reimbursement, and how their service
    patterns had changed from 1992 to 1994.  Details of our objectives,
    scope, and methodology are in appendix I.

       RESULTS IN BRIEF
    ------------------------------------------------------------ Letter :1

    Contrary to its original purpose, the RHC program is generally not
    focused on serving Medicare and Medicaid populations having
    difficulty obtaining primary care in isolated rural areas.  Rather,
    our work suggests that the additional Medicare and Medicaid payments
    (estimated at $295 million for 1996) provided to RHCs increasingly
    benefit well-staffed, financially viable clinics in suburban areas
    that already have extensive health care delivery systems in place.
    Most RHCs are conversions of existing physician practices that
    generally do not need or use the benefits under the program to
    enlarge the size of the practice or take other actions to expand care
    provided to underserved portions of the area's population.
    Nevertheless, RHC providers receive extraordinarily high
    reimbursement for each patient visit for Medicare and Medicaid
    services at many clinics, as much as $214 for each patient visit at
    one clinic in our sample compared with an average of $37 received by
    providers on the Medicare fee schedule.

    Contributing to this problem are the program's broad eligibility
    criteria, and the requirement that the Health Care Financing
    Administration (HCFA) reimburse all RHCs at cost, even if they are
    already financially viable using standard Medicare and Medicaid
    payment methods.  The situation is exacerbated by HCFA's not using
    its authority to set maximum payment limits for nearly half of the
    RHCs that are operated as a part of a hospital or other facility or
    implementing the screens necessary to determine whether claimed costs
    at independent or facility-based RHCs are reasonable.  As a result,
    we found examples where a hospital-owned clinic claimed overhead
    costs that were 120 percent of the direct costs of running the clinic
    and an independent clinic claimed $270,000 in compensation for each
    of its four staff physicians.  In addition, once certified, RHCs
    remain eligible for cost reimbursement indefinitely, even if the area
    they serve no longer qualifies as rural or underserved.

    To bring about improvements needed to direct assistance toward those
    rural areas that the program was originally intended to serve, both
    the Congress and the Secretary of Health and Human Services (HHS)
    will need to establish additional eligibility criteria and controls
    over the cost-
    reimbursement benefit of the program.

       BACKGROUND
    ------------------------------------------------------------ Letter :2

    In 1977, many rural communities were facing a disconnect between
    their health care delivery systems and Medicare and Medicaid, the
    nation's primary health insurance programs for the elderly and the
    poor.  Many isolated rural communities that had not been able to
    attract or retain a physician had come to rely on clinics that did
    not follow the traditional model of physician delivery of medical
    services.  These rural clinics were staffed by specially trained
    nurse practitioners and physician assistants who acted as either the
    primary care provider or assistants to overworked sole physicians.
    However, services rendered by these nonphysician providers were not
    covered by Medicare unless they were under the immediate supervision
    of a physician, and coverage under Medicaid was at the state's
    discretion.  As a result of this and other factors, some rural
    clinics were confronted with serious financial problems.  The
    Congress became concerned that without Medicare reimbursement, many
    of these clinics could never become self-sufficient and would be
    forced to close, leaving many areas without primary health care
    services.  Therefore, Public Law 95-210 authorized Medicare and
    Medicaid reimbursement to nonphysician primary care practitioners in
    RHCs.\1

    The RHC program is one of the few federal programs that is able to
    address underservice in small communities that do not have a
    traditional health care system in place.  Other assistance programs,
    such as the National Health Service Corps, which places providers in
    underserved areas, generally require that such a system be present.
    With their nontraditional approach, RHCs can provide care in areas
    where a traditional system is not financially viable.  Appendix II
    shows where RHCs were located throughout the nation near the end of
    1995.

    The RHC program is administered by HCFA, which must certify as RHCs
    all primary care providers requesting this status if they practice in
    a rural and underserved area and meet the conditions of participation
    for the Medicare program as determined by the state's survey agency.
    An RHC may be operated as an independent clinic or as part of a
    larger facility, such as a hospital.  Medicare and Medicaid pay
    independent and facility-based RHCs differently, but both generally
    reimburse RHCs on the basis of the actual costs of providing
    services.  This practice continued in the 1980s, when the Medicare
    program established maximum fees for services that would be paid to
    most other providers.  These new payment systems were developed
    because paying for services on the basis of costs or charges created
    incentives for inefficiency and cost escalation.  However, RHCs
    continue to receive cost-based reimbursement out of recognition that
    some clinics might not be financially viable under a fee schedule
    approach.

    --------------------
    \1 Certified Nurse-Midwives in RHCs also became eligible for
    reimbursement in 1989 (P.L.  101-239).

       PROGRAM IS NOT TARGETING
       UNDERSERVED MEDICARE AND
       MEDICAID POPULATIONS
    ------------------------------------------------------------ Letter :3

    The RHC program has grown rapidly since 1990, but not in those
    locations where Medicare and Medicaid populations are having
    difficulty obtaining primary care.  At many of the locations that we
    were able to analyze in depth, primary care was already available to
    the Medicare and Medicaid population, and certifying an RHC appeared
    to have little or no effect on the availability of care for any
    remaining underserved segments of the population.

          GROWTH PRIMARILY IN AREAS
          WITH ESTABLISHED HEALTH CARE
          SYSTEMS
    ---------------------------------------------------------- Letter :3.1

    RHCs are increasingly being certified in areas with substantial
    populations rather than in remote rural areas.  The program was
    designed to primarily benefit areas where population densities are
    insufficient to attract and support a physician-run clinic.

    The National Health Service Corps' benchmark for the minimum number
    of people needed to place a full-time primary care physician is
    2,000, according to the Chief of Site Development and Placement;
    however, as of November 1995, only 5 percent of all RHCs were in
    areas with fewer than 2,000 people\2 living within 15 miles\3 (see
    fig.  1).  Even adjusting this benchmark upward to 10,000 people
    would account for less than 25 percent of RHCs.

       Figure 1:  Distribution of RHCs
       by Population Living Within 15
       Miles

       (See figure in printed
       edition.)

    In contrast, 19 percent of RHCs had 50,000 or more people living
    within 15 miles of them, and this trend is increasing.  As figure 2
    shows, the percentage of RHCs certified each year in areas with
    50,000 or more people increased from almost 9 percent to 22 percent
    from 1991 to 1995, while the percentage for areas with populations of
    10,000 or fewer decreased from 34 percent to 11 percent.

       Figure 2:  RHCs by Population
       and Year Certified, 1991-95

       (See figure in printed
       edition.)

    Appendix III provides more detailed information on where RHCs are
    located in our four sample states.

    Our analysis indicates that many of the areas in which RHCs are being
    certified are not only well-populated but also have existing--and
    extensive--primary health care systems.  We performed a more detailed
    review of communities in Alabama, Kansas, New Hampshire, and
    Washington, where 144 RHCs had been certified.  Of these locations,
    75 percent had primary care available to Medicare and Medicaid
    beneficiaries before an RHC was certified.  The main reason for this
    was that over 65 percent of the 144 RHCs were conversions of existing
    physician practices in the community that had been reimbursed by
    Medicare and Medicaid for years.  For example, physicians in New
    Hampshire had been practicing an average of over 18 years before
    converting their practices to RHCs, while those in Kansas and Alabama
    had been practicing an average of over 15 years.\4

    Moreover, most communities also had additional health resources
    available before RHC certification, indicating the presence of a
    well-
    developed health care delivery system.  For example, at the time the
    RHC was certified in Moses Lake, Washington, this community--with a
    surrounding population of 25,000--had 17 practices with primary care
    providers, a number of specialty practices, one hospital, two skilled
    nursing facilities, a mental health facility, a hospice, and a home
    health agency.  Of the 144 RHCs in the four states reviewed, 57
    percent had anywhere from 2 to 18 primary care practice sites already
    in place, as well as a combination of other specialized health care
    providers and facilities.

    Sparsely populated, underserved communities still exist, and efforts
    to establish RHCs in such locations appear minimal.  For the four
    states in our analysis, we noted that many communities with fewer
    than 5,000 people had no Medicare or Medicaid primary care provider.
    Neither HCFA nor the state rural health offices were aware of any
    efforts to actively target and establish RHCs in these locations.\5
    Instead, many RHCs were certified in the same city where existing
    RHCs or other federally funded clinics were already in place.
    Nationwide, 37 percent of the 2,599 RHCs certified near the end of
    fiscal year 1995 were located in the same community as other RHCs or
    federally qualified health centers (FQHC),\6 with 74 cities having 3
    to 6 RHCs.  For example:

      -- 31 percent of the 144 RHCs in our four-state sample were in
         cities having 1 to 3 other RHCs or FQHCs and

      -- the city of Marianna, Florida, now has 7 RHCs for the 30,000
         people living within 15 miles, and 4 additional RHCs are 20
         miles away in Chipley, Florida, a community of 3,800.

    --------------------
    \2 Population data as of 1990 census.

    \3 The Bureau of Primary Care within HHS considers that in rural
    areas with poor access roads, 15 miles is the maximum acceptable
    distance for patients to have to travel to a primary care provider.
    For areas with better roads, the normal acceptable distance is 20 to
    25 miles.

    \4 Similarly, a nationwide survey conducted by the National Rural
    Health Clinic Association in 1994 found that nearly 74 percent of 487
    RHCs had been in operation as private practices an average of over 12
    years before they were certified as an RHC.

    \5 HHS' Inspector General reported that a more rational and strategic
    placement of RHCs was needed to ensure that government funding
    increased access to care.  See Rural Health Clinics:  Growth, Access
    and Payment, HHS Office of the Inspector General, OEI-05-94-00040
    (Washington, D.C.:  1996).

    \6 Like RHCs, FQHCs receive cost reimbursement from Medicare and
    Medicaid, and they may also receive federal grant funding to address
    underservice.

          RHCS GENERALLY NOT
          DECREASING DISTANCE TO CARE
    ---------------------------------------------------------- Letter :3.2

    While the RHC program was created to develop or expand the
    availability of health care in local communities, we did not find
    indications that the growing number of clinics were decreasing the
    distance that beneficiaries traveled for care.  Our review of
    Medicare and Medicaid claims data for 119 clinics in our four-state
    sample showed that the availability of care within communities did
    not change appreciably for at least 90 percent of Medicare and
    Medicaid beneficiaries after the RHC was certified.  At least 73
    percent of the more than 42,000 Medicare and Medicaid beneficiaries
    using RHCs in our sample had previously obtained care from a primary
    care provider in the same city in which they lived or the same city
    in which the RHC was.  For example, of 203 Medicare and Medicaid
    beneficiaries currently obtaining primary care at an RHC serving a
    surrounding community of nearly 60,000 in Hutchinson, Kansas, only 15
    were traveling more than 15 miles for care before the RHC was
    certified.

    Claims data were not available to identify the increased access to
    care that the RHC program provided for populations other than
    Medicare and Medicaid beneficiaries; however, RHCs are not required
    to address underservice in the community.  While many RHCs qualify
    for the program because the overall population is designated as
    underserved, less than half of the 76 RHCs we surveyed said that they
    used the program to expand their staff or increase the number of
    patients they see.  Even when certified for areas underserved only
    for specific population groups, 86 percent of the RHCs said that the
    program had not influenced the type of patients they serve in the
    community.  Regardless of how the underserved area is defined, most
    RHCs believe that the uninsured poor make up the majority of
    underserved people in their community; however, only 16 RHCs offered
    services on a sliding fee scale based on the patient's ability to pay
    for care.\7 One RHC said that some of its physicians would not accept
    Medicaid beneficiaries as patients unless they were in the state's
    managed care program.\8

    --------------------
    \7 Most clinics said that they would treat or refer all patients
    requesting care; however, other federal programs require a sliding
    fee scale to improve the likelihood that the uninsured poor will seek
    care.

    \8 In some states, such as Washington, that have Medicaid managed
    care programs, RHCs receive higher capitated payments than other
    providers.

          PROGRAM'S BENEFITS BEST
          EXEMPLIFIED BY RHCS IN
          SMALLEST LOCATIONS
    ---------------------------------------------------------- Letter :3.3

    Despite the lack of clear program effect in most locations, we did
    find instances in which the RHC program improved access to care for
    Medicare and Medicaid beneficiaries.  About 3,500 of the 42,500
    Medicare and Medicaid beneficiaries in our four-state sample reduced
    the distance that they had to travel for care by a median of 20 miles
    (to fewer than 15 miles) by using the RHC.  Those RHCs most
    successful in improving access tended to locate in communities
    without Medicare or Medicaid providers or in areas having a
    population of fewer than 5,000 within a 15-mile radius.  Following
    are some examples:

      -- Wadley, Alabama, a community of just over 500, was unable to
         support a primary care practice until a nearby hospital set up
         an RHC staffed by a part-time nurse practitioner.  Distance to
         care was reduced by a median of 18 miles for 46 of the 118
         Medicare beneficiaries using this clinic in 1994.

      -- A hospital district in eastern Washington uses three family
         physicians and two physician assistants to run an RHC in
         Ritzville and two satellite clinics, about 15 and 30 miles away,
         respectively.  Distance to care was reduced by a median of 48
         miles for at least 80 of the 507 Medicare beneficiaries using
         these clinics in 1994.

          BROAD ELIGIBILITY CRITERIA
          ALLOW GROWTH IN AREAS WHERE
          NEED IS MINIMAL
    ---------------------------------------------------------- Letter :3.4

    A key reason that RHCs may be certified in areas unlikely to improve
    access to care is the broad eligibility criteria, which provide no
    requirement or incentive for RHCs to locate in places with little or
    no existing medical infrastructure.  To be certified as an RHC, a
    practice must basically meet two tests in addition to meeting the
    normal conditions for participation in Medicare:\9 it must be located
    in a rural area, and the area must be designated as underserved.
    However, both tests are easily met, and there are no additional
    requirements to ensure that the enhanced payments under the program
    will be used to hire more providers or see more patients.

    --------------------
    \9 Under federal law, clinics meeting the conditions of participation
    for Medicare automatically meet conditions of participation for
    Medicaid.

             DEFINITION OF RURAL
    -------------------------------------------------------- Letter :3.4.1

    Under the law authorizing the RHC program, rural refers to any area
    not designated as urbanized by the Bureau of the Census.  Under this
    definition, cities, towns, or census areas with populations under
    50,000 are considered rural.  While the Census Bureau generally
    defines rural as areas with populations of fewer than 2,500, even
    these areas may be located near other cities that together constitute
    a substantial population base.  Nearly 500 RHCs have populations of
    from 50,000 to more than 1 million within 15 miles of them.\10

    --------------------
    \10 The median population surrounding these clinics was 83,000.

             DEFINITION OF UNDERSERVED
    -------------------------------------------------------- Letter :3.4.2

    Under the law authorizing the RHC program, underserved refers to a
    federally designated health professional shortage area (HPSA), a
    medically underserved area (MUA), or a state-designated underserved
    area.\11 In an earlier report, we pointed out several problems with
    the federal underservice designations that need to be addressed
    before these designations can be effectively used for targeting
    resources to the underserved.\12 For example, more than half of the
    underservice designations may be invalid because they are outdated or
    do not consider a significant number of primary care providers, such
    as nurse practitioners or physician assistants, whose services are
    promoted by the RHC program.  Using the designations as they
    currently stand provides no assurance that RHCs are only being
    permitted in areas that have insufficient numbers of primary care
    providers.  HHS' Inspector General\13 and administrators of the
    underservice designation systems have said that HCFA needs to
    establish additional program-specific screening criteria to better
    identify areas needing RHCs; however, HCFA has not yet decided
    whether to request a change in legislation for this purpose.

    --------------------
    \11 An HPSA is generally defined for a geographic area or a specific
    population group having fewer than one primary care physician for
    every 3,500 people.  An MUA uses additional factors besides primary
    care shortages, such as the infant mortality rate, percentage of
    population with incomes below the poverty level, and percentage of
    population age 65 and older.  HHS may also designate areas as
    underserved on the basis of the recommendation of state governors.

    \12 Health Care Shortage Areas:  Designations Not a Useful Tool for
    Directing Resources to the Underserved (GAO/HEHS-95-200, Sept.  8,
    1995).

    \13 See Rural Health Clinics:  Growth, Access and Payment,
    OEI-05-94-00040.

       CONTROLS ARE NOT IN PLACE TO
       ENSURE REASONABLE COSTS AND
       EFFECTIVE TARGETING OF FUNDS
    ------------------------------------------------------------ Letter :4

    Because the RHC program's cost-based reimbursement is usually more
    generous than Medicare and Medicaid fee schedules, adequate controls
    over claimed costs are particularly important.  Using 1993 claims
    data, we estimate on average that Medicare paid at least 43 percent
    more for cost-based reimbursement to RHCs than it paid to other
    providers who were paid using the fee schedule, while Medicaid paid
    at least 86 percent more.  Assuming this same difference between
    cost-based and fee schedule payments continues, reimbursing RHCs will
    cost Medicare around an additional $100 million and Medicaid about
    $195 million in 1996.\14

    We found four problem areas that may result in unneeded expenditure
    of a portion of these Medicare and Medicaid funds:  (1) no limit on
    payments made to facility-based RHCs, (2) no screening to determine
    if claimed costs are reasonable, (3) an inability to target
    cost-based reimbursement where needed for financial viability, and
    (4) no mechanism to discontinue cost-
    based reimbursement if the RHC's location is no longer rural or
    underserved.

    --------------------
    \14 The actual added cost to the Medicare and Medicaid programs is
    likely to be higher due to data limitations explained in app.  I.

          CONTROLS ARE LACKING ON
          PAYMENTS TO FACILITY-BASED
          RHCS
    ---------------------------------------------------------- Letter :4.1

    Nationwide data on ownership patterns show that nearly half of all
    RHCs are operated by a facility such as a hospital, skilled nursing
    facility, or home health agency.\15 As of 1990, there were only 57
    facility-based RHCs, but their number has grown so rapidly in recent
    years that at the end of 1995 there were 1,267, or 46 percent of all
    RHCs (see fig.  3).

       Figure 3:  RHCs by Ownership
       Type, 1978-95

       (See figure in printed
       edition.)

    This ownership trend has implications for Medicare and Medicaid
    expenditures because facility-based RHCs are not subject to the same
    cost-reporting requirements\16 and the annually adjusted limit,
    currently $56, on the cost per visit as are independent RHCs.  HCFA
    has not determined how much more these facility-based RHCs receive
    from Medicare and Medicaid as a result, but indications are that
    their average cost per visit is often substantially higher.  For
    example, our review of cost reports submitted by a sample of 28
    facility-based RHCs in 1993 and 1994 showed that they were paid up to
    $214\17 per Medicare patient visit while the maximum amount paid to
    independent RHCs in these years was about $55.\18

    HCFA officials said that they did not establish cost limits for
    facility-based RHCs, as they did for independent RHCs, because few
    facility-based RHCs were certified when the program began and it was
    easier to reimburse these RHCs the same way as Medicare paid the
    facility's other outpatient departments, on the basis of the lower of
    costs or charges for services.  Similarly, while HCFA estimates that
    Medicare and Medicaid payments to RHCs will be close to $1 billion by
    the year 2000, this estimate excludes Medicare payments that will be
    made to facility-based RHCs as well as year-end adjustments that can
    increase payments to RHCs.  HCFA has established a working group that
    is addressing the issue of payment limits for facility-based RHCs but
    has no estimate of when regulations will be issued.

    --------------------
    \15 Facility-based clinics may be located within the facility or set
    up as separate clinics either in the same community or in a different
    city and state.

    \16 Cost reports for facility-based RHCs include only summary cost
    data, while those for independent RHCs include a break out of costs
    by line item; the number and type of clinic staff; and the number of
    patient visits at the RHC, which is subject to a productivity
    standard for Medicare and Medicaid payment.  Facility-based RHCs are
    exempt from these requirements even though they are often operated as
    a separate clinic in a different community from the administering
    facility.

    \17 The range of Medicare payments was $24 to $214, with a median
    payment of $73.  Only cost reports covering a full 12-month period
    and those with Medicare charges consistent with HCFA claims data were
    used for this analysis.

    \18 Costs claimed for reimbursement by independent RHCs in 1993
    ranged from about $16 to $130 per patient visit, with about half of
    the independent RHCs claiming costs in excess of the payment limit.

          SCREENS FOR REASONABLE COSTS
          NOT USED FOR RHCS
    ---------------------------------------------------------- Letter :4.2

    While HCFA has established an overall payment limit for independent
    RHCs, it has not implemented screening guidelines to assess whether
    claimed costs of operating both independent and facility-based RHCs
    are reasonable.  These screening guidelines can be used to disallow
    costs in cases where provider salaries are excessive or overhead
    costs are disproportionately high.  Because these guidelines were
    never implemented, RHCs have no apparent limits on the amount or type
    of costs they claim for Medicare and Medicaid reimbursement.  For
    independent RHCs, our sample of 228 cost reports provided the
    following examples:

      -- Compensation for physicians at 23 percent of the RHCs exceeded
         the national mean of $127,000 by up to 50 percent or more.  One
         clinic, for example, claimed the equivalent of $270,000 for each
         of its four physicians.

      -- Some clinics claimed substantial costs related to hiring
         consultants or incorporating the business.  For example, one
         independent RHC with a full-time physician, nurse practitioner,
         and other clinical staff claimed just under $140,000 during a
         10-month reporting period for the compensation of a "clinical
         consultant."

    Criteria to determine whether claimed overhead costs are reasonable
    are especially needed for facility-based RHCs.  HCFA eliminated
    overhead screens for independent RHCs in 1982, stating that the
    maximum payment limit established for them was sufficient for this
    purpose.  However, facility-based RHCs are not subject to this limit
    and their overhead costs are generally higher because in addition to
    the direct overhead costs incurred by the clinic, the administering
    facility allocates a portion of its own overhead costs to the clinic
    for Medicare and Medicaid reimbursement.  This shifting of costs to
    RHCs for overhead categories such as the hospital cafeteria or
    nursing administration occurs whether the RHC is located within the
    facility or in a city that is 30 miles away.  Our review of 28 cost
    reports for facility-based RHCs showed that indirect overhead costs
    allocated by the hospital added from 8 percent to 120 percent to the
    RHC costs claimed for Medicare reimbursement.\19

    Some states have reduced the amount of Medicaid payments for this
    cost-shifting at facility-based RHCs, while other states use
    Medicare's method.\20 An Alabama Medicaid official estimated that the
    state's action limits the amount Medicaid pays to hospital-based RHCs
    in the state to about 5 to 10 percent more than payments to
    independent RHCs.  In contrast, HCFA officials estimate that Florida,
    which reimburses hospital-
    owned RHCs in the standard manner, paid these RHCs at more than twice
    the rate paid to independent RHCs.

    We heard arguments both for and against allowing hospitals and other
    facilities to shift a portion of their overhead costs to RHCs.
    However, we found no evidence to support the assumption that the
    increased payments resulting from such allocations improved RHC
    service to Medicare beneficiaries.  For example, costs for Medicare
    services at one RHC increased by 66 percent after converting its
    ownership status from independent to hospital-based.  As an
    independent RHC in 1994, this clinic claimed costs of $50 per
    Medicare visit, while as a hospital-owned RHC in 1995, costs per
    visit rose to $84.  The RHC reported the same staffing levels but 30
    percent fewer Medicare beneficiary visits in 1995.

    --------------------
    \19 The median amount of hospital overhead allocated to the clinics
    was 33 percent.

    \20 States have done so by limiting payment to the lower of costs or
    charges for services at the RHC.  Under this methodology, payments
    are usually based on charges that include a lower percentage of
    facility overhead allocations.  Other states follow Medicare's
    payment methodology, which combines the costs and charges of the RHC
    with all other outpatient departments and then pays on the basis of
    the lower of the aggregate costs or charges.  Under this methodology,
    RHCs are generally paid on the basis of costs.  This payment method,
    because it includes a higher percentage of facility overhead
    allocations, results in Medicare's paying some RHCs three times or
    more than what they charged for services.

          COST REIMBURSEMENT NOT
          TARGETED TO RHCS NEEDING THE
          SUBSIDY TO SURVIVE
    ---------------------------------------------------------- Letter :4.3

    The decision to establish cost-based reimbursement for RHCs was
    largely made out of concern that this payment method could help
    increase beneficiary access by subsidizing the operation of clinics
    that might otherwise be unable to survive financially.  For example,
    financial problems may exist for RHCs in communities too small to
    generate enough patient visits or until new clinics establish a
    sufficient patient base.  However, under the law, all RHCs qualify
    for cost-based Medicare and Medicaid reimbursement even if they have
    a substantial patient base.\21

    We asked the 76 clinics in our four-state sample about the importance
    of cost reimbursement to their financial viability.  Some newly
    established clinics said that it was necessary only for the first few
    years while an adequate patient base was being established.  Most of
    the remaining clinics said that they would be financially viable
    without cost reimbursement, but they thought it should be continued
    because payments under Medicare and Medicaid fee schedules were too
    low.  Representatives and consultants for small rural hospitals
    owning RHCs told us that the reimbursement benefits under the program
    helped keep their hospitals financially viable by offsetting the
    negative effects of Medicare and Medicaid reimbursement reform and
    helping them compete against other hospitals moving into the area.
    Representatives from independent clinics also said that cost
    reimbursement allowed them to better compete for patients by paying
    higher salaries to retain physicians or recruit additional ones to
    their practices.

    Cost reimbursement--along with other financial assistance--is still
    important for clinics locating in areas with small populations,
    according to RHC officials.  Starting RHCs in such areas appears to
    remain a somewhat risky financial venture that is helped by
    institutional sponsorship.  In our four-state sample, those few
    clinics among our 76 that had been started as new RHCs in smaller
    locations were generally sponsored as satellite clinics by a
    hospital, government entity, or independent provider network trying
    to ensure coverage of its service area.  For example, several such
    RHCs in Washington are owned by hospital districts that have taxing
    authority to support the clinics financially.  Such sponsorship was
    considered necessary, officials said, because the benefits of the RHC
    program alone were not enough to overcome the difficulties associated
    with starting a clinic in a sparsely populated rural area.  Our
    review of clinics established within the past 5 years showed that
    independent RHCs were more than twice as likely to be terminated than
    those owned by facilities.  However, even facility-based RHCs fail
    without sufficient community support.  For example, two
    hospital-sponsored clinics in Alabama and one in Washington, unable
    to attract a sufficient patient base for a full-time practice, closed
    within 2 years because patients chose to travel to providers in other
    communities for care or obtained care from competing providers within
    the same community.

    --------------------
    \21 For example, our review of 228 cost reports for independent RHCs
    for the years 1993 through 1995 showed that 44 percent of the
    independent RHCs reported patient visits in excess of the national
    average of 7,200 for a primary care physician practice, with over 10
    percent having 20,000 or more visits.

          SUBSIDIES ARE NOT
          DISCONTINUED WHEN RHCS NO
          LONGER MEET INITIAL PROGRAM
          CRITERIA
    ---------------------------------------------------------- Letter :4.4

    Under current law, HCFA must continue cost-based subsidies to RHCs
    indefinitely, even for clinics that are no longer located in
    underserved or rural areas.\22 This is significant because many areas
    of the United States that were considered rural under the program in
    1978 may now be part of an urbanized area.  For example, an RHC was
    established in 1978 in Merced, California, when the city's population
    was about 36,000.  Merced's 1990 population was more than
    56,000--above the maximum of 50,000 under the program's eligibility
    criteria.  Similarly, areas considered underserved 15 years ago may
    now have an adequate number of primary care physicians.  For example,
    one RHC in Marysville, Washington, was the only Medicare and Medicaid
    provider when first established in 1978.  Since that time, 15 other
    primary care practices have been established in an area that now has
    a population of 272,000 within 15 miles of the RHC.  This RHC
    continued to receive cost-based payments under the program through
    1994.

    --------------------
    \22 RHCs may lose their certification, however, if they fail to meet
    the conditions of participation for the Medicare program or change
    ownership.

       CONCLUSIONS
    ------------------------------------------------------------ Letter :5

    The RHC program is adrift without focus on its original goal of
    assisting underserved rural communities or controls over costs to the
    Medicare and Medicaid programs.  As it continues to grow--primarily
    in well-populated areas with established health care systems--there
    is little evidence to demonstrate that this growth is directed at
    improving access to care on the part of Medicare or Medicaid
    beneficiaries or other underserved segments of the population.
    Creating controls to do so is important because the program is often
    used as a way to increase the revenue of existing clinics that may
    already be financially secure or to subsidize those clinics or
    hospitals that are failing due to inefficiency or lack of community
    support.

    The law defines rural and underserved areas too broadly to ensure
    that the program is directed and maintained in those rural
    communities with a critical shortage of primary care providers.  In
    our view, the key to reorienting the program is to ensure that its
    most attractive feature for providers--cost-based reimbursement--is
    tied to additional program criteria developed to meet a clear program
    goal and that it is not used merely as a competitive tool or avenue
    to indefinitely circumvent the effects of Medicare and Medicaid
    payment reforms.  Success in meeting the original purpose of RHCs
    requires more active management at the federal, state, and local
    levels to identify specific locations where clinics are needed and to
    determine when financial assistance can reasonably be discontinued.

       RECOMMENDATIONS TO THE CONGRESS
    ------------------------------------------------------------ Letter :6

    To refocus the RHC program to meet its original purpose, the Congress
    should amend the law to

      -- restrict the cost-based reimbursement benefit of the program to
         (1) RHCs in areas with no other Medicare or Medicaid providers
         or (2) RHCs that can demonstrate that existing providers will
         not accept new Medicare or Medicaid patients and that the
         funding will be used to expand access to them and

      -- require periodic recertification to ensure that clinics continue
         to meet eligibility requirements for cost reimbursement.

       RECOMMENDATIONS TO THE
       SECRETARY OF HEALTH AND HUMAN
       SERVICES
    ------------------------------------------------------------ Letter :7

    For those RHCs that continue to be reimbursed on a cost-reimbursement
    basis, the Secretary of HHS should direct the Administrator of HCFA
    to

      -- revise Medicare payment policy (which Medicaid generally
         follows) to hold facility-based RHCs to the same payment limits
         and cost-reporting requirements as independent RHCs and

      -- apply reasonable cost principles to such categories as salaries
         and overhead claimed for reimbursement by RHCs.

       AGENCY COMMENTS AND OUR
       EVALUATION
    ------------------------------------------------------------ Letter :8

    In commenting on a draft of this report (see app.  IV), HHS stated
    that the results of our study clearly show that the RHC program is
    not maximizing its contribution to the safety net for underserved
    populations.  HHS agreed with the report's overall conclusions and
    recommendations to the Department.

    More specifically, HHS concurred with our recommendation that HCFA
    revise Medicare payment policy to hold facility-based RHCs to the
    same payment limits and cost-reporting requirements as independent
    RHCs.  HHS stated that HCFA is in the process of developing proposed
    regulations that would implement a similar upper payment limit for
    facility-based RHCs.  HHS also agreed with our recommendation that
    HCFA apply reasonable cost principles to such categories as salaries
    and overhead claimed for reimbursement by RHCs.  HHS said that it
    would direct Medicare contractors to increase the level of scrutiny
    on all costs incurred by RHCs, particularly in such categories as
    salaries and overhead.

    While HHS did not comment on our specific recommendation to the
    Congress that the law be changed to provide additional program
    eligibility criteria, HHS did concur with the basis for the
    recommendation.  HHS agreed with our conclusion that the current
    program eligibility criteria for defining rural and underserved areas
    does not go far enough to ensure that the program is directed and
    maintained in rural communities with critical shortages of primary
    care providers.  HHS suggested that further documentation of the need
    for health care services in the target community be required for RHC
    certification and cited the FQHC program as an example of the
    workability of this approach.  We agree with HHS' comments on the
    critical need and possibilities for additional program eligibility
    criteria.  However, to accomplish this, a change in law along the
    lines that we recommend would be necessary.

    ---------------------------------------------------------- Letter :8.1

    As agreed with your office, unless you publicly announce its contents
    earlier, we plan no further distribution of this report until 10 days
    after its issue date.  At that time, we will send copies to the
    Secretary of HHS, the Director of the Office of Management and
    Budget, appropriate congressional committees, and other interested
    parties.  We also will make copies available to others on request.
    Please contact me on (202) 512-7119 if you or your staff have any
    questions on this report.  Major contributors to this report are
    listed in appendix V.

    Sincerely yours,

    Bernice Steinhardt
    Director, Health Service Quality
     and Public Health

    OBJECTIVES, SCOPE, AND METHODOLOGY
    =========================================================== Appendix I

       IMPROVING ACCESS TO CARE
    --------------------------------------------------------- Appendix I:1

    Our first objective was to determine whether the RHC program was
    serving a Medicare and Medicaid population that would otherwise have
    difficulty obtaining primary care.  The purpose of the program is to
    assist small rural areas relying on nonphysicians or overworked sole
    physicians for care.  Therefore, we focused on where RHCs were
    located in terms of the population of the communities they served and
    the number of other primary care resources available.  Because it is
    possible that these providers were not available to all Medicare and
    Medicaid beneficiaries, we identified the distances that
    beneficiaries had to travel to obtain primary care before the RHC was
    certified.

    Using mapping software, we established each RHC as the center of a
    circle with a 15-mile radius and plotted 1990 population data from
    the Census Bureau to identify how many people lived within the area
    of these circles.  We chose the area within a 15-mile radius as the
    RHC service area because this is the maximum distance that HHS'
    Bureau of Primary Health Care considers reasonable for travel for
    primary care given the worst type of existing rural road conditions.

    We next focused our review on four states to determine the other
    primary care resources available to Medicare and Medicaid
    beneficiaries.  We judgmentally chose Alabama, Kansas, New Hampshire,
    and Washington on the basis of differences in geography, types of
    underservice, number and mix of RHCs, and variances in the Medicare
    and Medicaid reimbursement rates.  We excluded those states that had
    recently been reviewed by HHS' Inspector General and that were
    scheduled to be reviewed under an HCFA contract.  For these four
    states where 144 RHCs had been certified,\23 we contacted the fiscal
    intermediaries processing Medicare and Medicaid claims and from each
    obtained the database of Medicare and Medicaid providers.  We
    screened these databases for primary care providers using the
    provider type and specialty codes and aggregated them by practice
    address.  We then counted how many primary care practice sites
    existed in communities before and after the RHCs were certified.

    Our last step was to identify how far Medicare and Medicaid
    beneficiaries had to travel to obtain care before RHCs were certified
    in their community.  We did this by analyzing Medicare and Medicaid
    claims data for all beneficiaries using any of the 119 RHCs in our
    four-state sample that were certified in 1993 and 1994.  Our analysis
    included computing the differences in miles between where the
    beneficiaries lived and where the RHC or prior primary care provider
    was located.  We excluded those beneficiaries from our analysis that
    had moved during the time period and for which prior provider data
    were unavailable.  We also telephoned 76 of the 119 RHCs within our
    four-state sample and asked them whether the program had any
    influence on expanding their staff, the number or type of patients
    they see, or changing their practice to address the reasons
    underservice existed in their communities.

    --------------------
    \23 The 144 RHCs account for all RHCs certified in New Hampshire and
    Washington but only those certified in 1993 and 1994 in Kansas and
    Alabama.

       CONTROLLING PROGRAM COSTS
    --------------------------------------------------------- Appendix I:2

    Our second objective was to identify whether controls were in place
    to ensure that costs claimed for reimbursement are reasonable and to
    target the cost-reimbursement benefit of the program effectively.  We
    developed an estimate of program costs, reviewed the controls over
    these costs, and telephoned a sample of RHCs to determine their
    reliance on cost reimbursement for financial viability.

          DEVELOPING PROGRAM COST
          ESTIMATES
    ------------------------------------------------------- Appendix I:2.1

    We used 1993 as our base year in estimating how much additional
    Medicare and Medicaid funding will be provided to RHCs in 1996 under
    the cost-reimbursement benefit of the program instead of using the
    standard fee schedules.  We used 1993 as our base year for the
    estimate because this was the most recent year for which Medicare and
    Medicaid data were available.

    In developing our estimate of program costs, we consulted with
    officials from HCFA's Office of the Actuary (Office of Medicare and
    Medicaid Cost Estimates), Office of Research and Development
    (Division of Reimbursement and Economic Studies), Bureau of Policy
    Development (Office of Payment Policy), and Bureau of Data Management
    and Strategy.

    Using 1993 summary claims data published by HCFA, we determined the
    mean cost of a medical care visit paid from the fee schedule that
    HCFA officials said would most closely approximate an RHC visit.\24
    We then compared this figure with the amount that Medicare paid RHCs
    on average for each RHC visit.  We believe that this estimate is
    conservative for at least two reasons:

      -- it does not include the results of the year-end cost-report
         settlement that intermediary officials told us usually results
         in additional payments to RHCs and

      -- the fee schedule data include medical services provided by urban
         and specialist providers that generally receive higher
         reimbursement than rural primary care providers.

    To obtain the 1993 differential cost to Medicaid, we had to back into
    the mean cost per visit on the Medicaid fee schedule by converting
    Medicare-allowed charges into Medicaid payments.  We used allowed
    charges instead of payments because the latter excludes the
    beneficiary deductible and copay that would be an incurred cost of
    the Medicaid program.  Next, we adjusted this cost using a
    Medicaid-to-Medicare fee ratio developed by HCFA in conjunction with
    the Urban Institute.\25 We then compared this estimate of the mean
    Medicaid fee schedule payments with the mean payments to RHCs.

    We projected this estimate to 1996 Medicare and Medicaid RHC
    expenditures provided by HCFA's actuaries as follows:

      -- HCFA estimates Medicare expenditures only for independent RHCs.
         Because facility-based RHCs now comprise about half of all RHCs,
         we increased our initial estimate for Medicare accordingly.

      -- Medicaid estimates of RHC expenditures exclude payments to RHCs
         in Texas, Arizona, Hawaii, New York, and Oregon, which do not
         report these data separately to HCFA.  Because the RHCs in these
         states comprise 16 percent of the national total, we increased
         our initial estimate for Medicaid by this percentage.

    --------------------
    \24 RHC services include medical services generally provided in a
    primary care office setting plus six basic laboratory tests.  Other
    services, such as radiology, may be reimbursed separately under
    standard reimbursement methods.

    \25 This ratio was developed to compare the Medicaid fee schedule
    rates with the Medicare fee schedule payment rates.  The rate
    established for primary care in 1993 was 0.68.

          EVALUATING COST CONTROLS
    ------------------------------------------------------- Appendix I:2.2

    We next reviewed the controls that were in place to ensure that
    claimed costs for Medicare and Medicaid reimbursement were
    reasonable.  We obtained a file of Medicare claims paid to all RHCs
    from 1991 to 1995 as well as Medicaid claims paid to the RHCs in our
    four-state sample from 1994 to 1995.  The claims-paid file gave us
    information on the number of beneficiaries seen at the RHC, the
    number of visits, total charges, and total payments.

    We also obtained a sample of year-end cost reports for independent
    and hospital-owned RHCs.  The independent RHC cost reports provide
    detailed information on various cost categories, staffing levels, and
    patient visits at the RHCs.  We used this information to identify the
    cost per visit at the RHCs and to compare the claimed costs at RHCs
    with the national mean for similar providers.  We used the national
    mean as a standard because neither HCFA nor the fiscal intermediaries
    had used their legislative authority to establish criteria for
    identifying whether claimed costs of the RHCs were reasonable.

    The cost reports for hospital-owned RHCs did not provide this type of
    detailed information.  However, in combination with other data
    sources, we obtained the data necessary to calculate the cost per
    visit, the amount of direct costs attributed to the RHCs, as well as
    the amount and type of hospital overhead allocated to them.  We
    calculated the cost per Medicare visit for a judgmental sample of 28
    facility-based RHCs\26

    using a three-step process:

      -- First, we looked at schedule E, part B, of the cost report to
         see whether Medicare paid all hospital outpatient departments on
         the basis of the lower of either costs or charges for
         beneficiary services.

      -- Second, we looked at the RHC line item in schedule D, part IV,
         of the cost report to determine how much of these costs or
         charges were attributable to the RHC.

      -- Third, we obtained the number of Medicare beneficiary visits
         from either the Provider Statistical & Reimbursement Report\27
         or from Medicare claims for each RHC provider during the period
         covered by the cost report.

    --------------------
    \26 Our sample of 28 cost reports excluded those that did not cover a
    full 12-month period and those in which RHC charges in the cost
    report did not match those in HCFA's claims data file.

    \27 This HCFA report summarizes the number and amount of Medicare
    services and charges by revenue center for a facility.  For each RHC,
    we used the number of charges for any clinic revenue center
    (excluding dental clinic charges) as a proxy for the number of clinic
    visits.  We excluded charges at the RHC for ancillary revenue
    centers, such as laboratory services, which we assumed would be
    associated with a clinic visit.

          ASSESSING COST REIMBURSEMENT
          AS A FACTOR FOR CLINIC
          VIABILITY
    ------------------------------------------------------- Appendix I:2.3

    We next reviewed the extent to which the cost-reimbursement benefit
    was targeted to RHCs needing it to maintain or expand access.
    Because low patient volume was cited as the primary reason that RHCs
    would need cost reimbursement, we looked at the number of patient
    visits reported by a sample of independent RHCs in their cost
    reports.  We could not perform this analysis on hospital-owned RHCs
    because HCFA does not require them to include these data in their
    cost reports.  We also conducted a telephone survey of 76 RHCs in our
    four-state sample to determine their reliance on cost reimbursement
    for financial viability.

    We conducted our fieldwork from September 1995 through July 1996 in
    accordance with generally accepted government auditing standards.

    RURAL HEALTH CLINICS AS OF
    NOVEMBER 1995
    ========================================================== Appendix II

       (See figure in printed
       edition.)

       (See figure in printed
       edition.)

    Note:  Triangles may indicate more than one RHC.

    RURAL HEALTH CLINICS BY POPULATION
    SIZE IN OUR FOUR-STATE SAMPLE
    ========================================================= Appendix III

    The following figures show the location of RHCs in our four-state
    sample of Alabama, Kansas, New Hampshire, and Washington.  The RHCs
    are in the center of the 15-mile radius we drew around each one to
    count the number of people that live within a reasonable distance to
    care at the RHC per HHS criteria.

    Cities within a state are denoted by the irregular white patches.
    How close RHCs are to these cities can be determined by comparing the
    area covered by each circle with the boundaries of these cities.  The
    extent to which RHCs may be competing with providers in these cities
    or with each other for patients in a community can be seen by looking
    at the circles' overlap.

       Figure III.1:  RHCs in Alabama,
       by Population Size

       (See figure in printed
       edition.)

    Notes:  Each circle may indicate more than one RHC within the service
    area.

    Numbers in parentheses indicate the number of RHCs in each population
    size.

       Figure III.2:  RHCs in Kansas,
       by Population Size

       (See figure in printed
       edition.)

    Notes:  Each circle may indicate more than one RHC within the service
    area.

    Numbers in parentheses indicate the number of RHCs in each population
    size.

       Figure III.3:  RHCs in New
       Hampshire, by Population Size

       (See figure in printed
       edition.)

    Notes:  Each circle may indicate more than one RHC within the service
    area.

    Numbers in parentheses indicate the number of RHCs in each population
    size.

       Figure III.4:  RHCs in
       Washington, by Population Size

       (See figure in printed
       edition.)

    Notes:  Each circle may indicate more than one RHC within the service
    area.

    Numbers in parentheses indicate the number of RHCs in each population
    size.

    (See figure in printed edition.)Appendix IV
    COMMENTS FROM THE DEPARTMENT OF
    HEALTH AND HUMAN SERVICES
    ========================================================= Appendix III

    (See figure in printed edition.)

    (See figure in printed edition.)

    (See figure in printed edition.)

    MAJOR CONTRIBUTORS TO THIS REPORT
    =========================================================== Appendix V

    Sarah F.  Jaggar, Issue Area Director
    Frank Pasquier, Assistant Director, (206) 287-4861
    Lacinda Baumgartner, Evaluator-in-Charge
    Lisa Dobson, Evaluator
    Stan Stenersen, Evaluator
    Evan Stoll, Programmer Analyst

    *** End of document. ***