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. ***