Rural Primary Care Hospitals: Experience Offers Suggestions for
Medicare's Expanded Program (Letter Report, 02/23/98, GAO/HEHS-98-60).

Pursuant to a legislative requirement, GAO reviewed the rural primary
care hospital (RPCH) program, focusing on: (1) assessing compliance with
the requirements that RPCHs have an average length of stay of 72 hours
or less and that physicians certify that inpatients are expected to be
discharged within 72 hours; (2) assessing whether these two requirements
affected the type of patients treated by RPCHs; and (3) comparing
Medicare's cost for inpatient services in RPCHs to what those costs
would likely have been in hospitals paid under the prospective payment
system. GAO also looked at how the experience under the RPCH program
could be used in implementing the expanded critical access hospital
(CAH) program.

GAO noted that: (1) RPCHs provide additional and, likely, much more
proximate access to health care for Medicare beneficiaries residing in
the rural areas where the facilities operate; (2) these facilities
treat, on an inpatient basis, beneficiaries with less complex illnesses
and furnish important stabilization and transfer services for those with
more complex conditions; (3) moreover, RPCHs serve as the source of
outpatient care ranging from primary to emergency care; (4) the 13 RPCHs
for which complete data were available had 1,708 Medicare inpatient
cases since they were certified to participate in the program; (5) the
RPCHs provided the full inpatient stay for 1,545 beneficiaries who had
less complex needs and stabilized and transferred an additional 163
beneficiaries to full-service hospitals; (6) the RPCHs treated primarily
patients (65 percent of the total) who had respiratory ailments such as
pneumonia, circulating system problems such as congestive heart failure,
and digestive system illnesses such as inflammation of the digestive
canal; (7) in addition, during the most recent cost-reporting period,
these RPCHs provided more than 28,000 outpatient visits for more than
6,700 beneficiaries; (8) these outpatient visits ranged from those for
primary care to emergency treatment for injuries; (9) Medicare payments
for the 1,545 cases from September 1993 to May 1996 treated solely by an
RPCH were slightly more than if these cases had been treated at
full-service rural hospitals and somewhat less than if they had been
treated at urban hospitals; (10) a primary reason why RPCH costs were
higher than those for rural hospitals was that about 21 percent of the
stays exceeded the 72-hour stay limitation in effect at the time; (11)
without the extra inpatient days these cases involved, RPCH costs would
likely have been lower than those for rural full-service hospitals; (12)
the Health Care Financing Administration (HCFA) had not established a
way to enforce the 72-hour maximum length-of-stay requirement for RPCHs,
and it is important that the agency do so for the replacement CAH
program's 96 hour maximum; (13) as is to be expected with
limited-service hospitals, RPCHs in the four states GAO studied
transferred a higher portion of patients to other hospitals than did
full-service rural hospitals; and (14) total Medicare payments for the
163 transfer cases were about $148,000 higher than if a full service
rural hospital had transferred the patients to another acute care
hospital because of differences in the way payments are determined in
the two situations.

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

 REPORTNUM:  HEHS-98-60
     TITLE:  Rural Primary Care Hospitals: Experience Offers Suggestions 
             for Medicare's Expanded Program
      DATE:  02/23/98
   SUBJECT:  Health care programs
             Patient care services
             Medical services rates
             Medical economic analysis
             Health care cost control
             Hospital care services
             Community hospitals
IDENTIFIER:  Medicare Program
             HCFA Rural Primary Care Hospital Program
             HCFA Critical Access Hospital Program
             
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Cover
================================================================ COVER


Report to Congressional Committees

February 1998

RURAL PRIMARY CARE HOSPITALS -
EXPERIENCE OFFERS SUGGESTIONS FOR
MEDICARE'S EXPANDED PROGRAM

GAO/HEHS-98-60

Rural Primary Care Hospitals

(106439)


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

  BBA - Balanced Budget Act of 1997
  CAH - critical access hospital
  DRG - diagnosis-related group
  HCFA - Health Care Financing Administration
  HCRIS - Health Care Provider Cost Report Information System
  MAF - medical assistance facility
  MEDPAR - Medicare Provider Analysis and Review
  PPS - prospective payment system
  PRO - peer review organization
  RPCH - rural primary care hospital

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


B-278799

February 23, 1998

The Honorable William V.  Roth, Jr.
Chairman
The Honorable Daniel P.  Moynihan
Ranking Minority Member
Committee on Finance
United States Senate

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

The Honorable Tom Bliley
Chairman
The Honorable John D.  Dingell
Ranking Minority Member
Committee on Commerce
House of Representatives

One of the issues before the Congress is controlling Medicare costs
while maintaining access to basic hospital and physician services in
rural areas.\1 In the past, full-service rural hospitals provided
these services for Medicare beneficiaries.  However, many rural
hospitals have closed or are at risk of being closed, usually because
of financial difficulties.  To maintain rural access to primary
health care services, the Congress in 1989 authorized limited-service
hospitals, known as rural primary care hospitals (RPCH), to operate
in seven states--California, Colorado, Kansas, New York, North
Carolina, South Dakota, and West Virginia.  Beginning October 1,
1997, the Congress replaced RPCHs with critical access hospitals
(CAH), which were authorized to operate nationally.\2 RPCHs existing
as of October 1, 1997, are automatically eligible to participate in
Medicare as CAHs.  In this report, we refer to limited-service
hospitals as RPCHs. 

RPCHs were limited to a maximum of six beds, and Medicare paid them
(as it pays CAHs) on a reasonable cost basis for services provided to
its beneficiaries.  For cost-reporting periods begun between October
1, 1995, and October 1, 1997, RPCHs were limited on a cost-reporting
year basis to an average inpatient stay of 72 hours.  Before October
1995, inpatient stays were limited to 72 hours, and this was the
criterion in effect for the data available for analysis. 

The Social Security Act Amendments of 1994 required us to review the
RPCH program.  That act asked us to assess compliance with the
requirements that RPCHs have an average length of stay of 72 hours or
less and that physicians certify that inpatients are expected to be
discharged within 72 hours.  Data were not readily available to
answer those two questions (see app.  I for details).  The act also
asked us to assess whether these two requirements affected the type
of patients treated by RPCHs, so we reviewed the diagnoses of the
patients they treated.  In addition, your offices asked us,
consistent with the legislative mandate, to compare Medicare's cost
for inpatient services in RPCHs to what those costs would likely have
been in hospitals paid under the prospective payment system (PPS).\3
Finally, as discussed with your offices after the enactment of the
Balanced Budge Act of 1997 (BBA), we looked at how the experience
under the RPCH program could be used in implementing the expanded CAH
program.  To address these questions, we visited three RPCHs and
analyzed all 1,708 inpatient claims and more than 38,000 outpatient
claims submitted by the 13 RPCHs that had submitted cost reports to
Medicare as of March 1997.  These claims covered admissions from
September 1993 through May 1996 from RPCHs in Kansas, North Carolina,
South Dakota, and West Virginia.  We did not independently test the
reliability of the paid claims information provided by
intermediaries.  With this exception, we conducted our work between
December 1996 and November 1997, in accordance with generally
accepted government auditing standards.  Details regarding our
methodology appear in appendix I. 


--------------------
\1 Medicare classifies a rural area (or county) as a location not
part of a metropolitan statistical area. 

\2 Critical access hospitals are part of the Rural Hospital
Flexibility Program, established by the Balanced Budget Act of 1997
(BBA) (P.L.  No.  105-33, sec.  4201(a), Aug.  5, 1997).  They can
have a maximum of 15 inpatient beds and are designed to provide
access to basic emergency care, outpatient services, and up to 4 days
of limited inpatient care. 

\3 Most hospitals are paid under the PPS system, which establishes in
advance the amount a hospital will receive for treating patients. 
Payment amounts vary by the type of illness or injury the patient
has. 


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

RPCHs provide additional and, likely, much more proximate access to
health care for Medicare beneficiaries residing in the rural areas
where the facilities operate.  These facilities treat, on an
inpatient basis, beneficiaries with less complex illnesses and
furnish important stabilization and transfer services for those with
more complex conditions.  Moreover, RPCHs serve as the source of
outpatient care ranging from primary to emergency care.  The 13 RPCHs
for which complete data were available had 1,708 Medicare inpatient
cases since they were certified to participate in the program.  The
RPCHs provided the full inpatient stay for 1,545 beneficiaries who
had less complex needs and stabilized and transferred an additional
163 beneficiaries to full-service hospitals.  The RPCHs treated
primarily patients (65 percent of the total) who had respiratory
ailments such as pneumonia, circulating system problems such as
congestive heart failure, and digestive system illnesses such as
inflammation of the digestive canal. 

In addition, during the most recent cost-reporting period, these
RPCHs provided more than 28,000 outpatient visits for more than 6,700
beneficiaries.  These outpatient visits ranged from those for primary
care to emergency treatment for injuries. 

Medicare payments for the 1,545 cases from September 1993 to May 1996
treated solely by an RPCH were slightly more than if these cases had
been treated at full-service rural hospitals--$404,000, or 8.8
percent--and somewhat less than if they had been treated at urban
hospitals--$207,000, or 4.5 percent.  A primary reason why RPCH costs
were higher than those for rural hospitals was that about 21 percent
of the stays exceeded the 72-hour stay limitation in effect at the
time.  Without the extra inpatient days these cases involved, RPCH
costs would likely have been lower than those for rural full-service
hospitals.  The Health Care Financing Administration (HCFA) had not
established a way to enforce the 72-hour maximum length-of-stay
requirement for RPCHs, and it is important that the agency do so for
the replacement CAH program's 96-hour maximum. 

As is to be expected with limited-service hospitals, RPCHs in the
four states we studied transferred a higher portion of patients to
other hospitals than did full-service rural hospitals--9.5 versus 5.6
percent.  Total Medicare payments for the 163 transfer cases were
about $148,000 higher than if a full service rural hospital had
transferred the patients to another acute care hospital because of
differences in the way payments are determined in the two situations. 


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

The Omnibus Budget Reconciliation Act of 1989 (P.L.  101-239, Dec. 
19, 1989) authorized Medicare payment to RPCHs for inpatient and
outpatient services.  Program participation was limited to seven
states and HCFA selected California, Colorado, Kansas, New York,
North Carolina, South Dakota, and West Virginia.  California has no
certified RPCHs. 

RPCHs had to be located in rural counties and were limited to six
inpatient acute care beds.  Initially, RPCH inpatient stays were
limited to a 72-hour maximum, but section 102 of the Social Security
Act Amendments of 1994 (P.L.  103-432, Oct.  31, 1994) changed the
requirement to an average of 72 hours during a cost-reporting year
for periods beginning on or after October 1, 1995.  RPCHs employ
midlevel practitioners--physician assistants and nurse
practitioners--working under the supervision of a physician, who is
not required to be located at the RPCH.  RPCHs are not allowed to
provide surgery requiring general anesthesia but may perform
surgeries normally done under local anesthesia on an outpatient basis
at a hospital or ambulatory surgical center.  We found few surgical
procedures being performed at RPCHs during 1993-96. 

In September 1993, the first RPCH, located in South Dakota, was
certified to participate in Medicare.  As shown in table 1, there
were 38 certified RPCHs as of August 1997. 



                                Table 1
                
                 Number of Certified RPCHs, August 1997

                                                                Number
                                                                    of
                                                                certif
                                                                   ied
State                                                            RPCHs
--------------------------------------------------------------  ------
Colorado                                                             3
Kansas                                                              14
New York                                                             4
North Carolina                                                       3
South Dakota                                                         8
West Virginia                                                        6
======================================================================
Total                                                               38
----------------------------------------------------------------------
In addition to RPCHs, the Congress authorized a demonstration program
for the operation of limited-service hospitals that was implemented
by Montana.  Under this program, Medicare was authorized to pay for
basic emergency care, outpatient services, and limited inpatient care
(maximum stay of 96 hours) provided at these limited-service
hospitals, known as medical assistance facilities (MAF). 

In our October 1995 report, we found that the MAFs were important
sources of emergency and primary care for their communities.\4 MAFs
primarily served patients with urgent but uncomplicated conditions
and stabilized patients with more complicated needs before
transferring them to full-service hospitals.  Moreover, Medicare's
costs for inpatient care at MAFs were lower than if the care had been
furnished in rural hospitals. 

While full-service hospitals normally are paid under Medicare's PPS,
both RPCHs and MAFs are paid on a cost reimbursement basis, as are
CAHs, the replacement program for them.  Like MAFs, CAHs are limited
to 96-hour inpatient stays but can have 15 beds rather than the 6 for
RPCHs.  Both types of limited-service hospitals are scheduled to make
the transition into CAHs by October 1, 1998. 


--------------------
\4 Montana's Medical Assistance Facilities (GAO/HEHS-96-12R, Oct.  2,
1995). 


   RPCHS TREAT PATIENTS WITH LESS
   COMPLEX ILLNESSES OR STABILIZE
   THEM FOR TRANSFER
------------------------------------------------------------ Letter :3

As envisioned when the program was authorized, most RPCH inpatients
have less complex illnesses that do not require intensive or
high-technology care.  Patients with more extensive health needs who
go to RPCHs are generally stabilized and transferred to larger acute
care hospitals, another important service to the community.  In
addition, RPCHs often serve as the source of primary care for
residents in their areas. 

The average stay for the 1,708 inpatients treated by RPCHs between
September 1993 and May 1996 was 2.85 days.  They were assigned to 137
different DRGs--9 surgical DRGs covering 11 cases and 128 medical
DRGs covering 1,697 cases.\5

Ten of the eleven surgical cases were from one RPCH located in South
Dakota.  A state official confirmed that this RPCH performs surgeries
like those performed in ambulatory surgery centers that do not
require general anesthesia.  As we found when we reviewed services
provided by MAFs in Montana, the three medical conditions most
commonly treated by the RPCHs were pneumonia (247 cases), heart
failure and shock (141 cases), and inflammation of the digestive
canal (99 cases).  Together these three conditions accounted for 29
percent of the 1,708 cases, which is similar to the 28 percent they
represented in MAFs.  Conditions classified as respiratory,
circulatory, and digestive disorders accounted for 1,107 cases (65
percent) and 48 of the DRGs (35 percent) treated at RPCHs.  (See app. 
II for a summary of inpatient DRGs treated at RPCHs.)

During the period covered by our review, 163 of the 1,708 inpatients
(9.5 percent) were transferred from an RPCH to an acute-care
hospital.  The average RPCH stay for these patients was 1.9 days. 
During calendar years 1993 through 1996, about 5.6 percent of
Medicare inpatients at other rural hospitals in Kansas, North
Carolina, South Dakota, and West Virginia were transferred to another
hospital.  The percentage of RPCH patients transferred is 4
percentage points higher because one function of an RPCH is to
stabilize patients and prepare them for transfer to a facility if the
treatment they need is beyond the scope of RPCH services. 

In addition to providing inpatient care, RPCHs provide local primary
care for many Medicare beneficiaries.  The 13 RPCHs treated more than
6,700 different Medicare beneficiaries during their latest available
cost-reporting period and submitted more than 28,000 outpatient
claims for services for these patients (see table 2).  Outpatient
services included visits with physicians and physician assistants,
laboratory tests, influenza shots, colonoscopies, electrocardiograms,
diagnostic radiology services, and emergency care.  Medicare paid
about $4.9 million for these outpatient services (see app.  III for a
summary of Medicare outpatient costs by RPCH by cost-reporting year). 



                          Table 2
          
              Number of RPCH Outpatient Claims
            Submitted and Medicare Beneficiaries
                          Treated

                                   Number of     Number of
                         Cost-    outpatient      Medicare
                     reporting        claims  beneficiarie
RPCH                      year     submitted     s treated
----------------  ------------  ------------  ------------
Kansas
----------------------------------------------------------
Ashland District    1/1/95-12/         2,508           257
 Hospital                31/95
Cedar Vale          2/1/95-12/         3,250           670
 Community               31/95
 Hospital
Ellinwood           10/1/94-9/         2,738           530
 District                30/95
 Hospital
Grisell Memorial    1/1/95-12/         2,581           372
 Hospital                31/95
Lane County         1/1/95-12/         2,599           341
 Hospital                31/95
Oswego Health        10/27/94-         1,187           343
 Center               10/31/95

North Carolina
----------------------------------------------------------
Our Community       4/18/95-9/            \a           168
 Hospital                30/95
Yancy County       12/15/94-9/            \a         1,090
 Medical Center          30/95

South Dakota
----------------------------------------------------------
Douglas County      8/23/95-5/         1,370           389
 Memorial                31/96
 Hospital
Faulk County         3/1/95-2/         2,451           362
 Hospital                28/96
Gettysburg           2/1/95-1/         2,613           398
 Medical Center          31/96

West Virginia
----------------------------------------------------------
Broaddus            1/1/95-12/         5,265         1,141
 Hospital                31/95
Webster County      1/24/94-6/         2,067           694
 Memorial                30/94
 Hospital
==========================================================
Total                                 28,629         6,755
----------------------------------------------------------
\a Outpatient data for North Carolina did not identify the number of
claims submitted by the two North Carolina RPCHs. 


--------------------
\5 Diagnosis-related groups (DRG) are used to classify inpatients
into groups that determine the rate of payment under Medicare's
hospital PPS.  Patients covered by a DRG are expected to need the
same level of hospital resources to treat their conditions. 


   COMPARISON OF RPCH PAYMENTS
   WITH CURRENT PPS RATES
------------------------------------------------------------ Letter :4

Medicare payments for the 1,545 beneficiaries who received all their
inpatient care from an RPCH totaled about $4.6 million, a little over
$1,000 per day (see app.  III).  The average length of stay for these
beneficiaries was 2.95 days.  As we found when we made a similar
comparison for MAF inpatient costs, these costs compared favorably
with the amount Medicare would have paid if those patients had been
treated at rural PPS hospitals. 

Table 3 shows by RPCH and cost-reporting year the difference in
payments to RPCHs comparing the payments that would have been made to
rural and urban PPS hospitals.  Overall costs at the 12 RPCHs
covering 17 cost-reporting periods were about $404,000 more than the
amount Medicare would have paid rural PPS hospitals.\6 However,
payments for treatment at the 12 RPCHs were about $207,000 less than
the amount Medicare would have paid for treating the same conditions
at urban hospitals.  (See app.  IV for individual RPCH cost
comparisons to PPS payments.)



                          Table 3
          
            Net Difference in Medicare Costs for
             1,545 RPCH Patients Compared With
                   Estimated PPS Payments

                                       RPCH costs higher
                                          (lower) when
                                       compared with PPS
                                       payments to rural
                                      and urban hospitals
                                      --------------------
                              Number
                                  of
                     Cost-  inpatien       Rural     Urban
                 reporting        ts  hospitals\  hospital
RPCH                  year   treated           a       s\b
------------  ------------  --------  ----------  --------
Kansas
----------------------------------------------------------
Ashland         1/1/95-12/        18     $49,546   $35,498
 District            31/95
 Hospital
Cedar Vale      2/1/95-12/        84      25,328  (39,479)
 Community           31/95
 Hospital
Ellinwood       10/1/94-9/        63      70,115    26,762
 District            30/95
 Hospital
Grisell         1/1/94-12/        51      81,996    38,410
 Memorial            31/94
 Hospital
Grisell         1/1/95-12/        23      47,553    33,051
 Memorial            31/95
 Hospital
Lane County     1/1/95-12/        96     (3,027)  (65,562)
 Hospital            31/95
Oswego           10/27/94-        12     121,593   113,490
 Health           10/31/95
 Center

North Carolina
----------------------------------------------------------
Our             4/18/95-9/        24      43,092    33,709
 Community           30/95
 Hospital

South Dakota
----------------------------------------------------------
Douglas         8/23/95-5/       125      36,224   (4,453)
 County              31/96
 Memorial
 Hospital
Faulk County     9/8/93-2/        65      62,030    28,277
 Hospital            28/94
Faulk County     3/1/94-2/        85     231,860   191,341
 Hospital            28/95
Faulk County     3/1/95-2/        81     218,230   191,752
 Hospital            28/96
Gettysburg      8/25/94-1/        31    (30,186)  (43,628)
 Medical             31/95
 Center
Gettysburg       2/1/95-1/        98    (53,847)  (90,324)
 Medical             31/96
 Center

West Virginia
----------------------------------------------------------
Broaddus        1/1/94-12/       364   (258,597)  (341,544
 Hospital            31/94                               )
Broaddus        1/1/95-12/       284   (264,380)  (332,978
 Hospital            31/95                               )
Webster         1/24/94-6/        41      26,393    18,658
 County              30/94
 Memorial
 Hospital
==========================================================
Total                          1,545    $403,923  ($207,02
                                                        0)
----------------------------------------------------------
\a For Kansas, this represents a comparison of RPCH costs with an
average of the PPS payments for rural hospitals in Kansas and
Oklahoma.  For South Dakota, this represents a comparison of RPCH
costs with an average of the PPS payments for rural hospitals in
South Dakota and North Dakota.  For West Virginia and North Carolina,
this represents a comparison of RPCH costs with the PPS payments for
rural hospitals in West Virginia and North Carolina. 

\b For Kansas, this represents a comparison of RPCH costs with an
average of the PPS payments for urban hospitals in Kansas City and
Wichita, Kansas.  For North Carolina, this represents a comparison of
RPCH costs with an average of the PPS payments for urban hospitals in
Greenville, Raleigh, Rocky Mount, and Charlotte, North Carolina.  For
South Dakota, this represents a comparison of RPCH costs with an
average of the PPS payments for urban hospitals in Bismarck, North
Dakota, and Sioux Falls, South Dakota.  For West Virginia, this
represents a comparison of RPCH costs with an average of the PPS
payments for urban hospitals in Charleston, West Virginia. 

Although RPCH costs are slightly higher (8.8 percent) than PPS
payments to rural hospitals, RPCH costs would have been lower if
claims included in our review had complied with the 72-hour maximum
length-of-stay requirement in effect when these admissions
occurred.\7 About 21 percent of the 1,545 stays exceeded the 72-hour
limit and had 630 inpatient days incurred after the third day.  These
days cost the Medicare program an estimated $612,000.\8 Because of
the way cost reimbursement works, not all the cost of these days
would be saved by eliminating them.  The fixed costs allocated to the
days would be reallocated to the remaining days of care and paid by
Medicare.  However, variable costs should be reduced if hospitals
complied with the 72-hour limit and should result in lower overall
Medicare costs.  We believe the effect of this would result in RPCH
inpatient costs being less than similar inpatient costs in rural PPS
hospitals. 

Under a 96-hour limit, which CAHs have under BBA, the costs
associated with longer stays would still have been significant. 
About 8 percent of 1,545 inpatient stays included in our analysis
would have exceeded the 96-hour limit.  These stays had a total of
304 covered inpatient days after the fourth day.  Payments for those
days totaled an estimated $295,000. 

Turning to the cost to Medicare for patients who are transferred from
RPCHs, regardless of what kind of hospital makes the transfer, all
transfers result in higher cost to Medicare because two facilities
receive payment for the same patient.  Under PPS, the transferring
hospital receives a per diem payment determined by dividing the PPS
payment by the geometric mean length of stay associated with the
patient's DRG.  The hospital from which the patient is finally
discharged receives the full PPS payment for the patient's DRG.  When
patients are transferred from RPCHs, the RPCH receives cost-based
reimbursement for the patient, and the hospital from which the
patient is finally discharged receives the full PPS payment. 
Medicare RPCH payments for the 163 beneficiaries who were initially
treated at an RPCH and transferred to a full-service PPS hospital
totaled about $322,000 (see app.  III).  These RPCH stays averaged
1.9 days.  We estimate that these costs were about $148,000 (about
$910 per case) greater than the amount Medicare would have paid an
acute-care hospital in per diem payments if the patient had first
gone to an acute-care PPS hospital for the same length of time. 
Appendix V lists the hospitals where patients were transferred. 


--------------------
\6 We did not use in our comparison the higher PPS payments that some
rural PPS hospitals are entitled to because they qualified as rural
referral centers, disproportionate share hospitals, or sole community
hospitals. 

\7 Nine of the RPCHs included in our review were paid under their old
hospital provider number for a total of 433 inpatient days covering
136 cases, or 8 percent of the stays we examined.  Retroactive
certification of an RPCH that submitted claims under their old
hospital number until they became aware of certification as an RPCH
contributed to stays that exceeded the 72-hour time limit. 

\8 Some stays exceeding 72 hours might have been justified because of
weather-related delays in transferring the patient. 


   POTENTIAL PROBLEMS WITH
   EXPANDED PROGRAM
------------------------------------------------------------ Letter :5

As of August 1997, 51 limited-service hospitals (38 RPCHs and 13
MAFs) were authorized to treat Medicare patients.  Effective October
1, 1997, these limited-service hospitals were to start making a
transition into a new nationwide program--the Medicare Rural Hospital
Flexibility Program--and to be renamed CAHs.  As the number of CAHs
increase, it will become more important for HCFA to monitor the
inpatient stay and physician certification requirements established
by the Congress. 


      INPATIENT STAY LIMITATION
      REQUIRES MONITORING
---------------------------------------------------------- Letter :5.1

HCFA had no established way of ensuring that RPCHs complied with the
72-hour length of stay limitation when it was in effect or to assess
whether cases outside the limit met one of the allowable exceptions. 
As a result, HCFA did not know whether RPCHs complied with this
requirement.  As our work illustrates, when lengths of stay exceeded
the limit, Medicare costs tended to be higher than if patients had
gone to a rural PPS hospital. 

BBA's successor program, CAHs, provides that the Medicare peer review
organization (PRO) covering a CAH's area can waive the 96-hour limit
case by case after a request to review a case.  The statute does not
define the conditions that would warrant waiving the limit.  We
believe that the PRO review could serve as the mechanism for ensuring
compliance with the length-of-stay limit.  If intermediaries were
instructed to limit payment on CAH cases to no more than 4 days,
unless the claim were accompanied by a PRO waiver, CAHs would have an
incentive to ensure that they stay within the limit unless
circumstances warranted an exception.  HCFA would need to define what
these circumstances are for both CAHs and PROs. 


      PHYSICIAN CERTIFICATION
---------------------------------------------------------- Letter :5.2

Medicare regulations state that the program pays for inpatient RPCH
services only if a physician certifies that the individual may
reasonably be expected to be discharged or transferred to a hospital
within 72 hours (96 hours, effective October 1, 1997).  The
physician's certification is maintained in the patient's medical
record.  However, HCFA had not yet initiated a method to ensure
compliance with this requirement. 

HCFA officials told us that the agency planned to have state facility
survey personnel review compliance with the physician certification
requirement when RPCHs were recertified for continued participation
in the Medicare program.  The officials said HCFA also plans to use
this process for CAHs.  The physician certification requirement is
one way to help ensure that only the appropriate kinds of patients
are admitted to CAHs and that the 96-hour limit is likely to be
adhered to.  HCFA needs to formally establish a mechanism for
checking compliance with the physician certification provision. 


   CONCLUSIONS
------------------------------------------------------------ Letter :6

RPCHs were an important access point for inpatient and outpatient
services for Medicare beneficiaries in rural areas.  Medicare
payments to RPCHs for inpatient stays were, however, somewhat higher
than payments would have been to rural PPS hospitals to treat the
same patients.  A primary reason for this was that about 21 percent
of the inpatient cases had lengths of stay that exceeded the 72-hour
maximum in effect at the time, and 8 percent would have exceeded the
96-hour limit for CAHs.  HCFA has not established a way to enforce
the length-of-stay limit, and we believe one is needed to give CAHs
an incentive to adhere to the limit.  HCFA also needs to define for
CAHs and PROs, which are authorized to grant waivers to the 96-hour
limit, the conditions and circumstances under which it would be
appropriate to waive the requirement. 

HCFA also has not established a way of checking compliance with the
requirement that a physician certify that patients admitted to RPCHs,
now CAHs, are expected to be discharged within the maximum allowed
length-of-stay limit.  Such a mechanism should reinforce the
importance of the certification and its intent to ensure that only
the appropriate kinds of patients are admitted. 


   RECOMMENDATIONS
------------------------------------------------------------ Letter :7

The Secretary of Health and Human Services (HHS) should direct the
Administrator of HCFA to establish a mechanism for ensuring that CAHs
do not receive payment for inpatient cases that exceed the 96-hour
length-of-stay maximum unless the responsible PRO waives that limit
and defines the conditions and circumstances under which it would be
appropriate for PROs to waive the 96-hour limit.  HCFA should also
establish a method to ascertain compliance with the requirement that
physicians certify that patients are expected to be discharged within
96 hours of admission. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :8

We provided HCFA an opportunity to comment on a draft of this report,
but the agency was unable to provide us written comments in the time
required.  We did, however, discuss a draft with agency officials
involved with the RPCH program and incorporated their comments as
appropriate. 


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

This report was prepared under the direction of Thomas Dowdal, Senior
Assistant Director.  Please contact him or me at (202) 512-7114 if
you have any questions.  Others who made major contributions to his
report include Robert Sayers, Jerry Baugher, Robert DeRoy, and Joan
Vogel. 

Copies of this report are also being sent to appropriate House and
Senate committees, the Director of the Office of Management and
Budget, the Secretary of HHS, the Inspector General of HHS, and the
Administrator of the Health Care Financing Administration. 

William J.  Scanlon
Director, Health Financing
 and Systems Issues


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

Our objectives were to develop information on the cases treated and
inpatient and outpatient services performed at RPCHs, the relative
cost of providing inpatient health care services to Medicare
beneficiaries at RPCHs and acute-care hospitals, and compliance with
the physician certification and 72-hour inpatient stay requirement. 

We visited three RPCHs--two in North Carolina and one in South
Dakota--and also contacted a fourth RPCH in South Dakota.  From these
RPCHs, we obtained information on the types of patients they treated,
how they complied with the inpatient stay limitation and the
physician certification requirements, and why stays at their RPCHs
exceeded the 72-hour inpatient limitation.  We also met with state
rural health officials and state facility surveying personnel in
North Carolina and South Dakota to obtain information on the RPCH
program. 

We obtained automated cost and claim data for 15 RPCHs in Kansas,
North Carolina, South Dakota, and West Virginia.\9 Cost data were
extracted from HCFA's Health Care Provider Cost Report Information
System (HCRIS), which includes selected data from hospital cost
reports.  Paid claims were provided by the four
intermediaries--Kansas Blue Cross (Kansas), North Carolina Blue Cross
(North Carolina), IASD Health Services Corporation (South Dakota),
and Blue Cross of Virginia (West Virginia)--serving the RPCHs.  We
obtained inpatient and outpatient claims for each RPCH from the date
certified through May 1996.  Twelve of the 13 RPCHs submitted
inpatient claims.  All 13 RPCHs submitted outpatient claims. 

From the inpatient claims, we extracted data on the diagnoses and
length of stay associated with Medicare patients admitted to RPCHs. 
In addition, we extracted the same data from HCFA's Medicare Provider
Analysis and Review (MEDPAR) file for Medicare patients admitted to
RPCHs but whose claim was paid under the RPCH's old hospital provider
number.  We also used MEDPAR to obtain data on Medicare patients
transferred from an RPCH to an acute care hospital.  For patients
transferred to full-service hospitals, we obtained the name of the
hospital they were transferred to and the diagnoses and length of
stay. 

Using the cost report data, we estimated the costs for each RPCH
Medicare inpatient stay.  We then compared those costs with the
amount Medicare would have paid an acute-care hospital under PPS for
the same DRG at hospitals in the rural areas of the applicable states
and the urban hospitals nearest to the RPCHs.  We also computed the
amount Medicare paid a PPS hospital and an RPCH when it transferred
patients to an acute-care hospital. 

From the outpatient claims, we extracted data on the types of
services provided to Medicare beneficiaries.  For each RPCH cost
year, we calculated the number of outpatient claims submitted and the
number of Medicare beneficiaries treated by the RPCH. 


--------------------
\9 We excluded 2 of 15 RPCHs, one in North Carolina, the other in
South Dakota, from our analyses.  The North Carolina RPCH reported no
costs and submitted no claims.  The South Dakota RPCH reported
inpatient costs and submitted four claims, but we were unable to
assure ourselves of the accuracy of its cost data. 


   ESTIMATING RPCH INPATIENT COSTS
--------------------------------------------------------- Appendix I:1

Because the 13 RPCHs in our analysis were certified at different
times between September 8, 1993, and August 23, 1995, and had varying
cost-reporting years, the cost report information we obtained covers
different time periods for each facility, as identified in table I.1. 



                               Table I.1
                
                 Cost Reports and Inpatient Claims Data
                         Available for 13 RPCHs

                                                          Number of
                                                          inpatient
                                                         claims from
                                                        --------------
                                                  Cost
                                                report
                                                     s
                                          Date  availa    Paid
                                Locati  certif  ble in  claims
RPCH                                on     ied   HCRIS    tape  MEDPAR
------------------------------  ------  ------  ------  ------  ------
Kansas
----------------------------------------------------------------------
Ashland District Hospital       Ashlan     12/       1      23       0
                                     d   22/94
Cedar Vale Community Hospital    Cedar   1/26/       1      97       3
                                  Vale      95
Ellinwood District Hospital     Ellinw   10/1/       1      69       1
                                   ood      94
Grisell Memorial Hospital       Ransom   12/1/       2      43      42
                                            93
Lane County Hospital            Dighto   12/8/       1     108       1
                                     n      94
Oswego Health Center            Oswego     10/       1      12       0
                                         27/94

North Carolina
----------------------------------------------------------------------
Our Community Hospital          Scotla   4/18/       1      13      14
                                    nd     95\
                                  Neck
Yancy County Medical Center     Burnsv     12/       1       0       0
                                  ille     15/
                                           94\

South Dakota
----------------------------------------------------------------------
Douglas County Memorial         Armour   8/23/       1     135       3
 Hospital                                   95
Faulk County Hospital           Faulkt    9/8/       3     190      60
                                    on      93
Gettysburg Medical Center       Gettys   8/25/       2     130      11
                                  burg      94

West Virginia
----------------------------------------------------------------------
Broaddus Hospital               Philli    1/1/       2     703       1
                                    pi      94
Webster County Memorial         Webste   1/24/       1      49       0
 Hospital                            r      94
                                Spring
                                     s
======================================================================
Total                                               18   1,572     136
----------------------------------------------------------------------
We calculated the average inpatient operating costs per patient day
for each RPCH's cost-reporting period, excluding capital costs, by
dividing operating costs (which includes routine and ancillary costs)
by the number of Medicare days.\10 We estimated the cost of treating
each RPCH patient by multiplying the facility's average daily
Medicare cost by the number of days each patient was an inpatient. 


--------------------
\10 We excluded capital costs because they are a separate add-on to
the DRG-based PPS payments. 


   ESTIMATING PPS RATES
--------------------------------------------------------- Appendix I:2

We calculated the PPS rates for the 1,708 RPCH inpatients in our
analysis for hospitals in rural Kansas, North Carolina, South Dakota,
and West Virginia and appropriate urban areas.  We identified each
patient's DRG from the paid claim file and estimated the amount
Medicare would have paid for each of these RPCH discharges in a rural
and urban PPS hospital, using PPS payment rates in effect when the
patient was discharged.  Our estimate of PPS payments does not
include payments for capital costs or any additional amounts that
hospitals with teaching programs or a disproportionate share of
low-income patients receive from Medicare. 


   INPATIENTS WHO TRANSFERRED FROM
   RPCHS TO PPS HOSPITALS
--------------------------------------------------------- Appendix I:3

A total of 163 inpatients were treated at an RPCH and then
transferred to a PPS hospital.  We estimated Medicare's cost of
treating those patients at the RPCH in the same way we did for all
patients--that is, by multiplying the RPCH's daily Medicare cost by
the number of days the patient was at the RPCH before being
transferred. 

When an RPCH transfers a patient to a PPS hospital, the receiving
hospital is paid the full DRG rate and the RPCH is paid its costs. 
PPS hospitals are reimbursed for the care provided to a patient who
transfers to another hospital according to a per diem rate.  This
rate is obtained by dividing the PPS payment by the geometric mean
length of stay expected for the patient's DRG (this number is
published annually with the DRG relative weights). 

We calculated the per diem PPS rate for each of the 163 transfer
cases and multiplied that amount by the number of days each patient
stayed at the RPCH before being transferred.  The result of this
calculation was the estimated payment that PPS hospitals would have
received had the patient been treated at a PPS hospital for the same
number of days that the patient was at the RPCH prior to being
transferred. 

For each patient transferred, we compared the RPCH cost to what a
rural PPS hospital would have been paid if it had transferred the
patient.  The result showed whether the treatment at the RPCH was
more or less costly than treatment would have been for a transfer
case at a rural PPS hospital. 


   RPCH OUTPATIENT DATA
--------------------------------------------------------- Appendix I:4

The cost report information obtained for the 13 RPCHs covers the
cost-reporting periods identified in table I.1.  All 13 RPCHs
reported Medicare outpatient costs and submitted outpatient claims. 
We obtained the Medicare outpatient operating costs from HCRIS data
for each RPCH, for each cost-reporting period. 

From the paid claims file we determined, for each RPCH cost-reporting
period, the number of outpatient claims submitted and the number of
different Medicare beneficiaries treated.  We also identified the
types of outpatient services being provided to Medicare
beneficiaries. 


   RPCH COMPLIANCE WITH
   LENGTH-OF-STAY LIMITATION AND
   PHYSICIAN CERTIFICATION
--------------------------------------------------------- Appendix I:5

We did not evaluate the RPCHs' compliance with the annual average
72-hour length-of-stay requirement that became effective for
cost-reporting periods starting October 1, 1995.  The RPCH cost
reports available for our review covered RPCH cost-reporting periods
beginning prior to October 1, 1995, when a maximum inpatient hospital
stay requirement of 72 hours existed.  Moreover, HCFA officials told
us that they had not reviewed RPCHs' compliance with either of the
two (maximum or average) 72-hour requirements. 

We did not verify RPCHs' compliance with the requirement that
physicians certify that a Medicare patient can reasonably be expected
to be discharged within 72 hours (changed by BBA to 96 hours) because
this certification is entered on patient records maintained by RPCHs
and it was not practical for us to review these records.  Although
HCFA has not reviewed RPCHs' compliance with this requirement, HCFA
officials told us the agency plans to require state facility survey
personnel to determine physician compliance when they visit RPCHs as
part of Medicare's recertification process for continued
participation in the program. 


INPATIENT RPCH CASES REVIEWED BY
DRG CATEGORY
========================================================== Appendix II

                                            Cases        DRGs covered
                                        --------------  --------------
                                                Percen          Percen
DRG category                            Number       t  Number       t
--------------------------------------  ------  ------  ------  ------
Respiratory system                         474   27.7%      17   12.4%
Circulatory sytem                          454    26.6      20    14.6
Digestive system                           179    10.5      11     8.0
Nervous system                              98     5.7      10     7.3
Diabetes and other metabolic                90     5.3       5     3.7
Kidney and urinary tract                    82     4.8       8     5.8
Subtotal                                 1,377    80.6      71    51.8
Other DRG categories                       331    19.4      66    48.2
======================================================================
Total                                    1,708  100.0%     137  100.0%
----------------------------------------------------------------------

TOTAL MEDICARE INPATIENT AND
OUTPATIENT COSTS BY RPCH
COST-REPORTING YEARS
========================================================= Appendix III

                          Total RPCH Medicare
                           inpatient cost for
                              patients who
                          --------------------
                                                     Total
                   Cost-                          Medicare
               reporting            Transferre  outpatient
RPCH                year  Remained           d        cost
----------  ------------  --------  ----------  ----------
Kansas
----------------------------------------------------------
Ashland       1/1/95-12/  $102,649     $23,526    $285,604
 District          31/95
 Hospital
Cedar Vale    2/1/95-12/   277,774      36,960     229,208
 Community         31/95
 Hospital
Ellinwood     10/1/94-9/   231,815      17,320     240,652
 District          30/95
 Hospital
Grisell       1/1/94-12/   201,939       3,934     322,442
 Memorial          31/94
 Hospital
              1/1/95-12/   105,070      26,266     291,204
                   31/95
Lane          1/1/95-12/   236,487      21,020     289,382
 County            31/95
 Hospital
Oswego         10/27/94-   151,811           0     234,427
 Health         10/31/95
 Center

North Carolina
----------------------------------------------------------
Our           4/18/95-9/   121,200       7,947      95,887
 Community         30/95
 Hospital
Yancy        12/15/94-9/        \a          \a     629,351
 County            30/95
 Medical
 Center

South Dakota
----------------------------------------------------------
Douglas       8/23/95-5/   357,868      14,435     222,818
 County            31/96
 Memorial
 Hospital
Faulk          9/8/93-2/   228,467      16,388      20,423
 County            28/94
 Hospital
               3/1/94-2/   432,370       7,586     356,324
                   28/95
               3/1/95-2/   422,205      40,133     286,092
                   28/96
Gettysburg    8/25/94-1/    60,382       2,543      76,877
 Medical           31/95
 Center
               2/1/95-1/   225,207      14,528     214,672
                   31/96

West Virginia
----------------------------------------------------------
Broaddus      1/1/94-12/   750,492      24,624     501,113
 Hospital          31/94
              1/1/95-12/   542,723      47,759     516,587
                   31/95
Webster       1/24/94-6/   117,915      17,196      68,971
 County            30/94
 Memorial
 Hospital
==========================================================
Total                     $4,566,3    $322,165  $4,882,034
                                74
----------------------------------------------------------
\a This facility had no Medicare inpatient admissions. 


DIFFERENCE BETWEEN INDIVIDUAL RPCH
COSTS AND PPS PAYMENTS
========================================================== Appendix IV

The data in the tables in this appendix are for urban and rural areas
for 1,545 nontransferred inpatients who received all their care at
RPCHs. 



                                        Table IV.1
                         
                           Comparison of RPCH Payments With PPS
                           Payments for Kansas, Cost-Reporting
                                      Years 1994-96

                                    RPCH costs higher (lower) compared with PPS payments
                                             for hospitals In surrounding areas
                                   ------------------------------------------------------
                            Cost-
                        reporting  Kansas City,      Wichita,                       Rural
RPCH                         year        Kansas        Kansas  Rural Kansas      Oklahoma
-------------------  ------------  ------------  ------------  ------------  ------------
Ashland District          1995-96       $36,133       $34,863       $47,852       $51,239
 Hospital
Cedar Vale                1995-96      (37,351)      (41,607)        17,819        32,836
 Community Hospital
Ellinwood District        1995-96        28,954        24,570        64,799        75,431
 Hospital
Grisell Memorial          1995-96        33,418        32,683        45,912        49,194
 Hospital
                          1994-95        38,818        38,002        77,693        86,299
Lane County               1995-96      (63,154)      (67,969)      (10,553)         4,499
 Hospital
Oswego Health             1995-96       113,901       113,079       120,600       122,586
 Center
=========================================================================================
Total                                  $150,719      $133,621      $364,122      $422,084
-----------------------------------------------------------------------------------------


                               Table IV.2
                
                  Comparison of RPCH Payments With PPS
                   Payments for North Carolina, Cost-
                          Reporting Year 1995

                                  RPCH costs higher (lower) compared
                                  with PPS payments for hospitals in
                                          surrounding areas
                                --------------------------------------
                                Greenv  Raleig   Rocky  Charlo
RPCH                              ille       h   Mount     tte   Rural
------------------------------  ------  ------  ------  ------  ------
Our Community Hospital          $35,69  $31,22  $37,95  $29,96  $43,09
                                     3       7       4       3       2
----------------------------------------------------------------------


                               Table IV.3
                
                  Comparison of RPCH Payments With PPS
                    Payments for South Dakota, Cost-
                        Reporting Years 1993-96

                                          RPCH costs higher (lower)
                                        compared with PPS payments for
                                          hospitals in surroounding
                                                    areas
                                        ------------------------------
                                 Cost-   Sioux  Bismar
                                report  Falls,     ck,   Rural   Rural
                                   ing   South   North   South   North
RPCH                              year  Dakota  Dakota  Dakota  Dakota
------------------------------  ------  ------  ------  ------  ------
Douglas County Hospital          1995-  ($10,8  $1,920  $40,32  $32,12
                                    96     26)               5       3
Faulk County Hospital            1995-  189,49  194,01  221,31  215,14
                                    96       3       1       7       3
                                 1994-  191,47  191,20  234,62  229,10
                                    95       7       4       0       0
                                 1993-  23,608  22,946  64,262  59,797
                                    94
Gettysburg Medical Center        1995-  (92,74  (87,90  (49,44  (58,25
                                    96      3)      5)      3)      0)
                                 1994-  (43,74  (43,50  (28,66  (31,70
                                    95      8)      7)      5)      7)
======================================================================
Total                                   $257,2  $278,6  $482,4  $446,2
                                            61      69      16      06
----------------------------------------------------------------------


                               Table IV.4
                
                  Comparison of RPCH Payments With PPS
                   Payments for West Virginia, Cost-
                        Reporting Years 1994-96

                                                          RPCH costs
                                                        higher (lower)
                                                        compared with
                                                         PPS payments
                                                        for hospitals
                                                        in surrounding
                                                            areas
                                                        --------------
                                                 Cost-
                                                report
                                                   ing  Charle
RPCH                                              year    ston   Rural
----------------------------------------------  ------  ------  ------
Broaddus Hospital                                1995-  ($332,  ($264,
                                                    96    978)    380)
                                                 1994-  (341,5  (258,5
                                                    95     44)     97)
Webster County Memorial Hospital                  1994  18,658  26,393
======================================================================
Total                                                   ($655,  ($496,
                                                          864)    584)
----------------------------------------------------------------------

HOSPITALS RECEIVING TRANSFERRED
RPCH PATIENTS
=========================================================== Appendix V

                                            Number of RPCH
Hospital and location                             patients
--------------------------------------  ------------------
Transferred from RPCHs in Kansas
----------------------------------------------------------
Asbury-Salina Regional Medical Center,                   1
 Salina, Kans.
Central Kansas Medical Center, Great                     1
 Bend, Kans.
Duke University Medical Center,                          1
 Durham, N.C.
Halstead Hospital, Halstead, Kans.                       3
Hays Medical Center, Hays, Kans.                        10
Phillips Episcopal Memorial Medical                    6\a
 Center, Bartlesville, Okla.
St. Catherine Hospital, Garden City,                  11\b
 Kans.
St. Francis Regional Medical Center,                     6
 Wichita, Kans.
St. Joseph Medical Center, Wichita,                      1
 Kans.
St. Luke's Hospital, Kansas City, Mo.                    1
Wesley Medical Center, Wichita, Kans.                    5
Western Plains Hospital, Dodge City,                     1
 Kans.
William Newton Memorial Hospital,                        5
 Winfield, Kans.
==========================================================
Subtotal                                                52

Transferred from RPCHs in North Carolina
----------------------------------------------------------
Pill County Memorial Hospital,                           2
 Greenville, N.C.
Roanoke Chowan Hospital, Ahoskie, N.C.                   1
==========================================================
Subtotal                                                 3

Transferred from RPCHs in South Dakota
----------------------------------------------------------
McKennan Hospital, Sioux Falls, S.D.                     9
Queen of Peace Hospital, Mitchell,                       3
 S.D.
St. Luke Midland Regional Medical                       13
 Center, Aberdeen, S.D.
St. Mary's Hospital, Pierre, S.D.                      5\c
St. Mary's Hospital, Rochester, Minn.                    1
Sioux Valley Hospital, Sioux Falls,                     12
 S.D.
University of Minnesota Hospital and                     1
 Clinic, Minneapolis, Minn.
==========================================================
Subtotal                                                44

Transferred from RPCHs in West Virginia
----------------------------------------------------------
Aultman Hospital, Canton, Ohio                           1
Davis Memorial Hospital, Elkins, W.V.                   35
Fairmount General Hospital, Fairmount,                   3
 W.V.
Grafton City Hospital, Grafton, W.V.                   6\d
Monongalia General Hospital,                             6
 Morgantown, W.V.
Summersville Memorial Hospital,                          1
 Summersville, W.V.
United Hospital Center, Clarksburg,                     10
 W.V.
West Virginia University Hospital,                       2
 Morgantown, W.V.
==========================================================
Subtotal                                                64
==========================================================
Total                                                  163
----------------------------------------------------------
\a One of these patients was subsequently transferred to St.  John's
Medical Center, Tulsa, Okla. 

\b One of these patients was subsequently transferred to St.  Francis
Regional Medical Center, Wichita, Kans. 

\c One of these patients was subsequently transferred to St.  Luke
Midland Regional Medical Center, Aberdeen, S.D. 

\d One of these patients was subsequently transferred to West
Virginia University Hospital, Morgantown, W.V. 


*** End of document. ***