The role of critical access hospital status in mitigating the effects of new prospective payment systems under medicare

This article examines rural hospitals that potentially qualify as critical access hospitals (CAH) and identifies facilities at substantial financial r isk as a result of Medicares expansion of prospective payment systems (PPS) to nonacute settings. Using Health Care Financing Administration (HCFA) co st reports from the federal year ending Sept. 30, 1996, combined with count y-level sociodemographic data from the Area Resource File (ARF) characteris tics of potential CAHs were identified and their finances analyzed to deter mine whether they could benefit from the cost-based reimbursement rules app licable to CAH status. Rural hospitals were identified as potential CAHs if they met a combination of federal and state criteria for necessary provide rs. Rural facilities were classified as "at risk" if they had poor financia l ratios in conjunction with high levels of dependence on outpatient, home- care or skilled nursing services. Almost 30 percent of all rural hospitals were identified as potential CAHs. Ninety percent of potential CAH faciliti es were identified as "at risk" by at least one of five possible risk crite ria, and one-third were identified by at least three. Of those classified " at risk," 48 percent might not benefit from conversion to CAH because their inpatient Medicare reimbursement would likely be less under CAH payment ru les than under their current PPS payment rules. Many potential CAHs were do ing well under inpatient PPS because they were sole community hospitals (SC H) and were therefore eligible fbr special adjustments to the PPS rates. Th e Rural Hospital Flexibility Act would be move beneficial to the population of isolated rural hospitals if those eligible for both CAH and SCH status were given the option of retaining their SCH inpatient payment arrangements while still qualifying fbr outpatient cost-based reimbursement.