• Presentation

Reintroduction of Cost-Based Payments: Impact of Medicare Critical Access Hospital Program on Hospital Costs


Gilman, B. (2005, December). Reintroduction of Cost-Based Payments: Impact of Medicare Critical Access Hospital Program on Hospital Costs. Presented at American Public Health Association Annual Meeting, Philadelphia, PA.


Under the 1997 Balanced Budget Act, the US Congress gave Medicare the authority to exempt limited-service hospitals in rural areas from prospective payment systems (PPS) and to offer them the option of being reimbursed for inpatient and outpatient services on the basis of reasonable costs. The first conversion under Medicare's Critical Access Hospital (CAH) program was approved in 1999. Today, nearly one-quarter of all short-term acute care hospitals in the United States have been switched back to cost-based reimbursement under Medicare. While the CAH program provides essential financial support to safety net providers in rural communities, it also reintroduces incentives to increase the number and intensity of services provided and, thus, may accelerate in the growth in Medicare hospital spending.

The objective of the study is to assess the impact of the reintroduction of cost-based reimbursement on per capita costs among limited-service rural hospitals and on the growth in Medicare spending. The study does not compare the costs of the safety net program with potential benefits in terms of improved access to care.

The study uses Medicare cost report and claims data from 1996-2004 to compare changes in costs and treatment patterns among hospitals that converted to cost-based payment versus a group of near-eligible hospitals remaining under PPS. Financial outcomes include per capita costs, revenues and profits. Treatment outcomes include number of admissions and visits and number and hours per observation bed stay. Outcomes are measured at the facility-level, as well as for selected high-volume services. Regression models are used to control for facility characteristics (length of time since conversion, ownership, organizational structure, size, occupancy rate, service and casemix, proportion of Medicare patients, and geographic location) and market characteristics (managed care penetration, population density, and the availability of alternative local providers).

Preliminary results show that per capita revenues rose faster among converting hospitals following implementation of cost-based payment than among the comparison group of near-eligible limited-service hospitals during the same time period. The number of employees, annual average salaries, and capital expenditures also rose more among converting facilities than among the non-converting facilities. Finally, converting hospitals experienced higher per capita profits following the designation of their CAH status compared with their near-eligible non-converting hospital counterparts.

The reintroduction of cost-based payments under Medicare's CAH program has led to an increase in the intensity of services provided per inpatient admission and outpatient visit and contributed to the growth in Medicare spending.