Rural Hospitals and Medicare's Prospective Payment System...hospitals. CBO's study Rural Hospitals...

CONGRESS OF THE UNITED STATESCONGRESSIONAL BUDGET OFFICE

S T U D Y

CBO Publication

CONGRESSIONAL

BUDGET OFFICE

Second and D Streets, S. W.

Washington, D.C. 20515

S U M M A R Y !

December 1991

CBO STUDY ON RURAL HOSPITALS ANDMEDICARE'S PROSPECTIVE PAYMENT SYSTEM

During the last several years, numerous rural hospitals have experiencedfinancial difficulties and some have closed. Many people are concerned that acontinuation of these patterns might reduce access to hospital care in ruralareas. In response to these concerns, the Congress has modified Medicare's pro-spective payment system (PPS) in several ways to increase payments to ruralhospitals. CBO's study Rural Hospitals and Medicare's Prospective PaymentSystem, which was requested by the Senate Committee on Finance, examines theeffects of legislative changes in the PPS on rural hospitals' revenues fromMedicare and on these hospitals' financial conditions.

The main results of the study are:

o Legislative modifications to the PPS since its introduction have sub-stantially raised average payment rates for rural hospitals relative tothose for urban hospitals. Changes to the PPS scheduled to occurthrough 1995 will further increase relative payments to rural hospitals.

o Currently, over half of all rural hospitals qualify for special paymentsas rural referral centers, sole community hospitals, or Medicare-dependent hospitals. For 1991, average payments per case to ruralhospitals with these designations are estimated to be about 10 percenthigher than they would be without the special payments.

o Estimates indicate that the average financial condition of rural hos-pitals would be stronger under the 1991 and the 1995 PPS paymentrules than if the same level of total payments was distributed as underprevious years' payment policies.

o Even with the increased payments from Medicare, however, somerural hospitals will probably continue to have financial difficulties.Medicare could target additional revenues toward hospitals that aredeemed crucial for access to hospital care, but assuring access tohealth care in rural areas may require a broader approach including,for example, efforts to increase the presence of physicians and toreduce the number of patients who lack health insurance.

Questions regarding the study should be directed to Harriet L. Komisar ofCBO's Human Resources and Community Development Division at (202) 226-2655. The Office of Intergovernmental Relations is CBO's Congressional liaisonoffice and can be reached at 226-2600. For additional copies of the study, pleasecall CBO's Publications Office at 226-2809.

RURAL HOSPITALS AND MEDICARE'SPROSPECTIVE PAYMENT SYSTEM

The Congress of the United StatesCongressional Budget Office

NOTES

Unless otherwise indicated, all years referred to in this study arefederal fiscal years.

Details in the text and tables may not add to totals because ofrounding.

Preface

I n response to concerns about the financial conditions of rural hospitals and their potentialeffects on access to care, recent legislative actions have modified Medicare's prospective pay-ment system to increase payments to rural hospitals. These changes are being phased in

through 1995. At the request of the Senate Committee on Finance, this study provides estimates ofthe effects of these changes on payments to rural hospitals and on those hospitals' financial condi-tions. In keeping with the Congressional Budget Office's (CBO's) mandate to provide objective andimpartial analysis, the study contains no recommendations.

Harriet L. Komisar of the Human Resources and Community Development Division preparedthis study under the direction of Nancy M. Gordon and Kathryn M. Langwell. Susan HiltonLabovich and Tahirih Senne Linton did the extensive computer programming, and Jack Rodgersmade many substantial contributions to the analysis.

The study benefited from comments made by Carol Carter, Stuart Guterman, and DonaldYoung of the Prospective Payment Assessment Commission; Jon Christiansen of the University ofMinnesota; Elaine Power of the Office of Technology Assessment; and Dena Puskin of the Office ofRural Health Policy of the Public Health Service. Michael B. Berger, Jay Noell, Kimberly D.Guise, Julia Jacobsen, and Murray Ross of CBO also contributed to the study.

Sherry Snyder and Francis S. Pierce edited the manuscript; Chris Spoor provided editorial as-sistance. Sharon Corbin-Jallow prepared the numerous drafts, and Kathryn Quattrone prepared thestudy for publication.

Robert D. ReischauerDirector

December 1991

Contents

SUMMARY ix

ONE INTRODUCTION 1

The Financial Conditions of Rural Hospitals 2Evaluating the Financial Conditions of Hospitals 3

TWO PAYMENTS TO RURAL AND URBAN HOSPITALSUNDER THE PROSPECTIVE PAYMENT SYSTEM 9

The Payment System 9Sources of Differences in Payments to Urban and Rural Hospitals 16Relationship Between Payments and Costs 19

THREE THE EFFECTS OF LEGISLATIVE CHANGES INTHE PPS ON PAYMENTS TO RURAL HOSPITALS 23

Legislative Changes in the PPS, 1992-1995 23Effect of Legislative Changes on the Distribution of Payments

Among Different Categories of Hospitals 25

FOUR THE EFFECTS OF LEGISLATIVE CHANGES IN THE PPSON HOSPITALS' FINANCIAL CONDITIONS 29

Hospital Margins 29Implications of Current Policies for Rural Hospitals 34

APPENDIXES

A Relationship Between PPS Margins and Overall Marginsfor Rural Hospitals 39

B Urban/Rural Differences in Standardized Amounts and UpdateFactors, 1984-1995 41

C Selected Details of the Prospective Payment System 43

vi RURAL HOSPITALS December 1991

D Statistical Methods Used in Estimating the Differences in HospitalCosts Associated with Urban or Rural Location 49

E Distributions of Simulated 1989 PPS and Overall MarginsUnder Different Payment Rules 53

TABLES

S-l. Special Designations for Rural Hospitals and Their Effect on PPS Payments . . . . x

S-2. Comparison of the Distribution of 1991 PPS Payments Among Categoriesof Hospitals Under Payment Rules for 1984, 1991, and 1995 xii

S-3. Actual 1989 Margins and Simulated 1989 Margins UnderPayment Rules for 1984, 1991, and 1995 xiii

1. Overall Margins for Selected Hospital Categories, 1984-1989 3

2. Distribution of Overall Margins, 1984-1989 4

3. PPS Margins for Selected Hospital Categories, 1984-1989 5

4. Distribution of PPS Margins, 1984-1989 6

5. Number and Rate of Closures Among Community Hospitals, 1980-1989 8

6. Types of Rural Hospitals 14

7. Characteristics of PPS Hospitals, by Selected Hospital Categories 17

8. Percentage Difference in Average Payments per Case Between Urban andRural Hospitals, by Source 18

9. Estimated Differences in Adjusted Costs per Medicare CaseBetween Hospitals in Large Urban Areas or Other Urban Areas,and Hospitals in Rural Areas 20

10. Comparison of the Distribution of 1991 PPS Payments Among Categoriesof Hospitals Under Payment Rules for 1984, 1991, and 1995 26

11. Actual 1989 PPS Margins and Simulated 1989 PPS Margins UnderPayment Rules for 1984, 1991, and 1995 30

12. Distribution of Simulated 1989 PPS Margins Under PaymentRules for 1991 31

CONTENTS vii

13. Actual 1989 Overall Margins and Simulated 1989 Overall MarginsUnder Payment Rules for 1984, 1991, and 1995 33

14. Distribution of Simulated 1989 Overall Margins Under PaymentRules for 1991 34

A-l. Average PPS and Overall Margins for Rural Hospitals,by Margin Quartiles, 1989 39

A-2. Distribution of Rural Hospitals in Each PPS Margin Quartile,by Overall Margin Quartiles, 1989 40

B-l. Percentage Difference Between the Urban and Rural StandardizedAmounts, Relative to the Rural Amount, 1984-1992 41

B-2. Update Factors for PPS Payment Rates, 1984-1995 42

C-l. Effect on PPS Payments of Special Payment Provisions for RuralReferral, Sole Community, and Medicare-Dependent Hospitals,by Selected Categories of Rural Hospitals 47

C-2. Distribution of Sole Community and Medicare-Dependent HospitalsBetween Those with PPS Payments Based on Hospital-Specific Ratesand Those with Payments Based on Regular PPS Rates 48

E-l. Distribution of Simulated 1989 PPS Margins Under PaymentRules for 1984, 1991, and 1995 54

E-2. Distribution of Simulated 1989 Overall Margins UnderPayment Rules for 1984, 1991, and 1995 55

BOXES

1. Definition of Terms Relating to the Prospective Payment System 10

2. Calculating the PPS Payment for a Hypothetical Rural Hospitaland a Hypothetical Urban Hospital . 12

D-l. Definition of Variables Used in the Statistical Models 50

Summary

O ver the last several years, many ruralhospitals have experienced consider-able financial stress. Declining admis-

sions, changes in rural economies, and otherfactors have caused some rural hospitals toclose and numerous others to have difficultycovering their costs. Because the rural hospi-tal often plays a central role in its com-munity's health care network, there has beenincreasing concern that access to health caremight be adversely affected in some ruralareas if current trends continue.

Although many of the factors affecting thefinancial condition of rural hospitals are notrelated to Medicare reimbursements, Medi-care's prospective payment system (PPS) ap-pears to have initially contributed to the prob-lems of some rural hospitals. Specifically, inthe mid-1980s rural hospitals were more likelythan urban hospitals to receive payments un-der the PPS that were less than the costs theyincurred in treating Medicare patients.

In response to concerns about the financialcondition of rural hospitals, the Congress hasmodified the system in a number of ways toincrease payments to them. The OmnibusBudget Reconciliation Acts of 1989 and 1990(OBRA-89 and OBRA-90), in particular, in-clude a number of provisions that substan-tially increase rural payments. The changesestablished by OBRA-89 became effectiveduring 1990, and those in OBRA-90 are beingphased in over the 1991-1995 period. Thisstudy examines the effect of these, and earlier,changes in PPS policy on the Medicare reve-

nues of rural and urban hospitals, and theirimplications for the financial conditions ofhospitals.

PPS Policy forRural Hospitals

In the Social Security Amendments of 1983,the Congress replaced retrospective, cost-based reimbursement for inpatient hospitalservices provided to Medicare beneficiarieswith the prospective payment system. Underthis system, hospitals are paid a predeter-mined amount for each Medicare patient,based on the patient's diagnosis and treatmentand on certain characteristics of the hospital.If the expenses associated with treating thepatient are less than the payment amount, thehospital can keep the surplus, but if the costexceeds the payment, then the hospital will in-cur a loss.

The payment rates used by the PPS are de-signed to reflect the variations in costs amonghospitals resulting from factors considered tobe beyond the hospital's control and not re-lated to its efficiency. Payments are thereforeadjusted for certain cost-related factors in-cluding types of medical conditions treatedand labor costs in the local area. In addition,the system uses separate basic paymentamounts—known as standardized amounts--forrural and urban hospitals to account for his-

RURAL HOSPITALS December 1991

torical differences in costs that are caused byunspecified factors. Because these factors arecorrelated with location, this characteristicserves as a proxy for them, even though loca-tion itself is not considered to be a determi-nant of costs. The PPS currently applies sep-arate standardized amounts to hospitals inthree types of locations: large urban areas(those with populations of more than 1 mil-lion), other urban areas, and rural areas.

For 1991 payments, the average standard-ized amount per case for urban hospitals is 8percent higher than that for rural hospitals.The difference is considerably less than inearlier years; during the first three years of thePPS, for example, the difference was about 25percent. Because of concerns that a separaterural rate may be inequitable, the Congressrequired in OBRA-90 that the difference instandardized amounts be further reduced eachfiscal year through 1995, when the rate for ru-ral areas will equal the rate for "other urban"areas.

Modifications to the PPS have also pro-vided additional payments to certain types ofrural hospitals. To assist hospitals consideredto be important for access to health care be-cause they are the only providers in their geo-graphic areas, special payment rules apply tosole community hospitals (SCHs). Beginningin 1990, special payments also apply to a tem-porary class of small rural hospitals that servea relatively large proportion of Medicare pa-tients—referred to as Medicare-dependenthospitals (MDHs)--and that are therefore con-sidered to be especially vulnerable to financialrisk under the PPS. In addition, the specialrules for rural referral centers (RRCs), whichare larger rural hospitals that generally treatpatients from a wide geographic area, providethem with an urban standardized amount be-cause they are thought to have costs similar tourban hospitals. Over 50 percent of ruralhospitals currently are eligible for higher pay-ments as SCHs, MDHs, or RRCs (see Sum-mary Table 1). Payments to rural hospitals

Summary Table 1.Special Designations for Rural Hospitals and Their Effect on PPS Payments

Percentage Increase inPPS Payments Attributed

to Special PaymentHospitals3 Provisions

Hospital Category

All Rural Hospitals

Rural Hospitals with Special DesignationsRural referralSolecommunitydMedicare-dependent

Total

Other Rural Hospitals

Number

2,569

256533541

1,330

1,239

Percent

100.0

10.020.721.1

51.8

48.2

(Estimated, 1991)b

5.8

9.313.38.2

9.9

0

SOURCE: Congressional Budget Office estimates based on data provided by the Health Care Financing Administration and the Pro-spective Payment Assessment Commission.

a. Based on hospital classifications in September 1991.

b. Increase in payments to hospitals in each category relative to what payments would be to those hospitals if they did not havespecial designations. The estimates are based on hospital classifications in January 1991.

c. Includes 46 hospitals that are designated as both rural referral centers and sole community hospitals.

d. Sole community hospitals that are also rural referral centers are included in the rural referral category.

SUMMARY

with these special designations are estimatedto be 9.9 percent higher, on average, in 1991than they would be without the special pay-ments.

Relationship BetweenPayments and CostsAlthough the different standardized amountsfor urban and rural hospitals were originallybased on historical patterns of costs, both hos-pital costs and PPS policy have changed sincethe introduction of the payment system. Tosee what differentials in the standardizedamounts would be consistent with more recentconditions, the latest available data on hos-pital costs, which are from 1989, were ana-lyzed. For the analysis, all parts of the PPSwere assumed to be the same as under 1991law, except for the differences in the urbanand rural standardized amounts.

Under PPS policy for 1991, the standard-ized amounts for large urban areas and otherurban areas are 8.8 percent and 7.1 percenthigher, respectively, than the amount for ruralareas. Assuming that current cost relation-ships among hospitals groups are similar tothose in 1989, the results indicate that if thestandardized amount for large urban areaswas reduced by a small amount, but the ratesfor other urban and rural areas were un-changed, the average differences in paymentsamong the three groups would be approxi-mately consistent with the average differencesin their costs. The results also imply that asthe PPS moves toward a single standardizedamount in 1995 for hospitals located in "otherurban" and in rural areas, rural hospitals willreceive more, relative to urban hospitals, thancan be justified exclusively on the basis ofcosts.

Such estimates cannot, however, indicatewhat differentials in the standardized amountswould be most appropriate. For example,factors other than cost--such as ensuring ac-

cess to care--have been important in deter-mining PPS policy. In particular, hospitalsthat treat relatively high shares of low-incomepatients receive additional payments, beyondthe levels justified by their higher costs. Simi-larly, the payment increases for rural hospitalsscheduled to occur under OBRA-90 may helpto maintain access to health services in someareas by improving the financial prospects ofrural hospitals.

Estimated Effects ofLegislative Changes onHospitals' Payments andFinancial ConditionsIn order to examine the impact on hospitals ofchanges in PPS policy, payments to individualhospitals were estimated for the PPS rulescorresponding to three different years: 1984(the first year of the system), 1991, and 1995.Total PPS payments and the characteristics ofhospitals were held constant under the threesets of rules to isolate the effects of policychanges from other factors. For example, thetypes and numbers of cases treated by hos-pitals have changed over time, but these fac-tors were fixed in the analysis at the estimatedamounts in 1991. The results therefore indi-cate how payments for 1991 would differ ifthey were determined under the three sets ofrules.

Under the 1991 rules, payments to ruralhospitals are about 18 percent higher, andpayments to urban hospitals are about 2 per-cent lower, than they would be if paymentswere instead determined under the 1984 rules(see Summary Table 2). The 1995 rules shiftpayments even further toward rural hos-pitals—rural payments would be about 1 per-cent higher, and urban payments slightly low-er, than under the 1991 rules.

Among rural providers, those with specialdesignations—rural referral centers, sole com-

xii RURAL HOSPITALS December 1991

munity hospitals, and Medicare-dependent:hospitals—benefited the most from thechanges in policy between 1984 and 1991. Be-tween 1991 and 1995, however, payments toMedicare-dependent hospitals and rural refer-ral centers will fall relative to payments tosole community hospitals and "other rural"hospitals.

An additional analysis related the changesin PPS policy to the financial conditions ofhospitals. For this examination, simulated--orhypothetical-hospital margins (defined as thedifference between revenues and costs, ex-pressed as a percentage of revenues) for 1989were calculated under the payment rules for1984, 1991, and 1995. Actual data from 1989were used for all factors except the simulatedPPS payments; in particular, the actual costs

of treating both Medicare and non-Medicarepatients, and the actual revenues from non-Medicare payers, were assumed to be unaf-fected by the different payment rules. Thesimulated margins therefore do not forecasthospital margins for 1991 or future years.

The results indicate that if 1991 PPS ruleshad been applied in 1989, and if costs andnon-Medicare revenues were not affected bythis change, rural hospitals would have faredslightly better than urban hospitals under thePPS. Under the 1991 rules, the average simu-lated 1989 PPS margins are estimated to be0.2 percent for rural hospitals and -1.0 per-cent for urban hospitals, compared with actual1989 PPS margins of -4.7 percent for ruralhospitals and -0.2 percent for urban hospitals(see Summary Table 3). When costs and

Summary Table 2.Comparison of the Distribution of 1991 PPS Payments Among Categoriesof Hospitals Under Payment Rules for 1984,1991. and 1995

Distributionof Payments

Hospital Category

All HospitalsRuralUrban

Rural by CategoryRural referralSole communityb

Medicare-dependentOther rural

Urban by CategoryLarge MSA'Other urban

Number ofHospitals3

5,6332,5693,064

254449537

1,329

1,5191,545

1984Rules

100.011.888.2

4.41.41.14.8

49.239.0

(Percent)1991Rules

100.013.986.1

5.31.81.35.5

47.838.3

1995Rules

100.014.185.9

5.31.91.35.7

47.738.2

Difference in Payments(Percent)

1991 RulesRelativeto 1984

Rules

018.1-2.4

20.123.322.513.6

-2.8-1.9


Rules

019.6-2.6

19.231.116.817.1

-2.92.2

Relativeto 1991

Rules

01.3

-0.2

-0.76.3

-4.73.1

-0.1-0.3

SOURCE: Congressional Budget Office estimates based on data provided by the Health Care Financing Administration and the Pro-spective Payment Assessment Com mission.

NOTE: Total payments are set to equal the same amount under the different sets of rules so the values indicate the relative changes inpayments to the different categories of hospitals.

a. Based on hospital classifications in January 1991 and available data.

b. Sole community hospitals that are also rural referral centers are included in the rural referral category.

c. Hospitals located in Metropolitan Statistical Areas with more than 1 million people, or New England County Metropolitan Areas withmore than 970,000 people.

SUMMARY xin

Summary Table 3.Actual 1989 Margins and Simulated 1989 Margins UnderPayment Rules for 1984,1991, and 1995 (In percent)

Hospital Category


Number ofHospitals^ Actual

PPS Margins1

5,166 -0.82,384 -4.72,782 -0.2

1984Rules

-0.8-17.7

1.5

Simulated1991Rules

-0.80.2

-1.0

1995Rules

-0.81.4

-1.2

Rural by CategoryRural referralSole community1*Medicare-dependentOther rural

Urban by CategoryLarge MSA*Other urban

249428496

1,211

1,3621,420

-2.5-6.8-3.6-6.7

-0.1-0.3

-22.4-15.6-9.5

-15.9

2.40.5

-2.16.3

10.6-2.2

-0.5-1.7

-2.811.86.20.9

-0.6-2.0


Rural by CategoryRural referralSole community^Medicare-dependentOther rural

Urban by CategoryLarge MSAeOther urban

Overall Margins*

5,166 3.72,384 4,72,782 3.6

249 5.8428 4.4496 1.6

1,211 4.3

1,362 3.01,420 4.4

3.72.04.0

1.62.60.12.5

3.54.6

3.75.93.4

5.97.45.95.3

2.94.1

3.76.23.4

5.88.84.56.1

2.94.0


NOTE: Results correspond to federal fiscal year 1989.

a. Based on hospital classifications in January 1991 and available data.

b. The actual margins were based on data from the hospitals' cost-reporting periods beginning during federal fiscal year 1989,adjusted to correspond to federal fiscal year 1989.

c. For each hospital category, the PPS margin is defined as the difference between PPS payments and the operating costs associatedwith Medicare inpatient services for hospitals in the category, expressed as a percentage of PPS payments for the category.


e. Hospitals located in Metropolitan Statistical Areas with more than 1 million people, or New England County Metropolitan Areaswith more than 970,000 people.

f. For each hospital category, the overall margin is defined as the difference between the total revenues and total costs of hospitals inthe category, expressed as a percentage of total revenues for the category.

xiv RURAL HOSPITALS December 1991

revenues that are not related to the PPS arealso taken into account, the simulated 1989overall margins for all groups shown in Sum-mary Table 3 are positive under each set ofpayment rules. The results for individual hos-pitals vary considerably, however, and manyhospitals have negative simulated 1989 PPS oroverall margins under the 1991 and 1995rules.

Implications of CurrentPolicies for RuralHospitals

Legislative actions since 1984 have signifi-cantly increased payments to rural hospitals.Under the payment rules for 1991, the differ-ence in payments between urban and ruralhospitals is estimated to be similar to the dif-ference in their costs. In contrast, under theoriginal PPS, payments for rural hospitalswould be much lower, relative to their costs,than for urban hospitals. In 1995, when theprovisions of OBRA-90 will be fully phasedin, payments to rural hospitals will likely behigher, relative to their costs, than those tourban hospitals.

Although the results of this study suggestthat the changes in PPS policy have improved.

the average financial condition of rural hos-pitals relative to that of urban hospitals, somerural hospitals will continue to have financialdifficulties. For many, the causes of theseproblems are not related to Medicare policy.Because it pays hospitals on a per-case basis,the PPS may, however, pose systematic prob-lems for hospitals with certain characteristics.Small, low-volume hospitals, in particular,may have difficulties under the system be-cause they have relatively few patients overwhich to spread their fixed overhead expenses.In addition, despite the relative improvementin their payments, the financial conditions ofrural hospitals may, on average, be worse in1991 than in 1989, because costs per case mayhave increased more rapidly than payments.

In some locations, it may be desirable tosupport a local community hospital to ensureaccess to care, even if the hospital is unable tooperate as efficiently as others. Higher reve-nues from Medicare could be targeted to as-sist hospitals that are deemed crucial foraccess to health care, regardless of the causeof their difficulties. Alternatively, hospitalscould be assisted through programs other thanMedicare that addressed their particularneeds. Assuring access to health services may,however, require a broader approach includ-ing, for example, efforts to increase the pres-ence of physicians and other providers in ru-ral areas and to reduce the number of pa-tients who lack health insurance.

Chapter One

Introduction

R ural hospitals provide a substantialshare of hospital services in the UnitedStates.1 In 1989, they accounted for

one-fifth of inpatient days and outpatientvisits and nearly one-half of all communityhospitals.2 Moreover, the rural hospital oftenforms a crucial link in a community's healthcare system and economy. In many locations,the hospital is not only a major source of ser-vices, but is also critical to the community'sability to draw and retain physicians andother health care professionals. In addition,because the community's attractiveness tobusinesses may depend on the availability ofhealth services, the rural hospital's impor-tance to the local economy and its future de-velopment frequently extends beyond the em-ployment and income it provides.

Given the importance of rural hospitals, itis not surprising that the financial difficultiesthey have experienced in recent years havecaused widespread concern. In 1989, for ex-ample, 35 percent of rural hospitals reportedoverall financial losses, and 15 percent hadexperienced losses for at least three consecu-

Throughout this study, "rural" refers to locations thatare not part of a metropolitan statistical area (MSA) orNew England County Metropolitan Area (NECMA),and "urban" refers to metropolitan areas. This is theclassification system used by the Medicare prospectivepayment system.

American Hospital Association, Hospital Statistics(Chicago: 1990-1991 edition). Community hospitalsare nonfederal, short-term hospitals excluding psy-chiatric hospitals, hospitals that treat alcoholism andchemical dependency, and hospital units of institutions.Data on use may include subacute care units (for ex-ample, nursing home units) of the community hospitalswith such units.

tive years. The closure rate among ruralhospitals also increased substantially duringthe 1980s, from an average of 14 closures (or0.5 percent of rural hospitals) per year be-tween 1980 and 1985 to an average of morethan 40 (or 1.6 percent) per year between1986 and 1989. If current patterns continue,the availability of hospital and related healthservices in rural areas might become adverselyrestricted.

Although many of the factors affecting ruralhospitals' financial conditions are not directlyrelated to Medicare reimbursement, the im-pact of Medicare's prospective payment sys-tem (PPS) has been a concern. Under thissystem, which became effective in 1984, hos-pitals are at risk of incurring losses on theirMedicare patients if the costs of providing ser-vices to them exceed the predetermined PPSrates. During the first six years of the PPS--those for which data are available--rural hos-pitals had, on average, worse financial out-comes for Medicare services than urban hos-pitals. Moreover, by 1988, rural hospitals re-ported costs for treating Medicare patientsthat, on average, exceeded the payments theyreceived from the PPS--a situation that urbanhospitals were also experiencing by 1989. Inaddition, since Medicare patients account fora relatively high proportion of rural hospitals'services--50 percent of patient days in 1989,for example-Medicare is often looked to asan important component of efforts tostrengthen the rural health care system.

In response to concerns about the financialconditions of rural hospitals, the Congress hasmodified Medicare's PPS in a number of ways

RURAL HOSPITALS December 1991

to increase payments to them. The OmnibusBudget Reconciliation Act of 1989 (OBRA89) and that of 1990 (OBRA-90), in par-ticular, substantially increased payments to ru-ral hospitals. As a result, payments to ruralhospitals are currently much higher, relativeto payments to urban hospitals, than theywould have been under the original PPS rules.Under OBRA-90, further increases are sched-uled to occur each year through 1995.

The Financial Conditionsof Rural HospitalsThe financial conditions of rural hospitalshave been affected by a number of interre-lated factors, including changes in rural econ-omies and a rapid decline in hospital admis-sions. Developments in medical technology,third-party reimbursement policies, and otherfactors have resulted in a significant drop inthe demand for hospital inpatient servicesduring the last decade, especially among ruralhospitals. For example, changes in medicaltechnology have allowed certain procedures tomove to outpatient settings and have in-creased the demand for high-technology ser-vices. As a result, many rural hospitals faceincreasing competition for patients from larg-er, and in many cases urban, hospitals offeringthese technologically intensive services. Be-tween 1980 and 1989, patient days in ruralhospitals decreased by 32 percent, comparedwith 13 percent for urban hospitals. Althoughthe number of beds in rural hospitals de-creased by 17 percent between 1980 and 1989,the occupancy rate for rural hospitals also de-clined substantially, from 69 percent in 1980to 57 percent in 1989.3

Inpatient services provided to Medicarebeneficiaries are a major source of revenuesand costs in most hospitals. In 1989, Medi-

3. American Hospital Association, Hospital Statistics(Chicago: 1981 and 1990-1991 editions).

care patients accounted for about one-third ofhospital admissions and about 45 percent ofinpatient days. These shares are higher forrural hospitals: about 40 percent of hospitaladmissions and 50 percent of inpatient days in1989.

From 1966 through the early 1980s, Medi-care's cost-based reimbursement for inpatientservices gave hospitals considerable financialstability. Because Medicare reimbursementswere based on the actual costs incurred intreating beneficiaries, each hospital could es-sentially count on revenue from Medicare tocover a certain portion of its costs, subject tocertain tests of reasonableness. During thesame period, most other insurers also reim-bursed hospitals on the basis of allowablecosts or charges, so the industry generally en-joyed assured sources of revenue and rela-tively little financial risk. From 1966 to 1975,the revenue margin for the hospital industryfluctuated slightly around an average of 2.4percent of total revenue, and then rosethrough the 1976-1984 period.

Medicare introduced significantly more fi-nancial risk for providers by replacing cost-based reimbursement for inpatient serviceswith the prospective payment system. Underthe new system, payments are determined ona per-case basis, according to preset rates thatvary with the patient's diagnosis and treatmentand to certain hospital characteristics, includ-ing location and the size of teaching programs.Although hospitals may keep the surplus iftheir costs are less than the payments, theywill incur losses on their Medicare services ifthe costs exceed the payments (the PPS isdescribed in more detail in Chapter Two). Inthis way, the PPS provides incentives for hos-pitals to control costs by, for example, reduc-ing excess capacity. Therefore, although hos-pital margins were higher, on average, be-tween 1984 and 1989 than they had been be-fore 1980, the financial risk to providers isgreater under the PPS than during the previ-ous period, and the variation in marginsamong individual providers is also probablygreater.

CHAPTER ONE INTRODUCTION

Table 1.Overall Margins for Selected Hospital Categories, 1984-1989 (In percent)

Hospital Category

Rural by Size25 or fewer beds26 to 50 beds51 to 100 beds101 to 200 beds201 or more beds

1984 1985 1986 1987

4.83.16.17.99.3

1.83.65.9

10.1

0.12.64.56.7

0.3-1.52.44.25.3

1988

1.52.64.47.5

1989


7.96.78.2

6.45.26.6

4.83.55.0

3.72.93.9

4.04.04.0

3.84.73.6

-1.81.24.76.45.6

Urban by Size25 or fewer beds26 to 50 beds51 to 100 beds101 to 200 beds201 or more beds

-4.01.64.07.48.8

2.5-0.84.64.77.2

0.7-1.22.43.15.7

-1.5-2.20.62.34.5

-11.3-6.82.32.54.7

-7.0-1.70.12.44.1

SOURCE: Congressional Budget Office estimates based on data provided by the Health Care Financing Administration.

NOTE: Each year corresponds to hospitals' cost-reporting periods beginning during that federal fiscal year. For each hospital category,the overall margin is defined as the difference between the total revenues and total costs for hospitals in the category, expressedas a percentage of total revenues for the category.

a. The margin is between -0.05 percent and 0.05 percent.

Evaluating the FinancialConditions of Hospitals

Three measures—the overall revenue margin,the PPS operating margin, and the hospitalclosure rate-can be used to evaluate the fi-nancial status of hospitals during the past sev-eral years. The most recent complete dataavailable on hospitals' margins are from 1989.Since some of the most significant changes inMedicare policy for rural hospitals became ef-fective in 1990 or later, these historical datado not provide information on the impact ofthe most recent policies.

The Overall Revenue Margin

The overall revenue margin (defined as theexcess of total revenues over total costs, ex-pressed as a percentage of total revenues) pro-

vides a useful summary of hospitals' overall fi-nancial status. The overall margin takes intoaccount all sources of hospital expenses andincome, including inpatient, outpatient, andnonpatient-related activities of the hospital.

Although the overall margin provides a use-ful summary measure of a hospital's financialperformance, it has some important limita-tions. First, the reported data depend on hos-pitals' accounting practices. For example, be-cause many hospitals are part of a complexorganization, their overall margins will de-pend on the accounting conventions used toallocate costs and revenues among entitieswithin the larger organization. In addition, ahospital's total revenue will include any sub-sidies the hospital received from state or localgovernments. If such a subsidy is used to as-sist a financially distressed hospital, the mea-sured overall margin for that facility might beviewed as overstating the hospital's "under-lying" financial viability. For example, such

4 RURAL HOSPITALS December 1991

Table 2.Distribution of Overall Margins, 1984-1989 (In percent)

Marqins at Specified PercentilesYear

198419851986198719881989

10th

-6.9-9.1

-11.9-13.4-12.9-10.5

25th

0.4-0.6-2.5-3.2-3.0-2.0

Median

All Hospitals

5.24.12.92.32.52.7

75th

9.98.77.26.66.87.0

90th

15.813.611.611.011.511.4

Percentageof Hospitals

with NegativeOverall Margin

23.327.033.436.035.032.6

198419851986198719881989

-9.4-11.3-14.7-16.2-14.8-11.5

Rural Hospitals

-1.6 3.8 8.8-2.7 2.8 7.6-4.7 1.6 6.1-5.2 1.7 6.3-4.2 2.2 6.6-2.8 2.5 7.1

Urban Hospitals

14.912.510.710.911.912.0

30.434.141.641.338.134.7

198419851986198719881989

SOURCE

NOTE:

-4.3 2.0 6.3 10.8 16.1-6.2 0.9 5.1 9.7 14.5-8.6 -0.3 3.9 7.9 12.1

-10.5 -1.8 2.9 6.8 11.0-11.1 -2.0 2.7 6.9 11.2-9.9 -1.4 2.9 6.9 11.1

16.820.726.331.432.430.8

: Congressional Budget Office estimates based on data provided by the Health Care Financing Administration.

Each year corresponds to hospitals' cost-reporting periods beginning during that federal fiscal year. The overall margin forindividual hospitals is defined as the difference between the hospital's total revenues and total costs, expressed as a percentageof its total revenues.

government subsidies to hospitals were about1 percent of their total expenses in 1989.4 Fi-nally, it is uncertain—especially for public andprivate nonprofit hospitals—what amount anefficient, financially sound hospital wouldconsider a "target" overall margin. Becausenonprofit institutions cannot distribute profitsto their owners, "surplus" revenue would like-ly become an expense in the current or later

periods. As a result, the overall margins ofnonprofit hospitals in strong financial condi-tion might be close to zero.

From 1984 through 1987-the first fouryears of the PPS--the average overall marginfor rural hospitals decreased from 6.7 percentto 2.9 percent (see Table 1 on page 3).5 Ineach of these years, the overall margin for

Based on data from American Hospital Association,"Uncompensated and Unsponsored Hospital Care,1980-1989: A Fact Sheet Update" (Chicago, June 1991).

Average overall margins for groups of hospitals werecomputed as weighted averages of individual hospitalmargins, where the weighting was by the total revenue

of the hospital. This method is equivalent to com-puting aggregate margins for each hospital group.

The data for 1984 through 1989 correspond to the hos-pitals' cost-reporting periods that began during that fed-eral fiscal year, so they do not coincide exactly with thefederal fiscal years.

CHAPTER ONE INTRODUCTION

urban hospitals was about 1.0 percentagepoint to 1.5 percentage points higher than thatfor rural hospitals. In 1988 and 1989, how-ever, the overall margin for rural hospitalsrose and became higher than the margin forurban hospitals, which declined; in 1989, theoverall margin for rural hospitals was 4.7 per-cent compared with 3.6 percent for urban hos-pitals. But a larger share of rural hospitals re-ported a negative total margin that year-35percent of rural hospitals, compared with 31percent of urban hospitals (see Table 2).

Overall financial condition is stronglylinked to hospital size for rural and urbangroups. Within each group, smaller facilitieshave substantially lower overall margins, onaverage, than larger ones; for example, theoverall margins for rural and urban hospitalswith 25 or fewer beds were -1.8 percent and

-7.0 percent, respectively, in 1989, comparedwith margins of 5.6 percent and 4.1 percent,respectively, for rural and urban groups withmore than 200 beds (see Table 1). Moreover,among hospitals with similar numbers of beds,those in rural locations have generally hadhigher overall margins, on average, than thosein urban areas. For rural hospitals with 101to 200 beds, for example, the average marginwas 4.2 percent in 1987, compared with 2.3percent for similarly sized urban hospitals.

Although overall margins for both rural andurban hospitals have remained positive in theaggregate, financial conditions vary widelyamong individual hospitals in each group. In1989, 25 percent of rural hospitals had overallmargins that were less than -2.8 percent, andanother 25 percent had margins above 7.1percent (see Table 2).

Table 3.PPS Margins for Selected Hospital Categories, 1984-1989 (In percent)

Hospital Category 1984 1985 1986 1987 1988 1989


14.68.3

15.8

14.59.0

15.6

10.53.6

11.6

7.11.28.1

3.4-1.34.2

-0.8-4.8-0.1

Rural by Size25 or fewer beds26 to 50 beds51 to 100 beds101 to 200 beds201 or more beds

2.57.38.58.49.9

1.76.77.49.0

14.0

-6.10.62.04.37.8

-6.5-0.80.11.93.9

-4.9-1.1-2.5-1.0-0.1

-5.1-3.3-4.9-5.3-4.7

Urban by Size25 or fewer beds26 to 50 beds51 to 100 beds101 to 200 beds201 or more beds

5.310.714.214.016.5

6.312.113.212.816.4

0.97.47.28.2

12.7

-5.13.94.15.19.1

-8.50.50.60.75.2

-10.0-1.6-3.5-3.70.8


NOTE: Each year corresponds to hospitals'cost-reporting periods beginning during that federal fiscal year. For each category, the PPSmargin is defined as the difference between PPS payments and the operating costs associated with Medicare inpatient ser-vices for hospitals in the category, expressed as a percentage of PPS payments for the category. The table excludes hospitals instates not covered by the prospective payment system for years when not covered; that is, it excludes hospitals in Maryland forall years, excludes hospitals in Massachusetts and New York for 1984-1985, excludes hospitals in Puerto Rico for 1984-1986, andexcludes hospitals in New Jersey for 1984-1988.


Table 4.Distribution of PPS Margins, 1984-1989 (In percent)

Year 10thMargins at Specified Percentiles

25th Median 75th 90th

Percentageof Hospitals

with NegativePPS Margin

198419851986198719881989

198419851986198719881989

198419851986198719881989

-6.9-8.9

-17.4-21.2-27.9-31.7

-12.4-14.6-27.0-28.9-33.7-36.5

0.4-1.1-8.4

-13.4-22.6-28.1

All Hospitals

3.2 11.2 17.72.1 10.8 18.0

-3.8 5.9 13.9-7.1 3.6 12.2

-11.2 0.5 10.7-15.6 -2.9 7.8

Rural Hospitals

-1.2 7.8 14.5-2.1 6.8 14.3-9.3 1.3 10.2

-11.8 -0.3 9.0-14.3 -1.2 9.5-17.6 -3.8 7.3

Urban Hospitals

7.9 14.1 19.86.8 14.0 20.52.0 9.3 16.3

-2.5 6.4 14.2-8.9 1.8 11,4

-13.7 -2.2 8.3

23.124.420.519.619.817.1

20.521.517.316.918.516.9

25.326.522.820.920.917.3

18.620.532.840.448.556.5

27.829.946.350.952.757.6

9.611.220.731.144.855.5


NOTE: Each year corresponds to hospitals' cost-reporting periods beginning during that federal fiscal year. The PPS margin for in-dividual hospitals is defined as the difference between the hospital's PPS payments and its operating costs associated withMedicare inpatient services, expressed as a percentage of its PPS payments. The table excludes hospitals in states not covered bythe prospective payment system for years when not covered; that is, it excludes hospitals in Maryland for all years, excludeshospitals in Massachusetts and New York for 1984-1985, excludes hospitals in Puerto Rico for 1984-1986, and excludes hospitalsin New Jersey for 1984-1988.

Financial PerformanceUnder Medicare

The PPS operating margin compares the PPSpayments hospitals receive for inpatient ser-vices provided to Medicare beneficiaries withthe operating costs incurred in providingthose services. The PPS margin does not in-clude capital-related expenses or Medicarepayments for these expenses. As with theoverall margin, one should keep in mind cer-tain limitations in interpreting PPS margins.In particular, the reported costs associatedwith providing Medicare services depend onthe accounting conventions the hospital uses

to allocate costs between Medicare servicesand other activities.

The average PPS margin for both urban andrural hospitals decreased over the 1984-1989period.6 The PPS margin for all hospitals fellfrom 14.6 percent in 1984 to -0.8 percent in1989 (see Table 3 on page 5).7 Thus, in 1989,

6. The PPS margin for a hospital is defined as its PPS pay-ments minus the operating costs incurred in providinginpatient services to Medicare beneficiaries, expressed asa percentage of its PPS payments. Average PPS marginsfor groups of hospitals were computed as weightedaverages of individual hospital margins, where theweighting was by the PPS payments. This is equivalentto computing aggregate margins for each hospital group.

CHAPTER ONE INTRODUCTION 7

Medicare payments under the PPS were not,in aggregate, covering the costs that hospitalsreported they incurred in providing servicesto Medicare patients. In each year, the aver-age PPS margin for rural hospitals was sig-nificantly lower than for urban hospitals. Themargin for urban hospitals fell more rapidlyover time than that for rural hospitals, how-ever, so the difference between the groups de-creased. In 1984, the average PPS margin forrural hospitals was 7.5 percentage points lowerthan the urban margin, and in 1989 it wasonly 4.7 percentage points lower.

As with overall margins, smaller hospitals--in both urban and rural categories-generallyhave lower PPS margins than larger facilities.Unlike the patterns for overall margins, how-ever, the average PPS margins for rural hos-pitals have been lower than those for similarlysized urban hospitals, although in 1988 and1989 the smallest hospitals-those with 25 orfewer beds—have been an exception.

The proportions of both rural and urbanhospitals reporting negative PPS margins in-creased substantially over the 1984-1989 peri-od. In 1989, 58 percent of rural hospitals re-ported a negative PPS margin, more thandouble the share (28 percent) that reported anegative PPS margin in 1984 (see Table 4).Although a smaller proportion of urban hos-pitals than rural hospitals experienced losseseach year, the share with losses increasedmore rapidly for urban hospitals than for ru-ral hospitals, from 10 percent in 1984 to 56percent in 1989.

In general, rural hospitals with lower PPSmargins tend to have lower overall margins,and those with higher PPS margins tend tohave higher overall margins. For the one-quarter of rural hospitals with the lowest PPSmargins in 1989, for example, the averageoverall margin was -0.3 percent; for the quar-ter with the highest PPS margins, the average

overall margin was 7.2 percent (see AppendixA, Table A-l). This result is not particularlysurprising, since PPS payments accounted forapproximately one-fourth of rural hospitals'revenues in 1989. Within the general trend,however, the experiences of individual hos-pitals have varied. Among the rural hospitalsin the highest quarter for PPS margins, for in-stance, 13 percent were in the lowest quarterfor overall margins, and among those in thelowest quarter for PPS margins, 11 percentwere in the highest quarter for overall margins(see Appendix A, Table A-2).

Hospital Closures

The declining PPS margins during the mid-1980s were accompanied by an increasing rateof closures among both urban and rural hos-pitals.8 From 1986 through 1989, 166 ruralhospitals, or about 1.6 percent per year,closed—about three times the rate during theearlier part of the 1980s (see Table 5). Clos-ings of urban hospitals also increased over thisperiod, but not by as much as those for ruralhospitals. From 1986 through 1989, the aver-age rate of closure for urban hospitals was 1.1percent a year, compared with 0.7 percent ayear during the 1980-1985 period.

The rate of closing for rural hospitals ap-pears to have been slightly higher during the1970s than during the 1980-1985 period, butnot as high as in the later 1980s-between 1973and 1978, the rate was about 1 percent peryear. Urban hospitals closed at about thesame rate during the 1970s as during the 1986-1989 period.

A number of studies of rural hospitals thatclosed during the 1980s have found that cer-tain hospital or environmental characteristics

7. The data for 1984 through 1989 correspond to the hos-pitals' cost-reporting periods that began during that fed-eral fiscal year.

8. The numbers of closings reported here refer to com-munity hospitals that stopped providing acute-care in-patient services during the corresponding year. In somecases, the facility may have limited its services to out-patient, long-term care or other services. A few facili-ties may have reopened as acute-care hospitals in amore recent year.


Table 5.Number and Rate of Closures AmongCommunity Hospitals, 1980-1989

Year Rural Urban Total

Number of Closures3

1980198119821983198419851986198719881989

1511157

182036404644

30169

18272732373921

45272425454768778565

Rate of Closure (Percent)6

1980198119821983198419851986198719881989

0.50.40.50.30.70.71.41.51.81.8

1.00.50.30.60.90.91.11.21.30.7

0.80.50.40.40.80.81.21.41.51.2

SOURCE: Congressional Budget Office estimates based ondata from American Hospital Association, HospitalClosures, 1980-1989, A Statistical Profile (Chicago:March 1990); and American Hospital Association,Hospital Statistics (Chicago: 1981 through 1990-1991 editions).

NOTE: As defined by the American Hospital Association(AHA), community hospitals consist of all nonfederal,short-term hospitals, excluding psychiatric hospitals,hospitals that treat alcoholism and chemical depen-dency, and hospital units of institutions.

a. Represents the number of AHA-registered community hos-pitals that stopped providing inpatient acute-care hospitalservices during the year.

b. Defined as the number of closures during the year dividedby the total number of AHA-registered community hospitalsfor the year, expressed as a percentage.

were often associated with closure.9 Com-pared with other rural hospitals, those thatclosed tended—on average—to be smaller, have

Ross M Mullner and David G. Whiteis, "Rural Com-munity Hospital Closure and Health Policy," HealthPolicy, vol. 10 (1988), pp. 123-136; Prospective Pay-

lower margins and occupancy rates, offer anarrower range of services, and be more likelyto operate on a for-profit basis. Environ-mental factors that increase the risk of closinginclude relatively more competitive hospitalmarkets and declining local economies.

Several studies have also attempted to as-sess the impact of hospital closings on accessto care, generally by examining travel dis-tances between hospitals or through casestudies.10 A study of 41 rural hospitals thatclosed in 1989 found, for example, that 26 ofthe closed hospitals were located 20 miles orless from another hospital, and only 3 werelocated 30 or more miles from another hos-pital.11 These results suggest that the majorityof closings may have had little effect on accessto scheduled hospital services because otherhospitals were available. Even in locationsthat are relatively near alternative hospitals,however, some hospital closings have probablydecreased the availability of emergency carein their communities and created or worsenedaccess problems for vulnerable groups such aslow-income populations and the elderly, whoare more likely to have difficulty traveling far-ther. Closings of rural hospitals may alsohave reduced the availability of physicians.

ment Assessment Commission, The Role of Profit-ability and Community Characteristics in HospitalClosure: An Urban and Rural Analysis, TechnicalReport 1-91-02 (Washington, D.C.: February 1991).

10. Office of Technology Assessment, Health Care inRural America (September 1990); General AccountingOffice, Rural Hospitals: Federal Efforts Should Tar-get Areas Where Closures Would Threaten Access toCare, HRD-91-41 (February 1991); L. Gary Hart,Michael J. Pirani, and Roger A. Rosenblatt, "Causesand Consequences of Rural Hospital Closures fromthe Perspectives of Mayors," Rural Health WorkingPaper Series, Working Paper No. 9, WAMI (Washing-ton, Alaska, Montana, and Idaho) Rural HealthResearch Center (September 1990).

11. Simonetti Samuels, James P. Cunningham, andChristina Choi, "The Impact of Hospital Closures onTravel Time to Hospitals," Inquiry, vol. 28 (1991), pp.194-197.

Chapter Two

Payments to Rural and Urban HospitalsUnder the Prospective Payment System

U nder the prospective payment system,Medicare payments to hospitals are in-tended to reflect the variation in costs

among hospitals caused by factors consideredto be beyond the hospitals' control. Paymentrates are adjusted for the types of medicalconditions treated, labor costs, and certainother specified factors. In addition, the sys-tem currently uses separate basic paymentrates, called standardized amounts, to takeaccount of the historical differences in costsbetween rural and urban hospitals resultingfrom unspecified factors. Because rural andurban hospitals differ, on average, with re-spect to the factors used to adjust payments aswell as in their applicable standardizedamounts, the average Medicare payment percase to rural hospitals is substantially lowerthan that to urban hospitals. The appropriateamounts of the various adjustments and theurban and rural rates are difficult to deter-mine, however, and there has been muchconcern over these amounts and the resultingdivergence between reimbursements to ruraland urban hospitals.

This chapter describes the current PPS andthe factors that affect payment rates, and as-sesses the contributions of the separate com-ponents of the PPS to the overall difference inpayments between urban and rural hospitals.Because the payments were initially designedto reflect variations in costs, the analysis thenuses recent data to examine how closely the

current payment rates correspond to the cur-rent differences in costs between urban andrural hospitals.

The Payment System

The PPS covers the operating expenses asso-ciated with providing inpatient hospital ser-vices to Medicare beneficiaries. Certain othercosts related to inpatient care, including capi-tal-related expenses and the direct costs ofgraduate medical education, are reimbursedseparately.1 Terms commonly used in dis-cussing the PPS are explained in Box 1.

The reimbursement rates used by the PPScorrespond to the diagnosis-related groups(DRGs) classification system, under whicheach Medicare case is assigned to one of ap-proximately 490 DRGs based on the patient'smedical condition and treatment. For a givenhospital, all cases assigned to the same DRGare reimbursed at the same rate. Paymentsfor a particular DRG vary among hospitals,depending on the hospital's location and cer-tain other characteristics.

1. Until 1992, payments for capital-related inpatient ex-penses were based on incurred costs, but beginning in1992 those expenses are to be determined prospectivelyon a per-case basis.


Box 1Definition of Terms Relating to the Prospective Payment System

Characteristics of Patients

Diagnosis-Related Groups (DRGs): A system of classifying patients that groups hospital patients withsimilar medical conditions and treatments. For PPS payments, each Medicare discharge is assigned to asingle DRG.

DRG Weight: A factor used by the PPS in computing the payment for a Medicare case. The weight foreach DRG reflects the relative costliness of treating Medicare patients classified in that DRG, comparedwith the national average cost for all Medicare cases.

Case Mix: The mix of patients treated by a hospital, usually referring to their medical conditions andtreatments received. Under the PPS, case mix is measured by a case-mix index based on the DRGsystem. The hospital's case-mix index is equal to the average DRG weight for the hospital, and thereforeindicates the relative costliness of the types of cases the hospital treats.

Geographic Categories for Hospitals

Large Urban Area: A Metropolitan Statistical Area (MSA) with more than 1 million people, or a NewEngland County Metropolitan Area (NECMA) with more than 970,000 people.

Other Urban Area: An MSA with 1 million or fewer people, or a NECMA with 970,000 or fewerpeople.

Rural Hospital: One that is not located in an urban area.

Special Designations for Hospitals

Rural Referral Center (RRC): A special designation for rural hospitals that are generally large, offer abroad range of services, and treat patients from a wide geographic area. Under the PPS, payments toRRCs are based on the standardized amount for 'other urban" areas.

Sole Community Hospital (SCH): A special designation for hospitals that meet specific criteria thatdefine a sole provider of acute-care hospital services in its geographic area. Payments to SCHs are thehighest of three amounts: the regular PPS amount that would otherwise apply, or a hospital-specificamount based on either 1982 or 1987 costs updated to the current year.

Basic PPS Payments

The payment calculation begins with a basepayment amount, referred to as the standard-ized amount, which represents the cost asso-ciated with a typical (or average) Medicarecase. Separate standardized amounts current-ly apply to hospitals located in three geo-graphic categories: rural areas, large urbanareas (Metropolitan Statistical Areas withmore than 1 million people, or New EnglandCounty Metropolitan Areas with more than

970,000 people), and other urban areas.2These geographic categories serve as proxiesfor unspecified factors that affect hospitals'costs.

For each case, the applicable standardizedamount is multiplied by a DRG-specificweight that reflects the costliness of cases in

Rural referral hospitals are an exception: althoughlocated in rural areas, they are reimbursed at the "otherurban" rate.

CHAPTER TWO PAYMENTS TO RURAL AND URBAN HOSPITALS UNDER THE PPS 11

Medicare-Dependent Hospital (MDH): A temporary special designation for small (100 or fewer beds),rural hospitals that treat a relatively large proportion of Medicare patients. Special payment rules (whichare the same as those for sole community hospitals) apply to MDHs for cost-reporting periods beginningon or after April 1, 1990, and ending before April 1, 1993.

Other Components of the PPS Payment Formula

Standardized Amounts: The basic payment rates used by the PPS, before any adjustments are applied,such as those for the patient's DRG and the wage index for the hospital's location. Separatestandardized amounts currently apply to hospitals in three types of locations: large urban areas, otherurban areas, and rural areas.

Disproportionate Patient Percentage (DPP): The sum of two amounts—the percentage of the hospital'sMedicare patient days attributed to patients who receive benefits from the Supplemental Security Incomeprogram, and the percentage of all patient days for which Medicaid is the primary payer.

Disproportionate Share Adjustment: An adjustment to PPS payments for hospitals that treat a relativelyhigh proportion of low-income patients. Qualification for the adjustment, and the size of the adjust-ment, are based on the hospital's disproportionate patient percentage and on other characteristics of thehospital including urban or rural location, number of beds, and whether it is designated as a sole com-munity hospital or a rural referral center.

Outlier Payments: Additional payments for cases—referred to as outliers-that involve exceptionally longhospital stays or exceptionally high costs relative to the average for the patient's DRG.

Teaching Adjustment: A payment adjustment to account for the indirect effects of teaching programson hospitals' costs. The adjustment is based on the hospital's ratio of the number of interns and resi-dents to the number of beds.

Wage Index: An index that measures the relative level of wage rates for hospital employees in thehospital's wage area compared with the national average level of hospital wages. The labor cost portionof the hospital's standardized amount is multiplied by the applicable wage index to account for variationin labor costs.

Update Factor: The percentage increase applied to the standardized amounts, intended to reflectchanges in the prices of hospital inputs, hospital productivity, technological change, and other factors.The increase is generally applied annually.

the particular DRG relative to the nationalaverage cost per Medicare case. A single setof DRG weights applies to all hospitals. If aparticular case is determined to be an "out-lier" because of exceptionally high cost orlong length of stay, an additional paymentamount will apply to that case.

The resulting payment amount is then ad-justed for three other cost-related factors.First, an area wage index is used to adjust fordifferences in hospital employees' wagesamong different locations. The value of the

wage index represents the level of hospitalwages in the hospital's designated wage arearelative to the national average. A second ad-justment, referred to as the indirect teachingadjustment, compensates hospitals for thehigher costs associated with treating patientsin facilities with teaching programs. The finaladjustment-the disproportionate share adjust-ment—provides additional amounts to hospi-tals that treat a relatively high proportion oflow-income patients. (Examples of the pay-ment calculation for a hypothetical case aregiven in Box 2.)


Box 2Calculating the PPS Payment for a Hypothetical

Rural Hospital and a Hypothetical Urban Hospital

The examples in the table illustrate how the PPS payment for a single case assigned to diagnosis-related group(DRG) number 89-simple pneumonia and pleurisy, age greater than 17, with comorbidity or complica-tions-would be calculated for two hypothetical hospitals in 1991. The first hospital is located in a rural area inColorado, has 70 beds, is not a teaching hospital, and does not have any special designations. The hospital'sdisproportionate patient percentage of 25 percent is below the minimum amount needed for it to receive adisproportionate share adjustment. The other hypothetical hospital is located in Denver, Colorado, which is alarge urban area. The hospital has 240 beds and receives both the teaching and disproportionate share adjustments.

RuralHospital

UrbanHospital

DRG Weight for DRG 89

Hypothetical Case

Hypothetical Hospital's Characteristics

LocationWage Index for Hospital's LocationNumber of BedsTeaching Adjustment (Percent)b

Disproportionate Patient Percentage0

Disproportionate Share Adjustment (Percent)d

Special Designations

LaborNonlabor

Total

Standardized Amount (Dollars)

Calculating the PPS Payment (Dollars)

Adjusted Labor (Labor x Wage Index)Nonlabor

Adjusted Amount (Adjusted Labor + Nonlabor)

DRG Amount (Adjusted Amount x DRG Weight)

Additional Payment for Teaching (Teaching Adjustment x DRG Amount)

Additional Payment for Disproportionate Share (DisproportionateShare Adjustment x DRG Amount)

Total Payment (DRG Amount + Additional Payments for Teachingand Disproportionate Share)

1.1878

Colorado0.8425

700

250

None

2,434.74784.43

3,219.17

2,051.27784.43

2,835.70

3,368.24

0

0

3,368.24

1.1878

Denver3

1.0779240

11.0125

8.98None

2,480.601,021.98

3,502.58

2,673.841,021.98

3,695.82

4,389.90

483.33

394.21

5,267.44

SOURCE: Congressional Budget Office based on various volumes of the Federal Register and legislation.

NOTES: Based on applicable rates for 1991, effective January I, 1991.

DRG = diagnosis-related group.

a. Denver, Colorado, is a Metropolitan Statistical Area with more than 1 million people, so the standardized amount for largeurban areas applies to hospitals located there.

b. Based on the ratio of the hospital's number of interns and residents to its number of beds, or IRB, the adjustment is equalto [ (t + IRB)-405 -1] x 1.89. For the hypothetical urban hospital, an IRB of just over 0.15 was used, resulting in a teachingadjustment of 11.01 percent.

c. The sum of two ratios: the percentage of Medicare patient days attributed to patients receiving benefits from the Supple-mental Security Income program, and the percentage of all patient days for which Medicaid is the primary payer.

d. For a given disproportionate patient percentage, the amount of the adjustment varies for different types of hospitals (seeAppendix C for specific rules).


Although the structure of the paymentformula is identical for urban and rural hos-pitals, several components treat urban andrural hospitals differently. In particular, thestandardized amounts, the geographic areasused to compute the wage index, and thedisproportionate share adjustment differ forurban and rural facilities. The system's othermajor components—the DRG weights, thecriteria for determining "outlier" payments,and the formula for the indirect teaching ad-justment—are the same for all hospitals.

Standardized Amounts. When the PPS wasestablished, separate standardized amounts forurban and rural locations were based on his-torical patterns of costs.3 The differences inthe standardized amounts were designed toreflect the effects on costs of unspecified fac-tors that are not explicitly accounted for bythe PPS but are legitimate in that they wouldoccur even in efficiently operating hospitals.These factors were not included directly be-cause they were difficult to quantify. Sincethey were correlated with location, that char-acteristic was used instead, even though loca-tion itself was not considered to be a determi-nant of costs. Examples include differences inthe intensity or scope of services or differ-ences in the severity of illness not measuredby the DRG classifications.

One implication of this strategy is that it"locks in" historical practice patterns, andthereby may prevent providers from improv-ing or expanding their services. For example,limited revenues have probably constrainedthe abilities of many rural hospitals to investin new technologies, resulting in those hos-pitals providing a less technologically inten-sive, lower-cost style of services. By usingthose lower costs to set reimbursement rates,the PPS may have perpetuated existing dis-parities in the range and quality of servicesavailable in different locations.

Under the PPS, the standardized amountsare generally updated annually to take ac-count of inflation in the prices of hospital in-puts according to the growth of an input priceindex, known as the hospital market-basketindex, and other factors. In part because ofevidence that the initial payment rates wereset higher than necessary, the Congress hasgenerally specified percentage increases—orupdate factors--to the hospital rates that werelower than the increase in the market-basketindex (see Appendix B).

In response to concerns about the financialeffects of the PPS on rural hospitals, since1988 the Congress has generally set separateupdate factors for the urban and rural stan-dardized amounts, thereby substantially re-ducing the urban/rural differential in thoseamounts. For 1991 (effective January 1), thestandardized amounts for large urban areasand other urban areas were 8.8 percent and7.1 percent greater, respectively, than therural amount, compared with a 25 percent dif-ference between the urban and rural amountsin the first year of the PPS. (These differ-entials are the excess of the urban amountover the rural amount, expressed as a per-centage of the rural amount.) The OmnibusBudget Reconciliation Act of 1990 will reducethe difference further each year through 1995,when the standardized amounts for rural andother urban areas will be the same.4

Area Wage Index. The PPS uses differentwage areas to calculate the wage index for ur-ban and rural hospitals. For each urban hos-pital, the wage index indicates how the aver-age hospital wage in the hospital's MSA (orNECMA) compares with the nationwide aver-age. In contrast, the wage area for a ruralhospital generally consists of all rural loca-tions in the hospital's state. Beginning in1992, however, the wage index for numeroushospitals will be affected by the decisions of

3. A separate standardized amount for hospitals located inlarge urban areas (MSAs with more than 1 millionpeople, or NECMAs with more than 970,000) becameeffective on April 1, 1988.

4. The differences in the urban and rural standardizedamounts for the 1984-1991 period are discussed in moredetail in Appendix B. The changes for the 1992-1995period under OBRA-90 are described further in Chap-ter Three.


Table 6.Types of Rural Hospitals

Hospitals3

Hospital Category

Rural Referral and Sole Communityb

Rural Referral OnlySole Community OnlyMedicare-DependentOther Rural

Number

46210533541

1,239

Percent

1.88.2

20.721.148.2

Percentageof Discharges

5.826.814.911.940.6

AverageNumberof Beds

197196

524263

Total 2,569 100.0 100.0 69

SOURCE: Congressional Budget Office estimates based on data provided by the Health Care Financing Administration and theProspective Payment Assessment Commission.

NOTE: Reflects hospital classifications in September 1991. The percentages of discharges and number of beds are based on data from1989.

a. Hospitals for which data were available.

b. Designated as both a rural referral center and a sole community hospital.

the Medicare Geographic Classification Re-view Board (see Chapter Three).

Disproportionate Share Adjustment. Eligi-bility for the disproportionate share adjust-ment is determined by an index that reflectsthe hospital's proportion of low-income pa-tients, referred to as the disproportionate pa-tient percentage (DPP).5 The minimum DPPneeded to qualify for an adjustment, and thesize of the adjustment for qualifying hospitals,depends on urban or rural location and onthe hospital's number of beds. In general, theminimum DPP for rural hospitals is higherthan that for urban hospitals of the samesize—for example, a rural hospital with fewerthan 100 beds needs a DPP of 45 percent ormore to qualify for the adjustment, whereas asimilarly sized urban hospital needs a DPP of40 percent. In addition, the percentage ad-justment is generally lower for qualifying ruralhospitals than for qualifying urban hospitals ofthe same size.6

A hospital's disproportionate patient percentage is equalto the sum of two percentages: the percentage of Medi-care patient days attributable to patients receiving bene-fits from the Supplemental Security Income program,and the percentage of all patient days for which Medic-aid is the primary payer.

Special Payments for CertainTypes of Rural Hospitals

Special payments are available to three typesof rural hospitals under the PPS: rural referralcenters (RRCs), sole community hospitals(SCHs), and Medicare-dependent hospitals(MDHs). Although some SCHs are in urbanareas, these special designations for the mostpart assist rural hospitals; over 95 percent ofSCHs, and all RRCs and MDHs, are in ruralareas.7 Although the special provisions forRRCs and SCHs are permanent, the MDHclassification is a temporary designation. Asof September 1991, over half of all rural hos-pitals qualified for at least one of these threedesignations (see Table 6). In 1991, paymentsto rural hospitals with special designations areestimated to be 9.9 percent greater, on aver-age, than they would have been without thespecial designations.

6. The PPS provides different disproportionate share ad-justments to qualifying hospitals in several categories.These categories and the applicable adjustments are de-scribed in Appendix C.

7. Referral center status is also available to urban hos-pitals, but their PPS payments are unaffected by thedesignation.


Rural Referral Centers. RRCs are relativelylarge rural hospitals that generally provide abroad array of services and treat patients froma wide geographic area. To qualify as anRRC, a rural hospital must have at least 275beds or meet certain characteristics indicatinga high referral volume. (The specific qualifi-cations for RRCs are described in Appen-dix C.)

Because RRCs resemble urban hospitals inservice mix and some other characteristics andare thereby thought to have certain cost rela-tionships in common with urban hospitals,payments to RRCs are based on the stan-dardized amount for "other urban" areas (thatis, urban areas with 1 million or fewerpeople), rather than on the rural standardizedamount. A separate formula for computing adisproportionate share adjustment also appliesto RRCs.

In September 1991, 10 percent of ruralhospitals, or 256 hospitals, were classified asrural referral centers (46 of these RRCs werealso designated as sole community hospitals).RRCs account for about one-third of dis-charges from rural hospitals. They tend to beconsiderably larger than other rural hospitals;they have about 200 beds, on average, com-pared with an average of about 55 beds forother rural hospitals.

Sole Community Hospitals. In order to re-duce the financial risk for hospitals that,because of their relatively isolated locations,are considered important to ensuring access tohospital services for Medicare beneficiaries,the PPS applies special payment rules toSCHs. A hospital may become an SCH if itsatisfies specific criteria that define a sole pro-vider of inpatient, acute-care hospital servicesin a geographic area, based on distance, traveltime, severe weather conditions, or marketshare (see Appendix C for details). BecauseSCHs have generally been permitted to con-tinue that status whether or not they currentlymeet the criteria, the additional payments forSCHs are not always targeted toward meetingtheir original goal.

In September 1991, there were 579 ruralSCHs (of which 46 were also RRCs) and 29urban SCHs. SCHs account for 23 percent ofall rural hospitals and for about 21 percent ofMedicare discharges from rural hospitals.

Payments to SCHs are equal to the highestof three amounts: the regular payment amountthat would otherwise apply to the hospital(that is, the amount based on the federal pay-ment rates), a hospital-specific amount basedon 1982 data and updated to the current year,or a hospital-specific amount based on 1987data and updated to the current year. Thus,some SCHs receive payments that are higherthan what they would otherwise receive with-out the designations, but for other SCHs pay-ments are unaffected.8 Moreover, hospitalswhose costs were relatively high in 1982 or1987 receive more than otherwise similar hos-pitals, but these historical amounts do notnecessarily reflect those hospitals' currentcosts or the cost of providing care efficiently.For this reason, the aid from the special rulesmight be considered arbitrary.

In 1991, payments to about 40 percent ofSCHs are estimated to be based on the regularpayment rates, and payments to the other 60percent are estimated to be based on one ofthe hospital-specific rates (see Appendix C).For all SCHs, the average increase in 1991payments resulting from SCH status is about13 percent; for those receiving a hospital-specific amount, the average increase is about19 percent. These estimates include the in-crease in payments resulting from higher dis-proportionate share payments for rural SCHs,compared with other rural hospitals, as well asthe option of receiving a hospital-specific pay-ment rate.

Medicare-Dependent Hospitals. The tem-porary MDH classification was created byOBRA-89 to assist small rural hospitals thattreat relatively high proportions of Medicarepatients. In particular, the special payments

Whether a hospital has higher payments because ofSCH status may vary from year to year.


for MDHs apply for hospital cost-reportingperiods beginning on or after April 1, 1990,and ending before April 1, 1993.9 BecauseMDHs are small and rely on Medicare for arelatively large share of inpatient revenues,they may be especially vulnerable to financialrisk under the PPS. For example, any dif-ference between Medicare costs and paymentswould have a greater effect on the overall fi-nancial condition of MDHs than on that ofhospitals in which Medicare accounts for asmaller share of patients.

To qualify as an MDH, a hospital must belocated in a rural area, not be an SCH, have100 or fewer beds, and have had at least 60percent of hospital discharges or patient daysduring its base cost-reporting period (the peri-od ending on or after September 30, 1987, andbefore September 30, 1988) attributable toMedicare beneficiaries. About 541 hospitals,or 21 percent of rural hospitals, are desig-nated as MDHs. These hospitals account forabout 12 percent of Medicare discharges in1991.

The PPS payments for MDHs are computedin the same way as those for SCHs. In anygiven year, some MDHs benefit from thisstatus but others do not; in 1991, payments toabout 55 percent of MDHs are estimated toequal the regular PPS amount, and paymentsto the other 45 percent are estimated to bebased on one of the two hospital-specific rates(see Appendix C). For those receiving a hos-pital-specific amount, the average increase inpayments—compared with what they couldotherwise be-is about 17 percent. Among allMDHs, the average increase is 8 percent.

9. Therefore, for approximately 95 percent of currentlydesignated MDHs, special payments will apply to twocost-reporting periods; for the other 5 percent (gen-erally, those with 12-month cost-reporting periods be-ginning on April 1), the special payments will apply tothree years.

Sources of Differencesin Payments to Urbanand Rural HospitalsUnder the PPS, the various components of thepayment formula result in higher averagepayments per case for urban hospitals than forrural hospitals--$5,741 compared with $3,451,or 66 percent more, in 1991. The differencesin the standardized amounts for urban andrural areas account for less than one-tenth ofthe overall difference in payments, however.The bulk of the overall difference derivesfrom urban/rural differences in case mix andthe other factors used to adjust PPS payments,such as the wage index for the hospital's loca-tion. For example, the average case mix, mea-sured by the average DRG weighting factor, isabout 20 percent greater for urban hospitalsthan for rural hospitals--1.42 in 1991, com-pared with 1.19 for rural hospitals (seeTable 7).

In order to determine the relative impor-tance of each factor used by the PPS to theoverall difference in payments between ruraland urban hospitals, payments for each hos-pital were estimated under 1991 law, using re-cent data on hospital characteristics. Becauserural referral centers are paid according to thestandardized amount for "other urban" areas,RRCs and other rural hospitals were analyzedseparately.

In the first step in the analysis, only thestandardized amounts were allowed to differamong hospitals. The results indicate that ifthere were no further adjustments to pay-ments, or if case mix and the other adjust-ments had a uniform impact on all groups,then the average payment per case to urbanhospitals would be 5 percent higher than theaverage payment to all rural hospitals, 1 per-cent higher than the average payment toRRCs, and 8 percent higher than the averagepayment to rural hospitals other than RRCs(see Table 8). Thus, less than one-tenth of the


Table?.Characteristics of PPS Hospitals, by Selected Hospital Categories (Estimated, 1991)

Adjustmentfor Teaching

Hospital Category


Rural by CategoryRural referralSole communitydMedicare-dependentOther rural

Urban by CategoryLarge MSA*Other urban

Num-ber of

Hospitals9

5,6332,5693,064

254449537

1,329

1,5191,545

AverageCase-Mix

lndexb

1.371.191.42

1.311.141.091.14

1.421.41

AverageWageIndex1*

0.970.801.02

0.810.820.770.79

1.100.94

Percent-age of

HospitalsReceivingAdjust-ment

21.23.3

36.2

18.11.60.72.0

41.131.3

AverageAdjust-ment

(Percent)b

4.90.56.0

1.50.1e

0.1

7.74.2

Adjustmentfor Dispro-

portionate SharePercent-age of

HospitalsReceivingAdjust-ment

27.612.840.0

15.014.75.6

14.6

38.841.3

AverageAdjust-ment

(Percent)b

4.11.05.0

1.51.60.20.7

5.54.4

AveragePPS

Paymentper Case(Dollars K

5,2553,4515,741

4,0703,5593,0613,063

6,2785,188


NOTE: Based on hospital classifications in January 1991.

a. Number of hospitals for which data were available.

b. Average for all hospitals in the category, weighted by the number of Medicare discharges.

c. Average payment incurred (including beneficiaries' copayments) per Medicare discharge for hospitals in the category, weighted bythe number of Medicare discharges.


e. The average adjustment is less than 0.05 percent.

f. Hospitals located in Metropolitan Statistical Areas with more than 1 million people, or New England County Metropolitan Areas withmore than 970,000 people.

average difference in payments between urbanand rural hospitals (that is, approximately 5percentage points of the 66 percentage points)results from the difference in standardizedamounts.10

The next step isolated the effects of the ad-justment for area wage levels. Because of dif-ferences in the wage index, payments to urbanhospitals are 19 percent higher, on average,than payments to all rural hospitals. The ef-fect of the adjustment for wages is nearly the

same for RRCs and other rural hospitals--18percent and 20 percent, respectively—becauseRRCs are paid according to the rural wageindex for the hospital's state.

As the result of variations in the DRG casemix, payments to urban hospitals are 19 per-cent higher, on average, than payments torural hospitals. The difference is considerablyless between urban hospitals and RRCs, how-ever, because of their similar case mix: urbanpayments are only 8 percent higher than pay-

Note that the exact values of the measured effectsdepend on the order in which the components of thePPS are included, because of interactions between thecomponents resulting from the multiplicative struc-ture of the payment formula. The structure also im-

plies that the percentage differences in payments at-tributable to the individual components are not addi-ti»ro* i-otVior* tH*sir inHi\/iHnal fr»r>t»*ihiilive; rather, theiroverall differencesmultiplicative.

individual contributions to thein payments are approximately


merits to RRCs because of case mix, but 25percent more than payments to other ruralhospitals.

Though less important than the adjustmentsfor wage levels and case mix, urban/rural dif-ferences in payments for outlier cases, teach-ing, and disproportionate share also increaseurban payments relative to rural payments.On average, per-case payments to urban hos-pitals are 3 percent higher than payments torural hospitals because of differences in out-lier payments, 6 percent higher because of dif-ferences in teaching levels, and 4 percenthigher because of differences in dispropor-tionate share payments.

The only major components of the PPS thatincrease average payments to rural hospitals,relative to payments to urban hospitals, arethe special payments to SCHs, MDHs, andRRCs. If there were no special payments,then the average per-case payment to urbanhospitals would be 70 percent greater than theaverage payment to rural hospitals; averagepayments become 66 percent greater whenspecial payments are included (see the lowerpanel of Table 8). For RRCs, the special pay-ment provisions reduce the average differencein payments from 42 percent to 41 percent;for other rural hospitals, the special paymentsreduce the difference from 88 percent to 82percent.

Table 8.Percentage Difference in Average Payments per Case BetweenUrban and Rural Hospitals, by Source (Estimated, 1991)

PPS Payment Component

Total

All RuralHospitals

66

Rural ReferralCenters3

41

Other RuralHospitals'3

82

Contributions of Individual Components

Standardized AmountsAdjustment for Area Wage LevelCase MixPayments for OutliersAdjustment for TeachingAdjustment for Disproportionate ShareSpecial Payments

Standardized AmountsAdjustment for Area Wage LevelCase MixPayments for OutliersAdj ustm ent for Teach i ngAdjustment for Disproportionate ShareSpecial Payments

51919364

-2

Cumulative Contributions

5265055647066

1188253

-1

1182831384241

82025474

-3

8306369818882

SOURCE: Congressional Budget Office estimates based on data from the Health Care Financing Administration and the ProspectivePayment Assessment Commission.

NOTE: The values in the table are the differences in average payments per case between urban and rural hospitals resulting fromurban/rural differences in the individual components, expressed as a percentage of the average payment per case for ruralhospitals. Since PPS payments are determined by a formula that is approximately multiplicative, the cumulative contribution(lower panel) at each step can be obtained by combining the preceding and corresponding individual contributions in theupper panel. For example, for all rural hospitals, the product of the individual contributions of the first two factors-1.05 x1.19--equals their cumulative impact of 1.26, or 26 percent. Cumulative effects may not exactly equal products because ofrounding.

a. In contrast to other rural hospitals, rural referral centers' payments are based on the standardized amount for urban areas with 1million or fewer people rather than the standardized amount: for rural areas.

b. Excludes rural referral centers.

CHAPTER TWO PAYMENTS TO RUFAL AND URBAN HOSPITALS UNDER THE PPS 19

Relationship BetweenPayments and CostsWhen the PPS was established, the paymentformula was designed to take account of dif-ferences in costs that were considered to bebeyond the hospital's control and thereforenot related to the hospital's efficiency. Thedifferential in the standardized amounts forrural and urban hospitals corresponded to thedifference in costs in the base year (1981) thatremained after the costs were adjusted (orstandardized) to remove the effects of casemix, area wage levels, and the other factorsused by the PPS to adjust payments. Thedifferential thus was a proxy for unspecifiedfactors that were legitimately related to costs.

The payment formula does not includedirect adjustments for some other factors thatare correlated with hospital costs, such ashospital size and patient volume. In particu-lar, small, low-volume hospitals probably havehigher average costs per case, all else beingthe same, because they have fewer cases overwhich to spread the fixed overhead costs re-quired to operate a hospital. As a result, thePPS rates—which were intended to reflect theaverage costs for urban and rural hospitalgroups, respectively--may systematically paysmall hospitals within each geographic groupless, relative to their costs, than other hos-pitals. In addition, the per-case costs of smallhospitals may vary greatly from year to yearfor specific DRGs because of their low vol-umes, so basing the PPS rates on average costsmay also put small hospitals at greater fi-nancial risk.

Estimating the Differencesin Costs Among Urbanand Rural Hospitals

Over time, the urban/rural differentials instandardized amounts and other parts of thepayment system have been modified by legis-

lation. Patterns of costs among urban andrural hospitals may have also changed. Toidentify which urban/rural differentials instandardized amounts, if any, would be con-sistent with more recent data on hospitals'Medicare costs, CBO analyzed 1989 data.

Such estimates cannot, however, indicatewhich geographic differentials in the stan-dardized amounts would be most appropriate.Because geographic location is closely relatedto other factors, such as area wage levels, thatpotentially affect hospitals' costs, it is difficultto measure the separate effects of the differentfactors. In addition, factors other than cost,such as ensuring access to care, have beenimportant in determining PPS reimbursementpolicy.

Although the 1989 data have the advantageof describing the recent experiences of hos-pitals, they may reflect responses to incentivescreated by the PPS and thereby potentiallydistort the results. For example, if a hospital'spayments did not cover the costs of efficienttreatment for Medicare patients at an accept-able level of quality, then the hospital mayhave lowered its quality of care or otherwisechanged its behavior to reduce costs. Similar-ly, a hospital whose payments exceeded itscosts may have increased its expenditures,especially if, as a nonprofit institution, it wasnot allowed to distribute profits to its owners.

Urban/Rural Differentialsin Costs

For the analysis, two different models weredeveloped. (The models are described morecompletely in Appendix D.) Each model esti-mates the difference in Medicare operatingcosts per case between urban and rural hos-pitals that remains after other factors used bythe PPS to adjust payments—such as case mix,area wage levels, and teaching activity--aretaken into account.

The results of the first model indicatewhich urban/rural differentials in standardized


amounts would be consistent with the patternsof costs among hospital groups, if all otherparts of the PPS were determined under 1991payment rules. Using this model—referred toas the "1991 law" model—the estimated differ-ential in costs between hospitals located inlarge urban areas and those in rural areas is8.2 percent, and the estimated differential incosts between hospitals in "other urban" areasand rural hospitals is 7.0 percent (seeTable 9). The estimate for large urban areas issomewhat lower than the actual differential of8.8 percent for 1991, and the estimated differ-ential for "other urban" areas is approxi-mately the same as the current differential of7.1 percent. The results therefore indicatethat if the standardized amount for large ur-

Table 9.Estimated Differences in Adjusted Costs perMedicare Case Between Hospitals in LargeUrban Areas or Other Urban Areas, andHospitals in Rural Areas (In percent)

Statistical Model*

1991 Law

Hospital Location^Large OtherUrban UrbanAreas Areas

8.2 7.0

1991 Law, Exceptfor Teaching andDisproportionateShare Adjustments 16.0 11.9

SOURCE: Congressional Budget Office estimates based ondata from the Health Care Financing Administra-tion and the Prospective Payment Assessment Com-mission.

NOTE: Estimates are based on data from hospitals' cost-reporting periods beginning during federal fiscal year1989, which were adjusted to correspond to the federalfiscal year and weighted by the number of Medicarepatients discharged from the hospital.

a. Both estimation models reflect the structure of the currentprospective payment system. In the "1991 law" model, costsare adjusted to reflect the values legislated for 1991 for allcomponents of the PPS except the standardized amounts.In the other model, all the components except the teachingand disproportionate share adjustments and the standard-ized amounts are restricted to their 1991 values

b. Large urban areas are Metropolitan Statistical Areas (MSAs)with more than 1 million people, or New England CountyMetropolitan Areas (NECMAs) with more than 970,000people. Other urban areas are other MSAs or NECMAs. Inboth models, rural referral centers were treated as if theywere located in "other urban" areas because their pay-ments, under 1991 law, are based on the standardizedamount for "other urban" areas.

ban areas was reduced by a small amount, butthe rates for "other urban" and rural areaswere unchanged, the average differences inpayments among the three groups would beapproximately consistent with the averagedifferences in their 1989 costs.

Because the estimates reflect average differ-ences in costs between the geographic cate-gories, costs may vary widely among the hos-pitals within each category. Thus, if paymentswere calculated using the estimated differen-tials, one would expect that payments forsome providers within each category wouldexceed costs, and payments for others wouldbe less than costs. Assuming that cost rela-tionships between the hospital groups will beapproximately the same over the next fewyears as they were in 1989, the results alsoimply that as the system moves toward a sin-gle "other urban'Vrural standardized amountin 1995, payments to rural hospitals will, onaverage, be higher, relative to payments tourban hospitals, than can be justified exclu-sively on the basis of differences in costs.

The second model is the same as the firstexcept that the adjustments for teaching ac-tivity and disproportionate share were notfixed at their legislated amounts. Instead,these adjustments were also estimated, basedon the differences in costs associated with thetwo factors. This model is of interest becausethe current adjustments for teaching and dis-proportionate share reflect the incorporationof other policy goals—in addition to creatingincentives for efficiency-into the PPS. Spe-cifically, additional payments to teaching anddisproportionate share hospitals, beyond thelevels justified by their higher costs, weredesigned to increase the revenues of hospitalsthat treat relatively large shares of low-incomeand uninsured patients, thereby helping thesehospitals to continue providing services tothese patients. Because the teaching and dis-proportionate share adjustments tend to belinked to geographic location-for example, arelatively higher share of payments for theseadjustments goes to urban hospitals than torural hospitals-the adjustments interact withthe estimated urban/rural differentials in costs.


The results of the second model were there-fore expected to differ from the "1991 law'model.

Using the second model, the estimated dif-ferential in adjusted costs between large urbanareas and rural areas is 16.0 percent, and theestimated differential between other urbanareas and rural areas is 11.9 percent. Theseestimates are considerably higher than theestimates from the first model, and higherthan the current differentials in standardizedamounts.

The fact that the estimates were smaller inthe first model suggests that the current levelsof the PPS adjustments for teaching activityand disproportionate share increase paymentsto urban hospitals by more than the data in-dicate is necessary—on average—to offset thehigher costs associated with these two factors.Consequently, when these adjustments areconstrained to equal their legislated values (as

in the first model), the estimation procedureattempts to offset the higher average paymentsfor teaching activity and disproportionateshare to each urban group by lowering theestimated differentials in the standardizedamounts.

As noted, the differences in the results ofthe two models largely reflect the incorpora-tion of policy goals, beyond balancing pay-ments and costs, into the adjustments forteaching activity and disproportionate share.Similarly, the provisions for special paymentsto sole community and Medicare-dependenthospitals, and the payment increases for ruralhospitals scheduled to occur during the 1992-1995 period under OBRA-90--which are esti-mated to raise rural payments, on average, bymore than could be justified on the basis ofcosts—may help to maintain access to healthservices in some rural areas by improving thefinancial prospects of rural hospitals.

Chapter Three

The Effects of Legislative Changes inthe PPS on Payments to Rural Hospitals

S ince 1984, the first year of the pros-pective payment system, the Congresshas modified the system in a number

of ways that have affected the distribution ofpayments among hospitals. Several of thechanges were designed to increase paymentsto rural hospitals, both in general and forspecific types of rural hospitals. Others, suchas increases in the adjustment for hospitalstreating a relatively high proportion of low-income patients, have also affected the distri-bution of payments. The modifications havereflected both refinements of the PPS basedon the experiences of its first few years, andcertain policy objectives such as preservingaccess to hospital services for communitieslocated in rural areas and for individuals withlow incomes.

In addition to legislated revisions to thePPS, trends in hospital characteristics andpatient mix have also affected the distributionof payments among groups of hospitals overtime. For example, the fact that the com-plexity of case mix (as measured by diag-nosis-related groups) has increased morerapidly in urban hospitals than in rural hos-pitals has tended to raise relative paymentsper case to urban hospitals. Although somepatterns may in part reflect hospitals' behav-ioral responses to the incentives created bythe PPS, others were probably beyond thehospitals' control. In addition, since the PPSwas established, payments have been affectedby technical modifications in the system,including revisions in the wage index based onmore recent data and refinements in the defi-

nitions of the DRGs. The analysis in thischapter examines only the effects of the legis-lative changes in the PPS, not the impact ofchanges in hospital or patient characteristics,or in technical aspects of the system.

Legislative Changesin the PPS, 1992-1995

In 1992 and future years, Medicare paymentsto hospitals will be affected by a number offurther changes in the PPS. The OmnibusBudget Reconciliation Act of 1990 (OBRA-90), in particular, specifies policies that are tobe phased in over the 1992-1995 period.1 Inaddition, beginning in 1992, payments will beaffected by the reclassification of numeroushospitals into different geographic categoriesfor the purpose of computing payments.

Provisions of OBRA-90

Under OBRA-90, the distribution of paymentsamong hospitals will be significantly alteredby the further narrowing of the difference be-tween the urban and ru ra l standardizedamounts. The legislation specifies smaller up-dates to the standardized amounts for urbanhospitals than for rural hospitals in each year,so that in 1995 the rural rate will equal the

OBRA-90 also modified the PPS for fiscal year 1991.


rate for hospitals in "other urban" areas. In1995, the standardized amount for large urbanareas will be somewhat higher than the singlerate for rural and other urban areas.

The standardized amounts will also be af-fected by a different method of adjusting foroutlier cases. The current method appliesseparate reduction factors to the urban andrural standardized amounts, based on the pro-portions of projected payments attributable tooutlier payments for hospitals located in ur-ban and rural areas. Beginning in 1995, asingle reduction factor will be used instead tooffset all outlier payments. Since outlier pay-ments generally form a higher proportion ofpayments to urban hospitals—for instance, anestimated 5.6 percent for urban hospitals in1991 compared with 2.3 percent for rural hos-pitals-moving to a single reduction factor willincrease the factor for rural hospitals and de-crease it for urban hospitals. This modifica-tion will reduce aggregate payments to ruralhospitals by about 2 percent, and increase ag-gregate payments to urban hospitals by aboutone-half of one percent, compared with apply-ing separate reductions.

Also under OBRA-90, the disproportionateshare adjustment will increase in 1994 and1995 for urban hospitals that have 100 ormore beds (see Appendix C for details).When the increases are fully in place, dispro-portionate share payments to hospitals in thatgroup will be about 12 percent higher, onaverage, than under 1991 law.

In addition, the importance of the rural re-ferral center and Medicare-dependent hospi-tal designations will lessen significantly by1995. In particular, the effect of RRC statuswill decrease each year as the differential be-tween the "other urban" and rural standard-ized amounts is narrowed. For MDHs, thespecial payments are scheduled to be phasedout in 1993, after which time former MDHs

will be paid on the same basis as other ruralhospitals.

Geographic Rectification

Under the PPS, the geographic classificationsystem is intended to group hospitals that facesimilar market conditions with respect tolabor costs and competition for patients.Many hospitals have argued, however, thattheir geographic assignments are inappro-priate because they compete for patients andemployees with hospitals located in otherareas. In OBRA-89, the Congress establishedthe Medicare Geographic Classification Re-view Board (MGCRB) to evaluate hospitals'applications for reclassification to a differentgeographic area. The MGCRB may reclassifya hospital for the purposes of determining itsstandardized amount, its wage index, or both.Urban and rural hospitals may apply; for ex-ample, a rural hospital might request reclassi-fication to an urban area or to a differentrural area, or an urban hospital might requestthat it be classified in a different MetropolitanStatistical Area.

Fiscal year 1992 is the first year in whichreclassifications by the MGCRB will apply.For that year, more than 900 hospitals havebeen reclassified, more than 700 of which arelocated in rural areas. Among the rural hos-pitals that were reclassified, about 75 percentwere redesignated for their wage indexes only,11 percent for their standardized amountsonly, and about 14 percent for both. Amongthe urban hospitals that were reclassified, theproportions are 45 percent, 10 percent, and 45percent, respectively.

Analyzing the effects of geographic reclassi-fication on the Medicare revenues or financialconditions of hospitals is beyond the scope ofthis study. For that reason, all of the resultspresented are based on the 1991 classifications

CHAPTER THREE THE EFFECTS OF LEGISLATIVE CHANGES IN THE PPS 25

of hospitals. Given the large number of hos-pitals redesignated for 1992, however, the dis-tribution of Medicare payments among hospi-tals will be significantly affected. In particu-lar, because Medicare is required under bud-get neutrality provisions to pay for any higherpayments resulting from reclassification by re-ducing the standardized amounts for bothtypes of urban areas, reclassification will gen-erally redistribute revenue from urban hos-pitals that are not redesignated to the ruraland urban hospitals that are redesignated.The Health Care Financing Administrationestimates that in 1992, average payments percase will be approximately 1.0 percent lowerfor urban hospitals that are not reclassified,3.7 percent higher for reclassified urban hos-pitals, and 8.0 percent higher for reclassifiedrural hospitals than they would be without thereclassifications.2

Effect of Legislative Changeson the Distribution ofPayments Among DifferentCategories of Hospitals

The effects of changes in the PPS on the dis-tribution of payments among hospitals wereestimated by modeling payment rules cor-responding to three different years of the sys-tem: 1984, 1991, and 1995. Payments werethen simulated under each alternative set ofpayment rules, using the estimated 1991 char-acteristics and patient mix of hospitals. Hold-ing these characteristics constant isolated theeffects of legislative changes in the paymentrules from other factors that affected actualpayments over time. Similarly, the effects on

the distribution of PPS payments were iso-lated from the trend in national (or aggregate)PPS payments over time by assuming thatnational payments in 1991 were equal underthe three sets of payment rules, but the dis-tribution of those payments among individualhospitals was allowed to vary. The simula-tions therefore provide information on howlegislation affects the distribution of paymentsamong hospital groups, but not on the growthin payments over time.3

Both the 1991 and the 1995 rules increasepayments to rural hospitals and lower pay-ments to urban hospitals, compared with whatwould occur under the 1984 payment rules.Payments to rural hospitals under the 1991rules are estimated to be 18.1 percent higher,and payments to urban hospitals are 2.4 per-cent lower, than they would be under the 1984rules (see Table 10). Under the 1995 rules,rural payments (in 1991) would be 1.3 percentgreater, and urban payments 0.2 percent less,than under the 1991 rules.

Legislative changes in the PPS have differ-ent effects on the various types of rural hos-pitals. For example, the changes that oc-curred between 1984 and 1991 have benefitedthe specially designated hospitals more, onaverage, than other rural hospitals. For thecategories of specially designated rural hospi-tals, average payments under the 1991 rulesare from 20.1 percent to 23.3 percent higherthan they would be under the 1984 rules, andpayments to other rural hospitals are only13.6 percent higher.

The legislative changes scheduled for 1995will also redistribute payments among thedifferent types of rural hospitals. Under the1995 rules, payments would be lower, relative

2. See Federal Register, vol. 56, pp. 43345-43353 (August30, 1991), for the Health Care Financing Administra-tion's estimates of the impact of geographic reclassifica-tion in 1992.

3. Simulated payments under 1984 rules were based onnational standardized amounts. In contrast, actual pay-ments in 1984 were based on a blend of hospital-speci-

fic, regional, and national amounts to ease the transi-tion to the new system; the hospital-specific and re-gional amounts were scheduled to be phased out overseveral years. The simulated payments therefore reflectwhat the distribution of payments would be if the PPS,as originally designed and fully phased in, were cur-rently in place.


Table 10.Comparison of the Distribution of 1991 PPS Payments Among Categoriesof Hospitals Under Payment Rules for 1984,1991, and 1995

Distributionof Payments

Hospital Category


Rural by CategoryRural referralSole community''Medicare-dependentOther rural

Urban by CategoryLarge MSAC

Other urban

Rural by Size50 or fewer beds51 to 100 beds101 to 200 beds201 or more beds

Urban by Size1 00 or fewer beds101 to 200 beds201 to 400 beds401 or more beds

Major Teachingd

Other TeachingNonteaching

Disproportionate ShareNondisproportionate Share

VoluntaryProprietaryUrban GovernmentRural Government

Num-ber of

Hospitals3

5,6332,5693,064

254449537

1,329

1,5191,545

1,356732364117

806887979392

227965

4,441

1,5554,078

3,1871,109

437900

1984Rules

100.011.888.2

4.41.41.14.8

49.239.0

2.13.43.72.7

4.214.137.132.8

16.838.244.9

43.057.0

74.312.410.23.1

(Percent)1991Rules

100.013.986.1

5.31.81.35.5

47.838.3

2.43.94.43.2

4.114.336.731.0

15.437.547.1

43.656.4

73.512.710.13.7

1995Rules

100.014.185.9

5.31.91.35.7

47.738.2

2.54.04.53.1

4.114.236.631.0

15.537.447.1

43.956.1

73.312.710.23.7

Difference in Payments(Percent)


Rules

0.018.1-2.4

20.123.322.513.6

-2.8-1.9

17.917.418.718.1

-1.71.0

-1.2-5.4

-8.4-1.84.7

1.5-1.2

-1.22.7

-0.618.8


Rules

0.019.6-2.6

19.231.116.817.1

-2.92.2

19.820.020.517.6

-2.30.9

-1.4-5.5

-8.1-2.24.9

2.1-1.6

-1.42.90.1

20.6

Relativeto 1991

Rules

0.01.3

-0.2

-0.76.3

-4.73.1

-0.1-0.3

1.62.21.5

-0.4

-0.6-0.1-0.2-0.2

0.4-0.30.1

0.5-0.4

-0.20.10.71.6




c. Hospitals located in Metropolitan Statistical Areas with more than 1 million people, or New England County Metropolitan Areaswith more than 970,000 people.

d. Hospitals for which the ratio of the number of interns and residents to the number of beds is 0.25 or more.

CHAPTER THREE THE EFFECTS OF LEGISLATIVE CHANGES IN THE PPS 27

to those under 1991 rules, for rural referralcenters (-0.7 percent) and Medicare-depen-dent hospitals (-4.7 percent); payments wouldbe higher for sole community hospitals (6.3percent) and "other rural" hospitals (3.1 per-cent). This pattern occurs for RRCs becausethe standardized amount for "other urban"areas is scheduled to decline relative to therural standardized amount. When their spe-cial payment status of MDHs expires in 1993,their payments will drop relative to those forother groups.

An advantage of the approach applied hereis that it isolates the effects of legislativechanges from other changes that have oc-curred, such as those in case mix or the distri-bution of cases among hospitals. An impor-tant drawback to this approach, however, is

that certain policy changes may have been re-sponsive, at least in part, to changes in re-lationships among other payment- and cost-related factors. Over time, for example, thecase-mix index rose rapidly, reflecting boththe higher costs of treating more complexcases and the changes in the actual mix ofcases.4 The growth in the case-mix index wasnotably faster, on average, for urban hospitalsthan for rural hospitals, however. All else be-ing the same, the result is to increase pay-ments faster for urban hospitals than for ruralhospitals-a pattern of which the Congress wasaware when it raised the relative payments forrural hospitals.

4. Prospective Payment Assessment Commission, Medicareand the American Health Care System, Report to theCongress (Washington, D.C.: June 1991), pp. 49-50.

Chapter Four

The Effects of Legislative Changesin the PPS on Hospitals'

Financial Conditions

L egislative changes in the prospectivepayment system have redistributed pay-ments among hospitals and affected

their financial conditions. Historical dataindicate that although the financial conditionsof rural and urban hospitals became moresimilar between 1984 and 1989, the averagePPS margin for rural hospitals was still lowerin 1989 (-4.8 percent) than that for urbanhospitals (-0.1 percent).1 The historical datado not reflect the effects of some of the mostsignificant increases in rural payments, how-ever, which became effective after 1989 or arescheduled to occur by 1995.

To determine how these legislative changesin the PPS will affect the relative financialconditions of different groups of hospitals,CBO calculated hypothetical—or simulated--hospital margins for 1989 using the distribu-tions of payments corresponding to the origi-nal, 1991, and 1995 payment rules for thePPS. Paralleling the analysis in ChapterThree, the results indicate what 1989 marginswould have been for various hospital groupsunder these alternative payment rules, if otherfactors had remained the same.

Hospital Margins

The simulated margins, for the PPS and over-all, were based on 1989 data for all factorsexcept PPS payments, which, instead, reflectedthe distributions that would have occurred in1989 under each of the three payment poli-cies. The costs of treating both Medicare andnon-Medicare patients, and the revenues fromnon-Medicare payers, were assumed to be un-affected by the changes in PPS policy. Thus,the simulated margins do not provide fore-casts of hospital margins for 1991 or futureyears. Rather, they indicate how the differentsets of payment rules might have affected hos-pitals in 1989, if they had been in place thatyear.

The analysis was designed so that, undereach set of payment rules, the simulated PPSand overall margins for all hospitals equaledthe actual 1989 margins.2 For example, thesimulated 1989 PPS margin for all hospitalswas set to equal -0.8 percent, the actual 1989PPS margin. The analysis therefore looked

1. See Chapter One for trends in hospital margins for1984 through 1989.

2. The PPS and overall margins for categories of hospitalswere calculated as weighted averages of individual hos-pital margins, where the weighting was by PPS reve-nue or overall revenue, respectively. This approach is

equivalent to computing aggregate margins for eachhospital category. The PPS and overall margins forindividual hospitals were defined as in Chapter One,except that the 1989 data used here have been adjustedto correspond to federal fiscal year 1989. (In contrast,the 1989 data in Chapter One correspond to hospitals'cost-reporting periods beginning during federal fiscalyear 1989.)


Table 11.Actual 1989 PPS Margins and Simulated 1989 PPS Margins UnderPayment Rules for 1984,1991, and 1995 (In percent)

Hospital CategoryNumber ofHospitals3 Actual

1984Rules

Simulated1991Rules

1995Rules


Rural by CategoryRural referralSole communityc


Urban by CategoryLarge MSAdOther urban


5,1662,3842,782

249428496

1,211

1,3621,420

1,233693343115

-0.8-4.7-0.2

-2.5-6.8-3.6-6.7

-0.1-0.3

-3.4-4.8-5.3-4.9

-0.8-17.7

1.5

-22.4-15.6

-9.5-15.9

2.40.5

-8.7-14.6-21.4-23.5

-0.80.2

-1.0

-2.16.3

10.6-2.2

-0.5-1.7

7.82.3

-2.3-4.9

-0.81.4

-1.2

-2.811.86.20.9

-0.6-2.0

9.24.4

-0.8-5.3

Urban by Size100 or fewer beds101 to 200 beds201 to 400 beds401 or more beds

Major Teaching6




690823916353

194892

4,080

1,4413,725

2,9231,021

377845

-3.1-3.8-1.43.3

8.90.7

-5.0

3.2-3.8

-0.3-4.62.1

-5.8

-2.6-4.8-1.28.0

18.31.2

-9.3

3.3-3.9

0.1-6.24.4

-17.3

-4.2-4.0-2.52.6

10.4-0.7-4.4

4.7-5.0

-1.0-3.43.11.1

-4.9-4.1-2.82.4

10.8-1.1-4.2

5.2-5.4

-1.2-3.23.72.6


NOTE: Results correspond to federal fiscal year 1989. For each hospital category, the PPS margin is defined as the difference betweenPPS payments and the operating costs associated with Medicare in patient services for hospitals in the category, expressed as apercentage of PPS payments for the category.


b. The actual PPS margins were based on data from the hospitals' cost-reporting periods beginning during fiscal year 1989, adjusted tocorrespond to federal fiscal year 1989.

c. Sole community hospitals that are also rural referral centers are included in the rural referral category.

d. Hospitals located in Metropolitan Statistical Areas with more than 1 million people, or New England County Metropolitan Areas withmore than 970,000 people.

e. Hospitals for which the ratio of the number of interns and residents to the number of beds is 0.25 or more.

CHAPTER FOUR THE EFFECTS OF LEGISLATIVE CHANGES IN THE PPS 31

only at the effects of the relative changes inPPS payments per case among hospitals, sinceaggregate PPS payments to all hospitals wereunchanged for the different payment rules.

Simulated PPS Margins for 1989

If PPS payments in 1989 had been computedunder 1991 law (and all else remained thesame), the PPS margin for rural hospitalswould have been higher than if payments hadbeen computed under the 1984 rules, and thePPS margin for urban hospitals would havebeen lower--0.2 percent for the 1991 rulescompared with -17.7 percent under the 1984rules for rural hospitals, and -1.0 percentcompared with 1.5 percent for urban hospitals(see Table 11). This pattern occurs becausethe changes in the PPS between 1984 and1991 redistributed payments from urban torural hospitals. Similarly, the changes since1989-that is, the effects of the Omnibus Bud-get Reconciliation Acts of 1989 and 1990--have also redistributed payments from urbanto rural hospitals, as can be seen by compar-

ing the simulated margins under the 1991rules with the actual 1989 margins. Under the1995 rules, the redistribution of paymentstoward rural hospitals will be even more pro-nounced—the 1989 PPS margins are estimatedto be 1.4 percent for rural hospitals and -1.2percent for urban hospitals.

In addition, the difference between urbanand rural groups in the simulated PPS mar-gins is smaller under the 1991 and 1995 rulesthan under the 1984 rules or the actual 1989data. This pattern indicates that, under boththe 1991 and 1995 rules, the distribution ofPPS payments between urban and ruralgroups is closer to the distribution of costs be-tween these groups than under the 1984 rulesor in 1989.

The simulated PPS margins under the 1991and 1995 rules vary notably among the typesof rural hospitals. Under each of these rules,the 1989 PPS margins for sole communityhospitals and Medicare-dependent hospitalsare higher than the rural average, and thosefor rural referral and "other rural" hospitals

Table 12.Distribution of Simulated 1989 PPS Margins Under Payment Rules for 1991 (In percent)

Hospital Category


Rural by CategoryRural referralSole communitybMedicare-dependentOther rural

Number ofHospitals3

5,1662,3842,782

249428496

1,211

Margins at Specified Percentiles10th

-28.2-24.4-30.2

-19.0-18.2-16.3-32.4

25th

-12.7-9.2

-15.0

-10.5-4.4-2.3

-12.5

Median

-0.34.0

-3.1

-2.67.7

10.50.8

75th

11.515.27.8

6.616.621.512.6

90th

22.925.917.7

15.227.831.524.4

SOURCE: Congressional Budget Office estimates based on data provided by the Health Care Financing Administration and the Pro-spective Payment Assessment Com mission.

NOTE: Results correspond to federal fiscal year 1989. The PPS margin for individual hospitals is defined as the difference between thehospital's PPS payments and its operating costs associated with Medicare inpatient services, expressed as a percentage of its PPSpayments.




are lower. For example, under the 1991 rules,the simulated 1989 PPS margins are 10.6percent and 6.3 percent for MDHs and SCHs,respectively, but -2.1 percent and -2.2 percentfor RRCs and "other rural" hospitals. Theseresults indicate a change in the relative finan-cial conditions of the different rural groupssince 1989, when RRCs had the highest aver-age PPS margin (-2.5 percent) of the fourgroups and SCHs had the lowest PPS margin(-6.8 percent).

For rural hospitals, the 1989 PPS marginsdecrease as the number of beds increases, un-der each of the simulated sets of rules. Thispattern, which is seen to a limited extent inthe actual data from 1989, is heightened bythe policy changes since that year. For urbanhospitals, the simulated PPS margins tend toincrease with size, which is generally consis-tent with historical patterns for this group.

Although the results indicate that, underthe 1991 or 1995 rules, rural hospitals wouldhave had higher average PPS margins in 1989than urban hospitals, the results for individualhospitals vary considerably. Under the 1991rules, for example, the simulated PPS marginsfor one-fourth of rural hospitals are estimatedto be less than -9.2 percent, compared with amedian estimate of 4.0 percent (see Table12).3 The variation among individual hospi-tals within the broader payment categories(such as rural referral and sole community)primarily reflects the actual variation in theirfinancial conditions in 1989 because, for hos-pitals within each category, the effects ofchanges in PPS policy are relatively moreeven.

Simulated OverallMargins for 1989

The simulated 1989 overall margins also re-flect the reallocation of PPS payments towardrural hospitals. Under 1991 and 1995 rules,the 1989 overall margin would have been

higher for rural hospitals and lower for urbanhospitals than under the 1984 rules (see Table13). In addition, under both the 1991 and1995 rules, the overall 1989 margin wouldhave been higher for rural hospitals, taken asa group, than for urban hospitals.

The results for the simulated overall mar-gins differ somewhat among the differenttypes of rural hospitals. The change in rulesbetween 1984 and 1991, for example, is esti-mated to have a larger effect on 1989 overallmargins for the specially designated hospi-tals-the RRCs, SCHs, and MDHs-than onthose for other rural hospitals. Under the1991 rules, the simulated 1989 margins forRRCs, SCHs, and MDHs would be higher by4.3 percentage points, 4.8 percentage points,and 5.8 percentage points, respectively, thanunder the 1984 rules. For the "other rural"group, the difference is only 2.8 percentagepoints.

The simulated 1989 overall margins forrural hospitals also differ according to hos-pital size. For each simulation, as for theactual 1989 amounts, the overall margins risewith size until the category with the largesthospitals. The effects of policy changes since1984, however, are similar for the differentsize categories. For rural hospitals, the 1989overall margins improve by about the samenumber of percentage points under the 1991rules, compared with the 1984 rules, so theirrelative positions remain the same. A similarresult occurs between the 1991 and the 1995rules, except that the average overall margin isapproximately unchanged for the group withthe largest rural hospitals.

As with the simulated PPS margins, thesimulated overall margins vary notably amongindividual hospitals within groupings. Underthe 1991 rules, for example, the simulatedoverall margin for 1989 is estimated to be lessthan -0.6 percent for one-fourth of rural hos-pitals (see Table 14).4 The variation in thesimulated overall margins—like the simulated

3. For the distributions of the simulated PPS margins un-der the 1984 and 1995 rules, see Appendix E.

4. For the distributions of the simulated overall marginsunder the 1984 and 1995 rules, see Appendix E.


Table 13.Actual 1989 Overall Margins and Simulated 1989 OverallMargins Under Payment Rules for 1984,1991, and 1995 (In percent)

Hospital CategoryNumber ofHospitals9 Actual

1984Rules

Simulated1991Rules

1995Rules


Rural by CategoryRural referralSolecommunitycMedicare-dependentOther rural

Urban by CategoryLarge MSAd

Other urban


Urban by Size100 or fewer beds101 to 200 beds201 to 400 beds401 or more beds

Major Teaching6




5,1662,3842,782

249428496

1,211

1,3621,420

1,233693343115

690823916353

194892

4,080

1,4413,725

2,9231,021

377845

3.74.73.6

5.84.41.64.3

3.04.4

0.74.56.65.5

-0.42.23.74.6

1.64.24.2

2.94.4

4.13.62.02.7

3.72.04.0

1.62.60.12.5

3.54.6

-0.42.43.31.5

-0.32.03.85.7

3.74.33.3

2.94.4

4.23.32.40.3

3.75.93.4

5.97.45.95.3

2.94.1

3.46.37.35.5

-0.72.23.54.4

1.93.94.4

3.24.2

3.93.92.24.4

3.76.23.4

5.88.84.56.1

2.94.0

3.86.87.75.4

-0.82.23.44.4

2.03.84.4

3.34.1

3.93.92.34.8


NOTE: Results correspond to federal fiscal year 1989. For each hospital category, the overall margin is defined as the differencebetween the total revenues and total costs of hospitals in the category, expressed as a percentage of total revenues for thecategory.


b. The actual total margins were based on data from the hospitals' cost-reporting periods beginning during federal fiscal year 1989,adjusted to correspond to federal fiscal year 1989.

c. Sole community hospitals that are also rural referral centers are included in the rural referral category.

d. Hospitals located in Metropolitan Statistical Areas with more than 1 million people, or New England County Metropolitan Areaswith more than 970,000 people.

e. Hospitals for which the ratio of the number of interns and residents to the number of beds is 0.25 or more.


Table 14.Distribution of Simulated 1989 Overall Margins Under Payment Rules for 1991 (In percent)

Hospital Category


Rural by CategoryRural referralSole community15


Number ofHospitals3

5,1662,3842,782

249428496

1,211

10th

-9.5-8.3

-10.3

-0.8-12.1

-9.9-8.2

Marqins25th

-1.5-0.6-2.1

2.0-1.2-1.5-1.0

at Specified PercentilesMedian

3.54.52.7

5.84.85.53.8

75th

7.99.26.7

9.310.010.68.3

90th

13.015.111.2

13.617.916.013.5


NOTE: Results correspond to federal fiscal year 1989. The overall margin for individual hospitals is defined as the difference betweenthe hospital's total revenues and total costs, expressed as s percentage of its total revenues.



PPS margins--is driven primarily by the actualvariation in overall financial conditions in1989. Although hospitals with large overalllosses in 1989 would have had higher revenuesfrom the PPS under the 1991 or 1995 rules,the increases would not have been sufficientto prevent losses.

Hospital Margins in 1991

The analysis above examined hospital marginsin a 1989 context, by comparing hypothetical1989 revenues from the PPS under the alter-native payment rules with the costs hospitalsactually incurred in 1989. Although pro-jecting costs or margins for 1991 or futureyears is beyond the scope of this study, theavailable information indicates that the aver-age PPS margin for all hospitals in 1991 willbe significantly lower than for 1989. In par-ticular, the Prospective Payment AssessmentCommission estimates that the average PPSmargin for hospitals' cost-reporting periodsbeginning during 1991 will be -6.6 percent,compared with -1.4 percent for those begin-ning during 1989.5

Implications of CurrentPolicies for RuralHospitals

Although the Medicare PPS initially con-tributed to the financial difficulties of ruralhospitals, payments to rural hospitals have in-creased significantly in recent years, comparedwith those to urban hospitals, because of legis-lative actions. The results of this study in-dicate that if 1991 payment policies had beenin place in 1989, rural hospitals would havefared slightly better under the PPS--on aver-age-than urban hospitals. Under OBRA-90,Medicare payments to rural hospitals will con-tinue to rise, relative to payments to urbanhospitals, through 1995.

Prospective Payment Assessment Commission, Medicareand the American Health Care System, Report to theCongress (Washington, D.C.: June 1991).


Despite the relative improvement in pay-ments to rural hospitals, the average financialcondition of those hospitals under the PPSmay be worse in 1991 than in 1989. In par-ticular, the Prospective Payment AssessmentCommission has projected that the averagePPS margin for all hospitals fell by about 5percentage points between 1989 and 1991, to-6.6 percent. This pattern occurs because hos-pitals' costs are estimated to have grown fasterthan total PPS payments. Combining thatprojection with the distributional estimatesfrom this study suggests that average marginsfor both rural and urban groups have prob-ably decreased since 1989, but the decline hasbeen less, on average, for the rural hospitals.

In addition, although Medicare paymentpolicies have increased revenue for rural hos-pitals relative to what they would have beenwithout the changes in policy, the PPS maypose systematic problems for certain types ofrural hospitals-particularly small ones. Be-cause of their lower volumes of patients,smaller hospitals have relatively fewer patientsover which to spread their fixed operatingcosts, so their average cost per case will tendto be higher than for otherwise similar butlarger hospitals. Since the per-case paymentsfrom Medicare make no direct adjustment forsuch differences in size, some smaller hospi-tals may not be able to achieve the averagecosts per case needed to prevent losses onMedicare patients. Although the special pay-ment rules for sole community and Medi-care-dependent hospitals assist some smallhospitals, they neither adjust directly for sizenor assist all small or low-volume providers.

Furthermore, some rural hospitals willcontinue to have financial difficulties that arelargely independent of Medicare policy,Many severely distressed or closed hospitalshave reported very low volumes of patientsbecause of declining population, competitionfrom other providers, a lack of physicians orreferrals from physicians, and other factors.Research has also found that relatively high

proportions of uninsured patients are associ-ated with hospitals' financial stress.6

The closure of failing hospitals would havelittle effect on access in some locations, but inother areas closure would reduce access tocare. In those cases, maintaining the localhospital may be desirable, even if it is not ableto operate as efficiently as other facilities orcannot cover its costs. Higher revenues fromMedicare could be targeted to assist such hos-pitals, regardless of the cause of the problems.Using PPS policy in this way would be con-sistent with the current applications of theadjustments for teaching and disproportionateshare.

Federal policies directed at other parts ofthe health care system might also, indirectly,assist rural hospitals. Revenues to some hos-pitals have been increased, for example, by re-cent expansions of Medicaid to cover more in-dividuals, which reduced the number of pa-tients who were uninsured. Similarly, effortsto increase the supply of physicians and otherhealth care personnel in rural areas may en-able certain hospitals to attract more patients.

Although hospitals are a critical componentof the rural health care system, many otherfactors affect the availability of health servicesin rural communities. Assuring access tohealth care in rural areas may require a com-prehensive, broad-based approach that wouldinclude efforts to influence the locationalchoices of physicians and other providers, toexpand public and private insurance coverage,and to overcome other barriers such as lack oftransportation. Medicare's hospital paymentpolicy is but one component of possible re-sponses to the complex problem of ensuringaccess to health care in rural areas.

6. J. Rizzo, "Financially Distressed Hospitals: A Profile ofBehavior Before and After PPS" (Department of Healthand Human Services Publication No. (PHS) 90-3467),Hospital Studies Program Research Note 14, PublicHealth Service, Agency for Health Care Policy andResearch (September 1990).

Appendixes

Appendix A

Relationship Between PPS Marginsand Overall Margins for Rural Hospitals

T o examine the relationship betweenPPS margins and overall margins forrural hospitals, all rural hospitals reim-

bursed by the PPS were divided into quartilegroups according to the 1989 PPS margins ofthe individual hospitals.1 The same hospitalswere assigned to quartile groups based ontheir overall margins in 1989.

The average PPS and overall margins foreach of the quartile groupings are shown inTable A-l. The overall margin is generallylower for rural hospitals with low PPS marginsand higher for those with high PPS margins.Rural hospitals in the bottom quartile for PPSmargins, for example, have an average overallmargin of -0.3 percent, compared with anaverage overall margin of 7.2 percent for thetop quartile for PPS margins. The differencein overall margins between the hospitals withthe lowest and highest PPS margins is muchless, however, than their difference in PPSmargins-the average PPS margin is -31.3 per-cent for the lowest quartile, but 15.6 percentfor the highest.

Table A-2 shows how rural hospitals ineach of the quartile groups by PPS marginsare distributed among the quartile groups byoverall margins. For example, among hospi-tals in the highest quartile by PPS margins in1989-those with PPS margins greater than 7.3percent-approximately 13 percent had overallmargins in the lowest quartile (less than -2.8percent).

Table A-1.Average PPS and Overall Marginsfor Rural Hospitals, by MarginQuartiles, 1989 (In percent)

Hospital Groups

All Rural Hospitals

PPS Margin Quartiles3

LowestSecondThirdHighest

Overall Margin Quartilesb


AveragePPS

Margin

-4.8

-31.3-9.61.7

15.6

-14.2-8.9-3.60.7

AverageOverallMargin

4.7

-0.35.36.37.2

-12.60.54.8

14.5

1. The 1989 data are for hospitals' cost-reporting periodsthat began during federal fiscal year 1989.

SOURCE: Congressional Budget Office estimates based ondata provided by the Health Care Financing Admin-istration.

NOTE: Data correspond to hospitals' cost-reporting periodsthat began during federal fiscal year 1989. PPS mar-gins for individual hospitals are defined as the differ-ence between the hospital's PPS payments and itsoperating costs associated with Medicare inpatientservices, expressed as a percentage of its PPS payments.Overall margins for individual hospitals are defined asthe difference between the hospital's total revenuesand total costs, expressed as a percentage of its totalrevenues. The average PPS and overall margins forgroups of hospitals are computed as weighted aver-ages of individual hospital margins, where the weight-ing is by PPS payments or total revenues, respectively.

a. The values of the PPS margin at the 25th, 50th, and 75thpercentiles-that is, at the quartile "breaks"--are -17.6 per-cent, -3.8 percent, and 7.3 percent, respectively.

b. The values of the overall margin at the 25th, 50th, and 75thpercentiles are -2.8 percent, 2.5 percent, and 7.1 percent,respectively.


Table A-2.Distribution of Rural Hospitals in Each PPS Margin Quartile,by Overall Margin Quartiles, 1989 (In percent)

Overall Margin Quartilesb

PPS Margin Quartiles3 Lowest Second Third Highest Total


44261713

28 1626 2626 3019 27

11 10022 10027 10040 100


NOTE: Data correspond to hospitals' cost-reporting periods that began during federal fiscal year 1989. PPS margins for individualhospitals are defined as the difference between the hospital's PPS payments and its operating costs associated with Medicareinpatient services, expressed as a percentage of its PPS payments. Overall margins for individual hospitals are defined as thedifference between the hospital's total revenues and total costs, expressed as a percentage of its total revenues.

a. The values of the PPS margin at the 25th, 50th, and 75th percentiles--that is, at the quartile "breaks"--are -17.6 percent, -3.8 per-cent, and 7.3 percent, respectively.

b. The values of the overall margin at the 25th, 50th, and 75th percentiles are -2.8 percent, 2.5 percent, and 7.1 percent, respectively.

Appendix B

Urban/Rural Differences inStandardized Amounts andUpdate Factors, 1984-1995

W hen the prospective payment systemwas first set up, separate standardizedamounts applied to hospitals in two

types of locations: urban and rural. Theamounts were based on actual hospital costdata from the base year, 1981, and updated toapply to fiscal year 1984. Based on thehigher costs of hospitals in larger metropoli-tan areas, the Congress established a separatestandardized amount for hospitals located inlarge urban areas (Metropolitan StatisticalAreas with more than 1 million people, orNew England County Metropolitan Areaswith more than 970,000) beginning April 1,1988. In 1995, under the Omnibus BudgetReconciliation Act of 1990 (OBRA-90), thePPS will again have two standardizedamounts-one amount for rural and "otherurban" areas, and a higher amount for largeurban areas.

The difference between the standardizedamounts for urban and rural hospitals hasbeen reduced substantially since the introduc-tion of the system (see Table B-l). One majormechanism has been the annual percentageincreases—or update factors—applied to thestandardized amounts. By specifying a higherupdate factor for the rural amount than forthe urban amounts, the Congress has nar-rowed the urban/rural difference each yearsince 1988 (see Table B-2). Between 1984 and1992, the cumulative increase in the rate forrural hospitals was 42 percent, compared with31 percent for hospitals in large urban areasand 29 percent for hospitals in other urbanareas. Under OBRA-90, separate annual up-date factors through 1995 will reduce the dif-

ferences between the amounts for each type ofurban area and the rural amount until, in1995, a single amount will apply to "other ur-ban" and rural areas.

Other legislative actions have also affectedthe standardized amounts. In 1987, for ex-ample, the method used to adjust the stan-dardized amounts for outlier payments was

Table B-1.Percentage Difference Between the Urbanand Rural Standardized Amounts, Relativeto the Rural Amount, 1984-1992

Fiscal Year

198419851986198719881989199019911992

SOURCES:

LargeUrbanAreas

25.325.326.021.215.013.49.38.86.5

OtherUrbanAreas

25.325.326.021.214.512.37.67.14.8

AverageDiffer-ential3

25.325.326.021.214.812.98.48.05.6

Congressional Budget Office estimates based ondata from various volumes of the Federal Register.

NOTES: The differences in the table are equal to the urbanamount minus the rural amount, expressed as a per-centage of the rural amount, and are based on thestandardized amounts in effect at the end of thefiscal year. Initially, different standardized amountsapplied to two geographic categories: urban areas-defined as Metropolitan Statistical Areas (MSAs) orNew England County Metropolitan Areas (NECMAs)--and rural areas. Beginning April 1, 1988, separatestandardized amounts were established for large ur-ban areas (MSAs with populations over 1 million, orNECMAs with populations over 970,000) and otherurban areas.

a. The average urban differential was computed as theweighted average of the differentials for the two types ofurban areas, where the weighting was by the number ofMedicare discharges.


Table B-2.Update Factors for PPS Payment Rates, 1984-1995 (In percent)

Fiscal Years

198419851986198719881989d1990e1991*19929199319941995

RuralAreas

4.74.50.51.153.03.9

9.724.53.8

M-0.55M + 1.5

h

Update Factor3

LargeUrbanAreas

4.74.50.51.151.53.45.623.22.8

M-1.55MM

OtherUrbanAreas

4.74.50.51.151.02.9

4.973.22.8

M-1.55MM

Percentage Increasein Market-Basket Index

At Time ofPromulgation15

5.86.5

4.273.74.75.45.55.24.4n.a.n.a.n.a.

CurrentEstimatec

4.83.63.03.75.15.44.94.04.54.55.05.2

SOURCE: Congressional Budget Office estimates based on data and information from the Health Care Financing Administration,various volumes of the Federal Register, and legislation. Current estimates of the increases in the market-basket index arefrom the Health Care Financing Administration.

NOTE: The update factors for 1984-1992 are the actual increases that were in effect by the end of the fiscal year. The update factorsfor 1993-1995 are the scheduled increases under the Omnibus Budget Reconciliation Act of 1990.

M represents the percentage increase in the market-basket index,

n.a. = not applicable.

a. Before 1988, a single update factor applied to the rates for rural and urban areas. Since 1988, separate rural and urban updateshave generally been specified.

b. The estimated amounts at the time the regulations establishing the rates for each year were issued.

c. The amounts for 1988-1995 are from the 1991 fourth-quarter estimates of the Health Care Financing Administration's 1987-basedPPS market-basket index; the amounts for 1984-1987 are from the 1991 third-quarter estimates of the 1982-based market-basketindex.

d. Based on legislated increases of M -1.5 percentage points, M - 2.0 percentage points, and M - 2.5 percentage points, respectively. Mwas equal to 5.4 percent when promulgated.

e. Based on legislated increases of M + 4.22 percentage points, M+ 0.12 percentage points, and M - 0.53 percentage points, respec-tively. M was 5.5 percent when promulgated.

f. Based on legislated increases of M - 0.7 percentage points, M - 2.0 percentage points, and M - 2.0 percentage points, respectively. Mwas 5.2 percent when promulgated.

g. Based on legislated increases of M-0.6 percentage points, M-1.6 percentage points, and M-1.6 percentage points, respectively. Mwas 4.4 percent when promulgated.

h. The update factor will be M plus the amount needed to equate the standardized amounts for rural and "other urban" areas.

changed. The new—and current—method ap-plies separate reduction factors to the urbanand rural standardized amounts, based on theproportions of projected payments attribut-able to outlier payments for hospitals locatedin urban and rural areas. In contrast, theprevious system had applied a single reduc-tion rate to both the rural and urban stan-dardized amounts to offset total payments foroutlier cases. Since outlier payments gen-erally form a higher proportion of paymentsto urban hospitals, the change in method low-ered the reduction rate for the rural standard-

ized amount and raised it for the urban stan-dardized amounts. Also, in 1988, the Con-gress changed the basis for computing thestandardized amounts from hospital averagesto discharge-weighted averages. As a result,the standardized amount was relatively higherfor rural hospitals and relatively lower forurban hospitals than under the previousweighting.1

1. Federal Register, vol. 52 (September 1, 1987), pp. 33137-33140.

Appendix C

Selected Details of theProspective Payment System

T his appendix provides detailed infor-mation on selected components of theprospective payment system. These

components include the current criteria hos-pitals must meet to be designated as rural re-ferral centers (RRCs), sole community hos-pitals (SCHs), and Medicare-dependent hos-pitals (MDHs); how the disproportionateshare adjustment is determined; and how thespecial payment rules for RRCs, SCHs, andMDHs affect their payments.

Rural Referral CentersRural referral centers generally provide abroad range of services and treat patientsfrom a wide geographic area. Urban hospitalsalso may be designated as referral centers, but:such a designation does not affect their PPSpayments.

Qualifying Criteria

Initially, only RRCs with more than 500 bedscould receive the urban standardized amountunder the PPS. The Congress has substan-tially modified the RRC criteria, however, toinclude many more hospitals in the classifica-tion and to apply the special payments to allRRCs.

To qualify as an RRC, a hospital must belocated in a rural area and satisfy one of thefollowing criteria:1

a. The hospital has at least 275 beds; or

b. At least 50 percent of the hospital'sMedicare patients are referred fromother hospitals or from physicians noton the staff of the hospital, and Medi-care patients who live more than 25miles from the hospital account for atleast 60 percent of the hospital's Medi-care patients and Medicare services; or

c. The hospital meets all of the followingcriteria:

i. Its case-mix index is at least equalto the median national case-mixindex for urban hospitals, or tothe median case-mix index for ur-ban hospitals located in its region(excluding hospitals with teachingprograms); and

ii. Its annual number of discharges isat least equal to 5,000 (3,000 forosteopathic hospitals), or to themedian number of discharges for

The criteria listed are based on 42 Code of FederalRegulations, Chapter IV (10/1/90). An urban hospitalmay be designated as a referral center if it meets therequirements in "b."


urban hospitals located in its re-gion; and

iii. More than 50 percent of the hos-pital's medical staff are specialistsmeeting certain criteria relating tocertification, or at least 60 percentof its discharges are for patientswho live more than 25 miles fromthe hospital, or at least 40 percentof its patients are referred fromother hospitals or from physiciansnot on the hospital's staff.

Rural referral centers currently are permittedto retain the designation regardless of whetherthey continue to meet the qualifying criteria.For cost-reporting periods beginning on or af-ter October 1, 1992, however, a hospital musteither meet the criteria for designation duringthe current year or have met the applicablecriteria in two of the previous three years inorder to retain its status as an RRC.

Payments

The PPS payments to RRCs are based on thestandardized amount for "other urban"areas--urban areas with populations of 1million or less-because RRCs are thought tohave costs that are similar to those of urbanhospitals. In addition, under the OmnibusBudget Reconciliation Act of 1989 (OBRA-89), the Congress established a higher dispro-portionate share adjustment for most RRCsthan for otherwise similar rural hospitals, be-ginning April 1, 1990. If approved, RRCstatus starts with the first day of the hospital'scost-reporting period and applies for the en-tire year.

Sole Community Hospitals

For SCH designation, a hospital must demon-strate that it is isolated from other hospitalsby distance, travel time, or weather condi-tions. Although the basic distance require-

ment is that an SCH be more than 35 milesfrom other similar hospitals, a hospital that isisolated by at least 25 miles can qualify if-based on market share—it is the primary pro-vider of inpatient care in its market area.Significant changes in SCH policy were intro-duced under OBRA-89. These changes liber-alized the criteria for SCH status, modifiedthe method of calculating special payments forSCHs, and established special treatment forSCHs in calculating the disproportionateshare adjustment.

Qualifying Criteria

Currently, a hospital may be designated as anSCH if it is located in a rural area and satis-fies at least one of the following conditions:2

a. The hospital is located more than 35miles from the nearest acute-care hos-pital; or

b. Travel time to the nearest acute-carehospital is at least 45 minutes, takinginto account distance, posted speedlimits, and predictable weather condi-tions; or

c. The hospital is 15 to 35 miles fromother acute-care hospitals, but becauseof topography or weather conditionsthe other hospitals are inaccessible forat least 30 days in two out of threeyears; or

d. The hospital is 25 to 35 miles fromother hospitals and:

i. meets specific criteria demonstrat-ing that it treats at least 75 per-cent of patients in its market area,based on either Medicare or totaldischarges; or

2. Based on 42 Code of Federal Regulations, Chapter IV(10/1/90). An urban hospital may be designated as anSCH if it meets the requirement in "a" (Federal Regis-ter, vol. 56 (June 4, 1991), p. 25483).

APPENDIX C SELECTED DETAILS OF THE PROSPECTIVE PAYMENT SYSTEM 45

ii. has fewer than 50 beds and is cer-tified by the Medicare fiscal inter-mediary that it would have metthe criteria in (i) if patients werenot forced to go elsewhere be-cause the hospital lacked certainspecialty services.

In addition, hospitals designated as SCHs be-fore the introduction of the PPS are permittedto retain the designation.

Payments

Before 1990, payments to SCHs were based ona blend of hospital-specific (75 percent) andregional (25 percent) payment rates. Begin-ning April 1, 1990, payments to SCHs areequal to the highest of three amounts: a hos-pital-specific amount based on either 1982 or1987 data and updated to the current year, orthe regular PPS amount that would otherwiseapply to the hospital (that is, the paymentamount based on federal PPS rates). Specialpayments would apply 30 days after SCH sta-tus is approved.

A payment adjustment for decreases in vol-ume is also available to SCHs. Specifically, anSCH can qualify for this adjustment if, be-cause of circumstances beyond its control, itstotal discharges drop more than 5 percentcompared with those in the previous cost-re-porting period. Few hospitals, however, havereceived this adjustment. According to theHealth Care Financing Administration, only38 adjustments for declining volume had beengranted under the PPS as of June 1991.

Medicare-DependentHospitals

The MDH classification was established byOBRA-89 to apply to cost-reporting periodsbeginning on or after April 1, 1990, and end-ing before April 1, 1993.

Qualifying Criteria

A hospital is classified as an MDH if it is lo-cated in a rural area and meets all of the fol-lowing requirements:3

a. It has 100 or fewer beds; and

b. It is not a sole community hospital;and

c. At least 60 percent of its inpatient daysor discharges were attributable toMedicare beneficiaries for the hospi-tal's cost-reporting period ending on orafter September 30, 1987, but beforeSeptember 30, 1988.

Payments

PPS payments to MDHs are determined in thesame way as those for SCHs. Like SCHs,MDHs may receive an additional payment forsignificant decreases in volume.

Disproportionate ShareAdjustmentSince May 1986, PPS payments have includedthe disproportionate share adjustment to com-pensate hospitals for the higher costs asso-ciated with treating low-income patients.4 Inaddition, by providing higher Medicare reve-nues, the adjustment reduces financial stressfor some hospitals and thus helps to maintainaccess to care for the patients served by thosehospitals.

3. Based on 42 Code of Federal Regulations, Chapter IV(10/1/90).

4. The information in this section is largely based onCongressional Budget Office, Medicare's Dispropor-tionate Share Adjustment for Hospitals (May 1990). Thedescription of the disproportionate share adjustment isupdated here to include the provisions of OBRA-90.


Eligibility for a disproportionate share ad-justment, and the size of the adjustment forsome types of hospitals, is based on the hospi-tal's disproportionate patient percentage(DPP). The DPP is equal to the sum of twofactors: the percentage of all Medicare pa-tient days attributed to patients receivingbenefits from the Supplemental Security In-come (SSI) program, and the percentage of allpatient days for which Medicaid is the pri-mary payer. For example, a hospital forwhich the first amount is 10 percent and thesecond is 30 percent would have a dispropor-tionate patient percentage of 40 percent.

The Omnibus Budget Reconciliation Act of1989 established special rules for RRCs andrural SCHs effective April 1, 1990, which in-creased the adjustment for these hospitals.The legislation also lowered the minimumDPP needed to qualify for an adjustment forrural hospitals with more than 100 beds. Forurban hospitals with 100 or more beds, theadjustment was increased in 1990 by OBRA-89 and again in 1991 by OBRA-90. Further-more, OBRA-90 made the disproportionateshare adjustment a permanent part of thePPS.

Since January 1, 1991, the following ruleshave applied:

o Urban Hospitals with 100 or More Bedsand Rural Hospitals with 500 or MoreBeds. If the hospital's DPP is 15 per-cent or more, then it will receive anadjustment of at least 2.5 percent. Theamount of the adjustment increases forDPPs of more than 15 percent accord-ing to the following formulas:

DPP (Percent)

15.0 to 20.220.2 or more

Adjustment (Percent)

(DPP - 15.0) x 0.6 + 2.5(DPP - 20.2) x 0.7 + 5.62

Urban Hospitals with Fewer Than 100Beds. Hospitals with a DPP of 40 per-cent or more receive an adjustmentequal to 5 percent.

o Rural Sole Community Hospitals.Rural SCHs--that are not also RRCs-that have a DPP of 30 percent or morereceive an adjustment of 10 percent.

o Rural Referral Centers with More Than100 Beds. RRCs with more than 100beds-that are not also SCHs-and withDPPs of 30 percent or more receive anadjustment of at least 4 percent. Thosewith DPPs greater than 30 percent re-ceive an additional 0.6 percent adjust-ment for each increase of 1 percentagepoint in the DPP-that is, the adjust-ment equals (DPP - 30) x 0.6 + 4.0.

o Rural Referral Centers with 100 orFewer Beds. RRCs with 100 or fewerbeds—that are not also SCHs--and withDPPs of 45 percent or more receivethe same adjustment as describedabove for larger RRCs. If the DPP isless than 45 percent, however, they re-ceive no adjustment.

o Hospitals that Are Both Sole Com-munity Hospitals and Rural ReferralCenters. Hospitals in this categorywith a DPP of 30 percent to 40 percentreceive an adjustment of 10 percent.Those with DPPs above 40 percent re-ceive an adjustment equal to (DPP -30) x 0.6 + 4.0.

o Other Rural Hospitals with More Than100 Beds. For hospitals with DPPs of30 percent or more, the adjustment is 4percent.

o Other Rural Hospitals with 100 orFewer Beds. For hospitals with DPPsof 45 percent or more, the adjustmentis 4 percent.

In addition, urban hospitals that have 100 ormore beds and that derive more than 30 per-cent of their net inpatient revenue from stateand local government payments for care toindigent patients receive an adjustment of 35percent.

APPENDIX C SELECTED DETAILS OF THE PROSPECTIVE PAYMENT SYSTEM 47

Under OBRA-90, the adjustment for urbanhospitals with 100 or more beds (and ruralhospitals with 500 or more beds) is scheduledto increase in 1994 and 1995. The applicableadjustments are described by the followingformulas:

Year

1994

1995

DPP

(Percent)

15.0 to 20.220.2 or more

15.0 to 20.220.2 or more

Adjustment(Percent)

(DPP - 15) x 0.65 + 2.5(DPP - 20.2) x 0.8 + 5.88

(DPP - 15) x 0.65 + 2.5(DPP - 20.2) x 0.825 + 5.88

Estimated Effects of theSpecial Payment Rulesfor Specially DesignatedHospitalsThe analysis of how the special rules forSCHs, RRCs, and MDHs affect PPS paymentsincorporates the special rules for the dispro-portionate share adjustment for SCHs andRRCs as well as the other payment rules af-fecting specially designated hospitals. For

Tabled.Effect on PPS Payments of Special Payment Provisions for Rural Referral, Sole Community,and Medicare-Dependent Hospitals, by Selected Categories of Rural Hospitals (Estimated, 1991)

Hospital Category

All Rural Hospitals with Special DesignationsRural referralSole community onlydMedicare-dependent

All Rural Hospitals25 or fewer beds26 to 50 beds51 to 100 beds101 to 200 beds201 or more beds

Number ofHospitals3

1,240254449537

2,569399957732364117

IncreaseMillions

of Dollars

40424011154

404134398

116135

in Pavmentsb

Percent

9.99.3

13.38.2

5.87.14.14.95.28.7




b. Increase in payments to specially designated hospitals relative to what payments would be if they were not specially designated. Forrural referral centers, this increase indicates the effects of applying the "other urban" standardized amount rather than the ruralstandardized amount and the effects of special provisions for the disproportionate share adjustment. For sole community hospitals(SCHs) and Medicare-dependent hospitals, it estimates the effect of basing payments on a hospital-specific rate when doing so resultsin higher payments than the regular PPS rate, and for SCHs also includes the effects of special provisions for the disproportionateshare adjustment.

c. Includes hospitals that are designated as both rural referral centers and sole community hospitals.

d. Sole community hospitals that are also rural referral centers are included in the rural referral category. In addition to the rural solecommunity hospitals, there are approximately 22 sole community hospitals located in urban areas; the estimated increase in theirpayments for 1991 is 6.4 percent.


1991, total payments to rural hospitals desig-nated as SCHs, RRCs, or MDHs are about 9.9percent higher, on average, than they wouldbe if those hospitals were instead paid thesame as other rural hospitals (see Table C-l).

For RRCs, the average increase is 9.3 per-cent. The additional payments are derivedprimarily from the higher standardizedamount RRCs receive, compared with that forother rural hospitals; for 1991, the amount for"other urban" areas is 7.1 percent higher thanthe rural amount. Payments are also in-creased by the higher disproportionate shareadjustment for RRCs, compared with that forother rural hospitals.

For all SCHs (excluding those that are alsoRRCs), the special payment provisions in-crease 1991 payments by about 13.3 percent.Most of the increase results from the specialprovisions allowing payments to be based on ahospital-specific rate, instead of the regularstandardized amounts, when doing so wouldresult in higher payments. SCHs also benefitfrom a higher disproportionate share adjust-ment. Hospitals paid on a hospital-specificbasis benefit more, on average, from the spe-cial provisions than those reimbursed accord-ing to the regular PPS rates. For SCHs (ex-cluding those that are also RRCs) that receivea hospital-specific amount, the aggregate in-crease in payments is 18.9 percent, comparedwith 1.9 percent for those that receive theregular PPS amount (see Table C-2). For anyindividual hospital, however, which category itis in--the hospital-specific group or the groupreceiving the regular payment amount-couldvary from year to year.

For MDHs, the increase attributed to spe-cial provisions is 8.2 percent, on average. Aswith SCHs, the payment increase is higher forthose MDHs with payments based on a hos-pital-specific amount than for those paid onthe basis of the regular PPS amount. For thegroup paid according to hospital-specific

rates, the average increase in 1991 paymentsper case is 16.6 percent; for the other MDHs,payments are no higher than they would bewithout the special provisions.

Table C-2.Distribution of Sole Community andMedicare-Dependent Hospitals BetweenThose with PPS Payments Based on Hospital-Specific Rates and Those with PaymentsBased on Regular PPS Rates (Estimated, 1991)

Hospital Category

PaymentsBased On

Hospital- RegularSpecific PPS

Rate Ratea Total

Number of Hospitals

Sole Community Onlyb 271Medicare-Dependent 244

178293

Total 515 471

Percentage of Hospitals in Category

Sole Community Onlyb

Medicare-Dependent

Total

6045

52

4055

48

449537

986

100100

100

Increase in Payments Because of SpecialPayment Provisions (Percent)*

Sole Community Onlyb

Medicare-Dependent

Total

18.916.6

18.1

1.90.0

0.9

13.38.2

11.0

SOURCE: Congressional Budget Office estimates based ondata from the Health Care Financing Administra-tion and the Prospective Payment AssessmentCommission.


a. The regular PPS rate that would otherwise apply to the hos-pital-that is, the federal PPS rate.

b. Excludes sole community hospitals that are also rural re-ferral centers.

c. Includes special provisions for the disproportionate shareadjustment for sole community hospitals. If these provisionswere not included, the values in the "regular PPS rate"column would be zero, and those in the other columns forthe "sole community only" and "total" categories would bereduced.

Appendix D

Statistical Methods Used in Estimatingthe Differences in Hospital Costs

Associated with Urbanor Rural Location

T wo statistical models were used toanalyze the differences in costs be-tween rural and urban hospital groups.

Specifically, regression analysis was appliedto estimate the relationship between urbanor rural location and the cost of treatingMedicare patients, when other factors usedby the PPS to compute payments-such ascase mix and teaching activity—were alsotaken into account. This appendix furtherdescribes the regression models, the resultsof which are reported in Chapter Two andshown in Table 9.

The two models used in the analysis havethe same underlying structure. They are bothbased on a "restricted" model of hospital costsper case—that is, the only explanatory vari-ables considered are those factors that actuallydetermine PPS payments. In addition, suchmodels generally restrict the effects of selectedfactors on Medicare costs to the effect thatthose factors have on payments under the PPSpayment rules. The two models analyzed herediffer only in the specific restrictions that areapplied. The first model restricted all com-ponents of the PPS except the standardizedamounts. The second model restricted allcomponents except the adjustments for teach-ing and disproportionate share and the stan-dardized amounts. (The specific variablesused in the models are listed in Box D-l.)

The dependent variable for both models isthe hospital's average 1989 Medicare operat-ing cost per case. To account for the effect ofPPS policy for outlier cases, the Medicare

costs were reduced by the amount of outlierpayments. The dependent variable was alsoadjusted by the wage index for the hospital'slocation; this adjustment was equivalent toincluding the wage index as an explanatoryvariable and constraining the relationship be-tween the wage index and costs to the effectprescribed under 1991 payment rules.

As explanatory variables both models in-clude the other factors used by the PPS to ad-just payments-the hospital case mix indexand the measures of teaching intensity anddisproportionate share the PPS uses for thesefactors. The models also include dummy vari-ables—that is, variables that take on a value of1 or 0 to indicate whether or not a hospitalhas a specific characteristic-to indicate loca-tion in urban areas and large urban areas.(Hospitals located in rural areas formed thereference group.)

Because the payment system is approxi-mately multiplicative in form, the modelswere estimated in the "double logarithm"form—that is, on the left-hand side of theequation is the logarithm of Medicare costsper case, and on the right-hand side are thelogarithms of continuous dependent variablessuch as the case-mix index. This functionalform corresponds to a multiplicative relation-ship between costs and the continuous ex-planatory variables.

A simplified example can illustrate the esti-mation model. As seen in the example, adummy variable plays a somewhat different


Box D-lDefinition of Variables Used in the Statistical Models

Adjusted Cost per Case

Urban Area

Large Urban Area

Case-Mix Index

Teaching

Disproportionate Share

Dependent Variable

Logarithm of 1989 Medicare operating costs (which were reduced by theamount of payments for outlier cases, and adjusted by the area wage index)per Medicare case.

Explanatory Variables

A dummy variable indicating location in any urban area.

A dummy variable indicating location in a large urban area (MetropolitanStatistical Area with more than 1 million people, or New England CountyMetropolitan Area with more than 970,000).

Logarithm of the hospital's case-mix index (that is, its average diagnosis-related group weight) for 1989. Both models restricted this factor to thevalue indicated in 1991 law.

Logarithm of (1 + IRB), where IRB is the ratio of the number of internsand residents to the number of beds. The "1991 law" model restricted thisfactor to the value indicated in 1991 law, but the other model did not.

Logarithm of (1 + DPP), where DPP is the hospital's disproportionatepatient percentage. The "1991 law" model restricted this factor to the valueindicated in 1991 law, but the other model did not.

SOURCE: Congressional Budget Office.

role than a continuous explanatory variable.Suppose:

C =

where C and X are continuous variables, D isa dummy variable (that is, it has a value of 1or 0), and a, b, and d are fixed coefficients.

If the logarithms of both sides of the equa-tion are taken, the resulting functional form islinear:1

Ln(C) = Ln(a) + bLn(X) + Ln(d)D

In this example, b can be interpreted as theapproximate percentage change in C associ-

1. For the analysis, the regressions were weighted by thenumber of Medicare cases for each hospital.

ated with a 1 percent change in X. For exam-ple, suppose C is costs per case and X is thecase-mix index. Then, if the value of b is 0.5,a 1 percent change in the case-mix index willbe associated with approximately a 0.5 percentchange in costs per case (holding constant theother factors in the equation). In fact, for thetwo models estimated here, the coefficient forthe case-mix index was restricted to 1991law-that is, it was set to 1, since a 1 percentincrease in the case-mix index results in anequal percentage increase in PPS payments.

The coefficient for a dummy variable has asomewhat different interpretation in the ex-ample. It relates to the percentage change inC associated with the hospital's having thecharacteristic indicated by the dummy vari-able D. For example, suppose that C is costsper case, D indicates a hospital located in anurban area, and the coefficient for D--Ln(d)--

APPENDIX D STATISTICAL METHODS USED IN ESTIMATING THE DIFFERENCES 51

is 0.15. Then, d equals 1.16 and indicates thatcosts per case are 16 percent higher forhospitals in urban areas than for other hospi-tals (all other factors being the same).

The first regression model, referred to asthe 1991 law model, constrained the effect ofeach continuous variable factor on hospitals'costs per case to equal the effect that factorhas on PPS payments under 1991 law. It al-lowed the coefficients on the dummy variablesfor urban and large urban areas to vary. Theresults for those coefficients therefore indicatewhich urban/rural differentials in PPS rateswould be consistent, on average, with the 1989cost data if all other parts of the PPS wereunchanged.

The second model included exactly thesame factors, but it did not constrain the rela-

tionship between costs per case and the mea-sures of teaching intensity and dispropor-tionate share, or the dummy variables. Forexample, both models included the ratio ofthe number of interns and residents to thenumber of beds (IRB)-which the PPS uses tomeasure teaching intensity--but the secondmodel allowed the adjustment for differencesin the IRB to differ from its legislated value.The model simultaneously determined theaverage relationship between hospital costsand those factors, as well as urban or rurallocation. The results therefore indicate whichdifferentials in standardized amounts wouldbe consistent with differences in 1989 costs, ifthe teaching and disproportionate share ad-justments were also set at the levels that re-flected the average differences in costs associ-ated with these two factors.

Appendix E

Distributions of Simulated 1989PPS and Overall Margins

Under Different Payment Rules

T he tables in this appendix show the in addition to the simulated margins underdistributions of simulated PPS and the 1991 rules, which are also shown in Tablesoverall 1989 margins for selected hos- 12 and 14 (see Chapter Four). The results for

pital groups. They provide simulated margins PPS margins are in Table E-l, and those forunder the 1984 and the 1995 payment rules overall margins are in Table E-2.


Table E-1.Distribution of Simulated 1989 PPS Margins UnderPayment Rules for 1984,1991, and 1995 (In percent)

Hospital Category


Rural by CategoryRural referralSolecommunitybMedicare-dependentOther rural





Number ofHospitals*

5,1662,3842,782

249428496

1,211

5,1662,3842,782

249428496

1,211

5,1662,3842,782

249428496

1,211

Marqins at Specif led Percentiles10th

1984 Rules

-41.4-49.9-30.4

-45.8-53.5-51.2-49.8

1991 Rules

-28.2-24.4-30.2

-19.0-18.2-16.3-32.4

1995 Rules

-28.1-24.7-31.0

-20.5-11.9-29.7-28.2

25th

-21.6-29.3-14.9

-34.9-32.3-24.8-27.8

-12.7-9.2

-15.0

-10.5-4.4-2.3

-12.5

-12.5-8.0

-15.6

-11.41.0

-7.1-9.1

Median

-6.9-13.5

-2.6

-24.4-13.8-6.8

-12.3

-0.34.0

-3.1

-2.67.7

10.50.8

0.25.7

-3.6

-3.513.18.34.0

75th

5.20.08.3

-13.7-2.16.10.8

11.515.27.8

6.616.621.512.6

12.616.87.5

6.321.619.815.4

90th

16.212.717.9

-4.19.4

16.014.0

22.925.917.7

15.227.831.524.4

24.127.518.1

14.831.628.226.7


NOTE: Results correspond to federal fiscal year 1989. The PPS margin for individual hospitals is defined as the difference between thehospital's PPS payments and operating costs associated with Medicare inpatient services, expressed as a percentage of its PPSpayments.



APPENDIX E DISTRIBUTIONS OF SIMULATED 1989 PPS AND OVERALL MARGINS 55

Table E-2.Distribution of Simulated 1989 Overall Margins UnderPayment Rules for 1984,1991, and 1995 (In percent)

Hospital Category


Rural by CategoryRural referralSole communityb



Rural by CategoryRural referralSolecommunitybMedicare-dependentOther rural



Number ofHospitals3

5,1662,3842,782

249428496

1,211

5,1662,3842,782

249428496

1,211

5,1662,3842,782

249428496

1,211

Marqins at Specif led Percentiles10th

1984 Rules

-12.3-13.4-10.6

-6.9-17.4•18.8-12.0

1991 Rules

-9.5-8.3

-10.3

-0.8-12.1-9.9-8.2

1995 Rules

-9.5-8.1

-10.2

-1.2-11.3-12.8-7.6

25th

-3.7-5.2-2.2

-2.9-7.0-8.2-4.5

-1.5-0.6-2.1

2.0-1.2-1.5-1.0

-1.4-0.2-2.2

1.80.4

-3.2-0.2

Median

1.80.33.0

0.80.0

-0.70.7

3.54.52.7

5.84.85.53.8

3.64.92.6

5.56.14.04.6

75th

6.45.27.1

5.05.64.75.4

7.99.26.7

9.310.010.68.3

8.09.66.6

9.011.39.59.0

90th

11.210.611.5

8.711.810.910.4

13.015.111.2

13.617.916.013.5

13.215.111.2

13.419.315.314.3


NOTE: Results correspond to federal fiscal year 1989. The overall margin for individual hospitals is defined as the difference betweenthe hospital's total revenues and total costs, expressed as a percentage of its total revenues.



RELATED CBO STUDIES

Universal Health Insurance Coverage Using Medicare's Payment Rates,December 1991.

Restructuring Health Insurance for Medicare Enrollees, August 1991.

Selected Options for Expanding Health Insurance Coverage, July 1991.

Policy Choices for Long-Term Care, June 1991.

Rising Health Care Costs: Causes, Implications, and Strategies, April1991.

Medicare's Disproportionate Share Adjustment for Hospitals, May 1990.

Physician Payment Reform Under Medicare, April 1990.

Questions about these studies should be directed to CBO's HumanResources and Community Development Division at (202) 226-2653.The Office of Intergovernmental Relations is CBO's Congressionalliaison office and can be reached at 226-2600. Copies of the studies maybe obtained by calling CBO's Publications Office at 226-2809.

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