The Centers for Medicare & Medicaid Services (CMS) has proposed several significant changes to the Hospital Inpatient Prospective Payment Systems (IPPS). The proposed rule, published in the May 4 Federal Register (CMS-1500-P), would modify the reimbursement rates for FY 2006. It would also severely restrict capital improvement projects at critical access hospitals.

CMS will accept comments on the proposed rule until June 24. If approved, the proposed changes would take effect on Oct. 1, 2005 (the start of federal FY 2006).

Reimbursement rates to increase

Under the proposed rule, the total payments under the inpatient prospective payment system could increase by $2.4 billion in FY 2006. The update to the Operating Standardized Amount for FY 2006 is projected to be 3.2% for facilities that submit quality reporting data, and 2.8% for facilities that fail to submit. (To meet the “quality reporting data” requirement, hospitals must publish complete data for all 10 required measures in their March 2005 and August 2005 data publications.)

The FY 2006 Capital Standard Federal rate is projected to increase 0.7%.

For urban hospitals, the average reimbursement increase in FY 2006 is projected to be 2.5% nationwide. The increases will be slightly less in the Midwest: 2.1% in the East North Central region (Illinois, Indiana, Michigan, Ohio, and Wisconsin) and 2.3% in the West North Central region (Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota).

For rural hospitals, the projected increases are 2.6% nationwide, 2.6% in the East North Central region, and 2.3% in the West North Central region.

More changes affecting reimbursement

Another proposed change to the IPPS would increase the number of diagnosis-related groups (DRGs) subject to the postacute transfer policy. Under the proposal, reimbursement is expected to decrease by an average of 1.1% for all urban hospitals and by 0.7% for all rural hospitals, both nationwide and in the Midwestern regions listed above.

The proposed rule would also discontinue the practice of certifying rural health clinics (RHCs) affiliated with hospitals having 50 beds or more as provider-based. This aspect of the proposal is based on the reimbursement methodology for these RHCs.

For both free-standing RHCs and those affiliated with hospitals of 50-plus beds, reimbursement would be limited to the RHC per-encounter limit as updated annually. There would be no difference in reimbursement for these two types of facilities.

Provider-based determinations will still be made for RHCs affiliated with hospitals having fewer than 50 beds.  In this case, the provider-based RHC is not subject to the per-encounter limit.  A free-standing RHC, as noted, would be subject to the limit.

New restrictions on capital improvement projects

One of the most significant changes in the 369-page rule proposal relates to critical access hospitals (CAHs) that undergo capital improvement projects that involve even a minor change of location. Under the current proposal, a CAH that constructs a new building more than 250 yards from its current location could jeopardize its CAH status.

To qualify as a CAH, a facility must be located more than a 35-mile drive (a 15-mile drive in mountainous terrain or in areas served by secondary roads) from another hospital. In the past, a facility that didn’t meet the driving-distance criterion could qualify if the state designated the hospital as a necessary provider of services.

Under the Medicare Modernization Act of 2003 (MMA), this option will be eliminated as of January 1, 2006. Under the new rule, hospitals designated as CAHs under the “necessary provider” provision before the deadline can maintain their designation. However, if the CAH facility changes so much that it is “no longer the same facility due to relocation, cessation of business, or a substitute facility,” it can lose its CAH designation.

Relocation vs. cessation of business

CMS has proposed policies to determine whether or not relocation has occurred. A new facility would be considered “in the same location” under two scenarios: (1) if it is located within 250 yards of the current facility, or (2) if it is built on land that is contiguous to the current CAH campus and was owned prior to December 8, 2003 (the date the MMA was enacted).

The 250-yard requirement is based on the criteria defining what constitutes a hospital campus. Under this scenario, a provider’s designation as a necessary provider would continue to apply regardless of when the construction or renovation of the CAH commenced and was completed.

A CAH can relocate and maintain its status only if it continues to function as essentially the same provider. Factors CMS will consider in determining if this is the case include the distance the CAH moved from its old location, whether the inpatient population is generally the same as is the old location, and whether the range of services provided are essentially the same with the same staff. The provider would also need to meet all of the other conditions of participation (CoPs) for classification as a CAH.

If the CAH meets all of these criteria, it might be able to keep its “necessary provider” designation and continue to be reimbursed as a CAH.  However, additional limitations exist, as discussed in the next section.

New CAH facilities that don’t meet the same-location or relocation criteria would be assumed to have ceased business at one location and established a new business at another. This would be considered a voluntary termination of the CAH’s provider agreement. The provider would need to obtain an agreement to participate under a new provider number.

There is no appeals process for a voluntary termination. In such cases, providers must give advanced notice to CMS and the public regarding their intent to stop providing medical services to their respective communities. The cessation of business would terminate the provider’s CAH designation, and a “necessary provider” designation would no longer be available.

Relocated CAHs: key dates and requirements

As noted above, a provider may be able to keep its “necessary provider” designation after relocating to a new facility if it meets certain established criteria.  The most significant of these revolves around two key dates: Dec. 8, 2003 (the date the MMA was enacted), and Dec. 31, 2006 (the last day that states can designate otherwise disqualified hospitals as “necessary providers”).

For those CAHs that cannot complete their replacement facility before Dec. 31, 2006 and receive the “necessary provider” designation from their State before the sunset date, CMS would allow the CAH that has relocated to maintain its original “necessary provider” designation if the construction plans were “under development” prior to Dec. 8, 2003. Documentation to support an “under development” claim could include drafts of architectural specifications, the purchase of land and building supplies, or documented efforts to secure financing for the construction.

This documentation must be submitted in an application to the state agency prior to Jan. 1, 2006.  The application would also need to include:

• A demonstration that the CAH will meet the same state criteria for the necessary provider designation that were established when the waiver was originally issued. For example, if the location waiver was granted because the CAH was located in a “health professions shortage area” (HPSA), the CAH must remain in that HPSA.
  
  
• Assurance that, after the relocation, the CAH will be servicing the same community and will be operating essentially the same services with essentially the same staff. Specifically, it must demonstrate that it is serving at least 75 percent of the same service area, with 75 percent of the same services offered, and staffed by 75 percent of the same staff, including medical staff, contracted staff, and employees. This is essentially the same criteria used in determining whether the CAH has relocated.
  
  
• Assurance that the CAH will remain in compliance with all of the CoPs at 42 CFR Part 485 in the new location. Compliance would be qualified by a full survey in the new location to include the Life Safety Code and would include any off-site locations and rehabilitation or psychiatric distinct part units.
  
  
• Proof that the replacement facility will facilitate the access to care and improve the delivery of services to Medicare beneficiaries.

To recap, as the proposed rule now stands, a CAH may build a new facility and still maintain its “necessary provider” certification if the new facility meets the requirements for either

1. A replacement facility that is constructed within 250 yards of the current building or contiguous to the current CAH on land owned by the CAH prior to Dec. 8, 2003; or
   
   
2. A relocated facility if, at the relocation site, the CAH provides essentially the same services to the same service area with the same staff.

CAHs planning to relocate must provide documentation demonstrating that the plans to rebuild in the relocation area commenced prior to Dec. 8, 2003.  If a CAH that has a “necessary provider” certification from the state places a new facility in service on or after Jan. 1, 2006, and does not qualify as a replacement or relocated facility, will be considered to have ceased business at the old location and started a new business at the new location.

Measuring the impact on CAHs

CMS estimates that fewer than 10 CAHs would be impacted by the Dec. 8, 2003, “under development” documentation requirements.

However, according to recent research by the North Carolina Rural Health and Policy Analysis Center, there were 834 CAHs in November 2003 (the month before MMA was enacted). By March of 2005, the number of CAH facilities had grown to 1,085 - a 30 percent increase in just 16 months.

One of the reasons many hospitals sought the CAH certification was for assistance with facility expansion and renovation.  Operating under the PPS reimbursement system would never have allowed these providers to make the needed capital upgrades to their facilities.

Of the 1,085 current CAHs, approximately 700 received their CAH certification through a state-issued “necessary provider” designation.  If the CMS estimates are true - that the proposed rule will affect the capital improvement projects of fewer than 10 CAHs - then the remaining 690 or so CAHs operating under a “necessary provider” designation and considering an expansion or replacement facility must either complete these projects by the end of 2005 or be limited exclusively to their current location for any future capital projects.

Making your voice heard: suggested talking points

Many state and national rural health associations have provided information on how to comment on the section of the proposed rule relating to CAHs and called on members to also submit comments to their representatives in Congress. 

If you would like to join in this effort, here are some talking points you might want to focus on.

1. It was clearly not the intent of Congress in passing the Medicare Modernization Act to prohibit Critical Access Hospitals with “Necessary Provider” designations from replacing or relocating their facilities -- facilities that are often 40 or 50 years old.
   
   
2. Many rural hospitals are located on small parcels of land surrounded by residential neighborhoods. For these hospitals, relocation is typically the most appropriate way (and sometimes the only way) to replace outdated facilities.
   
   
3. The CMS proposal to prevent CAHs from rebuilding on adjacent land or nearby locations will end up costing Medicare more, because over time, the higher labor costs associated with outdated facilities far outstrip the capital costs of rebuilding.
   
   
4. A ban on major construction projects initiated after Dec. 8, 2003 is an overreaction to a potential problem that is already covered by another section of the proposed rule - namely, the requirement for assurance that, upon completion of the project, “the CAH will be servicing the same community and will be operating essentially the same services with essentially the same staff.”
   
   
5. A CAH’s Necessary Provider designation is associated with its current Medicare provider agreement which should remain intact unless the CAH fundamentally changes its business (e.g., ceases its current operations) or is terminated by Medicare. It is a longstanding policy that the provider agreement pertains to the legal entity and services provided - not the physical structure or location.

You may also wish to contact your representatives to voice your support for a new bill, the Rural Community Hospital Assistance Act of 2005 (HR 2350), introduced in the House of Representatives on May 12 by Rep. Jerry Moran of Kansas. A companion Senate bill with the same title (S 933) has been introduced by Sen. Sam Brownback, also of Kansas.

The new bill would allow CAHs to receive reimbursements for actual costs, rather than percentages of costs, for follow-up care (skilled nursing, home health services, etc.) after a patient leaves the hospital, as well as for ambulance services. Under the bill, the isolation test for ambulance services would also be eliminated.

While hospitals with 26 to 50 beds do not qualify as CAHs, they also have difficulty handling the financial losses associated with Medicare reimbursement.  The proposed legislation would remedy the situation somewhat by allowing these hospitals to receive reimbursements based on actual costs for inpatient, outpatient, home health and ambulance services.  Facilities currently designated as CAHs could also qualify as a rural community hospitals (RCHs).  There is no requirement that a RCH be a minimum distance from the next closest hospital.

If you would like to learn more about the proposed reimbursement changes to the Hospital Inpatient Prospective Payment Systems (IPPS) or the provisions related to CAHs, please contact a Wipfli professional.

Jim Dregney is Wipfli’s health care reimbursement manager and the firm’s leading expert on Medicare reimbursement issues. He can be reached at 651.636.6468 or jdregney@wipfli.com.