Content provided in partnership with

Health Care Industry

Medicare prospective payment without separate urban and rural rates

Health Care Financing Review, Winter, 1992 by Sheila M. O'Dougherty, Philip G. Cotterill, Steven Phillips, Elizabeth Richter, Nancy De Lew, Barbara Wynn, Thomas Ault

Introduction

In October 1983, Medicare's method of paying for inpatient hospital services changed from retrospective, cost-based reimbursement to a PPS. Under PPS, Medicare pays a fixed basic rate for each inpatient stay. This standard rate is either increased or decreased depending on the diagnosis-related group (DRG) applicable to the stay and factors such as the area wage level, the extent of the hospital's teaching activity, and the degree to which the hospital serves low-income persons. Additional payments are also made for unusually expensive cases (outliers). Initially, separate standard rates were established for urban and rural hospitals. Effective October 1987, Congress created two urban standard rates: one for hospitals in metropolitan areas with populations of more than 1 million (large urban) and another for hospitals in other urban areas.

More Articles of Interest: Redesigning Medicare inpatient PPS to adjust payment for post-admission...; Medicare payment options for rural hospitals: the name game - Medicare/Medicaid; Refinement of the Medicare diagnosis-related groups to incorporate a measure...; Design of a prospective payment patient classification system for ambulatory...; Preparing for Medicare's APC system - Ambulatory Payment Classification -...

The Omnibus Budget Reconciliation Act of 1990 (OBRA 1990) phases out the separate standard rates for urban and rural hospitals between fiscal year (FY) 1991 and FY 1995. The elimination of separate rates will be achieved by increasing the rural standard rate more rapidly than the urban rate. The OBRA 1990 action continues a process that began in FY 1988, when the rural standard rate first received a higher annual rate of increase (annual update factor) than the urban. In FY 1995, there will be a single standard rate for rural and other urban hospitals, and a slightly (1.6 percent) higher rate for hospitals in large urban areas.

At the outset of PPS, the standard rate for urban hospitals was more than 20 percent higher than the rate for rural hospitals (as a percent of the urban standard rate). This differential was based on analysis of the 1981 Medicare cost report data, which formed the basis for the original PPS standard rates. The data showed that average rural hospital costs per case were about 40 percent lower than the average urban hospital cost per case (as a percentage of the urban costs). After accounting for differences in case mix, labor costs, and indirect teaching costs, a difference of more than 20 percent remained.

The difference in the initial PPS urban and rural standard rates reflected the unexplained urban-rural cost differences and was motivated by a desire to not disadvantage urban hospitals financially. The relationship between the costs of urban and rural hospitals has changed very little since the inception of PPS. However, the financial condition of rural hospitals and potential adverse consequences for rural Medicare beneficiaries' access to care have been a source of perennial concern.

This concern and the perception that a separate rural rate may be inequitable are responsible for the gradual elimination of the urban-rural differences. Differential annual update factors and technical changes in the calculation of the standard rates (effective October 1, 1987, the rates were case-weighted instead of hospital-weighted and separate urban-rural offsets to finance outlier payments replaced a single offset) substantially narrowed the urban-rural differential even prior to the OBRA 1990 decision to phase out the rate differences. Particularly notable were the FY 1990 annual update factors, which increased the rural standard rate by 9.7 percent, compared with 5.6 percent for the large-urban rate and 5.0 percent for the other-urban rate. By FY 1991, the initial difference of more than 20 percent had been reduced to about 8.1 percent for the large-urban versus the rural rate and about 6.6 percent for the other-urban versus the rural rate.

Related studies

Congressional concern for rural hospitals has spawned a number of studies in recent years. The U.S. General Accounting Office (1990) analyzed reasons for rural hospital closures (Lillie-Blanton et al., 1992). The Prospective Payment Assessment Commission (ProPAC) investigated changes in PPS aimed at raising rural hospital payments and estimated the effect of those policies, had they been in effect at the beginning of PPS. ProPAC (1991) also studied the impact of low volumes of admissions on hospital costs and payments. The U.S. Congressional Budget Office (CBO) (1991) also examined the changes in PPS that were intended to raise rural hospital payments. They compared the effects of the PPS rules that were or would be in effect under current law in FY 1984, FY 1991, and FY 1995 and assessed their implications for the financial conditions of hospitals (U.S. Congressional Budget Office, 1991).

In the Omnibus Budget Reconciliation Act of 1989 (OBRA 1989), Congress directed the Secretary of the U.S. Department of Health and Human Services (USDHHS) to re-examine all the PPS adjustments (for case mix, teaching hospitals, rural referral centers [RRCs], sole community hospitals [SCHs], DSH hospitals, and outlier cases) to the standard rates for their appropriateness if separate urban-rural rates were eliminated and to recommend changes as well as additional payments or adjustments. In this article, we summarize the analyses conducted by the Health Care Financing Administration (HCFA) in response to this mandate. In contrast to the ProPAC and CBO studies, we do not evaluate the effects of past policy changes. Rather, we evaluate the payment adjustments that would be consistent with a single standard rate.

Health Care Industry

Medicare prospective payment without separate urban and rural rates

Health Care Financing Review, Winter, 1992 by Sheila M. O'Dougherty, Philip G. Cotterill, Steven Phillips, Elizabeth Richter, Nancy De Lew, Barbara Wynn, Thomas Ault

Find Research Guides for:

Find Featured Titles for: Arts

Most Popular Articles in Health

Most Popular Publications in Health