Although Medicaid revenue represents a comparatively small share of Critical Access Hospitals’ (CAHs) overall business (7.2% of all days, on average), Medicare Rural Hospital Flexibility Grant Program (Flex Program) officials continue to report that these revenues are important to rural hospitals and that Medicaid reimbursement policies are a significant factor in deciding whether to convert to CAH status. To gain a better understanding of the role and impact of state Medicaid programs and policies in the implementation of the Flex Program, the Flex Program Tracking Team documented the methods states use to pay hospitals generally and CAHs in particular.

Data Source

• Telephone interview survey of the official(s) within each state Medicaid agency who was most knowledgeable about the state’s reimbursement policies for inpatient, outpatient, home health, and skilled nursing facility services.

• Of the 47 states participating in the Flex Program, five are not included in the study results: Medicaid staff in three states (Massachusetts, Missouri, and New Mexico) declined to be interviewed, and in two states, Connecticut and Maryland, there are no certified CAHs and no expectation of conversions in the foreseeable future.

How Do Medicaid Programs Pay CAHs For Inpatient Care?

Of the 42 states studied, 17 (40%) have created differential Medicaid inpatient reimbursement policies for CAHs. Forty-eight percent of all CAHs are located in these 17 states. In 11 of the 17 states, the special payment policy is a cost-based methodology achieved through annual cost settlement. Other approaches, described below, create the opportunity for some CAHs to receive more than cost, depending on the individual institution’s cost structure:

• Minnesota:  CAHs receive a 20% add-on to the diagnosis-related group (DRG) calculation.

• Oklahoma:  CAHs receive a 38% enhancement to the per diem payment.

• Kentucky:  CAHs are given nearly a 100% enhancement to the per diem rate paid to other hospitals.

• North Carolina:  All Medicaid-participating hospitals are guaranteed DRG payments no lower than the 45th percentile. At the end of the fiscal year, if a CAH’s Medicaid costs are above the 45th percentile, Medicaid promises 100% cost settlement. If their costs are below the 45th percentile, the facility keeps the difference, receiving more than costs for their inpatient Medicaid services.

• New York:  All acute care hospitals within each of eight geographic regions are used as peer groups to determine a hospital’s per diem rate. CAHs are guaranteed payment equal to 110% of the average payment for their region. This payment methodology likely benefits CAHs, because larger and higher volume hospitals are used in the calculation of average payments.

• Ohio:  Any CAH Medicaid shortfall is recovered through payments from a disproportionate share hospital (DSH) pool protected for CAHs, with special criteria used to determine each CAH’s share.

In six other states, CAHs benefit from enhanced payment structures that were developed for either all rural hospitals (4 states) or all small hospitals (2 states), so Medicaid officials feel there is no need for a preferential CAH policy. Except for the few CAHs located in urban counties, the 49 CAHs in these six states qualify for these alternative payment methodologies. Two of the six states have alternate payment methods that are cost-based. In the remaining four states, it is difficult to assess how beneficial the methodologies are for CAHs. For example, the Utah Medicaid program pays rural hospitals 94% of charges, a methodology that is more or less beneficial depending on the individual hospital’s cost to charge ratio.

The remaining 19 states have not created preferential payments for CAHs or any other group of hospitals that might include CAHs. However, Medicaid officials in a number of states explained that the general reimbursement methodology used is not necessarily harmful to CAHs. For example, hospitals in Arizona are paid using a statewide per diem rate that benefits small rural hospitals, like CAHs, because the costs in these smaller hospitals are very likely to fall below the statewide average. In Louisiana, the per diem method is much like an interim rate, as DSH funds are used to offset all Medicaid shortfalls for rural hospitals. Finally, in some states, peer groupings have been designed to support small facilities with low patient volume. Thus, the pursuit of cost-based or other alternative inpatient Medicaid reimbursement policies is not necessarily a goal in all states.

In some states where creating special payment policies for CAHs has been an unrealized goal, contacts described past efforts to create a differential policy for inpatient Medicaid reimbursement for CAHs. Budget constraints have been the most common obstacle to implementing such changes. In at least five states, Medicaid officials reported that their state’s financial condition prevented progress towards establishing an enhanced rate for inpatient Medicaid care in CAHs. Despite these obstacles, several state contacts explained that they plan to continue to push for the establishment of a differential inpatient reimbursement policy for their state’s CAHs in the interest of strengthening the financial viability of these facilities.

State Medicaid Payment Policies for Critical Access Hospitals ...(cont'ed)

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