Balancing ‘Act’: Rural Margins and Medicare Reforms
Summary of the 7/29/99 Forum

July 1999

Rural relief in some form is a likely component of any package the Senate Committee on Finance will propose this year to remedy the most severe effects of Medicare payment reductions under the 1997 Balanced Budget Act, or BBA.

That was a message heard at the Capital Area Rural Health Roundtable, July 29^th where almost a hundred rural-interested association representatives and health policy officials met on Capitol Hill to discuss the long term effects on rural health services of the BBA’s Medicare provisions.

Sponsored quarterly by the George Mason University Center for Health Policy and Ethics to explore rural health issues, the Roundtable for July hosted speakers Gail Wilensky, chair of the Medicare Payment Advisory Commission (MedPAC); Keith Mueller, chairman of the rural panel of the Missouri-based Rural Policy Research Institute (RUPRI); Swainsboro, Georgia rural hospital chief financial officer, H.D. Cannington; and Senate legislative aide, Tom Walsh who staffs Senate finance committee member Charles Grassley (R-IA) on Medicare and aging issues.

The July forum focused in particular on the financial crucible predicted for small hospitals under the new Medicare prospective payment mandate which sets fixed (and reduced) payments for post-acute care. The new payment system applies to services like outpatient, skilled nursing, and home health care that many rural hospitals have embraced in the past decade in order to finance their low-volume high-cost in-hospital care and to fill service gaps in their communities.

The BBA As Prologue

RUPRI policy analyst Keith Mueller struck a conciliatory posture at the forum’s outset, saying that the BBA’s "limited reforms" to federal health care spending are a forecast of greater Medicare restructuring in the near future. "The whole purpose is to generate savings." he said, "and we need to keep in mind that we do need to have some savings at the end of the day." Mueller also reminded his audience that some rural benefits also came from the watershed legislation that closed out the 1997 legislative year, such as cost-based Medicare payments for Critical Access Hospitals - the new limited-service hospital model.

Still, there is ample evidence from research to date, said Mueller, that the impact of prospective payment will fall disproportionately on small rural hospitals. He recounted that in the mid-1990s when efforts to slow federal spending growth in Medicare were on the Congressional drawing board, the nation’s hospital operating margins in the aggregate were at record highs, and even rural providers appeared to be in reasonable shape. Since that time, however, private insurers have reduced their payments for services to the commercially-insured population, while the number of uninsured patients whose care is uncompensated has increased. At the time of the BBA’s implementation, "we’ve had to think about damage control" for rural systems which are "characterized by fiscal fragility." Rural providers tend to also be the safety nets in their communities, he said. [Projections by two national studies - Ernst & Young and the Lewin Group – suggest rural hospital operating margins could fall as low as -7% by the year 2002 and to almost –13% for those with fewer than 50 beds.]

The RUPRI analyst and director of the Nebraska Center for Rural Health Research called for moving ahead on the reforms of the BBA and beyond that to restructuring Medicare for marketplace competition, while making provision for the fact that "rural is different:" Providers are limited in number, more dependent on Medicare, and "historically inexperienced with…though not necessarily opposed to" the kind of system development that could sustain Medicare innovations like managed care and measuring quality of care. The key, he said, is to support local development as opposed to focusing on large outside health plans, a reference to some of the withdrawals from rural markets recently of national companies under the new Medicare + Choice experiment.

Released the day of the forum, the RUPRI panel report, Implementation of the Provisions of the Balanced Budget Act of 1997, outlines potential rural vulnerabilities under the BBA across providers and services. Subtitled Critical Issues for Rural Health Delivery, the report offers a range of policy options, such as developing a prospective payment system specific to rural providers, providing supplementary payments for certain higher costs borne by safety-net providers, improving Medicare’s wage-rate formulas for rural areas, and basing payment rates for Medicare managed care plans on service areas larger than single counties. It also calls for thorough impact analyses of prospective payment on rural services and rural Medicare beneficiaries.

Studies, aside, Mueller said it would be too late "if we wait for that final piece of evidence after the first canary dies" before taking action to preserve rural services.

Absence of the Smoking Data Gun

Speaking for the Medicare Payment Advisory Commission, however, chairwoman Gail Wilensky, said one of the "greatest sources of frustration" for the commission has, in fact, been the absence of post-BBA data and the difficulty of identifying for Congress which of today’s urban and rural provider problems are attributable to BBA policy changes, and which are not. Wilensky, a senior fellow at the Project Hope center for research and a former Health Care Financing Administration head, said current projections for the BBA’s impacts are based on 1997 data, and "old data and new assumptions does not make for new data."

Wilensky said the commission has attempted to "jump-start" data collection through discussions with HCFA and the hospital industry to consider faster ways to gather and report data. Though not mentioned, HCFA also recently established an internal work group to deal with rural issues.

There is still "widespread agreement that much can be instituted" in the way of immediate and targeted easing of BBA policies, Wilensky told questioners, who included representatives of a Louisiana rural hospital coalition who flew into Washington to seek some answers. The MedPAC chair outlined the need for refinements to formulas for outpatient care, therapeutic care, and nursing home care for patients with complex needs.

A good area for providing relief, said Wilensky, would be to allow institutions to adjust to outpatient prospective payment with a phase-in period, especially since the law now results in reductions of 5.8 percent - two percent greater than members, she said, were expecting to impose. She said the magnitude of such a change - 5.8 percent - is especially great for small and rural hospitals, and also for teaching hospitals because of their disproportionate use of outpatient care relative to inpatient revenues. A phase-in would also allow government to make impact assessments over time.

Although a considerable portion of federal policy support for rural health in the last decade has been instituted through Medicare funding, the MedPAC chairwoman drew a firm conceptual line between Medicare as a program for the elderly and Medicare as a policy instrument for problems she acknowledged might still be "the legitimate function of government" to address. "Medicare is in fact, a fragile fiscal program and will have enough to do to take care of the 78 million baby boomers," she said. On the other hand, if service shortages result in an access problem for Medicare’s seniors, then it is "absolutely a legitimate area of concern for [Medicare] policy changes," she added.

The View From Here

"I don’t know about other rural hospitals, but Emanuel Medical Center cannot survive under the current proposed rules," Georgia hospital administrator H.D. Cannington told attendees. Invited to describe what it is like to be in the administrative offices of a rural hospital today, the chief financial officer described his 72-bed hospital in rural Swainsboro (pop. 9,000) that serves 30,000 people in a three-county area. Augusta, Georgia is 80 miles away. Seventy percent of its patients are Medicare or Medicaid dependent and 10 percent are uninsured.

Cannington said a graduated phase-in of the scheduled cutbacks would just mean a slower death for his institution. Urban-based agencies aren’t necessarily available to replace lost services, he said, recalling that as a rural hospital administrator in a Florida county in 1992, he had opened a home health agency because doctors there could not persuade urban professionals to drive out on dirt roads to rural patients. Echoing those remarks, Grassley staffer Walsh later said, "there’s no surplus of agencies 'duking' it out for the privilege of serving the [rural] market," and added that an additional 15% across-the-board cut for home health scheduled in October of 2000 is going to be a "big cut."

Georgia’s Cannington walked his audience through his financial and managerial balance sheets: He calculated that outpatient prospective payment will reduce revenues at Emanuel Medical Center by more than $235,000 against what was a budgeted net profit of only $364,000 - "critically low" at a 2.2 percent margin. "This [impact] is due to our high use of the emergency room, observation services and diagnostic testing, which is typical of rural hospitals," he said.

"We cannot absorb a $300,000 reduction in reimbursement," Cannington concluded. Emanuel Medical Center ended its fiscal year this June with a loss in excess of $500,000. The new budget, he said, has been put together with reductions of 10 percent in supplies and one percent in salaries, and a projected $208,000 profit from a new mental health partial hospitalization program that opened this July. Needed renovations and repairs were stalled to purchase necessities (a new echocardiograph machine at $80,000, $28,000 in fuel storage tanks, a $21,000 hysteroscope) and move the hospital forward by $34,000 on a $140,000 road to Y2K computer compliance.

Cannington said federal policy changes are hard to deal with while running the hospital’s daily operations on a thin managerial infrastructure. "All department managers are working supervisors" who work weekends and "pull call just like everybody else," he said. Drawing managers with competitive salaries is also impossible, he said, given Medicare’s "area wage index" which effectively lowers reimbursements 13 to 24 percent below urban rates "for the same medical treatment."

On Senate Finance, "Something’s Happening …"

At the Senate finance committee staff level, Grassley health aide, Tom Walsh, reviewed a range of likely and possible changes under consideration. Joking with his audience that lyrics from an old song seem appropriate, "There’s something happening here; What it is, isn’t exactly clear," he nevertheless said the committee is "dominated by members whose state’s have large rural populations" and has rural interests firmly fixed within its sites on the BBA dilemma.

Walsh said the committee’s "big picture" is to continue reforming Medicare to make it financially viable for the future. "The challenges are to make sure that what gets done is good Medicare policy in the first place and that it’s done with special attention to rural areas." He said Committee members are predisposed to fixes in areas of well-documented problems for beneficiaries "as opposed to indiscriminate 'givebacks' to industries," and that this bodes well for rural needs. Walsh called for more conversations between rural providers and fact finders like MedPAC, HCFA, and General Accounting Office, while still concluding, "we really don’t have the luxury of waiting until all the returns are in from the provinces to decide what we are going to do."

Finance committee staff are currently talking about investing $5-7 billion over the next five years on Medicare fixes," said Walsh. But as much as $4.5 billion of that amount could be consumed by adjustments to the outpatient prospective payment mandate, unless the Health Care Finance Administration agrees to use what "seventy-seven members of the Senate believe" is the agency’s legal latitude to administratively reduce the projected savings rate from 5.7 percent to 3.8 percent over the next five years. Right now, said Walsh, the administration maintains it does not have that legal prerogative. "The [Clinton] Administration has not told us what its priorities are for the BBA," he said. "They appear to be especially concerned at the moment with large teaching hospitals."

Legislative solutions on rural outpatient care, said Walsh, "will have to be bird-dogged" but they could include such remedies as a phase-in; a floor on losses for any given facility in the first few years, or simply exempting certain favored categories of rural providers – like Medicare-dependent hospitals, rural referral centers, and sole community providers, as is done now for in-patient care.

In addition to out-patient prospective payment adjustments, the committee is seriously considering adjustment to, though not outright repeal of BBA caps for therapeutic services, according to Walsh. He also said finance committee chairman, William Roth (R-DE), recognizes MedPAC’s concern that the new prospective payment system seriously undercompensates care for medically-complex patients.

Other rural measures Senator Grassley would like to advance before the finance committee members are contained in his comprehensive rural health bill, S. 980, Promoting Health in Rural Areas Act of 1999. These include repeal of a BBA provision that reduces payment when a hospital transfers a Medicare patient to a post-acute setting earlier than provided for under the average diagnosis-related stay; reconsideration of the additional 15 percent cut across- the-board for home health in October of 2000; and repeal of the BBA’s phase-out on cost-based reimbursement for Rural Health Clinics and Community Health Centers.

Both Walsh and Wilensky said there may be opportunities to improve some pre-BBA policies such as DSH or "disproportionate-share" payments for rural facilities with a disproportionate share of Medicare and Medicaid patients. Walsh said current policy overcompensates urban and suburban hospitals. The Grassley bill calls for budget neutral measures to expand the threshold on eligibility for DSH status and include uncompensated care in the DSH formula. Also, the Medicare wage calculation needs to be adjusted for occupational mix, he said.

"Wild cards" that could "turn something into nothing" for rural fortunes in the BBA gamble are inherent in the fact, said Walsh, that rural interests are less well represented in the House and in the constraints that HCFA faces to upgrade its computer systems. He said even bigger risks come with Congress’ and the Administration’s desire to move aggressively on larger Medicare reforms this year - something the finance committee is interested in "taking a shot at." Walsh expressed hope, however, that "BBA fixes are seen as too essential by too many people for them to be held hostage to other issues."

Permission to use and distribute this account is permitted with attribution to
the Center for Health Policy and Ethics, George Mason University.