Critical Access Hospitals and Cost Shifting

With more than 1300 acute care hospitals, the Critical Access Hospital (CAH) program is the largest Medicare program aimed at maintaining access to health care for rural Americans.¹ However, there is debate about how best to support the financial viability of CAHs while limiting rising health care costs. Under Medicaid, almost 2 dozen states have adopted or are considering cost-based reimbursement for CAHs, while other states use alternative payment mechanisms.² President Barack Obama’s 2014 budget proposal calls for a reduction in CAHs’ Medicare reimbursement from 101% to 100% of costs. Several states have criticized the proposed cuts,³ given the small margins of CAHs.⁴ In the context of ongoing discussion about CAH reimbursement, it is important to better understand how health care providers currently utilize funds from the CAH Programs.

More than one-third of all CAHs are part of hospital systems that include non-CAH hospitals that are reimbursed prospectively (ie, with a prospectively set payment that is independent of the costs incurred). Prior research has shown that health care providers shift costs away from services reimbursed with a fixed amount and toward services reimbursed on a cost basis.⁵ If systems strategically use accounting practices to shift costs to CAHs, eliminating such practices may offer one way to hold down health care costs while preserving the financial viability of CAHs.

Data are on the organizational level, and therefore institutional review board approval was not required. We used data obtained from the American Hospital Association Annual Survey to identify 94 systems with 302 hospitals that converted to CAH designation from 1997 to 2010, the period from the start of the CAH program to the most recent year for which cost data (from the Medicare Hospital Cost Reports) are available.

Hospital systems frequently bundle services, such as information technology and management services, and provide them centrally at the parent organization. Medicare allows hospital systems to allocate these costs to system members; using a system member’s share of inpatient days to allocate costs is consistent with Medicare guidelines.⁶ The “administrative and general” cost category predominantly reflects costs from bundled services.

For each hospital system, we compared each system member’s share of administrative and general costs to its share of total system inpatient days (Table 1). To capture the underlying accounting, we defined this as the allocation ratio. An allocation ratio of 1 indicates that a hospital’s share of administrative and general costs follows its share of inpatient days.

We performed linear regression analysis on the sample to assess whether conversion to CAH designation (primary independent variable) was associated with a change in allocation ratio (primary dependent variable). Standard errors were clustered at the hospital system-year level. We defined statistical significance at the P < .05 level.

In the periods before CAH conversion, the ratio of each hospital’s relative proportion of administrative and general costs to its relative proportion of inpatient days was close to 1 (Table 2). In the time period after CAH conversion, the median value for the allocation ratio was 1.40 for newly designated CAHs, and this increase was statistically significant (P < .001). The higher postconversion administrative and general costs across all hospital systems totaled approximately $150 million annually, which represents about 5% of Medicare payments to CAHs in these systems.

Among hospitals that converted to CAH designation while part of a hospital system, the relative proportion of costs that reflect shared services provided by the parent organization is significantly higher than would be expected in the postconversion period. Our findings are consistent with hospital systems strategically changing their accounting methods to maximize cost-based reimbursement under the CAH program. As a result of the Medicare Modernization Act of 2003,⁷ few hospitals have converted to CAH designation since 2006. Thus, limiting new CAH conversions would not result in substantial program cost savings. While the proportion of CAHs that are part of a system has been increasing, most CAHs are stand-alone facilities. To maintain financing for the majority of CAHs, Medicare could attempt to contain CAH program costs by curbing the cost shifting that is possible under current guidelines.

Corresponding Author: Merle Ederhof, PhD, Steven M. Ross School of Business, University of Michigan, 701 Tappan St, Room R3362, Ann Arbor, MI 48109-1234 (ederhof@umich.edu).

Published Online: November 4, 2013. doi:10.1001/jamainternmed.2013.11901.

Author Contributions: Dr Ederhof had full access to all of the data in the study and takes responsibility for the integrity of the data and the accuracy of the data analysis.

Study concept and design: Ederhof.

Analysis and interpretation of data: Both authors.

Drafting of the manuscript: Both authors.

Critical revision of the manuscript for important intellectual content: Both authors.

Statistical analysis: Ederhof.

Administrative, technical, or material support: Ederhof.

Study supervision: Both authors.

Conflict of Interest Disclosures: None reported.

Funding/Support: Dr Chen is supported by a Career Development Grant Award (K08HS020671) from the Agency for Healthcare Research and Quality.

Role of the Sponsor: The funding source had no role in the design and conduct of the study; collection, management, analysis, and interpretation of the data; and preparation, review, or approval of the manuscript; and decision to submit the manuscript for publication.

Previous Presentation: The study was presented at the AcademyHealth Annual Research Meeting; June 26, 2012; Orlando, Florida.

Additional Contributions: John Z. Ayanian, MD, MPP, provided comments on an earlier version of this manuscript. Mary Jane Giesey, BA, provided research assistance. She was compensated for her work.