Concerns about the use of the Medicare Prospective
Payment System (PPS) for rural hospitals arose in the
1990s. Rural and small hospitals face factors, such as
diseconomies of scale, which could hinder financial
performance in comparison to urban and larger hospitals.
For these reasons, Federal law makers created special
payment classifications under the Medicare program,
recognizing that many rural hospitals are the only health
facility in their community, and their survival is vital
to ensure access to healthcare. One of these
classifications is Critical Access Hospital (CAH). CAHs
are limited to 25 beds and primarily operate in rural
areas. Unlike traditional hospitals (which are paid under
prospective payment systems), Medicare pays CAHs based on
each hospital's reported costs. Each CAH receives 101
percent of allowable Medicare costs for outpatient,
inpatient, laboratory and therapy services, as well as
post-acute care in the hospital's swing beds. To qualify
for the CAH program, a hospital had be at least 35 miles
by primary road from the nearest hospital (or 15 miles in
areas with mountainous terrain or only secondary roads)
or be declared a "Necessary Provider" by a state. Over
the past year, there have been several policy proposals
to redefine CAH status relative to the distance
requirement and to remove Necessary Provider CAHs'
permanent exemption from the distance requirement.
Decertification as a CAH and subsequent loss of
cost-based reimbursement could lead to substantial
reduction in the profitability of the affected hospitals.
To understand some of the regional differences in the
potential effects of implementing the policy proposals,
this study describes geographic variation in the 2012
profitability of CAHs. Two financial ratios are used to
compare the profitability of CAHs across nine areas of
the country and 45 states.