Geographic Variation in the Profitability of Critical Access Hospitals


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.

North Carolina Rural Health Research and Policy Analysis Center
George Pink, Victoria Freeman, Randy Randolph, G. Mark Holmes