Letters
Published Online: November 4, 2013. doi:10.1001/jamainternmed.2013.11901.
Table 2. Change in the Allocation Ratioa After Conversion to CAH Designation Year
Hospitals, No.
Allocation Ratio, Median
T−5
150
0.96
T−4
189
1.00
T−3
234
1.00
T−2
259
1.01
T−1
223
1.04
T+1
302
1.31
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.
T+2
281
1.38
Conflict of Interest Disclosures: None reported.
T+3
262
1.37
T+4
221
1.54
Funding/Support: Dr Chen is supported by a Career Development Grant Award (K08HS020671) from the Agency for Healthcare Research and Quality.
T+5
173
1.50
T (year of conversion)
Abbreviations: A & G, administrative and general; CAH, critical access hospital. a
(Relative Proportion of A & G Costs)/(Relative Proportion of Inpatient Days). P < .001 for the association between CAH conversion and the allocation ratio.
Results | 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. Discussion | 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. Merle Ederhof, PhD Lena M. Chen, MD, MS Author Affiliations: Accounting Department, Ross School of Business, University of Michigan, Ann Arbor (Ederhof); Division of General Medicine, Department of Internal Medicine, Institute for Healthcare Policy and Innovation, University of Michigan, Ann Arbor (Chen); VA Ann Arbor Healthcare System, Ann Arbor, Michigan (Chen). Corresponding Author: Merle Ederhof, PhD, Steven M. Ross School of Business, University of Michigan, 701 Tappan St, Room R3362, Ann Arbor, MI 48109-1234 ([email protected]). 144
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. 1. Joynt KE, Harris Y, Orav EJ, Jha AK. Quality of care and patient outcomes in critical access rural hospitals. JAMA. 2011;306(1):45-52. 2. Radford A, Hamon M, Nelligan C. States’ Use of Cost-Based Reimbursement for Medicaid Services at Critical Access Hospitals. North Carolina Rural Health Research & Policy Analysis Center Findings Brief. April 2010. 3. US Senate Committee on Finance. The President’s Budget for Fiscal Year 2014. April 17, 2013. http://www.finance.senate.gov/hearings/hearing/?id =9b1917e6-5056-a032-5286-a7d3d5c31c13. Accessed May 27, 2013. 4. Holmes GM, Pink GH, Friedman SA. The financial performance of rural hospitals and implications for elimination of the critical access hospital program. J Rural Health. 2013;29(2):140-149. 5. Eldenburg L, Kallapur S. Changes in hospital service mix and cost allocations in response to changes in Medicare reimbursement schemes. J Account Econ. 1997;(23):31-51. 6. Centers for Medicare & Medicaid Services. Provider Reimbursement Manual. Part II, chapter 39, section 3902. 7. Pub L No. 108-173, 117 Stat 2066.
Invited Commentary
Examine Critical Access Hospital Payment Policies Within the Context of Integrated Systems Faced with rural hospital closings, the Balanced Budget Act of 1997 set up criteria to establish critical access hospitals (CAHs) and alternative payment mechanisms for these facilities. The designation was intended for hospitals in areas where there was not another hospital within 35 miles. Until 2006, states had the ability to designate hospitals as necessary provider CAHs even if the 35-mile standard were not fulfilled. CAHs receive cost-based payments rather than prospective payments provided that they have no more than 25 beds and their annual average length of stay does not exceed 4 days. Currently there are more than 1300 CAHs. In this issue, Ederhof and Chen1 raise important issues related to the cost-based reimbursement system for CAHs. The study concludes that in CAHs that are part of hospital systems that include non-CAH hospitals, the relative portion of a system’s costs of shared services attributed to CAHs increased by 40% after conversion to CAH status, thereby al-
JAMA Internal Medicine January 2014 Volume 174, Number 1
Copyright 2014 American Medical Association. All rights reserved.
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Letters
lowing systems to maximize cost-based payments at an annual cost of $150 million. These findings must be considered in the context of the goals of the CAH designation as well as the potential advantages of integration of CAH within a larger hospital system. Although the CAH program has been unquestionably successful in preventing closures of rural hospitals, there are legitimate questions about the value of the program. A recent report of the Office of the Inspector General2 determined that 64% of CAHs are located less than 35 miles from another facility, and if the Centers for Medicare & Medicaid Services (CMS) decertified all CAHs located 15 or fewer miles from their nearest hospitals, Medicare could have saved $268 million in 2011. The CMS has recently proposed decreasing the cost-based payments from 101% to 100%. Cost-based payments lead to less efficient providers. Rosko and Mutter3 showed that CAHs are 5% less efficient than other rural hospitals and their inefficiency increases over time. In addition to being inefficient, CAHs may provide lower quality care. Joynt et al4 found that, compared with non-CAHs, CAHs scored worse on process quality measures related to acute myocardial infarction, congestive heart failure, and pneumonia and that patients admitted to a CAH have significantly higher 30-day mortality rates for these conditions. Ederhof and Chen1 raise the possibility of changing Medicare guidelines on administrative cost allocation to address what they describe as cost shifting. It is important to examine this suggestion in the context of the changing delivery system, specifically addressing the role of hospital systems with CAH members: (1) Do hospital systems shift costs to CAHs because of their more generous payments? (2) Did changes in the percentage of administrative costs attributed to CAH beds occur because care appropriately shifted from a prospective payment system acute hospital to the CAH? (3) Are CAHs more financially viable when they legally become part of or affiliate with a network of health care organizations in which the entire system receives 1 form of payment? (4) Does the quality of care at CAHs improve when the CAH is part of a larger system? Consolidation has led to a growing number of integrated systems as more emphasis is placed on team-based care, coordination across different health care provider settings, and value-based payment methodologies. We learned from system integration in the 1990s that multihospital system integration did not show evidence of economies of scale or improvements in costs per admission, profitability, service provision to the community, charity care, or patient outcomes. Multihospital systems do not necessarily improve efficiency and may actually incur higher administrative costs.5,6 Structural integration does not lead to process of care integration, but consolidation has led to changes in the balance of market power between hospitals and health plans with an increase in hospitals’ market power and higher prices.7,8 We should consider these lessons but acknowledge the potential of integrated systems to address one of the major impediments to CAHs’ financial survival: their small size results jamainternalmedicine.com
in insufficient revenue to support their operational and infrastructure needs. Systems that include CAHs should be held accountable for the efficiency of those hospitals and the care they provide. Being part of a system should benefit the individual components of the system, the people using the system, and the larger society. As members of integrated systems, CAHs may be capable of caring for appropriate patients who do not require higher level care in non-CAH settings. Avoiding transfers may save costs as well as being more patient and family centered. CAHs in larger systems should assess the needs of their communities and their role in meeting those needs. While maintaining their hospital service obligation as is necessary, they should consider undertaking responsibility for preventive care, chronic care and disease management, expanding behavioral health services, or community health improvement with support from the system. Payments and performance measures should reflect these efforts to improve health. Given the evidence that paying hospitals on a cost basis leads to inefficiency, it is appropriate for the CMS to revise the policy that both designates a rural hospital as a CAH and pays on a cost basis. But the move toward more consolidated systems is an opportunity to reform the payment system to ensure that entire systems are efficient, ensure access, meet the needs of communities, and deliver highquality care, including care to rural populations. Developing clear policies about how funds flow within a system with a CAH is as important as how CAHs are paid. Leaders of health system and payment reform efforts have the opportunity to explore innovative solutions to meet the health care needs of rural Americans. JudyAnn Bigby, MD Author Affiliation: Dr Bigby lives in Boston, Massachusetts. Corresponding Author: JudyAnn Bigby, MD, 60 Burroughs St, Boston, MA 02130 ([email protected]). Published Online: November 4, 2013. doi:10.1001/jamainternmed.2013.11469. Conflict of Interest Disclosures: None reported. 1. Ederhof M, Chen LM. Critical access hospitals and cost shifting [published online November 4, 2013]. JAMA Intern Med. doi:10.1001 /jamainternmed.2013.11901. 2. Department of Health and Human Services, Office of Inspector General. Most critical access hospitals would not meet the location requirements if required to re-enroll in Medicare. http://oig.hhs.gov/oei/reports/oei-05-12 -00080.pdf. Accessed September 13, 2013. 3. Rosko MD, Mutter RL. Inefficiency differences between critical access hospitals and prospectively paid rural hospitals. J Health Polit Policy Law. 2010;35(1):95-126. 4. Joynt KE, Harris Y, Orav EJ, Jha AK. Quality of care and patient outcomes in critical access rural hospitals. JAMA. 2011;306(1):45-52. 5. Burns LR, Pauly MV. Integrated delivery networks: a detour on the road to integrated health care? Health Aff (Millwood). 2002;21(4):128-143. 6. Burns LR, Pauly MV. Accountable care organizations may have difficulty avoiding the failures of integrated delivery networks of the 1990s. Health Aff (Millwood). 2012;31(11):2407-2416. 7. Frakt AB. How much do hospitals cost shift? a review of the evidence. Milbank Q. 2011;89(1):90-130. 8. Melnick G, Keeler E. The effects of multihospital systems on hospital prices. J Health Econ. 2007;26(2):400-413. JAMA Internal Medicine January 2014 Volume 174, Number 1
Copyright 2014 American Medical Association. All rights reserved.
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145
Published Online: November 4, 2013. doi:10.1001/jamainternmed.2013.11901.
Table 2. Change in the Allocation Ratioa After Conversion to CAH Designation Year
Hospitals, No.
Allocation Ratio, Median
T−5
150
0.96
T−4
189
1.00
T−3
234
1.00
T−2
259
1.01
T−1
223
1.04
T+1
302
1.31
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.
T+2
281
1.38
Conflict of Interest Disclosures: None reported.
T+3
262
1.37
T+4
221
1.54
Funding/Support: Dr Chen is supported by a Career Development Grant Award (K08HS020671) from the Agency for Healthcare Research and Quality.
T+5
173
1.50
T (year of conversion)
Abbreviations: A & G, administrative and general; CAH, critical access hospital. a
(Relative Proportion of A & G Costs)/(Relative Proportion of Inpatient Days). P < .001 for the association between CAH conversion and the allocation ratio.
Results | 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. Discussion | 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. Merle Ederhof, PhD Lena M. Chen, MD, MS Author Affiliations: Accounting Department, Ross School of Business, University of Michigan, Ann Arbor (Ederhof); Division of General Medicine, Department of Internal Medicine, Institute for Healthcare Policy and Innovation, University of Michigan, Ann Arbor (Chen); VA Ann Arbor Healthcare System, Ann Arbor, Michigan (Chen). Corresponding Author: Merle Ederhof, PhD, Steven M. Ross School of Business, University of Michigan, 701 Tappan St, Room R3362, Ann Arbor, MI 48109-1234 ([email protected]). 144
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. 1. Joynt KE, Harris Y, Orav EJ, Jha AK. Quality of care and patient outcomes in critical access rural hospitals. JAMA. 2011;306(1):45-52. 2. Radford A, Hamon M, Nelligan C. States’ Use of Cost-Based Reimbursement for Medicaid Services at Critical Access Hospitals. North Carolina Rural Health Research & Policy Analysis Center Findings Brief. April 2010. 3. US Senate Committee on Finance. The President’s Budget for Fiscal Year 2014. April 17, 2013. http://www.finance.senate.gov/hearings/hearing/?id =9b1917e6-5056-a032-5286-a7d3d5c31c13. Accessed May 27, 2013. 4. Holmes GM, Pink GH, Friedman SA. The financial performance of rural hospitals and implications for elimination of the critical access hospital program. J Rural Health. 2013;29(2):140-149. 5. Eldenburg L, Kallapur S. Changes in hospital service mix and cost allocations in response to changes in Medicare reimbursement schemes. J Account Econ. 1997;(23):31-51. 6. Centers for Medicare & Medicaid Services. Provider Reimbursement Manual. Part II, chapter 39, section 3902. 7. Pub L No. 108-173, 117 Stat 2066.
Invited Commentary
Examine Critical Access Hospital Payment Policies Within the Context of Integrated Systems Faced with rural hospital closings, the Balanced Budget Act of 1997 set up criteria to establish critical access hospitals (CAHs) and alternative payment mechanisms for these facilities. The designation was intended for hospitals in areas where there was not another hospital within 35 miles. Until 2006, states had the ability to designate hospitals as necessary provider CAHs even if the 35-mile standard were not fulfilled. CAHs receive cost-based payments rather than prospective payments provided that they have no more than 25 beds and their annual average length of stay does not exceed 4 days. Currently there are more than 1300 CAHs. In this issue, Ederhof and Chen1 raise important issues related to the cost-based reimbursement system for CAHs. The study concludes that in CAHs that are part of hospital systems that include non-CAH hospitals, the relative portion of a system’s costs of shared services attributed to CAHs increased by 40% after conversion to CAH status, thereby al-
JAMA Internal Medicine January 2014 Volume 174, Number 1
Copyright 2014 American Medical Association. All rights reserved.
Downloaded From: http://archinte.jamanetwork.com/ by a Nanyang Technological University User on 05/26/2015
jamainternalmedicine.com
Letters
lowing systems to maximize cost-based payments at an annual cost of $150 million. These findings must be considered in the context of the goals of the CAH designation as well as the potential advantages of integration of CAH within a larger hospital system. Although the CAH program has been unquestionably successful in preventing closures of rural hospitals, there are legitimate questions about the value of the program. A recent report of the Office of the Inspector General2 determined that 64% of CAHs are located less than 35 miles from another facility, and if the Centers for Medicare & Medicaid Services (CMS) decertified all CAHs located 15 or fewer miles from their nearest hospitals, Medicare could have saved $268 million in 2011. The CMS has recently proposed decreasing the cost-based payments from 101% to 100%. Cost-based payments lead to less efficient providers. Rosko and Mutter3 showed that CAHs are 5% less efficient than other rural hospitals and their inefficiency increases over time. In addition to being inefficient, CAHs may provide lower quality care. Joynt et al4 found that, compared with non-CAHs, CAHs scored worse on process quality measures related to acute myocardial infarction, congestive heart failure, and pneumonia and that patients admitted to a CAH have significantly higher 30-day mortality rates for these conditions. Ederhof and Chen1 raise the possibility of changing Medicare guidelines on administrative cost allocation to address what they describe as cost shifting. It is important to examine this suggestion in the context of the changing delivery system, specifically addressing the role of hospital systems with CAH members: (1) Do hospital systems shift costs to CAHs because of their more generous payments? (2) Did changes in the percentage of administrative costs attributed to CAH beds occur because care appropriately shifted from a prospective payment system acute hospital to the CAH? (3) Are CAHs more financially viable when they legally become part of or affiliate with a network of health care organizations in which the entire system receives 1 form of payment? (4) Does the quality of care at CAHs improve when the CAH is part of a larger system? Consolidation has led to a growing number of integrated systems as more emphasis is placed on team-based care, coordination across different health care provider settings, and value-based payment methodologies. We learned from system integration in the 1990s that multihospital system integration did not show evidence of economies of scale or improvements in costs per admission, profitability, service provision to the community, charity care, or patient outcomes. Multihospital systems do not necessarily improve efficiency and may actually incur higher administrative costs.5,6 Structural integration does not lead to process of care integration, but consolidation has led to changes in the balance of market power between hospitals and health plans with an increase in hospitals’ market power and higher prices.7,8 We should consider these lessons but acknowledge the potential of integrated systems to address one of the major impediments to CAHs’ financial survival: their small size results jamainternalmedicine.com
in insufficient revenue to support their operational and infrastructure needs. Systems that include CAHs should be held accountable for the efficiency of those hospitals and the care they provide. Being part of a system should benefit the individual components of the system, the people using the system, and the larger society. As members of integrated systems, CAHs may be capable of caring for appropriate patients who do not require higher level care in non-CAH settings. Avoiding transfers may save costs as well as being more patient and family centered. CAHs in larger systems should assess the needs of their communities and their role in meeting those needs. While maintaining their hospital service obligation as is necessary, they should consider undertaking responsibility for preventive care, chronic care and disease management, expanding behavioral health services, or community health improvement with support from the system. Payments and performance measures should reflect these efforts to improve health. Given the evidence that paying hospitals on a cost basis leads to inefficiency, it is appropriate for the CMS to revise the policy that both designates a rural hospital as a CAH and pays on a cost basis. But the move toward more consolidated systems is an opportunity to reform the payment system to ensure that entire systems are efficient, ensure access, meet the needs of communities, and deliver highquality care, including care to rural populations. Developing clear policies about how funds flow within a system with a CAH is as important as how CAHs are paid. Leaders of health system and payment reform efforts have the opportunity to explore innovative solutions to meet the health care needs of rural Americans. JudyAnn Bigby, MD Author Affiliation: Dr Bigby lives in Boston, Massachusetts. Corresponding Author: JudyAnn Bigby, MD, 60 Burroughs St, Boston, MA 02130 ([email protected]). Published Online: November 4, 2013. doi:10.1001/jamainternmed.2013.11469. Conflict of Interest Disclosures: None reported. 1. Ederhof M, Chen LM. Critical access hospitals and cost shifting [published online November 4, 2013]. JAMA Intern Med. doi:10.1001 /jamainternmed.2013.11901. 2. Department of Health and Human Services, Office of Inspector General. Most critical access hospitals would not meet the location requirements if required to re-enroll in Medicare. http://oig.hhs.gov/oei/reports/oei-05-12 -00080.pdf. Accessed September 13, 2013. 3. Rosko MD, Mutter RL. Inefficiency differences between critical access hospitals and prospectively paid rural hospitals. J Health Polit Policy Law. 2010;35(1):95-126. 4. Joynt KE, Harris Y, Orav EJ, Jha AK. Quality of care and patient outcomes in critical access rural hospitals. JAMA. 2011;306(1):45-52. 5. Burns LR, Pauly MV. Integrated delivery networks: a detour on the road to integrated health care? Health Aff (Millwood). 2002;21(4):128-143. 6. Burns LR, Pauly MV. Accountable care organizations may have difficulty avoiding the failures of integrated delivery networks of the 1990s. Health Aff (Millwood). 2012;31(11):2407-2416. 7. Frakt AB. How much do hospitals cost shift? a review of the evidence. Milbank Q. 2011;89(1):90-130. 8. Melnick G, Keeler E. The effects of multihospital systems on hospital prices. J Health Econ. 2007;26(2):400-413. JAMA Internal Medicine January 2014 Volume 174, Number 1
Copyright 2014 American Medical Association. All rights reserved.
Downloaded From: http://archinte.jamanetwork.com/ by a Nanyang Technological University User on 05/26/2015
145
