When Medicare was created in 1965 through Title XVIII of the Social Security Act, hospitals were faced with a unique problem: patients now had the means to access care; however, the rates at which hospitals were reimbursed by the state and federal governments through the Medicare fee schedule were often insufficient to cover the hospitals’ costs for providing that care. Consequently, smaller rural hospitals with a disproportionate share of Medicare beneficiaries were unable to cover their operating costs and a flood of rural hospital closures occurred throughout the United States. In all, from 1980 to 1989, more than 230 rural hospitals closed across the country.

To correct the disparity between costs and payment and stem the tide of rural hospital closures, beginning in 1990, Congress enacted a number of supplemental payment systems for qualifying hospitals, so called “Medicare Extenders” that provide extended payments to qualifying facilities in addition to the payments prescribed by the Medicare fee schedule. These new payment systems significantly improved the operating budgets of rural hospitals and effectively cauterized rural hospital closures.

Two particular payment systems have proven to be especially important to keeping rural hospitals open: the Medicare Dependent Small Rural Hospital Program (MDH Program) and the Increased Inpatient Hospital Payment Adjustment for Low-Volume Hospitals (LVH Program).

Medicare Dependent Hospitals (MDHs) are Inpatient Prospective Payment System hospitals located in rural areas, with 100 or fewer beds, for whom at least 60 percent of inpatient days or discharges are attributable to individuals entitled to Medicare Part A benefits during the hospital’s cost reporting period or periods. For discharges on or after October 1, 2006, and before October 1, 2017, MDHs are paid for their inpatient operating costs based on the federal rate, or, if costs are higher than the federal rate, the federal rate plus 75 percent of the amount by which the federal rate is exceeded by the MDH’s updated hospital-specific rate payment based on its fiscal FY1987 or FY2002 costs per discharge, whichever of these hospital-specific rates is highest.

Similar to the Medicare Dependent Hospital Program, the Increased Inpatient Hospital Payment Adjustment for Low-Volume Hospitals provides additional Medicare payments to qualifying hospitals in order to subsidize the operations of low-volume providers, and sustain and expand access to care in rural areas. Under the original rules, to qualify as an LVH, a hospital had to be located 25 miles or more from the nearest “subsection (d)” hospital and have less than 800 Medicare discharges. These rules were later amended by the Affordable Care Act to allow hospitals to receive increased low-volume payments for discharges starting in FY2011 on the condition that they were located more than fifteen 15 miles from the nearest subsection (d) hospital and had fewer than 1,600 Medicare discharges.

Both the MDH program and the LVH program provide rural hospitals the additional funds necessary to stabilize their budgets while continuing to provide a multitude of services.
Today, some thirty years after their creation, the crisis that Medicare Extenders were meant to address has been largely forgotten, and, aside from budget meetings and conversations among hospital stakeholders, the importance of the Medicare Extender programs has been forgotten with it. So much so that on September 30, 2017, Congress allowed both the MDH program and LVH program to expire. As a result, as of October 1, 2017, all previously qualifying MDHs no longer had MDH status and were set to be paid based only on the Medicare fee schedule. Similarly, as of October 1, 2017, the low-volume hospital qualifying criteria and payment adjustment methodology reverted to that which was in effect prior to the amendments made by the Affordable Care Act, effectively disqualifying a number of hospitals from receiving the payments.

Congressional inaction quickly led to panic and an outpouring of support for the MDH and LVH programs from hospital associations and rural health advocates, as their budgets in FY18 and ahead were threatened with dipping further into the red. For example, on January 17, 2018, as Congress worked to pass a continuing resolution to fund the federal government and reauthorize the Children’s Health Insurance Program (CHIP), hospital associations across the country, including the American Hospital Association, urgently lobbied Congress to enact extensions for the MDH and LVH programs as part of the continuing resolution. Without these Medicare Extenders, hospital associations and stakeholders argued, reduced rates for rural providers would force many hospitals to reduce services or close their doors entirely, further limiting access to care for rural Americans.

Similarly, in January of this year, the National Rural Health Association (NRHA) sent an urgent message to its constituents imploring them to contact their Congressional representatives and advocate for Medicare Extenders. Jessica Seigel, Government Affairs Communications Coordinator for the NRHA, stated that “Rural Medicare Extenders are essential to slowing the rural hospital closure crisis. Proposals to alter the Low Volume Hospital Adjustment, like in the Senate Finance bill, or cut the Critical Access Hospital swing-bed program, like in the House Ways and Means bill, are unacceptable. The extensive and damaging cuts already experienced by rural hospitals have resulted in forty-four (44) percent of rural hospitals operating at a loss.”

Unfortunately, there is data to back these assertions. Dr. George Pink and other researchers at the North Carolina Rural Health Research and Policy Analysis Center reviewed the fiscal health of more than 2,300 rural hospitals. They found that 9 percent, nearly 1-in-10 rural hospitals, were at high risk for financial trouble.

“These more vulnerable populations,” Pink said, “are at increased risk of losing access to some types of health care, exacerbation of health disparities and loss of hospital and other types of local employment.”

The situation is all the more dire when you consider the fact that MDHs total margins are the lowest of any hospital classification currently recognized in law. With that fact in mind, it becomes clear that payments based solely on the Medicare fee schedule, and not tied to operating costs, will place these hospitals and their patients at risk of closure and cessation of services.

The effects of rural hospital closures are not limited to reduced patient access and health care outcomes; they also harm rural economies. Rural hospitals are often one of the largest employers in rural areas – approximately 14 percent of total employment in rural communities is attributed to the health sector. Rural hospital closures cause a significant loss of revenue in rural economies (up to 20 percent in some cases) as well as reduce per capita income and increase rural unemployment. According to iVantage, a healthcare analytics firm, if 673 additional hospitals were forced to shut their doors, 99,000 direct health care jobs and another 137,000 community jobs would be lost. Over ten years, rural communities could lose as much as $277 billion in GDP.

“Today, some thirty years after their creation, the crisis that Medicare Extenders were meant to address has been largely forgotten…

Fortunately, it seems Congress has been paying attention. On February 8, the Senate passed the Bipartisan Budget Act of 2018 to re-open the federal government, which the President signed the same day. Included in the bill are extensions for the MDH and LVH Programs through October 1, 2022.

Legislatures even went a step further than some advocates had requested, expanding the qualifying criteria for the LVH Program from 1,600 discharges of individuals entitled to, or enrolled for, benefits under Medicare part A to 3,200 discharges for fiscal years 2019 through 2022.

Why Congress decided to include the Medicare Extenders in the budget bill instead of renewing them through separate legislation prior to their expiration is not clear. As is often the case with must-pass legislation, such as the federal budget, it is a convenient vehicle to which members of Congress can attach and pass controversial or unpopular legislation. However, since Medicare Extenders have bi-partisan support, the delay in renewing them is more likely a testament to the current conditions in Congress than to any other factors (Congress allowed CHIP, a very significant program that provides health care coverage to nearly nine million children, to remain expired for more than 100 days as they negotiated other issues).

Regardless of Congress’s motivations, one thing is clear: the Medicare Extender programs, rural hospital funding, and the issues which surround them, will all be back in the national spotlight in five years. Since 2010, 83 rural hospitals have closed across the United States, with 14 rural hospitals closing in Texas alone. Other hospitals have been forced to reduce staff and cut services, and as many as 700 more hospitals are at risk of closing within the next ten years.

Although both extensions provide additional security for hospitals’ operating budgets for the time being, institutionally speaking, five years is a short amount of time. Due to the limited term of the extensions, hospital associations and their stakeholders cannot rely on the MDH and LVH programs to exist beyond 2022 and must now incorporate that additional risk into their strategic planning. As a result, certain program and/or hiring expansions may not occur, because hospitals do not have the necessary assurances that would make those investments secure.

While the five-year extensions may pacify rural hospitals and constituents until after the 2020 Presidential election, legislatures still have not resolved the underlying issue: insufficient payment to rural hospitals under the Medicare fee schedule. Since both programs are set to expire again in the next five years, expect to see rural health care – particularly rural health care funding – continue to play an increasingly important role in American policy and politics as the next expiration date for these programs moves closer.

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Cameron Onks
Cameron Onks is an attorney at the F. Marie Hall Institute for Rural and Community Health at the Texas Tech University Health Sciences Center.