Implementing Health Care Reform for California’s Rural and Critical Access Hospitals

On March 23, 2010, President Obama signed into law H.R. 3590, the Patient Protection and Affordable Care Act (PPACA). The Senate subsequently approved the accompanying bill, H.R. 4872, the Reconciliation Act.

CHA is developing both near- and long-term plans to educate members and help hospitals comply with the law, and communicate with patients and communities about how reform will affect them, as well as plan for the future.

As a rural hospital leader, CHA is providing the following highlights to help you discuss health care reform with your board, staff and community, focusing on the key components specific to small and rural hospitals. 

  1. The final bill sustains and improves access to care in rural areas through various improvements:
    • Extends the outpatient hold-harmless payments, effective for dates of service on and after January 1, 2010, through December 31, 2010, for hospitals in rural areas with 100 or fewer beds and Sole Community Hospitals.
    • Improves Medicare payments for low-volume hospitals for FFYs 2011 and 2012. The size of a low-volume hospital is increased from 1,500 to 1,600 discharges per year and the Secretary is required to determine the low-volume add-on amount using a linear sliding scale ranging from 25% for low-volume hospitals with Medicare discharges below a certain threshold, to no adjustment for hospitals with more than 1,600 Medicare discharges.
    • Ensures that Critical Access Hospitals (CAHs) are paid 101 percent of Medicare costs for all outpatient services regardless of the billing methods elected.
    • Extends and expands the Rural Community Hospital Demonstration Program for five additional years, through December 31, 2014, and increases the number of participating hospitals from 15 to 30. In addition, this provision expands the eligible sites to rural areas in all states.
    • Extends the Medicare Dependent Hospital program, which is set to expire on September 30, 2011, for one additional year, through September 30, 2012.
    • Provides a 3% add-on payment for home health service provided to Medicare beneficiaries in rural areas from April 1, 2010 through December 31, 2015.
    • Removes the limit on the number of eligible counties that may participate in the demonstration project on community health integration models in certain rural counties within qualifying states.
    • Requires MedPAC to review payment adequacy for rural health care providers serving the Medicare program and report to Congress by January 1, 2011.
    • Extends the Medicare Rural Hospital Flexibility Program through 2012 and allows Small Rural Hospital Improvement (SHIP) grant program funding to support small rural hospitals’ participation in the delivery system reform programs outlined in this legislation (such as VBP, bundling, and accountable care organizations).
    • Extends reasonable cost reimbursement for clinical laboratory tests performed by hospitals with fewer than 50 beds in qualified rural areas as part of their outpatient services for cost reporting periods beginning on or after July 1, 2010, through June 30, 2011. This could affect services performed as late as June 30, 2012.
  2. The final bill extends the current outpatient 340B outpatient program to certain rural hospitals with Disproportionate Share Hospital (DSH) percentage greater than 8%, and is extended further to include Critical Access Hospitals, Rural Referral Centers and Sole Community Providers. [Previously, although Critical Access Hospitals are safety net providers, they have not been eligible to participate in the 340B Program because they receive cost-based reimbursement and do not have a disproportionate share adjustment percentage.] The 340B Drug Pricing Program limits the cost of drugs to Federal purchasers and to certain grantees of Federal agencies. The 340B program is also expanded to include inpatient drugs.
  3. The final bill establishes grants for clinics and hospitals to promote positive health behaviors in underserved areas. The majority of California’s rural hospitals serve residents of designated underserved areas.
  4. The final bill would establish a demonstration project to test a value-based purchasing (VBP) model for CAHs.
  5. The final bill imposes new rules that mostly duplicate existing California law, with two important changes. The legislation requires non-profit hospitals to conduct a community needs assessment every three years and adopt an implementation strategy. California law, SB 697 (1994), has a similar provision, but exempts certain types of hospitals (small and rural, children’s charitable e.g. Shriner’s, chemical dependency recovery hospitals and the University of California.) Hospitals exempted under California law will now have to do a community needs assessment (rural, UCs etc.) Further, California law, SB 697 (1994), requires hospitals to file their community needs assessment with OSHPD – but does not provide a penalty for noncompliance. OSHPD reports that some hospitals do not file their community needs assessment, and has been advocating for legislation to impose a penalty.

    This legislation imposes a $50,000 annual penalty for noncompliance with any of the non-profit hospital provisions – possibly pre-empting more harmful compliance legislation at the state level.
  6. The final bill enacts reductions in Medicare hospital payments for Inpatient and Outpatient Hospitals, Inpatient Rehabilitation Facilities, and Inpatient Psychiatric Facilities. Market basket updates will be reduced by:
    • 0.25% in 2010
    • 0.1% in 2011 and 2012
    • 0.3% in 2013
    • 0.2% in 2014 and 2015
    • 0.75% in 2016, 2017, 2018 and 2019

      There are no exemptions for small, rural or Critical Access Hospitals.

      For those rural facilities that provide home health services, there are additional reductions in the annual update factors for home health agencies by 1.0 percentage point in 2011, 2012, and 2013.
  7. The final bill enacts reductions in Medicaid and Medicare Disproportionate Share Hospital (DSH) payments. Medicaid DSH will be reduced by $14.1 billion over ten years, beginning with a $500 million cut in FFY 2014, and increasing to a $5.6 billion cut in FFY 2019. This represents an approximate 50% reduction compared to the $11.3 billion federal DSH allotment in FFY 2009.

    The Secretary of HHS is required to develop a methodology for reducing federal DSH allotments to each state. The largest DSH reductions would be imposed on the states that have the lowest uninsured percentages and on states that do not distribute DSH payments based on Medicaid inpatient volumes and uncompensated care (excluding bad debt).
    Medicare DSH payments will be reduced by $22 billion over ten years beginning in FFY 2014.

    25% of DSH payments are considered to be the “empirically justified” component of DSH and will continue to be paid to each hospital using the current methodology. 75% of DSH payments will be subject to reductions to reflect reductions in the uninsured population. For every percentage point reduction in the uninsured rate, DSH funding will be proportionally reduced. The calculation of the reduction in the uninsured population is modified to artificially increase the reduction of uninsured by an additional 0.1 percentage points in 2014 and 0.2 percentage points in 2015 through 2019; thereby increasing the level of Medicare DSH cuts. After reduction, this portion of DSH funds would be distributed to hospitals based on each hospital’s level of uncompensated care compared to total uncompensated care for all hospitals.
  8. Beginning in FFY 2013 acute care hospitals with higher than expected risk-adjusted readmission rates will receive reduced Medicare payments for every discharge. Payments will be reduced by the lower of a hospital- specific readmissions adjustment factor or a pre-determined floor (see below). In the first year, the payment policy will be applied to readmissions related to three conditions: heart failure, heart attack, and pneumonia. In the third year, the payment policy will be expanded to include chronic obstructive pulmonary disease (COPD), coronary artery bypass graft (CABG), percutaneous transluminal coronary angioplasty (PTCA), and other vascular procedures. The Secretary has the authority to expand the policy to additional conditions in future years, including all-cause readmissions.

    Maximum Payment Reduction for Individual Facilities: 1.0% in FFY 2013, increasing to 3.0% in FFY 2015 and thereafter.

    There are no exemptions for small, rural or Critical Access Hospitals.
  9. The final bill creates a new, independent board, the Independent Payment Advisory Board (IPAB) that would make binding recommendations on Medicare payment policy and non-binding recommendations for changes in private payer payments to providers. The recommendations exclude most providers for ten years — but not CAHs — through 2019.

For more information on health care reform, including a side-by-side comparison of the House, Senate and reconciliation bills with cost estimates for California hospitals, visit the CHA website at If you have any questions, please contact Anne O’Rourke, CHA senior vice president, federal relations, at (202) 488-4494 or