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entitled 'Medicare: Legislative Modifications Have Resulted in Payment 
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United States Government Accountability Office: 
GAO: 

Report to Congressional Requesters: 

April 2013: 

Medicare: 

Legislative Modifications Have Resulted in Payment Adjustments for 
Most Hospitals: 

GAO-13-334: 

GAO Highlights: 

Highlights of GAO-13-334, a report to congressional requesters. 

Why GAO Did This Study: 

To help control the growth of hospital spending, give hospitals an 
incentive to provide care efficiently, and ensure beneficiary access, 
Congress created the IPPS in 1983. Yet, Congress can enhance Medicare 
payments to certain hospitals by changing the qualifying criteria for 
IPPS payment categories, creating and extending exceptions to IPPS 
rules, or by exempting certain types of hospitals from the IPPS. The 
Institute of Medicine and the Medicare Payment Advisory Commission 
have stated that such practices undermine the integrity of the IPPS. 

GAO was asked to review legislation that altered payments to certain 
hospitals. In this report, GAO (1) identified provisions of law that 
enhanced Medicare payments for only a subset of hospitals and (2) 
examined the extent to which hospitals qualified for adjustments to 
the IPPS or exemptions from the IPPS in 2012. 

To conduct this work, GAO reviewed provisions enacted from 1997 to 
2012 to identify those that adjusted payments to a subset of IPPS 
hospitals or exempted hospitals from the IPPS. GAO analyzed data to 
learn the number, location, and size of hospitals affected by these 
provisions and budgetary estimates for the first year of 
implementation, where available. GAO also analyzed 2012 data on 4,783 
general hospitals to determine the number and types of adjustments 
they received, the extent to which they qualified for multiple 
adjustments, and the number exempted from the IPPS. 

The Department of Health and Human Services reviewed a draft of this 
report, and provided technical comments, which we incorporated as 
appropriate. 

What GAO Found: 

Over time, Congress has modified how Medicare reimburses certain 
hospitals under the inpatient prospective payment system (IPPS), which 
pays hospitals a flat fee per stay, set in advance, with different 
amounts for each type of condition. GAO identified numerous statutory 
provisions that individually increased Medicare payments to a subset 
of hospitals. 

* Seven provisions enabled hospitals to be paid under a different 
geographic wage index, which is used to address variation in labor 
costs. 

* Five provisions modified the classification criteria allowing IPPS 
hospitals to qualify for supplemental payments through the Medicare 
disproportionate share hospital (DSH) program or other types of 
special treatment. 

* Three provisions created and modified criteria for classifying small 
rural providers as Critical Access Hospitals (CAH), which are exempt 
from IPPS and instead are paid under an alternative methodology. 

In general, while such provisions were designed to affect only a 
subset of hospitals, nearly all of the 4,783 hospitals in GAO’s review 
qualified for an adjustment or exemption from the IPPS in 2012. About 
91 percent were subject to an IPPS payment adjustment or were excluded 
from the IPPS entirely. Most hospitals, over 63 percent, qualified for 
at least one of four categories of increased payment, with DSH 
payments being the most common. Under the CAH program, 28 percent of 
hospitals were exempt from the IPPS. The remaining hospitals, 9 
percent, received IPPS payments that were unadjusted for the 
modifications included in GAO’s review. Moreover, many IPPS hospitals 
qualified for multiple categories of payment adjustments. These 
findings suggest that the way Medicare currently pays hospitals may no 
longer ensure that the goals of the IPPS—-cost control, efficiency, 
and access—-are being met. 

Figure: Inpatient Prospective Payment System (IPPS) Hospitals 
Qualifying for No, One, or Multiple Forms of Payment Adjustments, by 
Location, 2012: 

[Refer to PDF for image: vertical bar graph] 

Number of hospitals: 

No additional payment: 
Large urban area: 236; 
Other urban area: 155; 
Rural area: 25. 

One form of additional payment: 
Large urban area: 553; 
Other urban area: 446; 
Rural area: 208. 

Two forms of additional payment: 
Large urban area: 505; 
Other urban area: 406; 
Rural area: 402. 

Three forms of additional payment: 
Large urban area: 77; 
Other urban area: 102; 
Rural area: 270. 

Four forms of additional payment: 
Large urban area: 3; 
Other urban area: 23; 
Rural area: 44. 

Source: GAO analysis of Centers for Medicare and Medicaid Services 
data. 

[End of figure] 

View [hyperlink, http://www.gao.gov/products/GAO-13-334]. For more 
information, contact James Cosgrove at (202) 512-7114 or 
cosgrovej@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

Numerous Statutory Provisions Have Resulted in Increased Medicare 
Payments to Certain Hospitals: 

IPPS Payment Adjustments or Exclusions Affected Nearly All Hospitals: 

Concluding Observations: 

Agency Comments: 

Appendix I: Estimated Effect of Nationwide Budget Neutrality of Rural 
Floor on Hospital Payments by State, Fiscal Year 2012 and 2013: 

Appendix II: Hospitals by Provider Type: 

Appendix III: GAO Contact and Staff Acknowledgments: 

Table: 

Table 1: Inpatient Prospective Payment System (IPPS) Hospitals 
Qualifying for Additional Medicare Payments by Category and Location, 
2012: 

Figures: 

Figure 1: Examples of Eligibility Criteria for Sole Community 
Hospitals: 

Figure 2: Examples of Eligibility Criteria for Rural Referral Centers: 

Figure 3: Eligibility Criteria for Medicare-Dependent Hospitals: 

Figure 4: Number of Hospitals Newly Designated as Critical Access 
Hospitals (CAH), 1998-2011: 

Figure 5: Percent of Each State's Hospitals Designated as Critical 
Access Hospitals (CAH), June 2012: 

Figure 6: Inpatient Prospective Payment System (IPPS) Hospitals 
Qualifying for No, One, or Multiple Forms of Payment Adjustments, by 
Location, 2012: 

Figure 7: Distribution of Inpatient Prospective Payment System (IPPS) 
Hospitals and Critical Access Hospitals (CAH), by Provider Type, 2012: 

Abbreviations: 

BBA Balanced Budget Act of 1997 

BBRA: Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 
1999: 

BIPA: Medicare, Medicaid, and SCHIP Benefits Improvement and 
Protection Act of 2000: 

CAH: Critical Access Hospital: 

CBO: Congressional Budget Office: 

CMS: Centers for Medicare & Medicaid Services: 

DPP: disproportionate patient percentage: 

DSH: disproportionate share hospital: 

Flex Program: Medicare Rural Hospital Flexibility program: 

HCERA: Health Care and Education Reconciliation Act of 2010: 

HHS: Department of Health and Human Services: 

IME: indirect medical education: 

IOM: Institute of Medicine: 

IPPS: inpatient prospective payment system: 

MDH: Medicare-dependent hospital: 

MedPAC: Medicare Payment Advisory Commission: 

MMA: Medicare Prescription Drug, Improvement, and Modernization Act of 
2003: 

MSA: metropolitan statistical area: 

PPACA: Patient Protection and Affordable Care Act of 2010: 

RRC: rural referral center: 

SCH: sole community hospital: 

the Board: Medicare Geographic Classification Review Board: 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

April 17, 2013: 

The Honorable Tom Coburn, M.D. 
Ranking Member: 
Committee on Homeland Security and Governmental Affairs: 
United States Senate: 

The Honorable Richard Burr: 
Ranking Member: 
Subcommittee on Primary Health and Aging: 
Committee on Health, Education, Labor and Pensions: 
United States Senate: 

In 2011, the Centers for Medicare & Medicaid Services (CMS)--the 
agency within the Department of Health and Human Services (HHS) that 
administers the Medicare program--paid hospitals about $147 billion 
for inpatient services provided to beneficiaries in fee-for-service 
Medicare, accounting for about one-quarter of all Medicare 
expenditures.[Footnote 1] To help control the growth of hospital 
spending, give hospitals an incentive to provide care efficiently, and 
ensure beneficiary access to care, Congress created the inpatient 
prospective payment system (IPPS) in 1983.[Footnote 2] Under this 
system, Medicare pays hospitals a flat fee per stay, set in advance, 
with different amounts for each type of condition. These payment rates 
are also influenced by such factors as the relative hourly wage in the 
area where the hospital is located and whether the hospital qualifies 
for additional payments. For hospitals not paid under IPPS, other 
Medicare payment methodologies apply. 

Congress can enhance Medicare payments to certain hospitals by 
changing the qualifying criteria for IPPS payment categories, creating 
and extending exceptions to IPPS rules, or exempting certain hospitals 
from the IPPS altogether. Specifically, Congress may allow hospitals 
meeting certain criteria to receive additional Medicare payments, and 
may revise some of the qualification criteria to enable more hospitals 
to benefit. For example, legislation has extended statutory provisions 
set to expire, or allowed certain hospitals to continue receiving 
additional payments after qualifying criteria have changed, through 
grandfathering. Often such efforts were intended to ensure beneficiary 
access to care or to help hospitals recruit and retain physicians and 
other medical professionals. However, some Medicare payment experts 
have expressed concerns about exceptions to the IPPS, extensions of 
certain provisions, and other forms of payment adjustments. They 
contend that such practices have a cumulative effect on the cost of 
the program, do not adequately target providers most in need, and 
undermine the integrity of the IPPS.[Footnote 3] 

In light of these issues, you asked us to review Medicare payment 
legislation that has benefited certain hospitals by creating new 
criteria or changing existing criteria for a hospital's 
classification, or modifying payments for hospitals that fit a narrow 
profile. In this report, we (1) identify provisions of law that 
enhanced Medicare IPPS payments for only a subset of hospitals, and 
the characteristics of affected hospitals and budgetary estimates, if 
any; and (2) examine the extent to which hospitals qualified for 
adjustments to, or exemptions from, the IPPS in 2012. 

To address these issues, we limited our review to statutory provisions 
enacted since 1997 and to the class of short-term acute care general 
hospitals then paid under the IPPS.[Footnote 4] We included in our 
review those provisions that subsequently adjusted payments to only a 
subset of IPPS hospitals or exempted hospitals from the IPPS during 
this period. The provisions covered in our review may be ongoing, time-
limited, or expired--as indicated. However, we excluded provisions 
that simply modified reimbursement to all hospitals in a previously 
established category of IPPS hospitals. We also excluded provisions 
that simply granted an extension of time to previously enacted payment 
rules. 

To identify and describe statutory provisions within our scope, we 
interviewed CMS officials and health care policy researchers with 
expertise in the area of Medicare hospital payment systems. We also 
reviewed literature on Medicare's hospital payment history and 
congressional committee and conference reports related to the 
statutory provisions identified.[Footnote 5] This resulted in our 
review of provisions from the following laws: 

* Balanced Budget Act of 1997 (BBA); 

* Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999 
(BBRA); 

* Medicare, Medicaid, and SCHIP Benefits Improvement and Protection 
Act of 2000 (BIPA); 

* Medicare Prescription Drug, Improvement, and Modernization Act of 
2003 (MMA); 

* Deficit Reduction Act of 2005; 

* Tax Relief and Health Care Act of 2006; 

* Medicare, Medicaid, and SCHIP Extension Act of 2007; 

* Medicare Improvements for Patients and Providers Act of 2008; 

* Patient Protection and Affordable Care Act (PPACA), as amended by 
the Health Care and Education Reconciliation Act of 2010 (HCERA); 
[Footnote 6] 

* Medicare and Medicaid Extenders Act of 2010; 

* Temporary Payroll Tax Cut Continuation Act of 2011; 

* Middle Class Tax Relief and Job Creation Act of 2012; and: 

* American Taxpayer Relief Act of 2012 (ATRA). 

To determine characteristics of hospitals affected by these 
provisions, we analyzed data on the number, size, and location of 
hospitals using two sources: CMS's fiscal year 1997 through 2013 
impact files, as applicable,[Footnote 7] and the Flex Monitoring Team--
a federally funded consortium of three rural health research centers. 
[Footnote 8] To report estimates of budgetary effects, we used data 
published by CMS and the Congressional Budget Office (CBO).[Footnote 
9] We generally reported data on the first year of a provision's 
implementation, if available. Unless otherwise noted, however, data on 
affected hospitals and Medicare fee-for-service spending were 
projections issued prior to the implementation of the provisions 
rather than actual effects. In order to assess the reliability of the 
data we analyzed, we reviewed CMS's documentation on the impact files, 
interviewed CMS officials familiar with the data, and compared impact 
file data to data in relevant federal register notices. We found these 
data sufficiently reliable for the purpose of this engagement. 

To assess the extent to which hospitals qualified for a Medicare 
payment adjustment in 2012, we analyzed CMS and Flex Monitoring Team 
data on 4,783 short-term acute care general hospitals, as of July 
2012. These data allowed us to report the number of hospitals that had 
their payments adjusted, the types of adjustments they received, and 
the extent to which they qualified for multiple adjustments. 

We conducted this performance audit from June 2012 to March 2013 in 
accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings based on our audit objectives. 

Background: 

The IPPS provides incentives for hospitals to operate efficiently by 
paying a predetermined, standardized amount for an entire inpatient 
episode of a given type rather than the actual costs incurred in 
providing the care. CMS calculates IPPS payments through a series of 
adjustments applied to separate national base payment rates covering 
operating and capital expenses.[Footnote 10] Specifically, the agency 
adjusts the base payment rates for patients in different diagnosis-
related groups, assuming that cases falling into a particular grouping 
address similar clinical problems that are expected to require similar 
amounts of hospital services.[Footnote 11] CMS then applies an area 
wage index to account for geographic differences in labor costs. 
Finally, CMS determines whether supplemental Medicare payments or 
other types of special treatment, such as those provided to certain 
rural hospitals, are applicable. 

Area Wage Index: 

CMS adjusts hospital payments under IPPS using the area wage index, to 
account for variation in labor costs across the country, as these 
costs are largely beyond any individual hospital's ability to control. 
The wage index reflects how average hospital wages in each geographic 
area compare to average hospital wages nationally, set as 1.0. Thus, 
Medicare payment to a hospital in an area with lower wages is 
generally below the national average payment and the payment to a 
hospital in a higher wage area is generally above the national 
average. CMS considers each distinct urban area as a single labor 
market, but it considers all rural areas within a state as a single 
labor market and therefore assigns them the same wage index.[Footnote 
12] If its wage index does not fully account for its relative labor 
costs, a hospital may qualify to be reclassified to a higher wage 
index area in order to receive higher Medicare payments. To request a 
reclassification to another geographic area, hospitals may apply to 
the Medicare Geographic Classification Review Board (the Board), an 
entity established by Congress. Among various criteria for 
reclassification, a hospital must demonstrate close proximity to the 
area for which it is seeking redesignation. 

Medical Education Payments: 

Medicare reimburses teaching hospitals and academic medical centers 
for both the direct and indirect costs of their residency training 
programs. Direct graduate medical education payments cover the direct 
costs of resident training, such as salaries and benefits. The 
indirect medical education (IME) adjustment--a percentage add-on to 
IPPS rates--reflects the higher patient care costs associated with 
resident education. The size of the IME adjustment depends on the 
hospital's teaching intensity, which is generally measured by a 
hospital's number of residents per bed. 

Medicare Disproportionate Share Hospitals: 

The Medicare disproportionate share hospital (DSH) adjustment 
generally provides supplemental payments to hospitals that treat a 
disproportionate number of low-income patients.[Footnote 13] To 
qualify for this payment adjustment, a hospital's disproportionate 
patient percentage (DPP)[Footnote 14]--the share of low-income 
patients treated by the hospital--must generally equal or exceed a 
specific threshold level determined by a statutory formula.[Footnote 
15] The amount of Medicare DSH payment adjustment varies by hospital 
location and size. 

Types of Rural Providers under IPPS: 

Rural hospitals may qualify for special treatment in determining 
payment rates under IPPS, although some urban hospitals may also 
qualify, through three programs: sole community hospitals (SCH), rural 
referral centers (RRC), and Medicare-dependent hospitals (MDH). 
[Footnote 16] In some cases, hospitals may qualify for more than one 
of these rural provider types, allowing them to receive multiple 
adjustments to their IPPS payment rates. 

Sole Community Hospitals: 

The SCH program provides payment adjustments to hospitals that are the 
only source of inpatient care in their community. To be designated as 
an SCH, a hospital must be located at least 35 miles from other like 
hospitals paid under the IPPS. Alternatively, if a hospital is located 
fewer than 35 miles from the nearest hospital, it may qualify as an 
SCH if it is located in a rural area and meets additional criteria. 
[Footnote 17] (See figure 1.) Medicare pays each SCH on the basis of 
the applicable IPPS rate or the hospital's updated historic cost per 
discharge, whichever provides the greater aggregate payment. 

Figure 1: Examples of Eligibility Criteria for Sole Community 
Hospitals: 

[Refer to PDF for image: illustration] 

Greater than or equal to 35 miles from nearest like hospital. 

Or: 

Rural; 
plus: 
Due to distance, posted speed, and predictable weather conditions, 
travel time between like hospitals is greater than or equal to 45 
minutes. 

Source: GAO; Art Explosion (images). 

[End of figure] 

Rural Referral Centers: 

The RRC program supports high-volume rural hospitals that treat a 
large number of complicated cases. In general, a hospital is 
classified as an RRC if it meets certain location, size, and patient 
mix criteria,[Footnote 18] or meets alternative criteria.[Footnote 19] 
(See figure 2.) Medicare provides RRCs with two payment enhancements: 
a higher DSH payment adjustment than other rural providers and an 
exemption from some of the applicable criteria for geographic 
reclassification so that they can be eligible for a higher wage index. 

Figure 2: Examples of Eligibility Criteria for Rural Referral Centers: 

[Refer to PDF for image: illustration] 

Rural: 
Plus: 
Greater than or equal to 275 beds; 
Or: 
* Greater than or equal to 50 percent of Medicare patients referred 
from other hospitals or physicians not on a hospital's staff; 
* Greater than or equal to 60 percent of Medicare patients live more 
than 25 miles from hospital; 
* Greater than or equal to 60 percent of hospital services are to 
Medicare patients living n=more than 25 miles from hospital. 

Source: GAO; Art Explosion (images). 

[End of figure] 

Medicare-Dependent Hospitals: 

The MDH classification allows small rural hospitals for which Medicare 
patients make up a significant percentage of inpatient days or 
discharges to receive adjustments to their IPPS rates. To qualify as 
an MDH, a hospital has to meet various criteria regarding location, 
size, and patient mix, as shown in figure 3. Specifically, MDHs have 
to be located in a rural area, have 100 or fewer beds, show that at 
least 60 percent of their inpatient days or discharges were for 
beneficiaries entitled to Medicare Part A, and not be classified as an 
SCH.[Footnote 20] Among other adjustments, MDHs benefit from being 
paid their IPPS rate plus 75 percent of the amount by which the 
hospital's updated historic cost per discharge exceeds the IPPS rate. 
Although the MDH program was originally enacted as a temporary 
program, it has been extended multiple times and is due to expire for 
discharges as of October 1, 2013. 

Figure 3: Eligibility Criteria for Medicare-Dependent Hospitals: 

[Refer to PDF for image: illustration] 

Rural: 
Plus: 
Less than or equal to 100 beds; 
Plus: 
Greater than or equal to 60 percent Medicare discharges; 
Plus: 
Not a Sole Community Hospital. 

Source: GAO; Art Explosion (images). 

[End of figure] 

Recent IPPS Reviews: 

The Institute of Medicine (IOM) and Medicare Payment Advisory 
Commission (MedPAC) recently evaluated the accuracy and adequacy of 
Medicare hospital payments. In the first of two reports, IOM--a unit 
of the National Academy of Sciences that addresses health policy--
found that the methods CMS uses for determining how Medicare pays 
hospitals for the same services in different parts of the country did 
not accurately reflect regional differences in expenses.[Footnote 21] 
It noted, for instance, that the current reclassification process 
allows almost 40 percent of eligible hospitals to be paid according to 
a wage index from a labor market outside of their physical location. 
To improve payment accuracy, it recommended streamlining the sources 
and application of data used to make adjustments. In its 2012 report, 
MedPAC--an independent entity that advises Congress on issues 
affecting Medicare--reviewed the rural special payment adjustments. 
[Footnote 22] It found that in some cases the special adjustments did 
not adequately target isolated small rural providers. MedPAC also 
reported that certain payment adjustments have overlapping purposes. 
It recommended using a more consistent targeted payment process to 
ensure that hospitals can continue to serve beneficiaries without 
unduly increasing Medicare program costs.[Footnote 23] 

Numerous Statutory Provisions Have Resulted in Increased Medicare 
Payments to Certain Hospitals: 

We identified 16 statutory provisions enacted between 1997 and 2012 
that modified Medicare payment for inpatient services in a way that 
benefited a subset of hospitals. These provisions allow hospitals to 
receive adjustments to their wage index, alter classification criteria 
for supplemental payments or other special treatment, or exclude 
hospitals from the IPPS. Most of the provisions we identified targeted 
rural hospitals for increased payment.[Footnote 24] 

Some Provisions Have Enabled Hospitals to Qualify for a Different Wage 
Index: 

We identified seven statutory provisions that have enabled hospitals 
to receive Medicare payment under a higher or nearby wage index. Some 
provisions moved hospitals in specific, named counties into different 
wage index areas, or set a minimum wage index for hospitals meeting 
certain criteria. Other provisions allow hospitals to reclassify from 
an urban to a rural area. Still others enable rural hospitals near 
urban areas to qualify for the higher wage index of the nearby area. 

Rural Floor: 

Section 4410 of BBA established a rural floor by requiring that the 
area wage index for a hospital in an urban area of a state could not 
be less than the area wage indexes for hospitals in that state's rural 
area. The provision applied to patient discharges beginning in fiscal 
year 1998, and specified that the implementation of the rural floor 
must be budget neutral--that is, any changes in the wage index for 
hospitals subject to the floor may not increase or decrease aggregate 
Medicare payments for the operating costs of inpatient services. 
[Footnote 25] Initially, this upwards adjustment only applied in 
states with at least one rural IPPS hospital. The rural floor 
provision increased the wage index for hospitals in urban areas that 
had been paid under a lower wage index than the rural areas of that 
state. In order to compensate for the increased wage indexes of urban 
hospitals receiving the rural floor, CMS initially applied a 
nationwide budget-neutrality adjustment to account for the additional 
payment to these hospitals. 

In fiscal year 2009, CMS changed this policy and began phasing in a 
revised rural floor budget-neutrality adjustment that would be 
calculated and applied on a state-by-state basis instead of on a 
nationwide basis. To do so, the agency blended the nationwide and 
state-by-state budget neutrality formulas for fiscal year 2009 and 
fiscal year 2010.[Footnote 26] As a result, within each state, some 
hospitals' wage index increased, while other hospitals' wage index 
decreased, in order to ensure that total Medicare payments to 
hospitals in that state remained the same. 

Section 3141 of PPACA reversed this policy by requiring that any 
adjustments to the wage index must be applied on a budget-neutral 
basis through a uniform national adjustment beginning in fiscal year 
2011.[Footnote 27] The application of the national budget-neutrality 
requirement has resulted in a transfer of Medicare payments from 
hospitals in states where no hospitals qualified for the rural floor 
to hospitals in states where at least one hospital qualified for this 
adjustment. (For information on the impact of this provision by state, 
see appendix I.) In fiscal year 2012, the effect of this PPACA 
provision was that: 

* hospitals in seven states (Alaska, California, Colorado, 
Connecticut, Massachusetts, New Hampshire, and New Jersey) and Puerto 
Rico received increased hospital payments; 

* hospitals in Massachusetts received the largest increase in 
payments--nearly $275 million--five times greater than New Jersey, the 
next largest recipient; 

* to pay for the rural floor in these states, hospital payments in 
other states were adjusted downward by as much as 0.5 percent, with a 
median state reduction of $7.3 million; and: 

* hospitals in five states saw declines of over $20 million: New York 
($47.5 million), Texas ($34 million), Florida ($29 million), Illinois 
($26 million), and Michigan ($21 million). 

Specific County and Area Reclassifications (Expired): 

Section 152 of BBRA reclassified hospitals in seven named counties or 
areas, deeming them to be located in specifically named large 
metropolitan areas, thus enabling them to qualify for the wage index 
of that area.[Footnote 28] This provision benefited hospitals in these 
counties that competed for labor with nearby hospitals in higher wage 
areas. The BBRA limited this reclassification to discharges during 
fiscal year 2000 and fiscal year 2001. Hospitals in the following 
specified counties were reclassified: 

* Iredell County, North Carolina, was deemed to be located in the 
Charlotte-Gastonia-Rock Hill, North Carolina-South Carolina 
metropolitan statistical area (MSA); 

* Orange County, New York, was deemed to be part of the large urban 
area of New York, New York;[Footnote 29] 

* Lake County, Indiana, was deemed to be located in the Chicago, 
Illinois MSA; 

* Lee County, Illinois, was deemed to be located in the Chicago, 
Illinois MSA; 

* Hamilton-Middletown, Ohio, was deemed to be located in the 
Cincinnati, Ohio-Kentucky-Indiana MSA; 

* Brazoria County, Texas, was deemed to be located in the Houston, 
Texas MSA; and: 

* Chittenden County, Vermont, was deemed to be located in the Boston-
Worcester-Lawrence-Lowell-Brockton, Massachusetts-New Hampshire MSA. 

Urban to Rural Reclassification: 

Section 401 of BBRA allowed certain urban hospitals, beginning January 
1, 2000, to request to be reclassified as rural hospitals for payment 
purposes under the IPPS.[Footnote 30] Generally, these hospitals may 
seek a lower wage index in a rural area in order to receive higher 
payments as a rural provider type, such as an SCH. According to CMS, 
the provision benefits hospitals that are within an urban area, but 
are isolated from the metropolitan core by distance or physical 
features. Under the BBRA provision, to qualify for this 
reclassification, a hospital must submit an application and meet one 
of the following criteria: 

* be located in a rural portion of an MSA or an area defined as rural 
by the state; 

* be designated as a rural hospital by the state; 

* would qualify as a rural, regional, or national referral center, or 
as an SCH if the hospital was located in a rural area; or: 

* meet other criteria established by CMS. 

By fiscal year 2013, 46 urban hospitals, comprising 1.3 percent of 
IPPS hospitals, had been reclassified by CMS as rural under this 
provision. Seven states--California, Florida, Missouri, New York, 
Pennsylvania, Texas, and Virginia--had more than two qualifying 
hospitals. 

Outmigration Adjustment: 

Section 505 of MMA required that HHS establish a process, beginning in 
fiscal year 2005, by which the agency may increase the wage index for 
hospitals located in counties where potential employees commute to 
higher wage index areas.[Footnote 31] The provision benefits hospitals 
located in counties where a higher than average percentage of hospital 
employees reside in that county but work in another county that has a 
higher wage index. Hospitals in qualifying counties receive an average 
of the differences between the higher and lower wage indexes, weighted 
by the percentage of hospital workers in the qualifying county who 
work in the higher-wage areas. 

In the first year of implementation, fiscal year 2005, 

* the wage index increased for 555 eligible hospitals, representing 
nearly 14 percent of IPPS hospitals; 

* eligible hospitals had an average of 140 beds; 

* California, Texas, and Michigan had the most eligible hospitals with 
89, 44, and 40 hospitals, respectively; 

* Massachusetts, Michigan, and Connecticut had the most qualifying 
hospitals as a percentage of all hospitals in the state with 45, 31, 
and 29 percent, respectively; and: 

* Utah, Minnesota, and Georgia benefited from the largest Medicare 
payment adjustment as a result of their qualifying status. 

Onetime Appeal of Wage Index Reclassification by the Board (Expired): 

Section 508 of MMA required HHS to establish a process by January 1, 
2004, so that a hospital denied a request to be reclassified to the 
wage index of another area in its state could submit a onetime appeal 
to the Board.[Footnote 32] The provision required the Board to grant 
appeals of and reclassify qualifying hospitals, defined as those 
hospitals that did not originally qualify for reclassification on the 
basis of distance or commuting requirements but met other criteria 
such as quality factors, as specified by HHS. The provision limited 
reclassifications to a three-year period for appeals filed by February 
15, 2004. The provision also capped additional Medicare expenditures 
resulting from these reclassifications to $900 million over the 
initial 3-year period. We found that, in its first year of 
implementation, 

* 130 hospitals, or approximately 3 percent of all IPPS hospitals, 
qualified for this adjustment; and: 

* four states--Connecticut, Michigan, North Dakota, and Pennsylvania--
had at least 10 qualifying hospitals each. 

While originally enacted as a onetime and time-limited provision, 
Congress extended reclassifications made under this provision numerous 
times until they expired on March 31, 2012. 

Frontier States: 

Section 10324 of PPACA established a hospital wage index floor 
adjustment, beginning with discharges as of fiscal year 2011, for 
hospitals located in frontier states.[Footnote 33] The provision 
defined a frontier state as one in which at least 50 percent of 
counties have a population of fewer than 6 people per square mile and 
set the wage index in these areas at no lower than 1.0. In other 
words, while the wage index for all other states is a ratio of the 
average hourly hospital wage in the area to the national average, if 
the wage index of a frontier state is lower than the national average--
or less than 1.0--this provision adjusts the wage index to 1.0. Prior 
to implementation, CMS projected that: 

* five states would meet the criteria to be designated as a frontier 
state: Montana, Nevada, North Dakota, South Dakota, and Wyoming; 

* 48 out of 82 IPPS hospitals in those states would be eligible for a 
modified wage index that is at least 1.0; and: 

* IPPS payments would increase by approximately $50 million in the 
first year. 

Provisions Modifying Classification Criteria for IPPS Supplemental 
Payments or Other Types of Special Treatment: 

We identified five statutory provisions that have affected the number 
of hospitals that qualify for IPPS supplemental payments or other 
types of special treatment. Most of these provisions modified the 
classification criteria for payment adjustments, thereby expanding the 
number of hospitals that qualify for higher payments. 

DSH Qualifying Criteria: 

Section 211 of BIPA revised the Medicare threshold criteria for DSH, 
resulting in an increased number of hospitals qualifying for a payment 
adjustment.[Footnote 34] Effective for discharges as of April 1, 2001, 
this provision allowed hospitals, regardless of location and size, to 
receive a DSH adjustment with a DPP of 15 percent or greater. 
Originally, different types of hospitals qualified for a DSH 
adjustment on the basis of varying DPP thresholds. For instance, urban 
hospitals with 100 or more beds qualified for a DSH payment with a 
minimum DPP of 15 percent, whereas urban hospitals with fewer than 100 
beds qualified for a DSH payment adjustment with a minimum DPP of 40 
percent. CMS reported that this adjustment of the DPP qualifying 
threshold: 

* added 1,191 primarily rural and small urban hospitals to those 
already receiving a DSH adjustment; for example, 351 additional rural 
hospitals with fewer than 100 beds and 244 additional urban hospitals 
with fewer than 100 beds started receiving a DSH adjustment after 
implementation; 

* would increase Medicare spending by $60 million from fiscal year 
2001 through fiscal year 2002; and: 

* would not negatively affect any hospitals. 

Section 402 of MMA modified the formulas used to calculate the DSH 
payment adjustment for certain hospitals, thereby increasing payments 
to these hospitals.[Footnote 35] Specifically, effective with 
discharges as of April 1, 2004, the DSH adjustment formula used for 
large urban hospitals was applied to other types of hospitals, 
including SCHs, RRCs, other rural hospitals with fewer than 500 beds, 
and urban hospitals with fewer than 100 beds.[Footnote 36] In 
addition, this provision capped this DSH payment adjustment at 12 
percent of the hospital's IPPS rate, while exempting RRCs from this 
cap.[Footnote 37] For instance, an urban hospital with fewer than 100 
beds that qualifies for a DSH payment adjustment of 18.1 percent is 
capped at the maximum 12 percent payment adjustment. 

Low-Volume Adjustment: 

Section 406 of MMA established a new payment adjustment for low-volume 
hospitals beginning in fiscal year 2005 that accounts for the higher 
costs per discharge at hospitals that admit a relatively small number 
of patients.[Footnote 38] To qualify, hospitals had to be located more 
than 25 miles from another hospital and have fewer than 800 total 
discharges annually. The provision required CMS to determine, on the 
basis of empirical data, applicable percentage increases, not to 
exceed 25 percent, in payments for qualifying low-volume 
hospitals.[Footnote 39] CMS explained in issuing the final rule 
implementing this MMA provision that the agency analyzed data and 
determined that hospitals with fewer than 200 discharges a year have 
sufficiently higher costs relative to payments to justify receiving a 
payment adjustment, but that hospitals with 200 to 800 discharges a 
year did not. CMS provided the maximum 25 percent payment adjustment 
only to those qualifying hospitals that were located more than 25 
miles from another hospital and had fewer than 200 discharges in a 
given year. CMS reported that: 

* CBO estimated this provision would increase Medicare program 
expenditures by less than $50 million annually, and: 

* only three hospitals--one located in Florida and two located in 
South Dakota--received a low-volume payment adjustment in fiscal year 
2005. All were small (30 or fewer beds) rural hospitals classified as 
SCHs. 

Section 3125, as amended by section 10314, of PPACA temporarily 
revised the qualifying criteria for a low-volume hospital designation 
making it easier for hospitals to receive the payment adjustment. 
[Footnote 40] Effective for fiscal year 2011 and fiscal year 2012, 
[Footnote 41] this provision decreased the required distance from the 
nearest hospital from 25 miles to 15 miles. In addition, it changed 
the maximum number of annual discharges allowed from 800 total 
patients to 1,600 Medicare Part A beneficiaries. The provision also 
required that payment adjustments for qualifying low-volume hospitals 
be calculated using a continuous sliding scale, paying up to an 
additional 25 percent to hospitals with 200 or fewer annual Medicare 
Part A discharges. 

As a result of these changes, both the number of hospitals receiving 
the low-volume payment adjustment and the estimated Medicare 
expenditures rose substantially. CMS reported that: 

* over the 2-year period, fiscal year 2011 and fiscal year 2012, the 
provision was estimated to cost Medicare approximately $880 million; 
and: 

* the number of hospitals that received a payment adjustment rose to 
approximately 645--or about 18 percent of IPPS hospitals--in fiscal 
year 2011 from 3 hospitals the year before. 

We found that, in fiscal year 2011, 

* at least 40 percent of IPPS hospitals in each of 6 states received a 
low-volume adjustment: Wyoming (67 percent), Vermont (50 percent), New 
Mexico (43 percent), Minnesota (42 percent), Alabama (41 percent), and 
Mississippi (41 percent); and: 

* recipient hospitals were relatively small,[Footnote 42] 
predominately located in rural areas, and likely to also receive a DSH 
payment adjustment. 

MDH Qualifying Criteria: 

Section 212 of BIPA modified one aspect of the MDH classification 
criteria. Effective for cost reporting periods beginning April 1, 
2001, it changed the data source used to determine whether at least 60 
percent of a hospital's discharges were Medicare beneficiaries. This 
provision allowed a hospital to base this determination on two of the 
three most recently audited fiscal year cost reporting periods. 
[Footnote 43] Prior to this change, discharge data were based on cost 
reporting periods beginning in 1987. 

This provision did not initially have a significant effect on the 
number of qualifying hospitals or on Medicare payments. CMS estimated 
that a total of 139 hospitals--all of which had previously been 
designated as MDHs--would qualify as an MDH using this revised data 
source. The agency further estimated that Medicare would spend an 
additional $10 million in the first year of implementation. It is 
likely that this provision had a greater effect on the number of 
hospitals qualifying for an MDH classification in later years because 
it allowed hospitals to use recent, rather than outdated, cost reports. 

Provisions Creating and Modifying Qualifying Criteria for CAHs: 

In 1997, Congress established the Critical Access Hospital (CAH) 
program, under which qualifying small rural hospitals are excluded 
from the IPPS and receive Medicare payment based on the reasonable 
costs of providing services.[Footnote 44] In effect, CAHs receive 
higher payments for providing services to Medicare beneficiaries than 
they would under the IPPS. Specifically, section 4201 of BBA allowed 
states to apply for approval to create a Medicare Rural Hospital 
Flexibility program (Flex Program), under which states must designate 
at least one hospital as a CAH.[Footnote 45] To be designated as a 
CAH, hospitals had to meet the following qualifying criteria: 

* type of organization: nonprofit or public hospital; 

* services: must provide 24-hour emergency services deemed necessary 
for ensuring access in each area served by the CAH; 

* location: rural county or other rural area in states with approved 
Flex Programs; 

* size: no more than 15 acute care inpatient beds; 

* average inpatient stay: no more than 4 days (subject to certain 
exceptions): 

* patient access: (a) located either more than 35 miles from the 
nearest hospital or CAH or more than 15 miles in areas with 
mountainous terrain or only secondary roads, or (b) designated by the 
state as a necessary provider of health care services to residents in 
the area. 

Prior to implementation, CMS reported that approximately 51 facilities 
in seven states--those participating in the demonstration program that 
preceded the CAH program--would be eligible to become CAHs. While the 
CAH program was expected to grow, CMS was not able to estimate 
reliably how many additional states would choose to participate or the 
potential cost of the CAH program to Medicare. 

Section 403 of BBRA made a number of changes to qualifying criteria 
for the CAH program.[Footnote 46] First, the provision changed the 
inpatient length of stay requirement from a maximum of 4 days to an 
annual average of 4 days. Second, the provision removed the 
requirement that eligible hospitals must be nonprofit or public, 
allowing for-profit hospitals to qualify as CAHs, if so approved by 
their state. Third, the provision permitted a state to designate as a 
CAH not only a currently operating hospital, but closed facilities or 
facilities that were previously hospitals but currently operate as a 
state-licensed health clinic or health center, if the facilities meet 
all other criteria.[Footnote 47] Data indicate that in the 2 years 
following the enactment of BBRA in 1999, 411 hospitals were newly 
designated as CAHs. 

Section 405 of MMA made further changes to the CAH program, which 
included alterations to the qualifying criteria.[Footnote 48] First, 
the provision permanently increased the bed limit for CAHs from 15 
beds to 25 beds. Second, it allowed CAHs to establish separate 
inpatient rehabilitation or psychiatric care units with no more than 
10 beds, with such services paid under the relevant prospective 
payment system (rather than the CAH reasonable cost basis).[Footnote 
49] Third, effective January 1, 2006, the provision eliminated the 
ability of a state to designate a hospital as a necessary provider, so 
that states could no longer waive the 35-mile distance requirement to 
designate a hospital as a CAH. However, the provision grandfathered 
all CAHs that had already received their CAH status by being 
designated as a necessary provider. 

CBO estimated that these changes to the CAH program under this 
provision would increase Medicare program expenditures by 
approximately $100 million annually, according to CMS. Data show that 
in 2004 and 2005, the 2 years following enactment of MMA, 422 new CAHs 
joined the program. However, the number of new CAH designations 
dropped sharply in 2006 with the elimination of the necessary provider 
designation. (See figure 4.) 

Figure 4: Number of Hospitals Newly Designated as Critical Access 
Hospitals (CAH), 1998-2011: 

[Refer to PDF for image: vertical bar graph] 

Calendar year: 1998; 
Number of hospitals: 2. 

Calendar year: 1999; 
Number of hospitals: 87. 

Calendar year: 2000; 
Number of hospitals: 189. 

Calendar year: 2001; 
Number of hospitals: 222. 

Calendar year: 2002; 
Number of hospitals: 174. 

Calendar year: 2003; 
Number of hospitals: 138. 

Calendar year: 2004; 
Number of hospitals: 199. 

Calendar year: 2005; 
Number of hospitals: 223. 

Calendar year: 2006; 
Number of hospitals: 18. 

Calendar year: 2007; 
Number of hospitals: 11. 

Calendar year: 2008; 
Number of hospitals: 14. 

Calendar year: 2009; 
Number of hospitals: 14. 

Calendar year: 2010; 
Number of hospitals: 14. 

Calendar year: 2011; 
Number of hospitals: 3. 

Source: Flex Monitoring Team. 

Note: A small number of hospitals were designated as CAHs prior to 
1998. No new hospitals were designated as CAHs from January 1, 2012, 
through June 30, 2012. 

[End of figure] 

The CAH program has grown to a total of 1,328 hospitals as of 2012. 
[Footnote 50] The majority of CAHs have the maximum 25 inpatient beds. 
In addition, CAHs are largely concentrated in the central states, 
although all but five states have at least one CAH.[Footnote 51] We 
found that the states with the largest percentage of hospitals 
designated as CAHs are North Dakota and Montana, with about 84 percent 
and 79 percent, respectively. (See figure 5.) Furthermore, according 
to MedPAC, 17 percent of CAHs are 35 or more miles from the nearest 
hospital, 67 percent are between 15 miles and 35 miles from the 
nearest hospital, and 16 percent of CAHs are fewer than 15 miles from 
the nearest hospital.[Footnote 52] These data indicate that not all 
CAHs meet current qualifying criteria.[Footnote 53] 

Figure 5: Percent of Each State's Hospitals Designated as Critical 
Access Hospitals (CAH), June 2012: 

[Refer to PDF for image: illustrated U.S. map] 

1%-19%: 
Alabama; 
Arizona; 
California; 
Florida; 
Massachusetts; 
New Mexico; 
New York; 
Pennsylvania; 
South Carolina; 
Tennessee; 
Virginia, 

20%-39%: 
Arkansas; 
Colorado; 
Georgia; 
Hawaii; 
Illinois; 
Indiana; 
Kentucky; 
Louisiana; 
Michigan; 
Mississippi; 
Missouri; 
Nevada; 
North Carolina; 
Ohio; 
Oklahoma; 
Texas; 
Utah; 
West Virginia. 

40%-59%: 
Alaska; 
Maine; 
New Hampshire; 
Oregon; 
Vermont; 
Washington; 
Wisconsin; 
Wyoming. 

60%+: 
Idaho; 
Iowa; 
Kansas; 
Minnesota; 
Montana; 
Nebraska; 
North Dakota; 
South Dakota; 

States not eligible or not participating: 
Connecticut; 
Delaware; 
Maryland; 
New Jersey; 
Rhode Island. 

Source: GAO analysis of CMS and Flex Monitoring Team data; Map 
Resources (map). 

[End of figure] 

Provision for Other Forms of Increased Medicare Payment (Expired): 

Section 1109 of HCERA authorized $400 million in Medicare payments to 
qualifying hospitals in low-spending counties over 2 years, fiscal 
year 2011 and fiscal year 2012.[Footnote 54] This provision defined 
qualifying hospitals as acute care hospitals located in a county that 
ranked within the lowest quartile of age, sex, and race adjusted 
spending per beneficiary enrolled in fee-for-service Medicare parts A 
and B. CMS allocated the additional payments to each qualifying 
hospital in proportion to its share of Medicare inpatient payments for 
all qualifying hospitals, based on fiscal year 2009 IPPS payments for 
operating expenses. In implementing this provision, 

* CMS made payments to about 400 hospitals, which accounted for 11 
percent of all IPPS hospitals and approximately 8 percent of IPPS beds; 

* Medicare expenditures increased $150 million in fiscal year 2011 and 
$250 million in fiscal year 2012; 

* on average, qualifying hospitals had 135 to 137 beds; 

* half of qualifying hospitals were in urban areas and half were in 
rural areas; and: 

* states with the most hospitals receiving this payment were New York 
(50 hospitals), Wisconsin (40 hospitals), Virginia (31 hospitals), 
Oregon (21 hospitals), and Iowa (20 hospitals). 

IPPS Payment Adjustments or Exclusions Affected Nearly All Hospitals: 

We found that, in 2012, payment adjustments to, or exclusions from, 
the IPPS affected nearly all of the 4,783 hospitals in our 
review.[Footnote 55] Of these hospitals--IPPS hospitals and CAHs--91 
percent were subject to a payment adjustment under the IPPS or were 
excluded from the IPPS entirely. Specifically, 

* 3,039 hospitals, or over 63 percent, qualified for at least one of 
the following four types of payment adjustments under the IPPS: a DSH 
adjustment, an IME adjustment, a wage index adjustment, or a rural 
provider type adjustment for an RRC, SCH, or MDH designation; 

* 1,328 hospitals, or about 28 percent, qualified as CAHs, excluding 
them from the IPPS; and: 

* 416 hospitals, or about 9 percent, received IPPS payments that were 
unadjusted for the modifications included in our review. 

Among the 3,455 IPPS hospitals, the vast majority qualified for one of 
the four categories of upward payment adjustment in 2012. The DSH 
adjustment had the broadest reach, affecting payments to about 4 in 5 
of IPPS hospitals. Nearly 1 in 3 hospitals qualified for an IME 
adjustment, 1 in 3 qualified for a wage index adjustment, and almost 1 
in 5 received a rural provider type adjustment. Each of these 
categories of increased payment benefited hospitals in both urban and 
rural areas. The DSH and IME adjustments applied mostly to urban 
hospitals' payments, whereas the wage index adjustment was applied to 
more rural hospitals' payments. Although rural provider type 
adjustments generally supported payment to rural hospitals, about 20 
percent of recipients were urban hospitals.[Footnote 56] (See table 1.) 

Table 1: Inpatient Prospective Payment System (IPPS) Hospitals 
Qualifying for Additional Medicare Payments by Category and Location, 
2012: 

Hospitals by location[A]: Large urban area hospitals; 
Disproportionate share hospital (DSH): 999; 
Categories of hospital payment adjustments: 
Indirect medical education (IME): 581; 
Wage index: 210; 
Rural provider type[B]: 16[C]. 

Hospitals by location[A]: Other urban area hospitals; 
Categories of hospital payment adjustments: 
Disproportionate share hospital (DSH): 897; 
Indirect medical education (IME): 389; 
Wage index: 258; 
Rural provider type[B]: 112[C]. 

Hospitals by location[A]: Rural hospitals; 
Categories of hospital payment adjustments: 
Disproportionate share hospital (DSH): 859; 
Indirect medical education (IME): 61; 
Wage index: 559; 
Rural provider type[B]: 519. 

Hospitals by location[A]: Total; 
Categories of hospital payment adjustments: 
Disproportionate share hospital (DSH): 2,755; 
Indirect medical education (IME): 1,031; 
Wage index: 1,027; 
Rural provider type[B]: 647. 

Source: GAO analysis of CMS data. 

Notes: CMS made these estimates in July 2012 for payments in 2013. 
These types of increased payment are not mutually exclusive, so a 
hospital could qualify for more than one type of increased payment. 

[A] Large urban areas have a population of at least 1 million; other 
urban areas have a population of fewer than 1 million; all areas not 
defined as urban are considered rural. In July 2012, there were 1,374 
hospitals in large urban areas, 1,132 hospitals in other urban areas, 
and 949 hospitals in rural areas. 

[B] Data on rural provider types exclude Medicare-dependent hospitals 
(MDH) because at the time, the program was set to expire on September 
30, 2012. However, the American Taxpayer Relief Act of 2012 extended 
the program until October 1, 2013. 

[C] Hospitals may be included through grandfathering, reclassification 
from an urban wage index area to a rural wage index area, or modified 
access requirement (such as being located more than 35 miles from 
other like hospitals). 

[End of table] 

Among the 3,039 IPPS hospitals receiving additional payment, the 
majority qualified for more than one category of payment adjustment. 
In 2012, roughly half of IPPS hospitals received two forms of 
adjustments and 13 percent qualified for three forms of adjustments. 
Two percent of IPPS hospitals qualified for four forms of adjustments, 
but no state had more than 10 hospitals qualifying for four forms of 
increased payment. The remaining IPPS hospitals, almost a third of the 
total, qualified for a DSH adjustment alone. By location, we found 
that most hospitals in urban areas qualified for one or two forms of 
increased payment, whereas most hospitals in rural areas qualified for 
two or more forms of additional pay. (See figure 6.) 

Of the 416 hospitals that did not qualify for IPPS payment 
adjustments, nearly all were in urban areas and were distributed 
across most states. Generally, they were substantially smaller than 
the average urban hospital, typically having 98 beds compared to 224 
beds. 

Figure 6: Inpatient Prospective Payment System (IPPS) Hospitals 
Qualifying for No, One, or Multiple Forms of Payment Adjustments, by 
Location, 2012: 

[Refer to PDF for image: vertical bar graph] 

Number of hospitals: 

No additional payment: 
Large urban area: 236; 
Other urban area: 155; 
Rural area: 25. 

One form of additional payment: 
Large urban area: 553; 
Other urban area: 446; 
Rural area: 208. 

Two forms of additional payment: 
Large urban area: 505; 
Other urban area: 406; 
Rural area: 402. 

Three forms of additional payment: 
Large urban area: 77; 
Other urban area: 102; 
Rural area: 270. 

Four forms of additional payment: 
Large urban area: 3; 
Other urban area: 23; 
Rural area: 44. 

Source: GAO analysis of Centers for Medicare and Medicaid Services 
data. 

Note: The number of IPPS hospitals totaled 3,455. CMS made these 
estimates in July 2012 for payments in 2013. Large urban areas have a 
population of at least 1 million. Other urban areas have a population 
of fewer than 1 million. The four forms of IPPS hospitals payment 
adjustments include wage index reclassification, indirect medical 
education (IME) payment, disproportionate share hospital (DSH) 
adjustment, or rural provider type adjustment. 

[End of figure] 

The multiple types of adjustments to Medicare payments vary in their 
financial effect, and can substantially affect a hospital's revenue. 
Take, for example, a beneficiary who undergoes coronary bypass surgery 
with angioplasty and has a major complication or comorbidity. When 
this surgery is performed at a teaching hospital in a large urban area 
that treats a high percentage of low-income patients, the total 
operating payment from Medicare comes to about $63,600.[Footnote 57] 
Specifically, in fiscal year 2013, the IPPS operating base rate for 
that case, adjusted for the local wage index, is approximately 
$41,500. Added to that amount is about $14,100 for IME and roughly 
$8,000 for Medicare DSH. Thus, the two payment adjustments increase 
the amount this hospital would receive for this discharge by more than 
50 percent. 

Concluding Observations: 

The IPPS streamlines how Medicare pays hospitals and gives hospitals 
an incentive to economize by paying a fixed amount, set in advance. 
Over time, however, numerous statutory provisions have been enacted 
that provide, grandfather, or extend additional payments to IPPS 
hospitals or exclude a substantial number of hospitals from the IPPS 
altogether. This piecemeal approach to modifying the original IPPS--a 
patchwork of individual "fixes"--has had the cumulative effect of most 
hospitals receiving modifications and add-ons to the basic payment 
formula that increase Medicare spending. In fact, over 90 percent of 
hospitals were subject to either IPPS payment adjustments or 
exemptions in 2012. These changes address characteristics of the 
hospital market such as competition for labor, challenges to rural 
hospitals, and the need to support Medicare-participating hospitals in 
certain markets. In addition, organizations such as IOM and MedPAC 
have recently made recommendations to strengthen the data used in 
geographic adjustments, and to hone the targeting of rural special 
payment adjustments. Taken together, these findings and 
recommendations suggest that, 30 years after the IPPS was implemented, 
the way Medicare currently pays hospitals may no longer ensure that 
the goals of the payment system--cost control, efficiency, and access--
are being met. 

Agency Comments: 

HHS reviewed a draft of this report and did not have any general 
comments. The agency provided technical comments, which we 
incorporated where appropriate. 

As we agreed with your offices, unless you publicly announce the 
contents of this report earlier, we plan no further distribution of it 
until 30 days from its date. We will send copies of this report to the 
Secretary of Health and Human Services. The report will also be 
available at no charge on our website at [hyperlink, 
http://www.gao.gov]. 

If you or your staffs have any questions about this report, please 
contact me at (202) 512-7114 or cosgrovej@gao.gov. Contact points for 
our Offices of Congressional Relations and Public Affairs may be found 
on the last page of this report. GAO staff who made key contributions 
to this report are listed in appendix III. 

Signed by: 

James Cosgrove: 
Director, Health Care: 

[End of section] 

Appendix I: Estimated Effect of Nationwide Budget Neutrality of Rural 
Floor on Hospital Payments by State, Fiscal Year 2012 and 2013: 

State: Massachusetts; 
Fiscal year 2012: 
Number of hospitals: 61; 
Number of hospitals receiving rural floor or imputed floor: 60; 
Percent change in payments: 8.7%; 
Difference (in millions of dollars): $274.8; 
Fiscal year 2013: 
Number of hospitals: 61; 
Number of hospitals receiving rural floor or imputed floor: 60; 
Percent change in payments: 5.7%; 
Difference (in millions of dollars): $188.0. 

State: California; 
Fiscal year 2012: 
Number of hospitals: 308; 
Number of hospitals receiving rural floor or imputed floor: 100; 
Percent change in payments: 0.2%; 
Difference (in millions of dollars): $20.3; 
Fiscal year 2013: 
Number of hospitals: 311; 
Number of hospitals receiving rural floor or imputed floor: 180; 
Percent change in payments: 0.9%; 
Difference (in millions of dollars): $98.5. 

State: Arizona; 
Fiscal year 2012: 
Number of hospitals: 57; 
Number of hospitals receiving rural floor or imputed floor: 0; 
Percent change in payments: -0.5%; 
Difference (in millions of dollars): -$8.8; 
Fiscal year 2013: 
Number of hospitals: 58; 
Number of hospitals receiving rural floor or imputed floor: 45; 
Percent change in payments: 1.7%; 
Difference (in millions of dollars): $31.4. 

State: Connecticut; 
Fiscal year 2012: 
Number of hospitals: 32; 
Number of hospitals receiving rural floor or imputed floor: 12; 
Percent change in payments: 1.9%; 
Difference (in millions of dollars): $30.0; 
Fiscal year 2013: 
Number of hospitals: 32; 
Number of hospitals receiving rural floor or imputed floor: 11; 
Percent change in payments: 1.0%; 
Difference (in millions of dollars): $16.7. 

State: New Jersey; 
Fiscal year 2012: 
Number of hospitals: 67; 
Number of hospitals receiving rural floor or imputed floor: 39; 
Percent change in payments: 1.4%; 
Difference (in millions of dollars): $54.2; 
Fiscal year 2013: 
Number of hospitals: 65; 
Number of hospitals receiving rural floor or imputed floor: 29; 
Percent change in payments: 0.4%; 
Difference (in millions of dollars): $14.4. 

State: New Hampshire; 
Fiscal year 2012: 
Number of hospitals: 13; 
Number of hospitals receiving rural floor or imputed floor: 9; 
Percent change in payments: 1.5%; 
Difference (in millions of dollars): $6.3; 
Fiscal year 2013: 
Number of hospitals: 13; 
Number of hospitals receiving rural floor or imputed floor: 9; 
Percent change in payments: 2.1%; 
Difference (in millions of dollars): $10.0. 

State: Colorado; 
Fiscal year 2012: 
Number of hospitals: 46; 
Number of hospitals receiving rural floor or imputed floor: 7; 
Percent change in payments: 0.4%; 
Difference (in millions of dollars): $4.3; 
Fiscal year 2013: 
Number of hospitals: 46; 
Number of hospitals receiving rural floor or imputed floor: 7; 
Percent change in payments: 0.5%; 
Difference (in millions of dollars): $5.8. 

State: Alaska; 
Fiscal year 2012: 
Number of hospitals: 6; 
Number of hospitals receiving rural floor or imputed floor: 4; 
Percent change in payments: 1.7%; 
Difference (in millions of dollars): $2.3; 
Fiscal year 2013: 
Number of hospitals: 6; 
Number of hospitals receiving rural floor or imputed floor: 4; 
Percent change in payments: 1.5%; 
Difference (in millions of dollars): $2.3. 

State: Rhode Island; 
Fiscal year 2012: 
Number of hospitals: 11; 
Number of hospitals receiving rural floor or imputed floor: 0; 
Percent change in payments: -0.6%; 
Difference (in millions of dollars): -$2.2; 
Fiscal year 2013: 
Number of hospitals: 11; 
Number of hospitals receiving rural floor or imputed floor: 4; 
Percent change in payments: 0.5%; 
Difference (in millions of dollars): $2.1. 

State: Puerto Rico; 
Fiscal year 2012: 
Number of hospitals: 51; 
Number of hospitals receiving rural floor or imputed floor: 12; 
Percent change in payments: 0.1%; 
Difference (in millions of dollars): $0.1; 
Fiscal year 2013: 
Number of hospitals: 52; 
Number of hospitals receiving rural floor or imputed floor: 13; 
Percent change in payments: 0.1%; 
Difference (in millions of dollars): $0.1. 

State: Wyoming; 
Fiscal year 2012: 
Number of hospitals: 11; 
Number of hospitals receiving rural floor or imputed floor: 0; 
Percent change in payments: 0.0; 
Difference (in millions of dollars): $0.0; 
Fiscal year 2013: 
Number of hospitals: 11; 
Number of hospitals receiving rural floor or imputed floor: 0; 
Percent change in payments: -0.1%; 
Difference (in millions of dollars): -$0.2. 

State: North Dakota; 
Fiscal year 2012: 
Number of hospitals: 6; 
Number of hospitals receiving rural floor or imputed floor: 0; 
Percent change in payments: -0.3%; 
Difference (in millions of dollars): -$0.8; 
Fiscal year 2013: 
Number of hospitals: 6; 
Number of hospitals receiving rural floor or imputed floor: 4; 
Percent change in payments: -0.2%; 
Difference (in millions of dollars): -$0.6. 

State: Montana; 
Fiscal year 2012: 
Number of hospitals: 12; 
Number of hospitals receiving rural floor or imputed floor: 1; 
Percent change in payments: -0.3%; 
Difference (in millions of dollars): -$0.8; 
Fiscal year 2013: 
Number of hospitals: 12; 
Number of hospitals receiving rural floor or imputed floor: 1; 
Percent change in payments: -0.3%; 
Difference (in millions of dollars): -$0.7. 

State: Vermont; 
Fiscal year 2012: 
Number of hospitals: 6; 
Number of hospitals receiving rural floor or imputed floor: 0; 
Percent change in payments: -0.3%; 
Difference (in millions of dollars): -$0.6; 
Fiscal year 2013: 
Number of hospitals: 6; 
Number of hospitals receiving rural floor or imputed floor: 0; 
Percent change in payments: -0.3%; 
Difference (in millions of dollars): -$0.7. 

State: South Dakota; 
Fiscal year 2012: 
Number of hospitals: 19; 
Number of hospitals receiving rural floor or imputed floor: 0; 
Percent change in payments: -0.3%; 
Difference (in millions of dollars): -$0.9; 
Fiscal year 2013: 
Number of hospitals: 18; 
Number of hospitals receiving rural floor or imputed floor: 0; 
Percent change in payments: -0.3%; 
Difference (in millions of dollars): -$0.8. 

State: Idaho; 
Fiscal year 2012: 
Number of hospitals: 15; 
Number of hospitals receiving rural floor or imputed floor: 0; 
Percent change in payments: -0.4%; 
Difference (in millions of dollars): -$1.0; 
Fiscal year 2013: 
Number of hospitals: 14; 
Number of hospitals receiving rural floor or imputed floor: 0; 
Percent change in payments: -0.3%; 
Difference (in millions of dollars): -$1.0. 

State: Hawaii; 
Fiscal year 2012: 
Number of hospitals: 14; 
Number of hospitals receiving rural floor or imputed floor: 0; 
Percent change in payments: -0.4%; 
Difference (in millions of dollars): -$1.1; 
Fiscal year 2013: 
Number of hospitals: 14; 
Number of hospitals receiving rural floor or imputed floor: 0; 
Percent change in payments: -0.4%; 
Difference (in millions of dollars): -$1.1. 

State: New Mexico; 
Fiscal year 2012: 
Number of hospitals: 28; 
Number of hospitals receiving rural floor or imputed floor: 0; 
Percent change in payments: -0.3%; 
Difference (in millions of dollars): -$1.6; 
Fiscal year 2013: 
Number of hospitals: 27; 
Number of hospitals receiving rural floor or imputed floor: 0; 
Percent change in payments: -0.3%; 
Difference (in millions of dollars): -$1.5. 

State: Utah; 
Fiscal year 2012: 
Number of hospitals: 32; 
Number of hospitals receiving rural floor or imputed floor: 2; 
Percent change in payments: -0.4%; 
Difference (in millions of dollars): -$1.7; 
Fiscal year 2013: 
Number of hospitals: 32; 
Number of hospitals receiving rural floor or imputed floor: 0; 
Percent change in payments: -0.4%; 
Difference (in millions of dollars): -$1.8. 

State: Delaware; 
Fiscal year 2012: 
Number of hospitals: 5; 
Number of hospitals receiving rural floor or imputed floor: 0; 
Percent change in payments: -0.5%; 
Difference (in millions of dollars): -$2.0; 
Fiscal year 2013: 
Number of hospitals: 6; 
Number of hospitals receiving rural floor or imputed floor: 0; 
Percent change in payments: -0.5%; 
Difference (in millions of dollars): -$2.1. 

State: Maine; 
Fiscal year 2012: 
Number of hospitals: 20; 
Number of hospitals receiving rural floor or imputed floor: 0; 
Percent change in payments: -0.4%; 
Difference (in millions of dollars): -$2.1; 
Fiscal year 2013: 
Number of hospitals: 20; 
Number of hospitals receiving rural floor or imputed floor: 0; 
Percent change in payments: -0.5%; 
Difference (in millions of dollars): -$2.4. 

State: Nebraska; 
Fiscal year 2012: 
Number of hospitals: 23; 
Number of hospitals receiving rural floor or imputed floor: 0; 
Percent change in payments: -0.4%; 
Difference (in millions of dollars): -$2.4; 
Fiscal year 2013: 
Number of hospitals: 23; 
Number of hospitals receiving rural floor or imputed floor: 0; 
Percent change in payments: -0.4%; 
Difference (in millions of dollars): -$2.5. 

State: Washington, DC; 
Fiscal year 2012: 
Number of hospitals: 7; 
Number of hospitals receiving rural floor or imputed floor: 0; 
Percent change in payments: -0.5%; 
Difference (in millions of dollars): -$2.5; 
Fiscal year 2013: 
Number of hospitals: 7; 
Number of hospitals receiving rural floor or imputed floor: 0; 
Percent change in payments: -0.5%; 
Difference (in millions of dollars): -$2.5. 

State: West Virginia; 
Fiscal year 2012: 
Number of hospitals: 32; 
Number of hospitals receiving rural floor or imputed floor: 3; 
Percent change in payments: -0.3%; 
Difference (in millions of dollars): -$2.2; 
Fiscal year 2013: 
Number of hospitals: 33; 
Number of hospitals receiving rural floor or imputed floor: 2; 
Percent change in payments: -0.3%; 
Difference (in millions of dollars): -$2.9. 

State: Nevada; 
Fiscal year 2012: 
Number of hospitals: 24; 
Number of hospitals receiving rural floor or imputed floor: 0; 
Percent change in payments: -0.5%; 
Difference (in millions of dollars): -$3.7; 
Fiscal year 2013: 
Number of hospitals: 24; 
Number of hospitals receiving rural floor or imputed floor: 4; 
Percent change in payments: -0.4%; 
Difference (in millions of dollars): -$3.2. 

State: Kansas; 
Fiscal year 2012: 
Number of hospitals: 55; 
Number of hospitals receiving rural floor or imputed floor: 1; 
Percent change in payments: -0.4%; 
Difference (in millions of dollars): -$3.5; 
Fiscal year 2013: 
Number of hospitals: 55; 
Number of hospitals receiving rural floor or imputed floor: 0; 
Percent change in payments: -0.4%; 
Difference (in millions of dollars): -$3.5. 

State: Oregon; 
Fiscal year 2012: 
Number of hospitals: 33; 
Number of hospitals receiving rural floor or imputed floor: 3; 
Percent change in payments: -0.4%; 
Difference (in millions of dollars): -$3.5; 
Fiscal year 2013: 
Number of hospitals: 33; 
Number of hospitals receiving rural floor or imputed floor: 0; 
Percent change in payments: -0.5%; 
Difference (in millions of dollars): -$4.1. 

State: Iowa; 
Fiscal year 2012: 
Number of hospitals: 34; 
Number of hospitals receiving rural floor or imputed floor: 5; 
Percent change in payments: -0.3%; 
Difference (in millions of dollars): -$3.0; 
Fiscal year 2013: 
Number of hospitals: 34; 
Number of hospitals receiving rural floor or imputed floor: 0; 
Percent change in payments: -0.4%; 
Difference (in millions of dollars): -$4.4. 

State: Wisconsin; 
Fiscal year 2012: 
Number of hospitals: 64; 
Number of hospitals receiving rural floor or imputed floor: 2; 
Percent change in payments: -0.4%; 
Difference (in millions of dollars): -$6.4; 
Fiscal year 2013: 
Number of hospitals: 65; 
Number of hospitals receiving rural floor or imputed floor: 8; 
Percent change in payments: -0.3%; 
Difference (in millions of dollars): -$5.0. 

State: Arkansas; 
Fiscal year 2012: 
Number of hospitals: 47; 
Number of hospitals receiving rural floor or imputed floor: 0; 
Percent change in payments: -0.4%; 
Difference (in millions of dollars): -$5.0; 
Fiscal year 2013: 
Number of hospitals: 45; 
Number of hospitals receiving rural floor or imputed floor: 0; 
Percent change in payments: -0.5%; 
Difference (in millions of dollars): -$5.2. 

State: Mississippi; 
Fiscal year 2012: 
Number of hospitals: 64; 
Number of hospitals receiving rural floor or imputed floor: 0; 
Percent change in payments: -0.5%; 
Difference (in millions of dollars): -$5.6; 
Fiscal year 2013: 
Number of hospitals: 66; 
Number of hospitals receiving rural floor or imputed floor: 0; 
Percent change in payments: -0.4%; 
Difference (in millions of dollars): -$5.5. 

State: Oklahoma; 
Fiscal year 2012: 
Number of hospitals: 85; 
Number of hospitals receiving rural floor or imputed floor: 2; 
Percent change in payments: -0.4%; 
Difference (in millions of dollars): -$5.7; 
Fiscal year 2013: 
Number of hospitals: 85; 
Number of hospitals receiving rural floor or imputed floor: 0; 
Percent change in payments: -0.4%; 
Difference (in millions of dollars): -$5.7. 

State: South Carolina; 
Fiscal year 2012: 
Number of hospitals: 55; 
Number of hospitals receiving rural floor or imputed floor: 0; 
Percent change in payments: -0.4%; 
Difference (in millions of dollars): -$7.2; 
Fiscal year 2013: 
Number of hospitals: 56; 
Number of hospitals receiving rural floor or imputed floor: 5; 
Percent change in payments: -0.3%; 
Difference (in millions of dollars): -$5.9. 

State: Washington; 
Fiscal year 2012: 
Number of hospitals: 48; 
Number of hospitals receiving rural floor or imputed floor: 2; 
Percent change in payments: -0.4%; 
Difference (in millions of dollars): -$7.3; 
Fiscal year 2013: 
Number of hospitals: 48; 
Number of hospitals receiving rural floor or imputed floor: 5; 
Percent change in payments: -0.3%; 
Difference (in millions of dollars): -$6.3. 

State: Louisiana; 
Fiscal year 2012: 
Number of hospitals: 97; 
Number of hospitals receiving rural floor or imputed floor: 10; 
Percent change in payments: -0.5%; 
Difference (in millions of dollars): -$7.2; 
Fiscal year 2013: 
Number of hospitals: 98; 
Number of hospitals receiving rural floor or imputed floor: 7; 
Percent change in payments: -0.4%; 
Difference (in millions of dollars): -$7.1. 

State: Tennessee; 
Fiscal year 2012: 
Number of hospitals: 99; 
Number of hospitals receiving rural floor or imputed floor: 11; 
Percent change in payments: -0.3%; 
Difference (in millions of dollars): -$7.7; 
Fiscal year 2013: 
Number of hospitals: 97; 
Number of hospitals receiving rural floor or imputed floor: 10; 
Percent change in payments: -0.3%; 
Difference (in millions of dollars): -$7.4. 

State: Alabama; 
Fiscal year 2012: 
Number of hospitals: 95; 
Number of hospitals receiving rural floor or imputed floor: 6; 
Percent change in payments: -0.4%; 
Difference (in millions of dollars): -$7.5; 
Fiscal year 2013: 
Number of hospitals: 96; 
Number of hospitals receiving rural floor or imputed floor: 3; 
Percent change in payments: -0.4%; 
Difference (in millions of dollars): -$8.2. 

State: Kentucky; 
Fiscal year 2012: 
Number of hospitals: 65; 
Number of hospitals receiving rural floor or imputed floor: 1; 
Percent change in payments: -0.4%; 
Difference (in millions of dollars): -$8.5; 
Fiscal year 2013: 
Number of hospitals: 65; 
Number of hospitals receiving rural floor or imputed floor: 0; 
Percent change in payments: -0.4%; 
Difference (in millions of dollars): -$8.4. 

State: Minnesota; 
Fiscal year 2012: 
Number of hospitals: 51; 
Number of hospitals receiving rural floor or imputed floor: 0; 
Percent change in payments: -0.5%; 
Difference (in millions of dollars): -$8.1; 
Fiscal year 2013: 
Number of hospitals: 51; 
Number of hospitals receiving rural floor or imputed floor: 0; 
Percent change in payments: -0.5%; 
Difference (in millions of dollars): -$8.6. 

State: Virginia; 
Fiscal year 2012: 
Number of hospitals: 81; 
Number of hospitals receiving rural floor or imputed floor: 2; 
Percent change in payments: -0.4%; 
Difference (in millions of dollars): -$10.8; 
Fiscal year 2013: 
Number of hospitals: 79; 
Number of hospitals receiving rural floor or imputed floor: 1; 
Percent change in payments: -0.4%; 
Difference (in millions of dollars): -$10.1. 

State: Missouri; 
Fiscal year 2012: 
Number of hospitals: 80; 
Number of hospitals receiving rural floor or imputed floor: 4; 
Percent change in payments: -0.4%; 
Difference (in millions of dollars): -$10.5; 
Fiscal year 2013: 
Number of hospitals: 76; 
Number of hospitals receiving rural floor or imputed floor: 2; 
Percent change in payments: -0.4%; 
Difference (in millions of dollars): -$10.9. 

State: Indiana; 
Fiscal year 2012: 
Number of hospitals: 89; 
Number of hospitals receiving rural floor or imputed floor: 1; 
Percent change in payments: -0.5%; 
Difference (in millions of dollars): -$11.1; 
Fiscal year 2013: 
Number of hospitals: 89; 
Number of hospitals receiving rural floor or imputed floor: 0; 
Percent change in payments: -0.5%; 
Difference (in millions of dollars): -$11.7. 

State: Georgia; 
Fiscal year 2012: 
Number of hospitals: 108; 
Number of hospitals receiving rural floor or imputed floor: 0; 
Percent change in payments: -0.5%; 
Difference (in millions of dollars): -$13.0; 
Fiscal year 2013: 
Number of hospitals: 108; 
Number of hospitals receiving rural floor or imputed floor: 0; 
Percent change in payments: -0.4%; 
Difference (in millions of dollars): -$12.7. 

State: Ohio; 
Fiscal year 2012: 
Number of hospitals: 138; 
Number of hospitals receiving rural floor or imputed floor: 9; 
Percent change in payments: -0.4%; 
Difference (in millions of dollars): -$15.8; 
Fiscal year 2013: 
Number of hospitals: 139; 
Number of hospitals receiving rural floor or imputed floor: 8; 
Percent change in payments: -0.4%; 
Difference (in millions of dollars): -$15.0. 

State: North Carolina; 
Fiscal year 2012: 
Number of hospitals: 89; 
Number of hospitals receiving rural floor or imputed floor: 4; 
Percent change in payments: -0.4%; 
Difference (in millions of dollars): -$15.5; 
Fiscal year 2013: 
Number of hospitals: 88; 
Number of hospitals receiving rural floor or imputed floor: 0; 
Percent change in payments: -0.4%; 
Difference (in millions of dollars): -$16.4. 

State: Pennsylvania; 
Fiscal year 2012: 
Number of hospitals: 152; 
Number of hospitals receiving rural floor or imputed floor: 16; 
Percent change in payments: -0.4%; 
Difference (in millions of dollars): -$17.3; 
Fiscal year 2013: 
Number of hospitals: 154; 
Number of hospitals receiving rural floor or imputed floor: 14; 
Percent change in payments: -0.4%; 
Difference (in millions of dollars): -$17.5. 

State: Michigan; 
Fiscal year 2012: 
Number of hospitals: 100; 
Number of hospitals receiving rural floor or imputed floor: 0; 
Percent change in payments: -0.5%; 
Difference (in millions of dollars): -$21.4; 
Fiscal year 2013: 
Number of hospitals: 96; 
Number of hospitals receiving rural floor or imputed floor: 0; 
Percent change in payments: -0.5%; 
Difference (in millions of dollars): -$21.2. 

State: Illinois; 
Fiscal year 2012: 
Number of hospitals: 130; 
Number of hospitals receiving rural floor or imputed floor: 0; 
Percent change in payments: -0.5%; 
Difference (in millions of dollars): -$26.3; 
Fiscal year 2013: 
Number of hospitals: 130; 
Number of hospitals receiving rural floor or imputed floor: 8; 
Percent change in payments: -0.5%; 
Difference (in millions of dollars): -$26.2. 

State: Florida; 
Fiscal year 2012: 
Number of hospitals: 168; 
Number of hospitals receiving rural floor or imputed floor: 5; 
Percent change in payments: -0.4%; 
Difference (in millions of dollars): -$29.1; 
Fiscal year 2013: 
Number of hospitals: 169; 
Number of hospitals receiving rural floor or imputed floor: 8; 
Percent change in payments: -0.4%; 
Difference (in millions of dollars): -$28.3. 

State: Texas; 
Fiscal year 2012: 
Number of hospitals: 320; 
Number of hospitals receiving rural floor or imputed floor: 4; 
Percent change in payments: -0.5%; 
Difference (in millions of dollars): -$34.0; 
Fiscal year 2013: 
Number of hospitals: 325; 
Number of hospitals receiving rural floor or imputed floor: 2; 
Percent change in payments: -0.4%; 
Difference (in millions of dollars): -$33.0. 

State: New York; 
Fiscal year 2012: 
Number of hospitals: 170; 
Number of hospitals receiving rural floor or imputed floor: 2; 
Percent change in payments: -0.5%; 
Difference (in millions of dollars): -$47.5; 
Fiscal year 2013: 
Number of hospitals: 168; 
Number of hospitals receiving rural floor or imputed floor: 0; 
Percent change in payments: -0.5%; 
Difference (in millions of dollars): -$46.8. 

Source: CMS. 

[End of table] 

Appendix II: Hospitals by Provider Type: 

Figure 7: Distribution of Inpatient Prospective Payment System (IPPS) 
Hospitals and Critical Access Hospitals (CAH), by Provider Type, 2012: 

[Refer to PDF for image: pie-chart] 

total number of IPPS hospitals and CAHs: 4,783. 

IPPS hospitals: 3,455 (72%): 
* Both Medicare-dependent hospitals (MDH) and rural referral centers 
(RRC): 18; (less than 1%); 
* Both sole community hospitals (SCH) and RRC: 118 (2%); 
* MDH only: 195 (4%); 
* RRC only: 203 (4%); 
* SCH only: 326 (7%); 
* Other IPPS: 2,595 (54%); 
CAHs: 1,328 (28%). 

Source: CMS. 

[End of figure] 

[End of section] 

Appendix III: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

James Cosgrove, (202) 512-7114 or cosgrovej@gao.gov: 

Staff Acknowledgments: 

In addition to the contact named above, Rosamond Katz, Assistant 
Director; Alexander Galuten; Katherine Perry; Kathryn Richter; and 
Hemi Tewarson made key contributions to this report. 

[End of section] 

Footnotes: 

[1] Medicare Parts A and B are known as Medicare fee-for-service. 
Medicare Part A covers hospital and other inpatient stays. Medicare 
Part B is optional, and covers hospital outpatient, physician, and 
other services. 

[2] See Social Security Amendments of 1983, Pub. L. No. 98-21, § 601, 
97 Stat. 65 (1983) (codified, as amended, at 42 U.S.C. § 1395ww). 
Medicare also pays hospitals for services provided to beneficiaries in 
outpatient departments under the outpatient prospective payment 
system, implemented in 2000. 

[3] A. Bruce Steinwald, President, Bruce Steinwald Consulting, 
Congress Should Not Extend Expiring Exceptions to Medicare Payment 
Policies Without Compelling Evidence Based on Beneficiary Need, 
testimony before the Subcommittee on Health, Committee on Ways and 
Means, September 21, 2011; Institute of Medicine, Geographic 
Adjustment in Medicare Payment Phase I: Improving Accuracy 
(Washington, D.C.: September 2011); Institute of Medicine, Geographic 
Adjustment in Medicare Payment Phase II: Implications for Access, 
Quality, and Efficiency (Washington, D.C.: July 2012); and Medicare 
Payment Advisory Commission, Report to the Congress: Medicare and the 
Healthcare Delivery System (Washington, D.C.: June 2012). 

[4] This scope excluded facilities not paid under the IPPS--
psychiatric, rehabilitation, children's, long-term care, and cancer 
hospitals, as well as religious nonmedical health care institutions. 
We also excluded Maryland hospitals because they too are subject to a 
separate payment methodology. 

[5] In this report, we describe statutory provisions within our scope 
that were identified through interviews with experts or literature 
review. Therefore, this list of provisions is not exhaustive. 

[6] In this report, references to PPACA include any amendments made by 
HCERA. 

[7] CMS's impact files provide hospital-level data the agency uses to 
estimate payment impacts of various policy changes in proposed and 
final rules published in the Federal Register. CMS usually prepares 
impact files in the summer preceding each federal fiscal year, based 
on the most recent data available at the time. Impact files include 
data on all Medicare acute care general hospitals. Because Maryland 
hospitals are not paid under the IPPS, we removed Maryland data from 
our analysis of the impact files. 

[8] The Flex Monitoring Team is comprised of rural health research 
centers at the Universities of Minnesota, North Carolina-Chapel Hill, 
and Southern Maine. These universities received a 5-year cooperative 
agreement award from the federal Office of Rural Health Policy to 
continue to monitor and evaluate rural hospital programs. To be 
consistent with other information in this report, we used June 30, 
2012, data from the Flex Monitoring Team. 

[9] Given the purpose of these estimates, CMS's projected budgetary 
impact data are not subsequently verified or compared to actual 
expenditures. 

[10] Medicare sets the base payment rates for the operating and 
capital costs that reasonably efficient hospitals are expected to 
incur in providing covered inpatient services. Operating payments 
cover labor and supply costs and capital payments cover costs for 
depreciation, interest, rent, and property-related insurance and 
taxes. CMS updates these rates annually. 

[11] Medicare categorizes all hospital inpatient care into medical-
severity adjusted, diagnosis-related groupings. Inpatient episodes are 
first grouped by principal diagnosis and then subdivided by the nature 
of co-morbidities or complications, if any. Each grouping has a 
numeric weight, which signifies the average cost of stays assigned to 
that grouping relative to the average cost of other inpatient stays. 

[12] CMS uses definitions from the Office of Management and Budget to 
define its urban and rural areas. Core Based Statistical Areas are 
either metropolitan (population of at least 50,000) or micropolitan 
(population of at least 10,000 and fewer than 50,000). In this report, 
we refer to both of these areas as "urban." We refer to all nonurban 
areas as "rural." 

[13] See 42 U.S.C. § 1395ww(d)(5)(F). 

[14] The DPP is generally computed as the sum of the percentage of 
Medicare inpatient days attributable to patients entitled to both 
Medicare Part A and Supplemental Security Income (the federal program 
that provides cash benefits to eligible low-income individuals who are 
aged, blind, or disabled) and the percentage of total patient days 
attributable to patients eligible for Medicaid but not eligible for 
Medicare Part A. 

[15] An alternative method for qualifying for the Medicare DSH 
adjustment applies to hospitals that are located in an urban area, 
have 100 or more beds, and can demonstrate that more than 30 percent 
of their total net inpatient care revenues come from state and local 
government sources for indigent care (other than Medicare and 
Medicaid). These hospitals are known as "Pickle" hospitals and qualify 
for a specific Medicare DSH adjustment. 

[16] Federal law and regulations refer to "Medicare-dependent small 
rural hospitals". In this report, we reference this category of rural 
providers as "Medicare-dependent hospitals" (MDH). 

[17] See 42 U.S.C. § 1395ww(d)(5)(D)(iii), 42 C.F.R. § 412.92(a). A 
hospital may also qualify as an SCH if (1) it is located between 25 
and 35 miles from another like hospital and meets additional criteria, 
such as having no more than 25 percent of Medicare beneficiaries in 
the service area being admitted to other like hospitals within 35 
miles, (2) it is located between 15 and 25 miles from other like 
hospitals and because of local topography or prolonged severe weather 
conditions, other like hospitals are inaccessible for at least 30 days 
in each 2 out of 3 years, or (3) because of distance, posted speed, 
and predictable weather conditions, the travel time between the 
hospital and the nearest like hospital is at least 45 minutes. 

[18] See 42 U.S.C. § 1395ww(d)(5)(C)(i), (ii), 42 C.F.R. § 412.96. A 
hospital generally may qualify as an RRC if it is in a rural area and 
has at least 275 beds (subject to certain exceptions). A hospital may 
also qualify as an RRC if (1) it is located in a rural area, (2) the 
hospital demonstrates that at least 50 percent of its Medicare 
patients are referred from other hospitals or physicians not on the 
hospital's staff, (3) at least 60 percent of the hospital's Medicare 
patients live more than 25 miles from the hospital, and (4) at least 
60 percent of the hospital services are provided to Medicare patients 
living more than 25 miles from the hospital. 

[19] Alternatively, a hospital may also qualify as an RRC if it is 
located in a rural area and meets the following two criteria: (1) For 
discharges during the most recent fiscal year, its case-mix index is 
at least equal to the lower of the median for all urban hospitals 
nationally or the median for urban hospitals located in each region; 
and (2) its number of discharges is at least 5,000 or the median 
number of discharges for urban hospitals in the census region where 
the hospital is located. In addition, the hospital must meet at least 
one of the following three criteria: (1) More than 50 percent of its 
medical staff are specialists who meet certain conditions; (2) at 
least 60 percent of all its discharges are for individuals who live 
more than 25 miles from the hospital; or (3) at least 40 percent of 
all inpatients are referred from other hospitals or from physicians 
not on the hospital's staff. 

[20] See 42 U.S.C. § 1395ww(d)(5)(G)(iv), 42 C.F.R. § 412.108. 

[21] Institute of Medicine, Geographic Adjustment in Medicare Payment 
Phase I: Improving Accuracy. 

[22] Medicare Payment Advisory Commission, Report to the Congress: 
Medicare and the Healthcare Delivery System. 

[23] In addition, in a 2012 report on the effects of exceptions and 
adjustments to the wage index, CMS stated that modifications to the 
wage index have created or further exacerbated distortions in labor 
market values. See Department of Health and Human Services, Centers 
for Medicare & Medicaid Services, Report to Congress: Plan to Reform 
the Medicare Wage Index (Washington, D.C.: 2012). 

[24] Although a majority of the provisions we identified targeted 
rural hospitals, because rural hospitals tend to be smaller than urban 
hospitals, they are likely to receive correspondingly smaller payment 
increases. 

[25] BBA, Pub. L. No. 105-33, § 4410, 111 Stat. 251, 402-3 (1997) 
(codified, as amended, at 42 U.S.C. § 1395ww note). A House of 
Representatives report accompanying the BBA stated that this provision 
addressed "an anomaly that exists with the way area wage indexes are 
applied which result in some urban hospitals being paid less than the 
average rural hospital in their states." H.R. Rep. No. 105-149 at 1305. 

[26] Medicare Program; Changes to the Hospital Inpatient Prospective 
Payment Systems and Fiscal Year 2009 Rates, 73 Fed. Reg. 48,434 (Aug. 
19, 2008). 

[27] PPACA, Pub. L. No. 111-148, § 3141, 124 Stat. 119, 441 (2010) 
(codified, as amended, at 42 U.S.C. § 1395ww note). 

[28] BBRA, Pub. L. No. 106-113, App. F, § 152, 113 Stat. 1501A-321, 
334 (1999). 

[29] In explaining the reclassification of Iredell County and Orange 
County, a Senate committee report stated that Iredell County is still 
classified as rural for purposes of Medicare reimbursement, even 
though the county is almost completely surrounded by three MSAs. 
Orange County hospitals compete directly for personnel with 
neighboring counties that are reimbursed on the higher New York City 
wage index. More specifically, these hospitals receive reimbursement 
that is 26 percent less than neighboring counties solely based on the 
MSA to which it is classified. S. Rep. No. 106-199. 

[30] BBRA, Pub. L. No. 106-113, App. F, § 401, 113 Stat. 1501A-321, 
369 (codified, as amended, at 42 U.S.C. § 1395ww(d)(8)). 

[31] MMA, Pub. L. No. 108-173, § 505, 117 Stat. 2066, 2293 (2003) 
(codified, as amended, at 42 U.S.C. § 1395ww(d)(13)). The MMA imposed 
certain broad parameters for this provision, including limiting the 
adjustment determinations for 3-year periods and requiring HHS to 
impose criteria for the process, such as defining which counties may 
qualify and establishing thresholds of at least 10 percent for 
migration to higher wage index areas. 

[32] MMA, Pub. L. No. 108-173, § 508, 117 Stat. at 2297 (codified, as 
amended, at 42 U.S.C. § 1395ww note). 

[33] PPACA, Pub. L. No. 111-148, § 10324, 124 Stat. at 959 (codified, 
as amended, at 42 U.S.C. § 1395ww(d)(3)(E)). 

[34] BIPA, Pub. L. No. 106-554, App. F, § 211, 114 Stat. 2763A-463, 
483 (2000) (codified, as amended, at 42 U.S.C. § 1395ww(d)(5)(F)(v)). 
In addition, the provision also modified the DSH payment formulas for 
SCHs, RRCs, small rural hospitals, and urban hospitals with fewer than 
100 beds. 

[35] MMA, Pub. L. No. 108-173, § 402, 117 Stat. at 2264 (codified, as 
amended, at 42 U.S.C. § 1395ww(d)(5)(F)). 

[36] Additional provisions have modified the Medicare DSH payment 
adjustment for all qualifying DSH hospitals, not a subset, and are, 
therefore, not included in our scope. For example, section 3133 of 
PPACA permanently reduces Medicare DSH payments by 75 percent 
beginning in fiscal year 2014 and provides DSH hospitals with 
additional payments based on a formula that includes certain factors 
such as the hospital's reduction in DSH funds, percentage change in 
the uninsured under 65 population, and uncompensated care provided by 
the hospital. 42 U.S.C. § 1395ww(r). According to CMS, this provision 
is estimated to save the Medicare program approximately $50 billion 
through fiscal year 2019. 

[37] Section 5003 of the Deficit Reduction Act of 2005 also exempted 
MDHs from the 12 percent cap, effective for discharges as of fiscal 
year 2007. Pub. L. No. 109-171, § 5003(d), 120 Stat. 4, 31 (2006) 
(codified, as amended, at 42 U.S.C. § 1395ww(d)(5)(F)(xiv)(II)). 

[38] MMA, Pub. L. No. 108-173 § 406, 117 Stat. at 2269 (codified, as 
amended, at 42 U.S.C. § 1395ww(d)(12)). 

[39] The provision effectively gave CMS the authority to set the 
maximum number of discharges hospitals could have in a given year to 
receive a payment adjustment, as long as it was fewer than 800 total 
discharges. 

[40] PPACA, Pub. L. No. 111-148. §§ 3125, 10314, 124 Stat. at 425, 944 
(codified, as amended, at 42 U.S.C. § 1395ww(d)(12)). 

[41] Section 605 of the American Taxpayer Relief Act of 2012 extended 
these payment adjustments through fiscal year 2013. Pub. L. No. 112-
240, § 605, 126 Stat, 2313, 2349 (2012) (to be codified at 42 U.S.C. § 
1395ww(d)(12)). According to CBO, this provision was estimated to 
increase Medicare spending by $300 million in fiscal year 2013. 

[42] These hospitals had an average bed size of 55, compared to a 
Medicare-wide IPPS hospital average bed size of 183. 

[43] BIPA, Pub. L. No. 106-554, App. F, § 212, 114 Stat. at 2763A-485 
(codified, as amended, at 42 U.S.C. § 1395ww(d)(5)(G)(iv)(IV)). 

[44] BBA, Pub. L. No. 105-33, § 4201, 111 Stat. at 369 (codified, as 
amended, at 42 U.S.C. §§ 1395f(I), 1395i-4). 

[45] CAHs are an outgrowth of the Medicare Assistance Facility 
Demonstration Project in Montana and the seven-state Essential Access 
Community Hospital/Rural Primary Care Hospital demonstration program 
established by Congress in 1989. The BBA replaced these initiatives in 
1997 with the state-administered Flex Program. 

[46] BBRA, Pub. L. No. 106-113, App. F, § 403, 113 Stat. at 1501A-370 
(codified, as amended, at 42 U.S.C. § 1395i-4(c)(2)). 

[47] A House of Representatives committee report discussing this 
provision explained that it would strengthen and provide increased 
flexibility for the CAH program, and a Senate committee report added 
that the change to an annual 4 day length of stay average would 
provide increased flexibility and choice for rural health care 
delivery setting. The provision also eliminates increased 
administrative burdens for these providers. See H.R. Rep. No. 106-436 
at 68, S. Rep. No. 106-199 at 27. 

[48] See MMA, Pub. L. No. 108-173, § 405(e), (g), (h), 117 Stat. at 
2266 (codified, as amended, at 42 U.S.C. § 1395i-4(c)(2), (h)). 

[49] In 2003, we reported that among the existing 620 CAHs at the 
time, 25 previously operated an inpatient rehabilitation or 
psychiatric care unit but had to close as part of becoming a CAH. In 
addition, we identified 683 rural hospitals as "potential CAHs" on the 
basis of their having an annual average of no more than 15 acute care 
patients per day. About 14 percent (93) of these potential CAHs 
operated a rehabilitation or psychiatric care unit and about half of 
those 93 potential CAHs had a net loss on Medicare services, 
indicating that they might benefit from becoming a CAH. See GAO, 
Medicare: Modest Eligibility Expansion for Critical Access Hospital 
Program Should Be Considered, [hyperlink, 
http://www.gao.gov/products/GAO-03-948] (Washington, D.C.: Sept. 19, 
2003). 

[50] According to MedPAC, the CAH payment system resulted in 
approximately $2 billion in higher payments to CAHs in 2010 than to 
hospitals receiving prospective payment for the same inpatient and 
outpatient services. 

[51] Five states--Connecticut, Delaware, Maryland, New Jersey, and 
Rhode Island--do not participate in the Flex Program and, therefore, 
may not designate any hospitals in those states as CAHs. 

[52] MedPAC, Report to the Congress: Medicare and the Healthcare 
Delivery System. 

[53] According to its fiscal year 2013 work plan, HHS's Office of the 
Inspector General announced plans to review CAHs to profile variation 
in size, services, and distance from other hospitals, among other 
things. 

[54] HCERA, Pub. L. No. 111-152, § 1109, 124 Stat. 1029, 1051 
(codified, as amended, at 42 U.S.C. § 1395ww note). 

[55] For the number of hospitals qualifying for each rural provider 
type adjustment and as CAHs, see appendix II. 

[56] According to CMS, urban hospitals may qualify for a rural 
provider type adjustment in one of three ways. An urban hospital may 
qualify as an SCH if it is located more than 35 miles from other like 
hospitals (not including CAHs). A hospital may remain an SCH, MDH, or 
RRC through grandfathering if it is located in an area redesignated as 
urban after the hospital received its rural provider type designation. 
Finally, a hospital may apply for redesignation into a rural wage 
index area by meeting certain criteria. 

[57] The IPPS per-discharge payment is comprised of two parts: one 
that provides for operating expenses and another for capital expenses. 
This calculation is only for the operating payment. 

[End of section] 

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