The following are highlights from the March 5th, 1997 testimony by Tim Size on behalf of the National Rural Health Association before the U.S. Senate Finance Committee on the Medicare budget for inpatient services; also testifying on this panel was the American Hospital Association and the American Association for Retired Persons:
It is difficult for us to have a detailed reaction to the President's budget proposal at this time because there are not many details currently available on exactly how the President would reach the general goals outlined in the Medicare reforms. With Medicare & rural health, the meat of the matter is usually found in the fine print. Nonetheless, the NRHA and rural communities will strongly oppose an across-the-board Medicare freeze or reduction as long as:
(1) rural beneficiaries have lower utilization rates, same tax rates
(2) rural hospitals have lower reimbursement for the same work
(3) rural hospitals have lower Medicare operating margins as a class
(4) rural hospitals serve disproportionately more Medicare patients
Inequitable Payment For 12 Years
In the first year following the implementation of Medicare's Prospective Payment System (PPS), urban hospitals enjoyed an average operating margin of 14% due to Medicare PPS inpatients, while rural hospitals received 8%. Over the following years Medicare margins fell, and the difference between urban and rural hospitals substantially narrowed. In 1990 through 1992, both groups averaged negative operating margins (Medicare revenues less than costs).
Since 1992, the margin for both urban and rural hospitals has improved, but urban hospital margins much more so-preliminary figures for 1995 show urban hospitals are again 6% higher than the average for rural hospitals. (Alert readers will remember this graph from two month's ago but it seemed worth repeating.) Some are quick to say that these numbers reflect superior management; however, when you look at total margins that include inpatient Medicare and all other activities, rural hospitals are doing as well as urban hospitals. What we have here is more a problem of the effect of discriminatory Medicare reimbursement against the class of rural hospitals, not as some would argue, rural not managing as well as urban.
Rural Hospital Issues

Reductions in hospital updates: PPS hospitals will be reduced by 1% per year. PPS-exempt will receive a 1.5% reduction per year. Capital payments for PPS hospitals will receive a 15.7% reduction while PPS-exempt hospitals will receive a reduction of 85% of their capital costs. As Medicare spending is considered, it is critical to understand how significantly disadvantaged rural hospitals already are by the current system. Across the board cuts that fail to recognize the Medicare payment inequities that discriminate against rural communities are destructive of rural health and the maintenance of local access to appropriate care.
Sole Community Hospital program "improvement": Because President Clinton does not offer any details on exactly how this program will be improved, it is difficult to have a specific reaction. However, the Sole Community Hospital Program is a crucial part of the rural health care delivery system and we support continuation and potential improvement of the program.
Medicare Dependent Hospitals: Rural hospitals with a high Medicare patient load often struggle to remain open. The MDH program expired on April 1, 1993. Because of the potential impact Medicare reform will have on hospitals, the NRHA supports reinstatement of the program with the following recommendations:
1) Reduce the eligibility percentage for Medicare discharges from the current 60 percent to 50 percent.
2) Include the current audited base year as an option in addition to the 1982 or 1987 updated hospital specific rate base.
3) Allow the same capital-related payments as those allowed for sole community providers.
EACH/RPCH program: The president's budget proposes to "expand" the current Rural Primary Care Hospital program. We agree with the idea of expanding this program but would take it one step further by recommending a more comprehensive Limited Service Hospital program that would grandfather in all current limited service hospital program such as the EACH/RPCH, Montana Assistance Facilities, and others and include them under one new limited hospital designation. Legislation recently introduced by Senators' Rockefeller, Baucus and Grassley moves in that direction. I have submitted for the record a white paper on this issue prepared by the NRHA that contains more detailed recommendations on this issue.
Disproportionate Share Hospital (DSH) payments: In conjunction with a per capita cap on Medicaid spending, President Clinton proposes to reduce DSH payments, eliminate increased IME and DSH payments attributable to outlier payments, and remove $11 billion in DSH, IME and GME payments from Medicare payments to HMOs and give them directly to hospitals. In Fiscal Year 1996, 98 percent of DSH payments went to urban hospitals. We agree with the Prospective Payment Commission's recent recommendation that DSH payments should be concentrated among hospitals with the highest shares of poor patients. "The same general approach for distributing payments should apply to all PPS hospitals. ProPAC believes with a change in the measure should also come one common threshold shared by both urban and rural hospitals."
Payment Rates For Rural Managed Care
Average Adjusted Per Capita Cap (AAPCC): The president is proposing a $350 payment floor (as of 1998) and a 70-30 regional/national blend by the year 2002. The NRHA supports a regional/national blend closer to 50-50 in conjunction with a payment floor of 85% of the national input-price adjusted capitation rate. Eliminating wide geographic variations that currently exist will encourage managed care participation in rural areas. While managed care is not a panacea, it is important to be on a level playing field so that those wishing to participate in these types of plans can have access to them. As there are currently practically no rural Medicare HMOs there is insufficient data to support reducing in rural counties overall payment to HMO's by 5% as proposed in the Clinton budget; without addressing the equity issue, rural areas (low payment areas) will again be further disadvantaged. Rural communities are placed in an untenable steel vise when federal policy aims to move Medicare into managed care while at the same time federal policy has the effect of prohibiting the development of rural Medicare managed care.
Other Key Issues
Fail-safe trigger: Not much has been said about the potential effects of the fail-safe mechanism in the Clinton budget proposal. The president proposes a trigger mechanism that would cut federal programs across-the-board 2.25% in fiscal year 2001 and 2002 if the budget is not balanced. Although the measure is just a "back up" as I believe Secretary Shalala said before your committee previously, the possibility of additional across-the-board cuts would affect rural health care providers significantly. Many times when we talk about cuts to this program or that program, it is not taken into consideration the cumulative effect of these cuts on any particular sector of health care. Rural providers are at a significant risk for devastating effects of cumulative cuts because the communities they serve rely so heavily on the Medicare fee-for-service system and Medicaid.
Graduate Medical Education (GME): The GME issue is very important to rural health providers. The current system of distributing these funds, primarily through Medicare, is flawed. The NRHA supports a payment system that supports national and regional workforce needs. In the interest of time, I am submitting for the record a white paper that details the history of this program and the NRHA's recommendations how it can be improved.
We are aware of the recently introduced legislation by Finance Committee members to establish a Medicare Commission and believe it is crucial that there is rural representation on such a commission in order to assess the impact of potential reforms on the 25% of Americans that reside in rural areas.