Medicare's Disproportionate & Inequitable Impact On Rural Health
By Tim Size, July, 1995
* (Medicare And The American Health Care System, Report To The Congress,
Prospective Payment Assessment Commission, pages 18 & 38, June, 1995)
Rural health has a troubled legacy from the Medicare program. The overwhelming and disproportionate share of patients seen by rural providers are Medicare enrollees while in a contrary manner, rural health represents a very minor portion of Medicare program expenditures. The small portion of Medicare expenditures for rural communities makes it difficult for them to gain the attention needed to solve long-standing rural equity issues. In summary:
Medicare casts a long shadow over rural health while
rural health is largely ignored by Medicare.
Rural communities are particularly vulnerable to Medicare further reducing its share of costs paid. Using information from the American and Wisconsin Hospital Associations, we have projected the impact on RWHC hospitals if Medicare baseline spending is reduced by $250 billion. Medicare currently pays rural hospitals in the Cooperative only 88% of costs. With the proposed cuts, Medicare is expected to only pay 75% of costs. Yes this is 75% of costs, an even much smaller percentage of charges. (These figures assume that the $250 billion reduction is prorated across all providers but that there is no increased enrollee cost sharing, no change in benefits.)
Our relatively small rural network will lose an additional $42 million dollars from 1996 through the year 2000 in hospital services alone. Enclosure I of this memo presents an analysis of RWHC in aggregate and Enclosure II shows an analysis by individual RWHC rural community. These figures do not include the effect of the reduction on associated rural physicians or nursing home services nor other federal funding cuts that have been proposed.
The Cooperative understands the long-term funding challenges faced by the Medicare Trust Fund and wants to be part of the solution. We believe that the context for the solution is well stated as follows: "An overwhelming majority of Americans say the Medicare program must be changed. But a new national survey shows that the public remains wary of efforts to dramatically overhaul the financially strapped program and will accept cuts in the growth of Medicare spending - but only to save Medicare and not to balance the federal budget or fund a tax cut." ("What Americans Think," The Washington Post Weekly Edition, July 10-16, 1995.)
Assuming that some level of cuts are inevitable, it is now critical to finally address specific areas of ongoing Medicare discrimination against rural communities:
The lack of a single Medicare payment area in most rural states for physician services, perpetuating the effect of decades old but no longer relevant geographic pricing differences.
The structure of the Medicare Wage Index (i.e. separate indices for each MSA but with all rural provider wages dumped into one statewide pool) and the failure to aggressively develop a model that more fairly describes the price of labor faced by rural hospitals.
The failure to occupationally mix adjust the data used to develop the current Medicare Wage Index - a short coming that tends to over pay large hospitals and underpay small hospitals and inhibit the development of an improved Wage Index model.
The distortion of the rural Medicare Wage Index by the inclusion of non-acute care salaries into the data base (particularly problematic for the many combination hospital/nursing home facilities found in the upper midwest.)
Thirteen Recommendations
Recommendation #1.
Prior to application of any budget cuts to rural communities embodied in Congressional enactment of the FY 1996 budget reconciliation, the Prospective Payment Advisory Commission and the Physician Payment Review Commission should analyze the rural impact, by state, of the Appropriations Committees' proposals for cutting the projected expenditures in the Medicare and Medicaid programs. Moreover, impact analyses are needed to assess the combined effects of reduced expenditures in the two programs and upcoming changes in the private health care insurance sector. (This recommendation is modeled after similar language from the National Advisory Committee On Rural Health.)
Many note that rural providers are paid less than their urban counterparts but neglect the larger picture that a combination of lower utilization and lower rural reimbursement rates translate into even lower Medicare payments on behalf of each Medicare enrollee. This is particularly significant as the trend towards expanding the use of HMO, PPO and POS finance-delivery models may continue or worsen the historically lower Medicare program payments for rural enrollees.
The national average Medicare program payment per enrollee in 1992 was $3,391. Compared to the national average, payments for services received by rural residents in Wisconsin (at both urban and rural sites) averaged $2,636 (78%) and for services received by urban residents in Wisconsin, $3,033 (89%). (Health Care Financing Review, Medicare and Medicaid Statistical Supplement, page 171, February. 1995)
Recommendation #2.
The Health Care Financing Administration (HCFA) shall be required to immediately effectuate the recommendation from Congress's Physician Payment Review Commission to establish Medicare single physician payment localities in all but a handful of very large states. HCFA shall also adjust hospitals' area Wage Indices to reflect a single statewide rate for hospital professional employees in all states having a single payment locality.
The Health Care Financing Administration has failed to eliminate the historical anti-rural geographic differentials currently used in the allocation of Medicare's payment for physician services and professionals employed by hospitals.
Wisconsin currently has eleven payment areas, each with a different Geographic Adjustment Factor, creating at its maximum, an eight percent urban-rural payment differential for the same medical service. Governor Thompson's Rural Health Development Council has used the following rationale for supporting single payment localities:
Recommendation #3.
The annual market basket of input costs calculated for rural hospitals shall not be decreased by any reduction in baseline projections for the average hourly wage.
We all know that the issue with Medicare is not whether the rate of growth in the Medicare program will be slowed (the $250 billion "cut") but by how much and through what mechanism. Many Medicare patients and hospital administrators may prefer addressing Medicare cuts through slower wage growth rather than fewer nurses at the bedside or in the clinic. But the current proposals to reduce future Medicare spending encourages just the opposite national response - cutting staff rather than slowing wage growth.
For example: Assume all hospitals freeze wages in 1996 to the 1995 level. Since the 1996 Medicare reimbursement is built on a formula that assumes some level of wage inflation over 1995, the wage freeze would generate some real savings in 1996
The problem begins in 1997 when Medicare payments would take into account the prior year's national suppression of wages due to the industry wide pay freeze. The Medicare formula would be "rebased," i.e. the hospital market basket used to account for inflation of input costs would be adjusted to take into account the industry's lower than expected actual wage rates for 1996.
Nationally, any reduction in the annual market basket of input costs faced by hospitals merely causes a rebasing of projected Medicare expenditures and does not "count" toward the $250 billion in sought after savings. (Savings are being defined as the difference between the projected baseline and actual program expenditures.) This problem can be limited if acknowledged and taken into account when the specific Medicare bill is drafted.
Recommendation #4a.
The Health Care Financing Administration (HCFA) shall occupationally mix adjust the data used to develop Medicare Wage Indices - a long-standing technical short coming that tends to over pay large hospitals and underpay small hospitals and inhibit the develop of an improved Wage Index model.
Recommendation #15 of the March, 1994, ProPAC Report and Recommendations to the Congress stated that, "The Secretary should develop and implement improved methods for collecting data on employee compensation and paid hours of employment for hospital workers by occupational category. Once these data become available, the Secretary should implement an adjustment to the hospital wage index under PPS. This adjustment would correct the wage index for the inappropriate effects of including geographic differences in the mix of occupations employed."
The occupational mix adjustment has not been implemented due to problems getting the data. Without this correction, hospitals with a more expensive mix of labor in effect are paid twice - they receive a case mix adjustment to acknowledge their greater proportion of higher paid staff but then get the same adjustment again through the flawed wage index adjustment. Hospitals with a less expensive occupational mix lose on the case mix adjustment and then a second time through the flawed wage index adjustment.
As noted by NACRH in its formal recommendation: "Just as the PPS market basket reflects the costs of purchasing an average mix of inputs, the labor market adjuster should reflect the cost of hiring an average mix of employees. The purpose of the labor market adjuster should be to reflect the difference between the prices in the particular labor market area and national average prices. The actual labor cost in a labor market area needs to be adjusted for differences in occupational mix so that hospital payments reflect these supply differences and do not reflect the results of different hiring decisions made by hospitals in different labor market areas."
Recommendation #4b.
Until an occupational mix adjustment is implemented, HCFA shall be prohibited from including the lower wages related to skilled nursing facilities operated by rural hospitals into those hospitals' Medicare average hourly wages.
You would not expect wages to vary significantly between neighboring rural hospitals. as shown in a recent HCFA study. But you can't compare apples and oranges. As part of a joint venture by the Wisconsin Hospital Association and RWHC, it has become clear that Medicare is doing just that - they are including the lower wages related to skilled nursing facilities operated by rural hospitals into those hospitals' Medicare average hourly wages.
This is a significant problem for two reasons:
Blocks Improvement Of Current Wage Index
There is almost universal agreement that the current system of throwing all rural hospitals into a statewide rural wage pool is artificial and a poor model of actual wage markets. However all models that might better reflect actual wage markets have been distorted and made politically less feasible due to data errors that are otherwise hidden in the existing statewide rural Wage Index.
Under-Pays All Rural Wisconsin Hospitals
Combination facilities (rural hospital inpatient services and skilled nursing care) are common in Wisconsin and Minnesota but less so elsewhere. Consequently the lower payments due to this data error disproportionately affect Wisconsin and Minnesota.
Recommendation #5.
The Health Care Financing Administration shall substantially change the current HMO system of reimbursement (based on historic adjusted average per capita costs of rural residents) to more accurately reflects the current cost of providing managed care to rural residents with equitable access to covered services. A competitive bidding process among Medicare HMOs shall not be implemented in rural communities before this new process is carefully piloted in several rural areas. (This recommendation is modeled after similar language from the National Advisory Committee On Rural Health.)
Recommendation #6.
The Federal Department of Justice and the Federal Trade Commission shall identify antitrust barriers (and remedies) to local rural health care providers forming networks to negotiate with substantially more powerful regional and multi-state HMOs and systems.
Rural networks have begun to ask the Federal Department of Justice to review a proposals that will allow them to negotiate with large managed care systems on behalf of their members, without being accused of violating antitrust law. Some guidance has been recently made available through the Statements of Enforcement Policy and Analytical Principles Relating to Health Care and Antitrust issued by the U.S. Department of Justice and the Federal Trade Commission on September 27, 1994. In this statement, the agencies described the principles to be applied in addressing issues commonly raised in connection with the formation and operation of multiprovider networks: integration - joint pricing and joint marketing - market definition - competitive effects - exclusivity - exclusion of providers - and efficiencies.
The agencies' statement also, however, pointed up the existing ambiguities in applying these principles to health care systems and networks:
"Because multiprovider networks are relatively new to the health care industry, the Agencies do not yet have sufficient experience evaluating them to issue a formal statement of antitrust enforcement policy or to set out a safety zone. The Agencies recognize, however, that guidance on antitrust issues raised by multiprovider networks is of vital importance to the health care industry."
Recommendation #7.
Implement the House Rural Health Coalition's "Responsible Deficit Plan."
Combined with the proposed lower Medicare reimbursement rates, the FY 1996 House and Senate Budget Resolutions are doubly threatening to rural health. The Rural Health Care Coalition has recommended "responsible deficit reduction" to the Labor-HHS-Education Subcommittee through FY96 appropriations that "balances the need for deficit reduction with the need to provide quality health care in rural areas."
Federal Office of Rural Health Policy
FY95 Appropriation $13.2 million
FY96 RHCC Recommendation $10.2 million
Rural Health Transition Grants
FY95 Appropriation $17.6 million
FY96 RHCC Recommendation $10.6 million
Rural Health Outreach Grants
FY95 Appropriation $27.0 million
FY96 RHCC Recommendation $30.0 million
Rural Telemedicine Grants
FY95 Appropriation $8.7 million
FY96 RHCC Recommendation $10.7 million
Essential Access Community Hospitals
FY95 Appropriation $3.5 million
FY96 RHCC Recommendation $3.5 million
In addition, the Coalition strongly recommended maintaining FY95 funding for Area Health Education Centers, Border Health Centers, Migrant Health Centers, Community Health centers and Family Medicine Training.
Recommendation #8.
Rural providers networks comprised primarily of rural providers shall be the recipient of at least 50% of any Rural Telemedicine Grants. The primary purpose of these grants shall be to assist rural providers in becoming ready internally to fully utilize the regional telecommunication networks being developed by the private sector.
Recommendation #9.
The current option of an EACH/PCH Medicare waiver shall be expanded to all fifty states.
We are often asked about "how to keep the ER without inpatient services" by rural hospital people in and outside of Wisconsin. As part of Wisconsin's alternative hospital model development, the Rural Medical Center project, we have looked closely at this issue and to the best of my knowledge the EACH/PCH waiver is the only option permitted by law, albeit currently limited to a few selected states.
There are a variety of perspectives about why EACH/PCH has floundered and has now been recommended for elimination in the President's budget. We are at risk of loosing an important piece of flexibility if authority for the EACH/PCH waiver is eliminated.
Regardless of what happens to EACH/PCH funding, we believe it is absolutely critical to the ongoing development of a strong rural health infrastructure that we keep and expand to all states the option of an EACH/PCH Medicare waiver. This would afford rural communities the option of designing a delivery system that maintains an emergency room as part of a cluster of local services in situations where a traditional inpatient unit can no longer be sustained.
Recommendation #10.
Protect rural community choice of local providers and local access to care by requiring HMOs to contract with those rural providers who are able and willing to meet specific managed care organization standards for quality, utilization, license and cost.
As managed care systems move to capture local markets, conflict is naturally developing with rural communities who wish their local providers to develop or retain relationships with multiple systems. The growing economic power of large HMOs to threaten the lock-out of local providers from the insured population can be used to force de facto exclusive relationships.
"Managed care plans may cause a de-stabilizing influence on the rural health delivery system. For example, they may threaten the survival of the rural hospital because of the financial incentives to keep patients out of hospitals or funnel them into urban hospitals. Second, the plans may not include some local practitioners in the network. If these practitioners then decide to leave the area, access to care may be severely impaired. This access problem could be magnified if at some later time the managed care plan decides to withdraw from the area because it is not meeting its profit and enrollment goals. Because of lower volume, managed care plans in rural areas may not be as profitable as urban areas. As a result, more resources may be located in urban settings, causing rural residents to travel longer distances to receive many of their services." (Managed Care As A Service Delivery Model In Rural Areas, The National Rural Health Association, May 19th, 1995).
Notwithstanding the uncertain protection of federal antitrust laws, the widespread rural strategy of maintaining multiple system relationships is specifically meant to reduce the likelihood of a single HMO gaining local monopoly power. Rural providers who are able and willing to meet specific managed care organization standards for quality, utilization and cost should be allowed to work with multiple managed care systems and not be forced into exclusive relationships.
The implementation of this recommendation will facilitate the development of rural managed care systems that work collaboratively rather than cohercively with rural providers and which are sensitive to local and rural population needs. It should promote managed care systems that enhance local access, quality and value in health care delivery for rural communities.
Recommendation #11.
Prohibit the bundling of Medicare outpatient services provided in rural communities.
Bundling would require that all non-physician services received during a Medicare patient encounter be bundled into one payment. While supporting the integration of physician and hospital services in rural communities, the Cooperative believes that the development of these relationships needs to be the result of careful local negotiation and not government fiat.
Bundling of the payment of Medicare outpatient services in rural areas facing chronic physician shortages will further weaken the financial stability of rural hospitals. Rural hospitals have an inherent disadvantage in any negotiation for fixed resources with community physicians. If forced to negotiate their share of a bundled physician-hospital payment, rural hospitals are guaranteed to be at a disadvantage, further weakening their fiscal health.
Recommendation #12.
Any subsidy of Medicare enrollees for benefits in excess of their total contribution (including employee and employer contributions, any interest the government earns on those taxes, and all Medicare premiums paid) should be subject to means testing.
"It is widely believed that Medicare aged and disabled recipients 'pay their own way' by contributing payroll taxes to a hospital trust fund during their working lifetimes and by paying annual insurance premiums after they retire. The reality is that retiree health expenditures represent a substantial burden on current workers... someone retiring in 1990, even though contributing nearly $18,000 to Medicare, will receive an $82,000 subsidy as expected program outlays are projected to reach nearly $100,000 per retiree (in 1991 dollars)." (The Nation's Health Care Bill: Who Bears the Burden?, prepared by the Center for Health Economics Research, Waltham, Massachusetts, July, 1994.)
Recommendation #13.
All universities and colleges, accepting federal funds in FY 1996 for health professional training or educational programs should submit to the Governor of their state by September 1st, 1996 an institutional plan that describes how they will participate with others in meeting their state's need for an adequate distribution of primary care providers serving Medicare enrollees. The following disciplines are to be included (if the institution grants a relevant degrees): dentistry, nursing, medicine, pharmacy, physical therapy and physician assistants..
Each individual educational institution's plan should include:
a. annual goals through the year 2006 regarding the percent of graduates who are expected to choose to enter a primary care practice immediately after graduation.
b. annual goals through the year 2006 regarding the percent of graduates who after any post-graduate training (i.e. medical residencies) will enter a primary care practice.
c. for a. and b., a goal for what percentage of graduates will chose to work in "an underserved community and/or with an underserved population" (i.e. in a health professional shortage area (HPSA), medically underserved area (MUA), medically underserved population (MUP) or in communities or with populations that are at risk of becoming a HPSA, MUA or MUP.)
d. for a. and b., how these future goals compare with their own past goals and accomplishments.
e. a five year work plan with specific educational strategies, i.e. curriculum and institutional changes designed to foster the stated career and placement choice goals as well as an explanation of the assumed functional relationship of these strategies to the stated goals. Training to enhance cultural competence relevant to underserved communities and populations is expected.
f. data, independent and verifiable wherever reasonably possible, to back all major claims of past achievement and as the baseline to verify future changes.
g. for the two medical schools, a plan for working with residency sites to jointly foster medical residents choosing post-residency primary care practices in "an underserved community and/or with an underserved population."
h. evidence of community and constituency participation in the institutional planning process.
i. the results of any outside peer reviews that have been completed regarding the institution's plan as well as any relevant comparative information with other schools in their region.
In most states, many millions of dollars of federal and state tax dollars are used to train health care providers without the benefit of meaningful work force or education planning. The states continue to face major problems relative to the supply and distribution of primary care providers. Two basic sets of questions need to be thoroughly addressed: (1) how can educational institutions receiving government funds to train or educate primary care providers be more effective, and (2) what is the relationship between their programs and the need for primary care providers throughout the state?
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