This is the final working paper for an article that appeared in the Oct-Dec 1992 issue
of the then bi-monthly newsletter of the National Rural Health Association.
A Pause On The Road To Rural Hospital Equity
"The less things change, the more they remain the same"-Sicilian proverb
by Tim Size, Executive Director, Rural Wisconsin Hospital Cooperative
This year has seen a number of important congressional, administrative and judicial events related to rural hospitals' quest for payment equity under Medicare's Prospective Payment System (PPS). While the backlash against rural hospitals implicit in some of these actions must be sobering, it is important that we maintain and assure a longer term perspective.
During February of 1985, the second year of PPS, the National Health Policy Forum at George Washington University hosted an invitational workshop on "PPS Design: Tackling Major Structural Issues" - it was the National Rural Health Association's (NRHA) first opportunity to present a rural perspective that seemed all but absent from the initial design. On behalf of the NRHA and Rural Wisconsin Hospital Cooperative (RWHC), I presented testimony to "challenge the justice of a system based on two national rates perpetuating historical urban and rural payment inequities not related to legitimate wage or intensity differentials." We requested the development of a model more sensitive to actual labor markets than one where the wage scale takes a nose dive at the urban county line. A senior representative of the Health Care Financing Administration (HCFA), responded with a belittling "of course, all models have their boundary problems;" apparently he had forgotten that differential calculus allows for gradual approximations of change. Weeks later, Carolyne Davis, then head of HCFA, stated that they would answer questions about rural wages by the end of the year. Unfortunately basic questions about equitable area wage designations remain unanswered; if anything they have become more divisive.
The complexity of PPS and the general lack of availability of wage adjusted national data have always made it difficult to get your arms around the equity issue difficult. To deal with this problem, I have found the comparison of "rural Wisconsin" to "Madison, Wisconsin" a reasonable proxy for wage adjusted national comparisons. In PPS Year 2, hospitals in Madison, Wisconsin had a standardized base payment rate (controlling for case mix) 25 percent greater than rural Wisconsin counties and after applying the wage index, a differential of nearly 50 percent. Eight years later, in PPS Year 10, hospitals in Madison, Wisconsin have a standardized base payment rate only 4 percent greater than rural Wisconsin counties but after applying the wage index, a wage adjusted differential continues of nearly 20 percent. Those rural hospitals that were able to be reclassified by the Medicare Geographic Classification Review Board (MGCRB) into the Madison labor market have a wage adjusted differential reduced to 8 percent.
Rural hospitals have made substantial progress towards equity. The improvements that have taken place are the result of both creative adaptations by rural providers and national initiatives to improve the equity of PPS payment formulas. Of greatest importance have been the Omnibus Reconciliation Acts of 1989 and 1990 with their commitment to phase out the urban/rural differential in the standardized base payment rate, creation of the MGCRB, improvements to expand the number of rural Disproportionate Share Hospitals, improved payments for Sole Community Providers and recognition of the special needs of small rural Medicare-dependent hospitals. But greater equity now also includes the reality that both urban and rural hospitals have on average significantly negative PPS operating margins. The aggregate PPS operating margin for all hospitals during PPS Year 9 is estimated by the Prospective Payment Assessment Commission (ProPAC) to be an average loss of 10 percent.
Underlying these many changes has been a broad acceptance of the idea that the initial design of PPS was particularly flawed as it negatively impacted on rural hospitals in ways that made neither professional nor political sense. But the wage bias has been particularly intransigent . From its inception, PPS has been biased against rural hospitals, in large part, through misunderstanding and manipulation of the model used to describe each hospital's relevant labor markets:
· In reality, professional markets now vary little over large areas of a state and variations in non-professional labor markets can be best visualized as gently rolling hills. I.e. wages change slowly over a region, not dropping abruptly at the county line.
· Rural hospitals adversely effected by earlier PPS inequities have not been able to spend money that they did not have; the salaries of the employees of these hospitals have been artificially suppressed. Historical expense data for these facilities is a particularly poor proxy for local labor markets.
· Rural hospitals make a disproportionate use of professional contract labor: the exclusion of a contract labor artificially depresses reported Full Time Equivalent wage expenses for rural hospitals.
· Professional labor shortages in rural areas have put a disproportionate upward pressure on rural salaries bringing them much closer to what had been higher urban salaries; an additional cost to rural hospitals not reflected in wage indices calculated using old and non-representative data of hospital expenses.
It is in the context of the above history that we need to view recent events: this year the NRHA "Equity Lawsuit" has been concluded, potentially divisive legislative and judicial battles about Geographic Reclassification have begun, and the Medicare Dependent Hospital and Rural Referral Center benefits have not yet been extended.
In November 1987, the NRHA Board agreed in principle to sponsor a class action suit against the Department of Health and Human Services (DHHS) and in November of 1988, filed its initial complaint in the United States District Court in Washington D.C.. The basic claim was that the relatively lower PPS payment rates for rural hospitals constituted a "taking without just compensation", a violation of the Due Process guarantee of the Fifth Amendment to the Constitution by unconstitutionally burdening a class of rural hospitals with the cost of subsidizing Medicare operations at their respective hospitals. The predicted response by DHHS was not to argue the case on its merits but to fight on jurisdictional grounds - that the Provider Review Reimbursement Board (PRRB) was the proper place to take this type of grievance. (Not part of the DHHS brief was the note that appeals to PRRB rarely if ever again see the light of day).
Oral arguments on the apriori issue of the court's jurisdiction were heard on May 8th, 1989. Three and a half years later, NRHA has been notified that the Judge is accepting the Government's argument that his court does not have jurisdiction. While the Judge indicated a willingness to hear a tangential issue related to broadening the definition of Hill-Burton uncompensated care, NRHA and the seven named plaintiff hospitals decided that the benefit of perhaps winning such a case was not in balance with the probable expenditure. While rural hospitals did not get their day in court for a "constitutional challenge," We believe that the credible pursuit by NRHA of this judicial remedy played a significant role in focusing attention on the seriousness of the structural defects in PPS and the need for Congressional action.
On June 4, 1992, the Department of Health and Human Services published in the Federal Register a proposed "108 percent Rule" revising the criteria and procedures concerning the reclassification of hospitals by the MGCRB. This action had been anticipated given the growth in the number of hospitals which stood to benefit from Reclassification in FFY 1993. Notwithstanding NRHA's understanding of the need for ongoing refinements of all parts of PPS, NRHA strongly urged that HCFA not to proceed with the Proposed Rules as Metropolitan Statistical Area reconfigurations and a major ProPAC study of revised labor markets were expected within the year.
The Proposed Rule required that "to qualify to use another area's wage index, the hospital's average hourly wage must be at least 108 percent of the average hourly wage in the area in which it is located (an area's average hourly wage is equivalent to its wage index) ..." The use of 108 percent rather than 105 percent or 110 percent belies the selection of a threshold developed to exclude the desired number of hospitals. The Rule continues its pseudo-science to say that "The 108 percent threshold is based on the average hospital wage as a percentage of its area wage (96 percent) plus one standard deviation (12 percent)." The four percent difference is due to the difference in calculating an average wage per hospital versus an average wage per hour worked-the latter method reflects the effect of those hospitals with a larger than average number of employees paying larger than average salaries, driving up the area wage. Why did HCFA choose one standard deviation instead of one-half, or two? Has there every been a more classic case of arbitrary judgements hiding behind a maze of numbers and Federal Register fine print.
The strategic use of a regulation emphasizing the 108 percent rather than the 112 percent is the obvious benefit of a lower number appears to be more reasonable, the new barrier less drastic. But the new threshold was sufficiently high enough to deliver the desired effect of reversing the utility of the MGCRB as an interim means to improve rural payment equity. HCFA estimated that 71 percent of the hospitals reclassified for FFY 1992 would not qualify for wage index reclassification if the 108 percent wage index threshold was in effect. Against major objections from the hospitals most effected, HCFA published its final regulations on September 1st; the 108 percent Rule will effect payments for the federal fiscal year beginning on October 1st, 1993 unless reversed by Congress or the courts.
On September 4th, the Coalition for Reclassification (Coalition) filed a request for declaratory judgment and injunctive relief in the United States District Court in the Northern District of Mississippi seeking to prevent the 108 percent rule from effecting the next review process beginning on October 1st, 1992. On September 15th, both NRHA and RWHC filed an Affidavit in support of the Coalition's action as a sign of both organization's solidarity with the action taken by the Coalition.
The hearing on the Coalition's motion for a preliminary injunction was adjourned in accordance to a Court Order agreed to by the Coalition and Dr. Sullivan. The Order permitted hospitals seeking reclassification to file applications before October 1st, 1992 for FFY 1994 under either the new or old rules. In addition, the Order established a process by which the DHHS review of these applications will proceed, with the 108 percent Rule held in abeyance until the Court's review is completed. The Court's has scheduled a hearing on all pending motions by December 3rd and on the merits, if required, by January 19th. While the Secretary's agreement with this order does not indicate any "softening" of his position on the 108 percent rule, it does restore some credibility to the judicial system as an appropriate source of support for selected equity issues.
The request for declaratory judgment and injunctive relief was in part based on arguments that the regulation violates Congressional intent, particularly in not allowing an adjustment for each applicant's occupational mix when determining whether or not the 108 percent threshold is met. In a possible attempt to undermine this argument, language was added to a tax bill sent to the President in the closing hours of the 102nd Congress, H.R. 11. The language would have allowed the DHHS Secretary to operate the reclassification process as he or she saw fit, free of any consideration of earlier Congressional intent. The President vetoed the bill as he opposed parts of the bill that would raise new taxes. While the offending reclassification language did not become law, an opportunity to extend Medicare Dependent Hospital and Rural Referral Center benefits was lost.
During a part of 1992, our progress forward has been paused but it is now time to move on; at a minimum our new agenda for rural Medicare equity needs to include the following six elements:
· Supporting the Coalition for Reclassification's legal action,
· gaining extension of Medicare Dependent Hospitals and Rural Referral Center benefits,
· preparing to defend past equity improvements in the 103rd Congress,
· pursuing additional equity improvements in the 103rd Congress,
· implementing of the ProPAC rolling hills model of wage areas,
· developing stronger support for the equity claims of all rural providers and
· limiting the precedent of Medicare's inequities as national health reform proceeds.
We can not be distracted from our long term goals by either failure or half-victories. Max Depree in his new book Leadership Jazz says it very well: "Fragility is part of a vision's nature. People who think they have created an indestructible vision simply issue a command, write an agenda. Had Odysseus sailed home according to an agenda, the account of his voyage would not be worth remembering."