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Does Medicare discriminate against rural hospitals?


I find the forced courtesies of the Senate wearying, so it was good to see Jay Rockefeller let loose when Kent Conrad suggested that Medicare buy-in should be scotched because Medicare doesn't pay North Dakota's hospitals enough.

“I’m really very tired of hearing about that from him,” Rockefeller told reporters. "It’s always about North Dakota, and it’s never about any other part of the country. We’re trying to do the best thing for the country as a whole.”

The question I'm going to try and answer in this post is whether Conrad has a point, and Medicare does put rural hospitals at a disadvantage. It's going to get real complicated, real quick. But before it does, keep this in mind: There are, according to experts I spoke to, seven hospitals in North Dakota that rely on Medicare payment rates (others use special reimbursement schemes, and so aren't relevant to Conrad's point). Seven. There's something deeply absurd about scotching good national policy because seven North Dakota hospitals complained to Kent Conrad.

On to the substance. The answer, as far as most people can figure out, is no, Medicare does not disadvantage rural hospitals. Evidence can be found on page 57 of MedPAC's 2009 report (pdf) to Congress. Relative to urban hospitals, Medicare's payments actually covered a slightly higher percentage of rural hospital costs. To repeat: If the measure of payment adequacy is whether revenue cover expenditures, then rural hospitals did better than urban hospitals in the most recent year for which there is data.

Which gets to the difficulty of this conversation. The issue does not seem to be that rural hospitals are suffering compared with their urban cousins. Rather, it's that rural hospitals want to be paid more money. And one obvious place to squeeze some extra money out of Medicare is in what's called "input price adjustments."

Though a rural hospital and an urban hospital get the same base amount of money to treat a pneumonia patient, that money gets adjusted in different directions. One of those adjustments happens for inputs. Rural hospitals pay staff a lot less than urban hospitals do. Medicare uses the hospital's own data to make adjustments to the base rate to account for these differences. This means that rural hospitals are paid less in comparison with urban hospitals, even though it doesn't mean that they are paid less in comparison with their costs than urban hospitals.

Another argument you occasionally see is that rural hospitals get less than urban hospitals per beneficiary. But if you dig into that data, a similar story reveals itself. Adjusting for everything -- wage increases and illnesses and so forth -- rural hospitals are still paid less per beneficiary. And the reason is that they do less to each beneficiary. This is, from the perspective of the health-care system, a good thing. The problem is not that Fargo undertreats but that Miami overtreats. If you're a hospital administrator, however, it's galling to see your hospital down at the bottom of the reimbursement ladder.

Another issue here is that rural hospitals tend to have monopolies over their local areas. The rates they get out of insurers border on extortion, in large part because insurers really have no choice but to deal with them. Medicare, however, does not bargain with individual hospitals, and so hospitals can't take a hard negotiation line. They could choose not to accept Medicare patients, but none of them do that, which is more evidence that Medicare's payment rates are largely considered worth having, even if they're not as generous as hospitals would like. Obviously, the hospitals see this as an example of Medicare's problems. But from society's point of view, this is probably evidence of the problems with private insurers. The health-care system needs to learn to live with less. The private insurance industry is too weak to bargain down rates, however, and so it accustoms hospitals to more.

At this point, we're pretty much finished with the available data. But not with the underlying issue. Medicare could be paying hospitals appropriately and they're still struggling. Many of these rural hospitals are struggling because their business model isn't very viable. The areas they serve are shrinking, but the services demanded by customers are increasing. And hiring staff and maintaining machinery in a chemotherapy unit, for instance, is pricey.

A quarter of rural hospitals are already designated "critical access" institutions, and Medicare pays them heftier rates to keep them in business. Maybe the answer is for other rural hospitals to join their ranks. But the answer can't be to hold up good policy because the business model isn't working for other reasons.

Rural hospitals are not, as far as we can tell, disadvantaged in comparison to their urban counterparts. If there's a different reason to increase rural payment rates -- and the House's legislation directs the Institute of Medicine to look into this question and report back within two years -- we might consider doing that. But rural payment rates are not a reason to hold back the expansion of Medicare. Given our concern with cost control, in fact, they may be a reason to accelerate it.

Photo credit: Chip Somodevilla/Getty.

By Ezra Klein  |  December 8, 2009; 11:05 AM ET
Categories:  Health Reform  
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Next: In praise of Manmohan Singh


One problem that confronts all providers is that yesterday's costs are used as the basis for tomorrow's payment rates. If CMS is using 2008 cost data (including employee pay rates) to calculate 2010 provider payments, for example, it is ignoring what it cost the provider to offer its employees cost of living increases or merit increases in 2009. So where does the provider find the funds to keep employees satisfied? This affects all providers, urban and rural, so it does not fully address the Conrad problem.

Posted by: bill0465 | December 8, 2009 11:55 AM | Report abuse

Another issue facing rural hospitals, underscored by you already, is that the Critical Access program ceased accepting new institutions a few years back. This happened precisely because the rural hospital business model is a cost pit, and Medicare wasn't about to become their sole lifeline.

Posted by: Paulbtucker | December 8, 2009 12:00 PM | Report abuse

The danger in the words goes beyond the fact that rural hospitals are described as having "customers" whereas democratic party supporters in urban areas are termed patients. A "good policy" must recognize the fact that all citizens, regardless of geography or other discriminating factors, are patients with the same right to quality, affordable care. A government policy argument which begins to turn on a geographical "business model" can quickly degenerate into discussion of class and race-based issues.

As the Court said in Marbury, the Constitution is written: each state, regardless of population density, is entitled to its share of the pie (and the debate floor). There's a human component which trumps the "business model", even more so when subtle discrimination between greedy "customers" and favored "patients"

Posted by: rmgregory | December 8, 2009 12:09 PM | Report abuse

Great post Ezra! Put this one on the sidebar. What you wrote cannot be emphasized enough, and the public has to understand this, or we're never going to have cost control in this country.

Posted by: bmull | December 8, 2009 12:15 PM | Report abuse

It's a lovely platitude to say that all patients have "the same right to quality affordable care" regardless of geography, but its a perfect example of the reason we are being swallowed alive by health care costs. You can't just wave your hand and say, well, I want the lifestyle advantages of a living in a rural area, but society is obligated to deliver to me all the same services, at the same cost and convenience, as if I lived in an urban area. One of the most irritating tendencies in current discourse is people choosing to put themselves into a situation in which they know there will be limitations, then railing loudly and bitterly when they come up against these limitations. Kudos to Jay Rockefeller, it takes guts for a guy from West Virginia to give tha response he did, since his own state is one of the worst offenders in yowling for special treatment.

Posted by: exgovgirl | December 8, 2009 12:18 PM | Report abuse

+1 with exgovgirl.

Posted by: JEinATL | December 8, 2009 1:01 PM | Report abuse

This is ridiculous. Would Conrad rather have those patients uninsured? Or covered at Medicaid rates? Because those don't exactly seem like super alternatives for rural hospitals.

Posted by: bean3 | December 8, 2009 1:01 PM | Report abuse

Something else possibly to keep in mind: I wonder to what extent providers complaining about Medicare payment has to do with all the overhead they use to do business with Blue Cross that they don't need [and is therefore complete dead weight] when it comes to Medicare.

If everyone were covered by Medicare, providers could see more patients because they spend less time verifying coverage and disputing payment and the Medicare rate would be seen as more fair. With our mixed system, doctors likely pay to employ people to deal with insurance companies who are not necessary for dealing with Medicare. The insurance companies need to pay doctors and hospitals enough to cover this cost.

I'm not sure how this all works out with Medicare. Medicare shouldn't cover these unnecessary costs, but if it doesn't, or doesn't pay something extra, it may be seen as not covering the providers cost of doing business.

Posted by: bcbulger | December 8, 2009 1:25 PM | Report abuse

I usually post comments when you are entirely off base or off the cuff. However here I want to congratulate you on some nice spadework. Very good post.

Posted by: michaelterra | December 8, 2009 1:41 PM | Report abuse

Ezra gets a lot wrong, or at least inaccurate, in this post.

“There are, according to experts I spoke to, seven hospitals in North Dakota that rely on Medicare payment rates (others use special reimbursement schemes, and so aren't relevant to Conrad's point). Seven.”

There are seven rural PPS hospitals in ND and there are 35 Critical Access Hospitals (CAHs) which are small (no more than 25 beds), rural hospitals. There are also only 5 urban PPS hospitals in ND so rural PPS hospitals outnumber urban PPS hospitals in ND.

“Relative to urban hospitals, Medicare's payments actually covered a slightly higher percentage of rural hospital costs.”

Ezra fails to mention that the rural hospitals STILL LOSE MONEY on Medicare patients. Even including CAHS, the average rural hospital has a negative overall Medicare margin. Excluding CAHs, the average rural hospital has a -5.6% overall Medicare margin. Compared to -6% for urban hospitals. (See page 57 of Ezra’s link.) They lose money on their Medicare patients. Urbans do slightly worse, but urban hospitals have more (in most cases, far more) private pay patients which offsets their negative Medicare margins. Medicare/Medicaid are the dominant payers in rural areas due to the age of the population (Medicare beneficiaries are more likely to live in rural areas than the general population) and the lack of privately insured patients.

“The issue does not seem to be that rural hospitals are suffering compared with their urban cousins. Rather, it's that rural hospitals want to be paid more money.”

They’d like to not LOSE MONEY caring for their patients. Call them crazy, but it doesn’t sound greedy to me. The PPS hospitals in ND, which historically are very efficient, get paid less than urban hospitals for the same care. Try recruiting a doctor to be employed by a rural PPS hospital and tell them they will be paid less for giving the same care than they would get paid in an urban hospital. Is it easy to recruit doctors to practice in rural areas? No. Can a rural PPS hospital raise their doctors pay? Not when payments are made on historical bases.

“A quarter of rural hospitals are already designated "critical access" institutions, and Medicare pays them heftier rates to keep them in business.”

No. ONE QUARTER OF ALL COMMUNITY HOSPITALS in the USA are CAHs. That means they’re over half of all rural hospitals. And how much does CMS pay these hospitals? About 2% of all Medicare hospital payments go to CAHs. That’s it.

“But rural payment rates are not a reason to hold back the expansion of Medicare.”

Absolutely true, but holding back the facts on negative Medicare margins isn’t the way to expand Medicare either.

Posted by: steveh46 | December 8, 2009 2:06 PM | Report abuse

As a cost cutting measure I think it's fair to question what role rural hospitals should have. Should they do mainly emergency care before sending a patient off to a larger facility? Should everyone have a CAT scan? Do they all need to administer chemotherapy? Should they focus on routine care and send complications to a larger facility?

Posted by: ideallydc | December 8, 2009 2:22 PM | Report abuse

Does your logic apply equally to the residents of New Orleans/Louisiana? Because the $300 mil that we're doling out to them for Landrieu's vote sure seems like it's based on their living in area with a "lifestyle advantages," i.e., coastal living that sometimes includes hurricanes, over most rural areas.

This type of logic is great, except of course when it applies to other resources that "urban areas" want but don't have, such as reasonably priced inner-city groceries ("go live where the food is produced") and water ("go live in Michigan and Ohio, not LA, Las Vegas and Phoenix").

Careful playing that card, it can just as easily get flipped back on you.


Posted by: philly211 | December 8, 2009 2:29 PM | Report abuse

While I think @steveh46's tone was a little bit strident for the nature of this argument (wonkish), he does make a couple key points, which I'd like to underline and maybe expand on.

1. The 'still lose money' thing -- as he notes, rural and urban hospitals both lose a marginal amount of money on medicare patients. Urban hospitals, however, typically have a patient mix that includes enough privately-insured individuals to compensate. This is not the case in many rural areas.

2. Critical Access Hospitals -- during the 90s, many hospitals were in financial crisis. In cities, there is typically enough capacity / entrepreneurship to shift patient populations around, but in rural areas, the bankruptcy of a hospital can substantially diminish access to care. The CAH program was piloted as a way to keep struggling rural hospitals in business, and, while it has kept them afloat, is indeed quite expensive. It is not clear whether it will be a good long-term solution or not in maintaining access to hospital-level care for all Americans -- essentially, the CAH 'business model' (which sets a maximum on the average patient length-of-stay, among other measures) was improvised, and it is still too soon to see if it will be market-viable.

Posted by: rusty_spatula | December 8, 2009 2:55 PM | Report abuse

"Is it easy to recruit doctors to practice in rural areas? No. Can a rural PPS hospital raise their doctors pay? Not when payments are made on historical bases."

A number of rural hospitals are eligible for designation as part of Health Professional Shortage Areas, which means that medical professionals at the beginning of their careers can apply for loan forgiveness contracts, while physicians are eligible for Medicare bonus payments. Checking for ND, there are lots of HPSAs scored in the high teens.

Posted by: pseudonymousinnc | December 8, 2009 7:08 PM | Report abuse

I talked to a doctor today in the Chicago area, and I mentioned Kent Conrad's comments about Medicare. She replied that Medicare did pay much lower than the "market rate."

I didn't have a reply at the time and probably would have said nothing anyway just to avoid an argument. However, it is strange for someone to talk of a "market rate" when it comes to health care.

I mean most people don't realize how much they pay for health care. They think that their employer pays for most of the premium, when in fact the employer purchases insurance with earnings of the employee. Emplyers will look to limit their exposure to high utilizers just as insurance companies look to limit their own.

When people go to the hospital they say give me the works. After all, the insurance company is paying for it. And people overuse the system because they expect others to do the same. Hence we have the tragedy of the commons.

It isn't much of a "market." Certainly not like a supermarket or a Best Buy store. I think that doctors using the term "market rate" in this context points to some of the common cognitive dissonance.

Posted by: bcbulger | December 8, 2009 8:04 PM | Report abuse

Thirty five of forty seven North Dakota hospitals are critical access facilities. They receive cost plus 1% reimbursement from Medicare, more of a public utility model for rural facilities.

Ezra didn't indicate whether any of his 7 hospitals were CAH facilities.

Kent Conrad''s holding up national health reform for 12 North Dakota hospitals is a ruse. It's a shake down (like Mary Landrieu) or cover for Conrad's backing the wishes of his for-profit donors, many with no facilities in his state.

Posted by: jepysdad | December 9, 2009 3:55 PM | Report abuse

Exgovgirl has actually said a very large mouthful. Not only does her statement apply to health care and other services that are more difficult to provide in a rural area, but there are a lot of other things that city people find objectionable, but are part and parcel of rural living and make it what it is. Being involved in agriculture, this absolutely infuriates me.

City people move to the country for the benefits of rural living and drive up real estate prices for people already there to the extent that rural people can't afford their own homes anymore. Then the city people demand local services that cost everyone so that the people already there are faced with increased taxes. This includes expanded sewer systems, new roads, new school buildings, increased law enforcement because they bring their legal problems with them, and so on. Then the city people demand that things be as "nice" as in the city. That means that farmers can no longer farm the way they used to which increases their costs at little or no real benefit to anyone else but it smells better and drives family farms out of business. In the end the city people destroy what was good about the rural area and create the same situation that they were fleeing, but now other people have to suffer, too.

This has little to do with rural hospital reimbursement, but it is part of the same pattern. So you guys in the city, just stay there. We don't really appreciate you moving in, but normally we're too polite to tell you that.

Posted by: dkmjr | December 11, 2009 12:25 AM | Report abuse

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