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.
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