iProtean—OIG Pushes to Limit Critical Access Hospital Designations

The Office of Inspector General (OIG) released a report last week that urged CMS to tighten access to critical access hospital (CAH) designation.


Based on its study of CAHs, the OIG reported that nearly two-thirds of CAHs would not meet the location requirements if required to re-enroll, and the vast majority of these CAHs would not meet the distance requirement.


CAH designation requires that a hospital be located at least a certain driving distance from other hospitals (including CAHs)—the “distance requirement”—and be located in rural areas—the “rural requirement.” Taken together the two requirements are known as the “location requirement.”


In addition, until 2006, state governors were given discretion to waive the distance requirement. This allowed hospitals more closely concentrated in an area to be awarded “necessary provider” (NP) status. Today, NP status hospitals represent three-quarters of the 1,328 CAHs.


In its report, the OIG noted that if CMS were authorized to reassess whether all CAHs should maintain their certifications and concluded that some should be decertified, Medicare and beneficiaries could realize substantial savings. “If CMS had decertified CAHs that were 15 or fewer miles from their nearest hospitals in 2011, Medicare and beneficiaries would have saved $449 million.” However, CMS does not have the authority to decertify most of these CAHs because they are NP CAHs. (“Most Critical Access Hospitals Would Not Meet the Location Requirements If Required to Re-Enroll in Medicare,” Department of Health and Human Services Office of Inspector General, August 2013)



The CAH program was established in 1997 in response to a surge in rural hospital closures resulting from the Balanced Budget Act of that year. The program reimburses hospitals for 101 percent of their “reasonable inpatient and outpatient costs.” Hospitals could qualify only if they were rural and located 1) more than a 35-mile drive from a hospital or another CAH or 2) more than a 15-mile drive from a hospital or another CAH in areas of mountainous terrain or areas where only secondary roads are available.


State governors had the discretion to waive the distance requirement and award NP status. This state discretion was discontinued in 2006 as a result of the Medicare Prescription Drug, Improvement, and Modernization Act (MMA). However, MMA allowed existing NP CAHs to retain their NP designations indefinitely, as long as they continue to meet all other CAH requirements.


OIG Findings and Recommendations

The OIG report found that 849, or two thirds, of the nation’s CAHs do not meet both the distance and rural requirements. Of the 846 CAHs that do not meet the distance requirement, 306 were located a drive of 15 or fewer miles from their nearest hospitals or other CAHs.


OIG offered four specific recommendations to CMS:

  1. Seek legislative authority to remove necessary provider CAH’s permanent exemption from the distance requirement, thus allowing CMS to reassess these CAHs.
  2. Seek legislative authority to revise the CAH Conditions of Participation to include alternative location-related requirements.
  3. Ensure that it periodically reassesses CAH’s compliance with all location-related Conditions of Participation
  4. Ensure that it applies its uniform definition of “mountainous terrain” to all CAHs


CMS concurred with all but the second recommendation, and the OIG report includes the CMS response as well as its discussion of that response. To read the OIG report, click here.


In 2011, the Obama administration proposed eliminating CAH designations for hospitals within 10 miles of each other and cutting payments to 100 percent of costs (estimated savings of $1.4 billion over 10 years). The OIG recommendations offer a different approach to reducing costs in the Medicare program. Both likely will be considered as Congress debates budget and deficit issues over the next several weeks. However, whether either approach will be adopted as part of the overall reduction package is unknown.


Earlier this year, Medicare officials quietly directed state inspectors to begin recertifying all CAHs to make sure they meet the distance requirements. However, without statutory authority from Congress, inspectors cannot investigate that issue for NP hospitals because, as noted above, individual state governments awarded NP status. (“Proposal to strip critical-access status from two-thirds of those hospitals called a death knell for many,” Modern Healthcare.com, August 17, 2013)


Impact on Hospitals

The impact of losing CAH designation for most hospitals would be significant and could even result in closures, some analysts say. In addition to losing cost plus reimbursement and transferring to prospective payment, decertified CAHs would see other hits to their top-line revenue:

  • Medicare outpatient copayments, based on charges for care at CAHs, would decline
  • Many would cease to be eligible for the 340B program, which gives smaller hospitals the ability to get discounts of up to 50 percent on prescription drug prices.

(“Proposal to strip critical-access status from two-thirds of those hospitals called a death knell for many,” Modern Healthcare.com, August 17, 2013)


The financial impact, on top of existing reductions for hospitals—the 2 percent Medicare payment reduction, changes to Medicaid payments and the impending lost of DSH payments—would be the tipping point for many small hospitals.


Industry Response

Reaction to the OIG report has been swift and intense, from the National Rural Hospital Association, the American Hospital Association, the Healthcare Financial Management Association, lawmakers in both chambers of Congress, analysts and rural and CAH providers.


HFMA’s director of thought leadership noted in an announcement to HMFA members: “The OIG’s focus on the distance requirement does not take into account the reasons why many CAHs were designated as necessary providers by the states, or the extent to which these reasons continue to justify CAH status. Before any action is taken that may limit CAH designation, policymakers will need a better understanding of the extent to which necessary provider CAHs do in fact continue to provide needed access to care, regardless of their distance from another hospital.”


The American Hospital Association (AHA) criticized the report’s recommendations in a statement from its vice president of payment and policy: “The OIG’s recommendation that CMS seek legislative authority to remove and reevaluate certain CAHs’ special Medicare status is completely inappropriate and demonstrates an unfortunate lack of understanding of how health care is delivered in rural America. If the recommendation were implemented, many of these facilities may be forced to close and patients could lose their access to essential medical services.” (“Medicare Decertifying Some CAHs That Could Not Meet Location Requirements If Required To Re-Enroll In Medicare Could Save Millions, OIG Says,” Health Lawyers Weekly, AHLA, August 16, 2013)


The National Rural Health Association (NRHA) said the OIG changes could endanger the viability of many of the facilities that provide care to 64 million Americans. Noting that the OIG’s recommendations would “kill rural health care,” NRHA’s CEO said, If the full report were implemented, it would result in shutting down up to 70 percent of a state’s rural hospitals.” (“OIG: Limit Critical Access Hospital Designations,” HFMA Weekly News, HFMA, August 16, 2013)


Think tank/policy makers, however, noted that even though changes to CAH designation could close hospitals, the loss of hospitals located relatively close to other healthcare facilities would not impact care. (“OIG: Limit Critical Access Hospital Designations,” HFMA Weekly News, HFMA, August 16, 2013)



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