CMS Calls On Rural Hospitals to Join Alternative Payment Model

April 20, 2017 - CMS is seeking applicants to participate in a new round of the Rural Community Hospital Demonstration Program that tests a cost-based alternative payment model among small rural hospitals.

Lawmakers authorized a five-year extension of the demonstration under the 21st Century Cures Act. The act allowed for new applicants as well as an opportunity for previous rural hospital participants to join a second extension period if they were part of the demonstration as of the last day of the first period or Dec. 30, 2014.

The Rural Community Hospital Demonstration program first implemented the alternative payment model at rural hospitals for inpatient hospital services furnished to Medicare beneficiaries in 2004. CMS launched two other rounds in 2008 and 2010.

The alternative payment model aimed to help rural hospitals that are too large to qualify for higher Medicare reimbursement rates as a Critical Access Hospital. While the hospitals are larger, many facilities still struggled because of their size to offset lower reimbursement rates with greater patient volumes or revenue from other non-Medicare services.

CMS intended to support the rural hospitals by calculating Medicare reimbursement based on actual healthcare costs for inpatient services.

Participating rural hospitals in the new demonstration period will receive Medicare reimbursement for inpatient hospital services, excluding those furnished in a psychiatric or rehabilitation unit, under the following rules:

• Medicare reimbursement for discharges during the first cost reporting period on or after demonstration implementation will be the reasonable costs of providing covered inpatient hospital services

• For discharges occurring after the initial cost reporting period, Medicare reimbursement will be the less of their reasonable costs or a target amount for the hospital services

CMS plans to determine a rural hospital’s target amount by taking the reasonable costs during the first cost reporting period and increasing the amount by the Medicare inpatient prospective payment system update factor for that period. The target amount from then on will be the product of the preceding cost reporting period’s target amount and the update factor.

While previous demonstration iterations allowed hospitals to start the program based on their specific cost reporting period, CMS proposed to align performance periods for participants in the upcoming demonstration extension.

“CMS is proposing that the five-year period of performance for each of these hospitals, as well as for each of the additional hospitals newly selected would begin with the start of the first cost reporting period on or after October 1, 2017 following upon the announcement of the selection of additional hospitals,” the federal agency wrote.

However, each selected rural hospital will still hold its own participation agreement with CMS. The agreement will detail Medicare reimbursement structures and requirements for administrative activities, audits, and reports.

To fund the demonstration, CMS also proposed to keep the alternative payment model budget neutral as in prior performance periods. The federal agency plans to adjust the national Medicare inpatient prospective payment system rates to balance the additional costs associated with demonstration implementation.

Interested rural hospitals can respond to the CMS Request for Application as long as the facilities meet the following hospital requirements:

• Located in a designated rural area or legally treated as residing in a rural area

• Contains 51 acute care inpatient beds or fewer, excluding beds in a psychiatric or rehabilitation department which is a distinct part of the hospital

• 24-hour emergency care access

• Not eligible for Critical Access Hospital status, or has not been designated a Critical Access Hospital

The 21st Century Cures Act mandated that CMS give priority to applicants in the 20 states with the lowest population density. Although new demonstration participants can be from any state.

The Request for Application will ask hospital leaders to detail their financial and service-related challenges and potential solutions. Hospital leaders must also explain how rural hospital closures has affected the needs of their service area and any obstacles the facility has faced serving a low-density population region.

Under the legislation, the alternative payment model demonstration also may not exceed 30 rural hospital participants.

Applications for the Rural Community Hospital Demonstration are due by May 17 and CMS anticipates selecting the hospitals by June 2017.