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Paynesville Press - December 17, 2003

Hospital switches to cost-based reimbursement

By Michael Jacobson

The Paynesville Area Hospital officially has switched to critical access hospital designation, a move which should mean hundreds of thousands of dollars in increased Medicare reimbursement each year.

The hospital - part of the Paynesville Area Health Care System (PAHCS) - applied for critical access designation several months ago, but the survey by the health department was just completed earlier this month. With PAHCS passing the state survey on Tuesday, Dec. 2 - with no deficiencies and only five minor recommendations - critical access designation should be in effect from that date.

The general public should not notice any changes due to the new designation, according to PAHCS CEO Steve Moburg. The only significant changes will come in the hospital's Medicare reimbursement.

"We will be able to see the same patients," said Moburg. "The community and patients won't notice a difference. Neither will the staff. The only difference will be the payment we receive."

Critical-access hospitals are a federal designation that affects federal reimbursement for Medicare patients, which account for approximately 60 percent of the hospital caseload for PAHCS. Instead of paying on a fixed rate based on the diagnosis, the designation would allow PAHCS to bill for actual costs for Medicare patients in the hospital. (The designation would not affect reimbursement for either clinic patients or nursing home residents.) PAHCS administrators estimate that the switch to critical access should mean an extra $3,000 to $4,000 per day in revenue for PAHCS. This could mean an additional $1 million in revenue per year for PAHCS.

Here's how it works.

In the early 1980s, Medicare reimbursement shifted from cost-based to case-based. This means that reimbursement was done based on the diagnosis, not on actual costs. Every illness had a corresponding monetary value for Medicare.

What it did not take into account is that some cases were more severe than others and cost more to treat. This was especially true for rural health care providers with smaller volumes and greater overhead costs per patient.

This case-based reimbursement system led to larger health care organizations, in an effort for greater efficiency.

The system was a triple whammy for rural facilities, according to Moburg, because rural facilities have higher usership by Medicare (elderly) patients, have smaller volumes and higher per-patient costs, and actually got lower reimbursement under the case-based system than urban facilities.

Then, about seven years ago, the federal government recognized that rural providers are crucial and need higher reimbursement rates and established the critical access designation.

In its last fiscal year, PAHCS billed nearly $33 million for patient care at clinics, at the hospital, and at its nursing homes, but of that total PAHCS wrote off $11 million as uncollectible. With critical access designation, PAHCS should capture nearly $1 million more from Medicare per year, revenue that they would have previously written off.

The name itself, critical access, according to Moburg, recognizes that rural hospitals are important. Just over half of the 88 hospitals in Minnesota now are designated as critical access.

Originally, PAHCS did not apply for the critical access designation because of some of the requirements. For instance, at one time hospitals with the designation were limited to 96 hours per patient stay. Now, though, hospitals just must average less than 96 hours per patient stay, something PAHCS already does. Currently, the average hospital stay at PAHCS is around 60 hours.

Another requirement is that critical access hospitals can only have 25 beds. To meet this requirement, PAHCS removed five beds from double rooms in the hospital, making five more single rooms. Right now, these 25 beds must be 15 acute beds and 10 swing beds, but in January PAHCS will be able to interchange these beds however it needs to, thanks to the new Medicare law.

PAHCS actually studied the switch to critical access based on its 2001 cost report - from its fiscal year from Oct. 1, 2000, to Sept. 30, 2001 - but at that time the benefit was not dramatic, said Moburg. But with the recent construction project, including renovations at the hospital, in the 2002 cost report - based on the fiscal year from Oct. 1, 2001, to Sept. 30, 2002 - the change in reimbursement was very dramatic, since the project costs were recognized in the cost-based reimbursement for a critical-access hospital.

The added reimbursement comes at a good time for PAHCS, which ran in the red at around $50,000 per month in 2003 and recently made some staff reductions to operate more efficiently. PAHCS did run in the black nearly $70,000 in its first month of operation for its 2004 fiscal year (October 2003).

With the added Medicare reimbursement from critical access starting in December 2003, that trend should continue.

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