On May 11,2004, the U.S. Centers for Medicare and Medicaid Services (CMS) announced plans to implement new metropolitan area designations beginning with fiscal year 2005. If finalized, these changes will profoundly affect many aspects of the Medicare program, including provider payments, certain special designations, eligibility for federal physician self-referral exceptions and Anti-Kickback law safe harbors and grant programs. Moreover, these changes would have broad implications for a variety of providers, including hospitals, skilled nursing facilities, home health agencies, ambulatory surgery centers and many others. All providers are advised to carefully examine CMS’s proposal and prepare for the implications.
New Metropolitan Areas
Many aspects of the Medicare program are affected by a provider’s location. Under most Medicare payment systems, for example, reimbursement amounts vary based on a provider’s location in an urban or rural area. Traditionally, CMS has designated urban and rural areas by using a classification system developed by the U.S. Office of Management and Budget (OMB). OMB identifies metropolitan areas around the United States using a set of criteria based largely on population density and commuting patterns. Every 10 years, in anticipation of the next decennial census, OMB reviews and occasionally revises the criteria it uses to define metropolitan areas and then issues new designations using those criteria and updated census data.
On December 27, 2000, OMB announced the new criteria it would use to identify metropolitan areas using data from the 2000 census. (65 Fed. Reg. 82,228 et seq. (Dec. 27, 2000)) On June 6, 2003, it announced the revised metropolitan area designations developed using the new criteria and Census 2000 data. (OMB Bulletin 03-04l (June 6, 2003. A copy of the bulletin is available at www.whitehouse.gov/omb/bulletins/fy04/b04-03.html.) OMB’s latest standards are a dramatic departure from past practice and presented numerous challenges to CMS. OMB once again identified Metropolitan Statistical Areas (MSAs), which are based on population cores of at least 50,000, with surrounding counties added depending on economic and social integration, as measured by commuting patterns between outlying counties and the central urban area. However, for the first time, OMB also identified Micropolitan Statistical Areas based on urban clusters of between 10,000 and 50,000 population.
Whether and to what extent CMS would utilize the Micropolitan Areas has been the source of speculation and consternation for more than three years. Because the new Micropolitan Areas are essentially a third area definition made up mostly of currently rural areas, but also some or all of current MSAs, how these areas would be treated would significantly impact affected providers. This question was particularly relevant to providers in rural areas, since nearly 40 percent are now in Micropolitan Areas according to OMB.
On May 11,2004, CMS announced that it does not intend to use the Micropolitan Areas as a variable in calculating payment or otherwise administering the Medicare program. However, the agency is proposing to adopt OMB’s new MSA designations, and that decision alone would profoundly affect many aspects of the Medicare program. If implemented, there would be 370 Metropolitan Statistical Areas (362 in the United States and eight in Puerto Rico), which adds 49 new MSAs and moves numerous counties into and out of existing metropolitan areas.
Geographic designation plays a large role in Medicare payment. Under most Medicare prospective payment systems, payments are geographically adjusted by a wage index, which is intended to adjust payments to reflect labor cost variations between localities. CMS uses the OMB metropolitan area designations to identify labor markets and calculate and assign wage indexes for providers. CMS calculates a distinct wage index for each MSA and one wage index per state for the areas that lie outside of MSAs.
CMS uses the hospital wage index to adjust payments under the prospective payment systems applicable to inpatient and outpatient hospital services, skilled nursing facilities, home health agencies and ambulatory surgery centers, among others. Under the revised designations, 65 counties would be relocated from one MSA to another; 288 counties would be relocated from rural areas into MSAs; and 46 counties would be moved from MSAs into rural areas. These changes will cause significant wage index swings for some areas for virtually all provider types.
Perhaps most significantly affected will be hospitals. CMS estimates that more than 1,600 hospitals, 38 percent, will experience a lower wage index as a result of the metropolitan area changes (1,175 will experience no change, while nearly 1,500, about 35 percent, will experience a higher wage index). But wage index changes are merely the tip of the iceberg.
Medicare payments to hospitals vary based on geographic location in a number of ways. CMS uses a geographic adjustment factor to adjust capital payments under the hospital inpatient prospective payment system and calculates and assigns these adjustment factors similarly to the wage index. Geographic designation also plays a role in determining, among other things, disproportionate share payment adjustments, indirect medical education adjustments, graduate medical education payments and outpatient prospective payment system transitional payments. Additionally, some state Medicaid programs and private payor contracts vary payments based on Medicare geographic designation.
According to CMS, 1,749 hospitals are currently assigned to rural areas, while 2,545 are assigned to urban areas. Under the revised standards, 197 currently rural hospitals would become urban; 67 currently urban hospitals would become rural.
To help alleviate the decreased payments for urban hospitals that would be deemed rural, the preamble to the Federal Register notice says that CMS is proposing a transition that would allow these hospitals to maintain their assignment to the MSA where they are currently located for fiscal years 2005 through 2007. However, no such transition protection appears in the proposed regulations. Moreover, it is unclear how far CMS intends to extend this protection. CMS seems to intend that this protection will apply for purposes of assigning the wage index. It is not clear whether affected hospitals will continue to be considered urban for purposes of disproportionate share payment adjustments, indirect medical education adjustments and other affected payment. CMS is not proposing a transition for other hospitals, even though 48 percent of rural hospitals would still experience a wage index decrease by implementing new labor markets.
The new MSAs also will present new challenges and opportunities for hospitals with respect to wage index geographic reclassification. Hospitals that have previously qualified for wage index reclassification for fiscal year 2005 did so on the basis of the MSAs that currently are used to define labor market areas. If CMS moves forward with its proposal to adopt the new MSAs, many existing MSAs will be reconfigured. As such, the wage index of the MSA to which a hospital has reclassified, or the area where it is located, may be affected significantly by this proposed change. The changes also will present new MSA options to hospitals that traditionally qualify for reclassification and new opportunities to hospitals that previously have been unable to qualify for reclassification.
Hospitals that expect to be reclassified for fiscal year 2005, including those that qualified through the one-time exceptions process created by the Medicare Modernization Act, should verify that the reclassified wage index for the labor market area into which they have been reclassified (in Table 4C in the Addendum to the proposed rule) exceeds the wage index of the labor market area where they are physically located (in Table 4A or 4B in the Addendum of the proposed rule) after implementation of the new MSAs. If the hospital’s reclassified wage index is less than the wage index for its own area, it may consider withdrawing its reclassification.
Where a previously existing MSA would be divided into two or more separate MSAs, CMS is proposing to assign a hospital that reclassified to that MSA to the nearest county in the current MSA, and the hospital’s fiscal year 2005 reclassification would be to the new MSA that includes that county to which it has been assigned. CMS assigned hospitals in this manner based on mapping data. Hospitals that qualified for reclassification for fiscal year 2005 should check Tables 9A and 9B in the proposed rule, which list hospitals that qualified for reclassification under the ordinary process and one-time exceptions process, respectively, to verify that CMS has listed the hospital as qualifying for reclassification, and CMS has appropriately identified the area to which the hospital is and will be assigned. Several errors have already been identified. Hospitals that spot errors or disagree with CMS’s determination of the closest proximate county must submit a comment (as specified under the “Comment Period” and “Addresses” sections at the beginning of the proposed rule) indicating the basis for their disagreement.
Medicare regulations permit hospitals to withdraw an approved reclassification before it becomes effective. However, the hospital must effectively withdraw its reclassification “within 45 days of the publication” of the proposed rule. CMS has not made clear whether the 45-day period begins when CMS posted the notice on its website, May 11,2004, or when the notice was published in the Federal Register, May 18, 2004. Of course, the answer is of paramount importance to hospitals that are contemplating such action.
Hospitals that qualify for reclassification also will want to review Table 4J in the Addendum to the proposed rule. Table 4J identifies those hospitals that qualify for a supplemental wage index adjustment. The Medicare Modernization Act requires CMS to make adjustments to the hospital wage index based on commuting patterns of hospital employees who reside in the county but work in a different county with a higher wage index. CMS is now proposing criteria to identify qualifying counties and a formula for adjusting the wage index.
CMS’s analysis indicates that 411 hospitals in 224 counties qualify under the proposed criteria. Hospitals located in qualifying counties are identified by provider number in Table 4J. The table also indicates the amount by which the wage index will increase for each qualifying hospitals.
CMS proposes that all qualifying hospitals will automatically receive the increased wage index, unless the hospital has already been reclassified to another geographic area for purposes of the wage index amount (including reclassifications made under the one-time exception process). CMS proposes that the wage index adjustment will be effective for the hospital for a period of three fiscal years, FY 2005 through FY 2007.
Although good news for most qualifying hospitals, qualifying for a wage index adjustment may present issues for hospitals that also qualify for wage index reclassification. Hospitals receiving the wage index adjustment will not be eligible for geographic reclassification. As such, a hospital cannot simultaneously receive a wage index adjustment and reclassification. It is unclear, however, whether a hospital that has a pending geographic reclassification for fiscal year 2005 and also qualifies for a wage index adjustment pursuant to this proposal, but prefers to activate its reclassification, must affirmatively withdraw its wage index adjustment. If not, will the wage index adjustment trump the reclassification, even if the reclassification is more valuable?
It also is unclear whether a hospital that activates a wage index adjustment for fiscal year 2005 will be barred from seeking wage index reclassification in fiscal year 2006 and 2007, since the wage index adjustment endures for three years. In other words, must the hospital withdraw the wage index adjustment now for fiscal year 2005, or may it withdraw the wage index adjustment annually if it later qualifies for wage index reclassification? Hospitals have only a short time to ponder these questions, since hospitals that wish to waive the application of this wage index adjustment must notify CMS within 45 days of the publication of the proposed rule. As noted above, it is not clear whether the 45-day clock begins ticking when CMS posted the notice on its website, May 11,2004, or when the notice will be published in the Federal Register, May 18, 2004.
Hospitals will have a difficult time making these decisions. The published wage indexes are likely to change significantly between now and when the final rule is published in August. CMS is making many proposals that affect the wage index. Revisions to any of these proposals would affect the wage index. Additionally, some hospitals may elect to withdraw reclassifications after reviewing these tables, which also could impact the wage index. Moreover, there undoubtedly are errors in the wage index calculations, which will be corrected during the intervening period. As such, hospitals have to make a leap of faith in determining whether to maintain a wage index reclassification for fiscal year 2005.
The changes also present new opportunities for hospitals. Hospitals that previously have been unable to qualify for reclassification may now have a chance, if MSA changes move MSAs closer, lower average hourly wages of neighboring MSAs or raise wage indexes of neighboring MSAs. CMS is also proposing several changes to the reclassification rules, which also may make it easier for hospitals to qualify for reclassification. Even hospitals that have pending reclassifications for fiscal year 2006 should examine new options that may be created if other MSAs are established nearby. Applications for reclassification for fiscal year 2006 must be filed by September 1, so hospitals should examine all options quickly after the final rule is published in August.
CMS’s proposal to implement the new MSAs will have implications far beyond just payment. Although CMS does not expressly address these other considerations in the preamble, it appears that the new MSA classifications also will affect certain provider designations that are based on urban-rural location. For example, qualifying criteria for Rural Referral Center, Sole Community Hospital, Medicare Dependent Hospital, Critical Access Hospital and Rural Health Clinic status are all contingent upon being located in a rural area. For the 197 currently rural hospitals that would become urban, this redesignation may affect their ability to qualify for or retain these special designations. For the 67 currently urban hospitals that would become rural, these changes present new opportunities to obtain one or more of these designations. Many other designations are affected by location; all should be examined if the changes are implemented.
Even hospitals that will not move from one geographic designation to another may be affected, if competing hospitals that are relocated lose or can qualify for a location-based designation. Many of these designations, such as Sole Community Hospital status, carry significant reimbursement advantages. If a neighboring hospital were to obtain such status, it could find itself with significantly improved cash flow and better able to compete in the marketplace.
Fraud and Abuse Implications
CMS’s decision also will affect the availability of certain special exceptions under the federal physician self-referral and Anti-Kickback laws. Under the federal physician self-referral proscription, special exceptions are available to physicians with ownership interests in rural providers. Similarly, under the federal Anti-Kickback statute, special safe harbor protection is available for certain investments in an entity located in an underserved area, which tend to be located in rural areas.
Physicians and providers who have premised transactions on these exceptions may be forced to re-examine, and perhaps even unwind, such arrangements. Additionally, the geographic area changes could present new opportunities for providers presently located in urban areas that will be moved into rural areas.
Location-Based Grants and Demonstrations
Many federal grant and demonstration programs also are contingent upon urban-rural location. Nearly a half-dozen demonstration projects established under the Medicare Modernization Act alone require providers to be located in rural areas or serve rural populations. Likewise, countless federal grants are made available specifically to providers in rural areas to improve care and access in those communities. Hospitals that are re-designated pursuant to the proposed MSA changes will confront challenges to their eligibility, or opportunities to now pursue these funding sources.