Kusserow on Compliance: OIG Calls for Re-Examination of Critical Access Hospital Payment System

  • Medicare Beneficiaries Pay Half of the Costs for Outpatient Services at CAHs
  • Beneficiaries Pay Two to Six Times More than for Same Services at Acute Care Hospitals

The HHS Office of Inspector General’s (OIG) Office of Evaluation and Inspection (OEI) released a report on critical access hospitals (CAHs), calling for modification of how coinsurance is calculated for outpatient services received at CAHs that would reduce the current reimbursement amounts. The OIG cited higher costs Medicare beneficiaries pay when services are received at a CAH, than for the same services at acute care hospitals. This follows another OIG report from last year. Now these two reports stand back to back with a call for a review of critical access criteria for hundreds of small rural hospitals across the nation. Needless to note, there will be a lot of reaction from rural healthcare providers on this subject, as there was when the first report came out.

CAH Background

The CAH certification was created to ensure that rural beneficiaries would have access to hospital services, with Medicare reimbursing them 101 percent of “reasonable costs.” This is instead of payments made at the predetermined rates set by the Outpatient Prospective Payment System (OPPS). The system that Medicare uses to calculate outpatient coinsurance amounts for beneficiaries who receive services at CAHs differs from that used for beneficiaries who receive services at acute care hospitals. Beneficiaries who receive services at CAHs pay coinsurance amounts based on CAH charges, whereas beneficiaries who receive services at acute care hospitals pay coinsurance amounts based on OPPS rates. CAH charges are typically higher than the reasonable costs associated with CAH services or the OPPS rates that acute-care hospitals receive.

OIG Findings

The OIG reviewed claims data to calculate the percentages and amounts of coinsurance that Medicare beneficiaries paid toward the costs of outpatient services at CAHs. This data was compared to what it would be if beneficiaries paid at acute-care hospitals for the 10 most common outpatient services provided at CAHs. The OIG found that as result of coinsurance amounts being based on charges, Medicare beneficiaries paid nearly half the costs for outpatient services at CAHs. Because coinsurance amounts were based on charges, Medicare beneficiaries paid a higher percentage of the costs in coinsurance for outpatient services received at CAHs than they would have paid at hospitals under OPPS. For the 10 frequently provided outpatient services at CAHs, beneficiaries paid between two and six times the amount in coinsurance that they would have for the same services at acute care hospitals.

OIG Recommendations

To reduce the percentage of costs that Medicare beneficiaries pay in coinsurance, the OIG recommended that CMS seek legislative authority to modify how coinsurance is calculated for outpatient services received at CAHs. The OIG offered suggestions as to how CMS could modify how coinsurance is calculated for such services. These included:

  1. Computing coinsurance so that it is based on interim payment rates rather than charges, and
  2. Processing claims for outpatient services at CAHs as if they were paid under OPPS for the purpose of calculating an OPPS equivalent coinsurance.

CMS neither concurred, nor non-concurred with the OIG recommendation, preferring to sit on the sidelines for the time being; however, it is likely that CMS will eventually have to re-examine how CAH qualifications are defined and its current system of payments for CAHs.

Richard P. Kusserow served as DHHS Inspector General for 11 years. He currently is CEO of Strategic Management Services, LLC (SM), a firm that has assisted more than 3,000 organizations and entities with compliance related matters. The SM sister company, CRC, provides a wide range of compliance tools including sanction-screening.

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Copyright © 2014 Strategic Management Services, LLC. Published with permission.

Philadelphia Smokers Cough Up More For Benefits

The City of Philadelphia has ramped up its efforts to curb smoking with two major changes to its employee benefits programs. First, beginning January 1, 2015, all pharmacies in its Preferred Health Network (PHN) must be tobacco-free; employees who fill prescriptions at an out-of-network pharmacy will pay an additional copayment on top of the copayment for the medication. City employees and their spouses who have used tobacco in the previous year also will pay an additional $500 for health insurance, although the amount will be reduced if they complete an approved smoking cessation program by May 1, 2015.

CVS Caremark is both a pharmacy benefits administrator (PBA) and the second largest chain of pharmacies in the nation; only Walgreens is larger. The company announced in February 2014 that its pharmacies would no longer sell tobacco products. The PBA recently began to offer optional tobacco-free pharmacy networks as part of its benefit program. The City of Philadelphia is the first employer to adopt the option, which applies to non-union workers.

Philadelphia’s Network

The City announced on Friday, October 24, 2014 that together with its pharmacy benefits administrator, CVS Caremark, it has recruited 135 independent pharmacies and the CVS, Target, and Wegmans chains to participate in the tobacco-free PHN. Covered employees and spouses who fill their prescriptions at an out-of-network pharmacy will make a copayment of $15 per prescription in addition to the copayment for the drugs. Mayor Michael A. Nutter noted that the PHN and benefit changes were part of a multifaceted effort called “Get Healthy Philly.” Other components include coverage of smoking cessation medications and a new $2 per pack tax on cigarettes.

HHS Announces $840M to Move Health Care from Quantity to Quality

HHS has announced $840 million in funding to support health care strategies that focus on patient health outcomes and care coordination. The funding, which is being made possible through the Transforming Clinical Practice Initiative, will be awarded to applicants who demonstrate strategies to HHS that can be implemented to improve information access and health care outcomes.


According to an HHS release announcing the funding, applicants may include organizations like group practices, health care systems, and medical provider associations. The funding is designed to help these kinds of organizations develop new strategies to provide doctors with better access to patient information, grow the ways in which patients can communicate with those that care for them, improve patient care coordination, and more efficiently use electronic health records. At its essence, the funding is about better care delivery, improved physician payment models, and enhancing information distribution. To become a successful applicant, physicians and practices will need to demonstrate measurable progress towards achieving theses goals. HHS will evaluate evidence of improved outcomes, cost savings, avoided unnecessary hospitalizations, and reduced unnecessary testing when considering applications.


The $840 million initiative will be paid out over the next four years. The initiative will reach its goals by influencing 150,000 clinicians through a combination of incentives, tools, and information. All of the strategies that HHS endeavors to support are designed to encourage doctors to team up and move health care from a volume-driven system to one that is based on value and quality of care.


The Transforming Clinical Practice Initiative is one of the many strategies advanced by the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148) devoted to changing the structure of health care delivery in the United States. HHS indicates that through other successful programs and initiatives like the Quality Improvement Organization (QIO) Program, Partnership for Patients with Hospital Engagement Networks (HENs), and Accountable Care Organizations (ACOs), the ACA has already positively impacted patient health outcomes. For example, HHS says the ACA “has helped reduce hospital readmissions in Medicare by nearly 10 percent between 2007 and 2013—translating into 150,000 fewer readmissions—and quality improvements have resulted in saving 15,000 lives and $4 billion in health spending during 2011 and 2012.”

Numbers Crunched: CHIP Helps Close Health Insurance Gap

Since creation of the Children’s Health Insurance Program (CHIP) in 1997, the number of uninsured children has fallen nationally from 10.7 million (15 percent of all children) to 6.6 million (9 percent of all children), according to a 50-state examination conducted by The Pew Charitable Trusts and the John D. and Catherine T. MacArthur Foundation. The report analyzes spending and enrollment data for CHIP programs in all 50 states plus the District of Columbia, and found wide variation in implementation among the states. It also considered the impact of the Patient Protection and Affordable Care Act (ACA) (P.L 111-148) on CHIP funding.


CHIP is jointly funded by federal and state funds. In total, CHIP covers 8.1 million children in the United States. Federal contributions toward CHIP in each state are capped; states have two years to spend the federal funds allotted to them, otherwise the funds can be distributed to other states. States are given flexibility in structuring their programs and spending designated dollars, which allows for wide variation in how states have chosen to extend health insurance coverage to uninsured children. States must offer benefits above a federally-defined minimum, but may impose cost sharing or cap their CHIP enrollment.

States have three options for administering CHIP services: as an expansion to the state’s Medicaid program; separately from the state’s Medicaid program; or a combination of Medicaid expansion and separate CHIP program that cover different populations with separate eligibility criteria. All states have the option to cover specific populations of low-income individuals other than children; 200,000 such individuals are enrolled in CHIP overall.

Report Findings

The report found that CHIP is a relatively small program for states with regard to spending. State-funded CHIP spending amounted to 0.3 percent of revenue from states’ own sources in 2012; in comparison, Medicaid averaged 16 percent. From 2005 to 2012, CHIP spending experienced an inflation-adjusted compound annual growth rate of 5.5 percent, double that of overall national health expenditures; during that time period, enrollment in CHIP grew 32 percent. Overall numbers can be misleading, however. State spending in Arizona decreased by 27.2 percent, in part due to the state’s decision to freeze CHIP enrollment; conversely, New Mexico’s spending increased by 27.2 percent. There is also a wide variety in spending per child, ranging from under $1,000 in five states to over $2,000 in six states and the District of Columbia.

The ACA included CHIP-related provisions that will impact the program. The law funds CHIP through 2015; it will increase the federal match rate by up to 23 percent in October 2015—the federal share of CHIP funding due to this increase will average 93 percent. As a result, the report predicts that state spending on CHIP will be dramatically reduced or possibly eliminated in some states. The ACA also streamlines eligibility determinations for CHIP, and allows states to expand their CHIP programs to include children of low-income state employees. The report believes that because of these changes, the ACA will have a significant effect on CHIP.