Relative inefficiency of rural critical access hospitals must be balanced against their contributions to care access and quality

Research Activities, September 2010, No. 361

Medicare created the critical access hospital (CAH) program to improve the financial viability of small, isolated rural hospitals that are critical to the care of Medicare beneficiaries in rural areas. Through its CAH program, Medicare pays these hospitals on a cost basis, instead of the prospective payment system it uses for other hospitals. This keeps them from being penalized if they lack the economies of scale needed to keep costs below the prospective payment rates paid by Medicare. However, a new study shows that CAH hospitals are less cost-efficient that non-CAH rural hospitals.

Ryan L. Mutter, Ph.D., of the Agency for Healthcare Research and Quality (AHRQ), and Michael D. Rosko, Ph.D., of Widener University, compared the hospital-level cost inefficiency of CAHs and a group of similar, nonconverting rural hospitals paid on a prospective basis. They found that CAH facilities had more cost inefficiency (15.9 percent) than the comparison group (10.34 percent). Perhaps the most remarkable trend was the correlation between the rise in cost inefficiency and the number of years in the CAH program. Hospitals with only 1 year in the CAH program had a mean cost inefficiency of 13.33 percent, but with each extra year (up to 7 years) in the program, inefficiency increased, reaching a maximum of 21.85 percent.

In estimating efficiency, the researchers examined the relationship between provider inputs and intermediate outputs, such as discharges and outpatient visits. The study included a total of 534 hospitals. In the first year (1997) of the study, there were 12 CAH hospitals and 531 nonconverting hospitals; by 1994, there were 286 CAHs and 257 prospectively paid hospitals in the sample. The researchers believe that, given the potentially devastating effects of closing hospitals in isolated communities, the CAH program has achieved a reasonable balance among its objectives of efficiency, access, and quality. However, they remain concerned that too much inefficiency may be spawned by cost-based reimbursement, and advise that its cost and efficiency trends be monitored. This study was supported in part by the Agency for Healthcare Research and Quality (Contract No. 290-00-0004).

See "Inefficiency differences between critical access hospitals and prospectively paid rural hospitals," by Drs. Rosko and Mutter, in the February 2010 Journal of Health Politics, Policy and Law 35(1), pp. 95-126. Reprints (AHRQ Publication No. 10-R056) are available from the AHRQ Publications Clearinghouse.

Current as of September 2010
Internet Citation: Relative inefficiency of rural critical access hospitals must be balanced against their contributions to care access and quality: Research Activities, September 2010, No. 361. September 2010. Agency for Healthcare Research and Quality, Rockville, MD. http://archive.ahrq.gov/news/newsletters/research-activities/sep10/0910RA24.html