HCM 400 Module 3 Reimbursement Short Paper Example

Paid at Cost: How Medicare and Others Pay Pine Hollow Memorial Hospital

[Student Name]

Southern New Hampshire University

HCM 400: Healthcare Finance

Module Three Short Paper

[Instructor Name]

[Date]

The organization, setting and figures below are a composite written as a model document. No real employer, client, colleague or patient is described.

Paid at Cost: How Medicare and Others Pay Pine Hollow Memorial Hospital

Most hospitals receive a fixed Medicare payment for each admission, regardless of what the stay costs them. Pine Hollow Memorial Hospital does not. Its critical access status means Medicare reimburses what the hospital itself spends. This paper explains how that works, how the hospital's other payers pay and what the payment system means for its finances and decisions.

The Critical Access Designation

Congress created the critical access hospital designation in 1997 through the Medicare Rural Hospital Flexibility Program to help small rural hospitals survive. To qualify, a hospital generally must be located in a rural area at least 35 miles from another hospital, or 15 miles in mountainous terrain or areas with only secondary roads, keep no more than 25 inpatient beds, maintain an average stay of 96 hours or less and provide 24-hour emergency care. Pine Hollow meets these criteria.

More Than a Payment Rule

Reiter et al. (2023) described how the Flexibility Program also funds state programs that help critical access hospitals strengthen operations and finances, for example through benchmarking, revenue cycle support and quality improvement assistance. Pine Hollow's state program provides free financial benchmarking reports and consultant hours, resources the hospital has used only lightly.

How Cost-Based Payment Works

Medicare pays critical access hospitals 101% of their reasonable costs for inpatient and outpatient services provided to Medicare patients, before an across-the-board reduction that currently lowers payment slightly. During the year, Medicare makes interim payments based on estimates. After the year ends, the hospital files a cost report detailing its expenses and how they are allocated among departments and patients, and Medicare settles the difference between interim payments and allowable costs.

A Worked Example

Suppose Pine Hollow's allowable inpatient costs are $6.0 million and Medicare patients account for 60% of inpatient days. Medicare's share of cost is $3.6 million, and at 101%, payment would be about $3.64 million before the reduction. If interim payments totaled $3.4 million, Medicare would owe the hospital about $240,000 at settlement. If costs had been overestimated, the hospital would owe money back.

Table 1. Simplified Medicare Inpatient Settlement

Note. Illustrative figures; actual settlements depend on detailed cost report rules.

Why the Cost Report Matters So Much

Because payment depends on the cost report, errors in it translate directly into lost revenue. If costs that should be assigned to inpatient and outpatient services are instead recorded in nonreimbursable areas such as the retail pharmacy, Medicare pays less. If swing bed days are counted incorrectly, the allocation of costs shifts. Pine Hollow prepares its cost report with a part-time consultant, and a review last year found about $180,000 in allowable costs that had been misallocated in the prior year. Investing in cost report expertise is therefore one of the most direct ways a critical access hospital can protect its revenue.

Swing Beds and the Clinic

Pine Hollow's swing beds let the same inpatient beds serve patients who no longer need hospital care but need skilled nursing, such as rehabilitation after surgery. Medicare also pays for swing bed care based on cost, which has made swing beds an important revenue source. The hospital's rural health clinic receives an all-inclusive payment per visit, set under separate Medicare rules.

Medicaid, Commercial and Self-Pay

Medicaid, about 18% of patient revenue, pays through the state's fee schedules and managed care contracts, generally below cost. Commercial insurers, about 24%, pay negotiated rates, often a discount from charges; they are the only payer that typically pays more than cost. Self-pay patients, about 6%, pay the least, and much of their care becomes bad debt or charity care.

Strengths of Cost-Based Payment

Cost-based payment protects small hospitals from the volatility of low volume. A hospital with five inpatients one day and twenty the next cannot spread fixed costs the way a large hospital can, and fixed per-case prices would produce steep losses. By paying costs, Medicare keeps rural emergency rooms and inpatient beds open where they would otherwise be unaffordable.

Weaknesses of Cost-Based Payment

The same design weakens incentives for efficiency: if costs rise, Medicare's payment rises too, at least for its share. It also makes revenue depend heavily on accurate cost reporting, which requires skilled staff that small hospitals often lack. And it covers only Medicare's share, so costs of care for Medicaid and uninsured patients still fall on the hospital.

Payment and Quality

Joynt et al. (2013) examined mortality among Medicare patients admitted to critical access and other hospitals over nearly a decade and found that mortality at critical access hospitals, once similar, rose relative to other hospitals for common conditions. Payment that keeps hospitals open does not by itself ensure they keep pace with advances in care, which is why investment in quality and staff remains essential.

Managing Revenue Under Cost-Based Payment

In a survey of executives at small rural hospitals, Holmes and Pink (2012) found wide use of strategies like better billing and collections, reviewing chargemaster pricing and strengthening cost reporting, and that leaders rated revenue cycle and cost report improvements among the most effective. For Pine Hollow, accurate cost allocation, timely interim rate reviews and a strong swing bed program are practical levers.

Implications for Pine Hollow

Because more than half of its revenue is cost-based, Pine Hollow's financial health depends on accurate cost reports and on managing costs for its non-Medicare patients. Its losses come largely from Medicaid and self-pay care and from services with low volume that commercial payers do not cover generously. Understanding the payment system points the hospital toward better cost reporting, swing bed use and commercial contract negotiation rather than cutting emergency services.

Conclusion

Critical access hospitals are paid differently from most hospitals, receiving Medicare payment based on their costs. That design keeps small rural hospitals open but weakens efficiency incentives and places great weight on cost reporting. For Pine Hollow, mastering the payment system is as important as controlling costs.

References

Holmes, G. M., & Pink, G. H. (2012). Adoption and perceived effectiveness of financial improvement strategies in critical access hospitals. The Journal of Rural Health, 28(1), 92-100. https://doi.org/10.1111/j.1748-0361.2011.00368.x

Joynt, K. E., Orav, E. J., & Jha, A. K. (2013). Mortality rates for Medicare beneficiaries admitted to critical access and non-critical access hospitals, 2002-2010. JAMA, 309(13), 1379-1387. https://doi.org/10.1001/jama.2013.2366

Reiter, K. L., Gurzenda, S., Thompson, K., Holmes, G. M., & Pink, G. H. (2023). Supporting critical access hospital operational and financial improvement through the Medicare Rural Hospital Flexibility Program. The Journal of Rural Health, 39(4), 710-715. https://doi.org/10.1111/jrh.12762