Payment methodology for critical access hospitals

Minnesota Health Care Programs (MHCP) developed a new cost-based inpatient payment methodology for critical access hospitals (CAH) according to the 2013 legislative directive. The new methodology was codified in 2015 by amending Minnesota Statutes, 2014 section 256.969, subd. 2b, hospital payment rates. The new methodology also requires DHS to rebase rates every two years beginning July 1, 2017.

Effective date

The new cost-based inpatient payment methodology for CAH is effective for discharges on or after July 1, 2015.

Payment rates

Hospital-specific per diem inpatient payment rates are designed to pay a percentage of costs within these three reimbursement tiers:

• Hospitals with base year payments at or below 80 percent of base year costs will have a per diem payment rate set so that aggregate annual reimbursement equals 85 percent of the hospital’s base year costs.
• Hospitals with base year payments greater than 80 percent and up to 90 percent of base year costs will have a per diem payment rate set so that aggregate annual reimbursement equals 95 percent of the hospital’s base year costs.
• Hospitals with base year payments at or above 100 percent of base year costs will have a per diem payment rate set so that aggregate annual reimbursement equals 100 percent of the hospital’s base year costs.

Inpatient payment rates were rebased using the three payment tiers as described and 2014 costs. These rebased rates are effective for discharges on or after July 1, 2017. The rebased rates will be inflated on July 1, 2018, using the Centers for Medicare & Medicaid Services (CMS) Inpatient Hospital Market Basket index. See the charts for rates 2015-2016, and 2017:

• Critical Access Hospital Fee-For-Service Per Diem Rates (DHS-7670) (PDF): Payment Rates effective for discharges or dates of service on or after July 1, 2015
• Critical Access Hospital Fee-For-Service Per Diem Rates (DHS-7670A) (PDF): Payment Rates effective for discharges or dates of service on or after July 1, 2017

MHCP developed a new formula for determining payment rates for outpatient hospital services in a CAH. CAH outpatient services are no longer to be paid at actual costs. Instead, MHCP will determine a payment rate for each hospital using the cost-to-charge ratios from Worksheet C on each hospital’s As Filed Medicare Cost Report. 

Under our previous payment method, we paid initial claims at an interim rate at the time the services were billed. We then used a cost settlement process to determine the hospitals’ actual costs for providing the service and reconciled the interim payments to the actual costs. The cost settlement process was eliminated with changes to Minnesota Statutes, 2014 section 256B.75(b).

MHCP sends letters to each CAH describing the outpatient rates and the rate computation formula each time the outpatient rate is updated.

Effective date

The change to the new payment rate will begin with services delivered on the first day of each hospital’s fiscal year ending (FYE) in 2016. The table shows the dates for the CAH’s in Minnesota.

Fiscal year ending and effective dates

Payment rates

MHCP will calculate the new 2017 FYE payment rates using information from Worksheet C of each hospital’s 2015 As Filed Medicare Cost Report. The outpatient rate is the MHCP allowable charges multiplied by the result of the following calculation:

Ancillary services costs plus outpatient services costs (excluding costs related to rural health clinics and federally qualified health centers) divided by the ancillary services charges plus outpatient services charges (excluding charges related to rural health clinics and federally qualified health centers).

Costs and charges that are related to rural health clinics and federally qualified health centers are excluded from the rate calculation because these clinic services are reimbursed using an alternate method. These costs and charges were also excluded from the previous cost settlement payment method.

The outpatient payment rates for the hospital’s fiscal year ending in 2018 will be based on the same Worksheet C information taken from each hospital’s 2016 As Filed Medicare Cost Report. The outpatient payment rates for the hospital’s fiscal year ending in 2019 will be based on the same Worksheet C information taken from each hospital’s 2017 As Filed Medicare Cost Report.

Computed payment rates

MHCP will notify each hospital of their new outpatient rate before the rate is updated each year. 

Disproportionate share hospital (DSH) payments ending

CAHs are no longer eligible for Disproportionate Share Hospital (DSH) payments effective July 1, 2015. Hospitals that are currently receiving DSH payments must continue to file DSH audit reports until all audits are completed.

Minnesota Statutes, section 256.969 subd. 2b