CMS Creates More Rural Innovation – Round 3 – Rural Community Hospital Demonstration Program To Meet Rural Needs

The Center of Medicare and Medicaid Service (CMS) continues to develop a growing portfolio of various payment and service delivery models across the nation that aim to achieve better care for patients, better health for our communities, and lower costs through improvement for our healthcare system.

That said, the rural healthcare market is one such area of focus.  With the continued spirit of innovation necessary within the new healthcare era, CMS is conducting intensive evaluation of the demonstration, assessing the financial impact on participating hospitals and the effect on healthcare for the populations served through the Rural Community Hospital Demonstration Program.

Program Purpose:

The goal and purpose, which was issued on April 17, 2017 is to test the feasibility and advisability of cost-based reimbursement for small rural community hospitals that are too large to be critical access hospitals (CAHs) and furnish covered inpatient hospital services to Medicare beneficiaries. Since this program focuses on promoting high quality and efficient healthcare delivery in this solicitation, applicants are asked to specify interventions that both increase access to and improve the quality of care, while enhancing patient care options and the ability for beneficiaries to remain in their own rural communities.

Not the First Round, Going for Round Three: The Background:

CMS actually began the program back in 2004 and it was initiated as a five-year program under the Medicare Modernization Act (MMA) of 2003. Although it was then extended for another five-year period under the Patient Protection and Affordable Care Act (PPACA) and the 21st Century Cures Act, enacted Dec. 13, 2016, the program requires another five-year extension period.

This program allows some previously participating hospitals to continue participation, and also allows additional hospitals located in any state to participate subject to a maximum of 30 hospitals participating at the same time.


Also, within the program select additional hospitals would participate for a period of five years. This is open to hospitals that were participating as of the last day of the initial five-year period, or as of Dec. 30, 2014, and have decided to continue participation. These hospitals do not have to complete this solicitation.

Usage of IPPS:

Since 2004, CMS has included a segment specific to the proposed and final rules for the Medicare Inpatient Prospective Payment System (IPPS). Under the IPPS, each case is categorized into a diagnosis-related group (DRG). Each DRG has a payment weight assigned to it, based on the average resources used to treat Medicare patients in that DRG. As it relates to this program, on an annual basis it will be ensured there will be budget neutrality as it has in the two previous programs.

Rural Applications: 

For rural applicants the eligibility requirements are outlined in section 410A of the MMA, which is the original authorizing legislation and includes the following applicant criteria:

  1. Must be located in a rural area
  2. Must have fewer than 51 acute care inpatient beds, as reported in its most recent cost report (beds in a psychiatric or rehabilitation unit which is a distinct part of the hospital shall not be counted) ;
  1. Must have available 24-hour emergency care services; and
  1. Is not eligible for Critical Access Hospital/CAH designation, or has not been designated a CAH under section 1820 of the Social Security Act.

Additional Priority Information: 

  • Applicants interested may be located in any State for demonstration project selection.
  • Additionally, under Section 15003 of the 21st Century Cures Act, which authorizes the current extension of the demonstration, requires the CMS give priority in selecting new participants that are located in one of the lowest population densities – twenty-states in the nation.  Hence, the CMS will give priority to applications from the following states, based on ProQuest Statistical Abstract of the United States: 2015: Alaska, Arizona, Arkansas, Colorado, Idaho, Iowa, Kansas, Maine, Mississippi, Montana, Nebraska, Nevada, New Mexico, North Dakota, Oklahoma, Oregon, South Dakota, Utah, Vermont and Wyoming 
  • Finally, the CMS will consider the impact of closures of hospitals located in rural areas in the state in which the applicant hospital is located during the 5-year period immediately preceding the date of the enactment of the 21st Century Cures Act.

Payment – Demonstration Process:

While complicated and confusing the enclosed process has worked since the two prior program rounds: The hospitals participating in the demonstration will receive payment for inpatient hospital services furnished to Medicare beneficiaries, with the exclusion of services in a psychiatric or rehabilitation unit that is a distinct part of the hospital…using the following rules:

    1. Discharges that occur in the first cost reporting period on or after the implementation of the extension, their reasonable costs of providing covered inpatient hospital services;
    2. Discharges that occur during the second or subsequent cost reporting period, the lesser of their reasonable costs or a target amount. Additionally, the target amount in the second cost reporting period has been defined as the reasonable costs of providing the covered inpatient hospital services in the first cost reporting period, which is increased by the Inpatient Prospective Payment System (IPPS) update factor of the cost reporting period.

Additional Application Focus and Review Process:

If the applicant hospital meets the eligibility requirements, the supplied application will then be referred to a technical panel for evaluation and scoring. Applicant hospitals must sign a Medicare Waiver Demonstration Applicant Data Sheet; provide a five-year project duration according to the hospital’s upcoming cost report period beginning and end dates. Finished applications will include a completed data sheet, all narrative information, responses to, cost report pages, and maps.

Application will include the following:

    1. Problem Statement: Explain why the applicant hospital desires to receive payment under a reasonable cost-based methodology instead of payment under the current IPPS.
    1. Strategy for Financial Viability: The applicant should describe its strategy for improving its financial situation, both in terms of efforts it has undertaken recently and those that it plans under the demonstration.
    1. Goals for Demonstration: The applicant should describe any specific projects for which it will use additional Medicare funds obtained through the demonstration, and how any such projects will benefit Medicare beneficiaries in the hospital’s service area.
    1. Collaboration with Other Providers to Serve Area: The applicant should describe its current geographic area and the population it serves and collaborations.

Applicants must also provide the following:

  • Evidence that the hospital is in a federally designated rural area.
  • Road miles to the nearest hospital or CAH, and number of hospitals or CAHs within 35 road miles of the hospital. (A map with distances between providers would be helpful).
  • Medicare swing bed approval.
  • Number of acute care inpatient beds, from the latest cost report (beds in a psychiatric or rehabilitation unit of a hospital shall not be counted toward the total number of beds).
  • If the hospital makes available 24-hour emergency care services.
  • Most recent three years of data on occupancy rate, average daily census, number of discharges, average inpatient length of stay, payer mix. Specify the numbers for each year.
  • Eligibility for sole community hospital designation.
  • Eligibility for CAH designation.
  • Management type of the hospital – private, publicly owned, faith-based, and/or owned by a large multi-hospital system.
  • Total costs for Medicare inpatient services from the latest cost report (if applicable, this should include costs for Medicare swing bed services).
  • The hospital’s Medicare inpatient operating margin.
  • The hospital’s operating margin (including inpatient services, outpatient services, distinct part psychiatric units, and rehabilitation units).
  • A plan or statement of how the hospital enhances quality of care.
  • Total Medicare payment for inpatient services from latest cost report (if applicable, this should include Medicare payment for swing bed services).

Review Process: 

Also, CMS will specify the periods of performance for participating hospitals when the selections are announced. An independent review panel will score all eligible applications. Decisions will be final, and no appeals will be granted.

Submittal Options:

Hospital applications submittal options include email or sent hardcopy for consideration if received on or before May 17, 2017 (PST). Applicants may, but are not required to, submit up to six hard copies.

Making A Difference:

The disparity divide is a rural reality – research, policy and fact sheets have all reinforced, validated and brought to light the disparities within rural health and healthcare barriers to access.  The market dynamics, recruitment and retention, and increased healthcare needs of the patient populations require some additional opportunities to keep rural hospitals open, competitive and collaborative.  Rural represents the pioneer of the past, the survivors of the present and the innovators of the future.  Hopefully, more qualifying applicants especially those identified in the 20 states aforementioned will submit applications and create a win win opportunity for their respective community, clinicians, patients and collaborations, keeping vibrancy within rural.


Janelle Ali-Dinar, PhD

Janelle Ali-Dinar, PhD is a rural healthcare expert and advocate with more than 15 years of healthcare executive experience in many key areas addressing critical access hospitals (CAHs), rural health clinics (RHCs), physicians, and patients. Dr. Ali-Dinar is a sought-after speaker on Capitol Hill. A former hospital CEO and regional rural strategy executive, Janelle is also a past National Rural Health Association rural fellow, Rural Congress member, and Nebraska Rural Health Association president. She is currently the Nebraska DHHS chair of The Office of Minority Health Statewide Council, addressing needs of rural, public, minority, tribal, and refugee health, and she serves on the Regional Health Equity Region VII council as co-chair of Rural Health and Partnerships. Janelle holds a master’s degree and doctorate in communications and is a recent graduate in public health leadership. Janelle is currently the vice president of rural health for MyGenetx and is a member of the RACmonitor editorial board.

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