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STATEMENT OF WORK - Centers for Medicare & Medicaid … - how to calculate total margin

STATEMENT OF WORK - Centers for Medicare & Medicaid …-how to calculate total margin

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Kathleen Sebelius
Secretary of Health and Human Services
Section 3142 of the Affordable Care Act directs the Secretary of Health and Human Services to
"...conduct a study on the need for an additional payment for urban Medicare-dependent
hospitals for inpatient hospital services under section 1886 of the Social Security Act..."
Section 3142 calls for an analysis of the Medicare inpatient margins of urban Medicare-
dependent hospitals (UMDHs) as compared to other hospitals receiving one or more additional
Medicare payments and adjustments under various provisions of section 1886 of the Security
Act. The Secretary is directed to submit a report to Congress containing the results of the study
together with recommendations for legislation and administrative action, as appropriate. This
report contains findings from the study required by section 3142, along with recommendations
based on those findings.
Section 3142 defines an UMDH as a subsection (d) hospital that does not receive any additional
Medicare payments or adjustments under section 1886 of the Social Security Act, and for which
more than 60 percent of the hospital's inpatient days or discharges must have been attributable to
inpatients entitled to benefits under Part A, during two of the three most recently audited cost
reporting periods for which the Secretary has a settled cost report. We used Medicare cost
reports, prospective payment historical impact files, and Medicare Provider Analysis and Review
(MedPAR) files to identify UMDHs. In order to compare the Medicare inpatient margins of
UMDHs with other facilities, it was also necessary to identify other categories of hospitals that
receive additional Medicare payments and adjustments. Other hospital types identified for the
analysis included Medicare-dependent small rural hospitals (MDHs); sole community hospitals
(SCHs); rural referral centers (that were not also a MDH or SCH); critical access hospitals;
teaching hospitals (with or without disproportionate share hospital operating payments); and
non-teaching hospitals receiving disproportionate share hospital operating payments. We also
identified non-Medicare dependent hospitals (hospitals that neither received additional Medicare
payments nor met the criteria to be classified as an UMDH) as a separate comparison group.
Our study used Medicare cost report data to analyze Medicare inpatient operating margins,
defined as [(the sum of Medicare operating payments minus the sum of Medicare operating
costs) divided by (the sum of Medicare operating payments)] multiplied by 100. Under this
formula the payments and costs of larger hospitals will be more influential and the resulting
amount is equivalent to a weighted average of the Medicare inpatient operating margins of the
hospitals under analysis. Total (all-payer) facility margins were also calculated as a measure of
overall financial condition. Total facility margins reflect the relationship between total revenues
and costs, including both operating costs and capital costs for inpatient, outpatient, skilled
nursing facility, and other types of services.
Key findings are summarized as follows:
1. Urban Medicare-dependent hospitals were found to have lower Medicare inpatient operating
margins than hospitals that receive additional payments or adjustments beyond the basic
diagnosis-related group (DRG)-based prospective payment system (IPPS) rate. In FY 2008, the
average Medicare inpatient operating margin of UMDHs was -12.0 percent, compared to -1.2
percent for hospitals receiving additional payments or adjustments. Non-Medicare dependent
hospitals had an average Medicare inpatient operating margin of -23.4 percent. These patterns