In an effort to improve their Medicare reimbursement, a growing number of US hospitals are taking advantage of a 2016 CMS decision that allows them to reclassify from an urban to a rural geographic designation, then one year later classify their wage index back to an urban designation while retaining the geographic rural designation. Although the primary driver of reclassification is typically the positive impact on clinical payments, there can also be significant implications for the hospital’s graduate medical education (GME) reimbursement.
Teaching hospitals that trained residents prior to 1996, and those that have since begun new training programs, have an established resident FTE cap that limits the amount of Medicare reimbursement they are eligible to claim for GME activity. While the resident cap for urban teaching hospitals was set at 100% of the 1996 resident FTE level, rural hospitals received a cap of 130% of the 1996 FTE level in an effort to induce more physicians to train in underserved areas. Urban teaching hospitals that reclassify to rural geographic status are eligible to receive a 30% increase in their indirect medical education (IME) cap to match this regulatory standard. The direct GME cap, however, will remain unchanged.
For hospitals currently training above their cap, this means they would potentially be able to claim IME reimbursement for some of the currently un-reimbursable resident FTEs in established programs—up to 130% of the original IME cap.
Unlike urban hospitals, rurally designated hospitals are also eligible to garner additional cap space for new residency programs established after the initial cap-setting period. Hospitals that reclassify from urban to rural become eligible for this rural hospital exception to the resident FTE cap-setting rules for IME reimbursement only. Urban hospitals with a historical resident FTE cap that undergo a rural reclassification are eligible to claim IME reimbursement for new training programs established after the transition; these programs would be ineligible for new reimbursement absent the reclassification.
Roughly 69% of all teaching hospitals currently train above their resident FTE cap. With continued medical school expansion and physician workforce demands increasing the need for GME training positions, rural reclassification may provide urban teaching hospitals an opportunity to establish new reimbursable residency programs and garner additional Medicare GME payments.
The long-term gains in GME reimbursement should be weighed against a potential decrease in clinical payments for the first year following the reclassification, in cases where the rural wage index is lower than the previous urban wage index. Hospitals must also maintain the rural geographic designation for at least 10 years or they will forfeit the additional resident FTE cap space garnered through the reclassification.
Urban teaching hospitals that may qualify for a transition to a rural geographic designation under 42 CFR 412.103 should conduct detailed financial modeling and strategic planning to determine whether such a transition is financially sustainable and aligned with the long-term academic goals and mission of the organization.