Healthcare Hunger Games #5: Rural Community Hospital Demonstration, Cost-Based Reimbursement, and Acting on Strategic Options

‘-by Ryan Sprinkle

Like a primetime drama, leaders in Washington, D.C. have attempted to keep healthcare industry observers on the edge of their seats over the last week. Pennsylvania Avenue and Capitol Hill have purportedly engaged in whispered conversations about whether to make another effort to repeal and replace the ACA in the coming weeks. While the political melodrama surrounding healthcare reform unfolds like a series of episodes ending in “To Be Continued,” the bureaucratic state continues to move forward like a Netflix binge session with a steady stream of new policy guidance to industry participants.

For example, last week the CMS issued a fact sheet updating the guidance it is providing to Rural and Community Hospitals as part of the Rural Community Hospital Demonstration program. Last fall, Congress authorized the continuation of this demonstration program for an additional five years with the passage of the 21st Century Cures Act. The demonstration program is an opportunity for a non-Critical Access Rural and Community Hospital to seek higher Medicare reimbursement. Similar to the cost-based reimbursement methodology that Critical Access Hospitals receive, participating hospitals under the demonstration program will be reimbursed for their reasonable costs of providing covered inpatient hospital services for discharges that take place during the first cost report period. In effect, Medicare cost-based reimbursement compensates providers at 101% of the costs of providing hospital Medicare services.

After the first year of the demonstration program, participating hospitals will be reimbursed at either the lesser of their reasonable costs or at a “target amount.” The “target amount” is defined as that cost report year’s reasonable cost plus any increase in the Inpatient Prospective Payment System update factor for that same cost report year.


The CMS has indicated that, in accordance with the ACA, the demonstration program is limited to no more than 30 hospitals and hospitals that have been participating in the program are eligible to apply again. Importantly, though, the 21st Century Cures Act requires CMS to consider Rural and Community Hospital closures in the five-year period prior to the Cures Act’s passage and the population density of the state in selecting demonstration site hospitals.

For rural, non-Critical Access Hospitals in states that did not accept Medicaid expansion, the decision to develop an application for this demonstration project represents a strategic option that should be evaluated by the hospital’s management team and board. Over 180 hospitals have closed since 2010, and participation in this program may represent an attractive opportunity for successful applicants to receive reimbursement similar to Critical Access Hospitals without scaling down operations to 25 or fewer inpatient beds. (Applications are due May 17, 2017.)

Regardless of whether a hospital is eligible to submit an application for this demonstration project, it is important to know and understand the strategic options available to your healthcare organization. Ongoing changes to reimbursement and activity in local markets require that hospital boards and leaders either develop or reassess their strategic plans, identify opportunities for improving performance, and proactively address organizational challenges. Having worked with distressed healthcare organizations, I can assure you that identifying and executing on your organization’s strategic options before you reach peak drama is a more pleasurable viewing experience for all involved.

Past Healthcare Hunger Games Blogs

#1: This Week in Washington and Your State Capital

#2: The Art of the Deal Attempts Herding Cats

#3: Healthcare Hunger Games #3: Consumer-driven Healthcare a la the Administrative State

#4: Healthcare Hunger Games #4: Vegas Vacation, Bubblegum, and the Georgia Rural and Community Hospital Tax Credit Program

Ryan Sprinkle is a consultant at Stroudwater and a licensed (but recovering) attorney. He invites you to send him questions or topics related to federal and state health care policy to be discussed in this ongoing blog series. He can be reached via email at or by phone at (770) 913-9046.