Methodology

Sources of Data

The locations of hospitals and the number of licensed inpatient beds were obtained from the Provider of Services (POS) File maintained by the Center for Medicare and Medicaid Services (CMS). Only hospitals classified as short-term general acute care hospitals are included, and hospitals that provide only specialty surgical care, psychiatric care, rehabilitation services, or long-term care are excluded.

A hospital is classified as “closed” if it appears on the list of rural closures maintained by the Cecil G. Sheps Center for Health Services Research at the University of North Carolina. A hospital is considered to be “closed” if it stopped providing inpatient services, even if the facility continued to provide emergency or outpatient services.

A hospitals is classified as “rural” if it is located in an area classified as rural by the Health Resources and Services Administration (HRSA), i.e., (1) a nonmetropolitan county or (2) a subcounty area of a metropolitan county that has a Rural Urban Community Area (RUCA) code of 4 or greater. The rural status of most hospitals was derived from a list maintained by the Cecil G. Sheps Center for Health Services Research. For consistency with the counts used by the Sheps Center, Critical Access Hospitals that closed were considered to be “rural” even if they were located in an area that did not meet the HRSA criteria.

Data on costs and revenues for hospitals were obtained from the Hospital Cost Reports that hospitals are required to submit each year to the Centers for Medicare and Medicaid Services (CMS). These data are maintained in the CMS Healthcare Cost Report Information System (HCRIS). A hospital cost report was not used if the report did not cover a full fiscal year or if no operating expenses were reported.

Calculation of Measures

Margins (Profit or Loss)

A hospital’s Total Margin is calculated by subtracting the hospital’s total expenses from its total revenues.

The hospital’s Patient Services Margin is calculated by subtracting the costs it incurs delivering patient services from the revenues it receives from patient services. The cost of patient services is calculated by combining the total reimbursable expenses and the professional services costs and other patient services costs reported on the Medicare Cost Report.

Percentage Margins

The percentage margin is calculated by dividing the margin (in dollars) by the costs or expenses used in calculating the margin, i.e., Percentage Margin = [Revenues – Costs]/Costs). This is different than the standard approach of using revenues in the denominator. When revenues and costs differ by small amounts, the two approaches lead to similar results. However, in the kinds of extreme situations which often face small hospitals, using costs in the denominator leads to a more easily understandable result. For example, if a hospital is only receiving revenues sufficient to cover one-half of its costs, the margin as a percent of expenses calculated here is -50%, whereas the margin calculated as a percent of revenues would be -100%. If the hospital receives no revenues at all to cover a particular set of costs (e.g., for the costs associated with uninsured charity care patients), the margin as a percentage of costs is -100%, whereas a margin as a percentage of revenues cannot be calculated under the standard approach because the denominator would be zero. The standard approach is based on the way profits are calculated for for-profit businesses, which assume that prices are set by the market and businesses must keep their costs below those prices. In contrast, for rural hospitals and other essential community services, the cost depends on the services that need to be delivered, and payments need to be set at amounts sufficient to cover those costs.

Medicare Costs

The cost of services to patients who have Original Medicare (i.e., Medicare beneficiaries who have not enrolled in a Medicare Advantage Plan) is based on the amount reported in the hospital’s Cost Report, but with three adjustments to more accurately reflect the actual costs associated with these services:

Professional services delivered by physicians and other clinicians to Medicare beneficiaries are not considered by Medicare to be a “hospital cost.” Medicare pays for these services using the Medicare Physician Fee Schedule, and the amounts of payment are not included on the cost report. There is no information on the cost report that can be used to determine the proportion of these services that are received by Medicare beneficiaries. Consequently, neither the payments nor the costs associated with these amounts are included in the costs, payments, or margins that are calculated for Medicare. These costs and payments are included in the hospital’s patient services cost and patient services revenue, however, so they end up being part of the Private/Other category.

Medicaid Costs and Payments

The Medicare Cost Report calculates the cost of services to Medicaid patients by applying the overall cost-to-charge ratio for the entire hospital to the total Medicaid charges reported by the hospital. However, this can overestimate or underestimate the cost if Medicaid patients receive a different mix of services than other patients do. Since this is of particular concern for hospitals with a large number of Medicaid patients receiving long-term care in hospital swing beds, the costs of services to Medicaid patients at these hospitals are adjusted in an effort to better estimate the actual costs.

Many hospitals receive two types of Medicaid payments: (1) payments for individual services to patients enrolled in Medicaid, and (2) Disproportionate Share Hospital (DSH) and/or other supplemental payments. The amounts of these payments differ significantly across states and among hospitals within the state. Unfortunately, these payments are not reported in consistent ways on Medicare Cost Reports; as a result, in some cases they are included in the Medicaid margin and other cases they are included in Non-Patient Service Revenues.

Private Insurance Costs and Payments

Medicare Cost Reports do not include the specific amounts hospitals charge or are paid for services to patients with private health insurance. Consequently, the costs and payments for these patients have to be estimated by subtracting the costs and payments for Medicare, Medicaid, CHIP, indigent care, and uninsured charity care patients from the total patient service costs and revenues.