CMS Proposal to Implement New Metropolitan Areas Would Affect Medicare Payments for Most Hospitals


The Centers for Medicare & Medicaid Services (CMS) recently issued the federal Fiscal Year 2015 Medicare Inpatient Prospective Payment System Proposed Rule, which contains a proposal to implement new metropolitan areas announced by the U.S. Office of Management and Budget in February 2013.  If CMS’s proposal is adopted, the changes would profoundly affect many aspects of Medicare program payments.  Therefore, all hospitals are advised to carefully examine the proposal and prepare for its effects.

On April 30, 2014, the Centers for Medicare & Medicaid Services (CMS) issued the federal Fiscal Year (FY) 2015 Medicare Inpatient Prospective Payment System Proposed Rule.  This release contains a proposal by CMS to implement new metropolitan areas announced by the U.S. Office of Management and Budget (OMB) in February 2013, based on 2010 census data.  If this proposal is adopted, the changes would profoundly affect many aspects of Medicare hospital payments and certain physician referral arrangements.  All hospitals are advised to carefully examine CMS’s proposal and prepare for its effects.

New Metropolitan Areas

OMB identifies metropolitan areas around the United States using a set of criteria based largely on population density and commuting patterns.  Every 10 years, in anticipation of the next decennial census, OMB reviews and occasionally revises the criteria it uses to define metropolitan areas, then issues new designations using those criteria and updated census data.

On June 28, 2010, OMB announced the new criteria it would use to identify metropolitan areas using data from the 2010 census (75 Fed. Reg. 37,246 et seq.)  On February 28, 2013, it announced the revised metropolitan area designations developed using the new criteria and census 2010 data (OMB Bulletin 13-0l).  Click here to view the bulletin, and click here for a U.S. map illustrating the new areas.

Medicare Implications

The metropolitan area designations are used by a wide variety of federal programs.  CMS uses the delineations to classify counties and the providers in those counties into urban and rural areas, because Medicare payment and many Medicare programs for a wide array of providers (not just hospitals) are based on location within an urban or rural area.

CMS typically adopts the revised metropolitan area classifications every 10 years as OMB publishes the updates.  As expected, as part of the federal FY 2015 Medicare Inpatient Prospective Payment System Proposed Rule, CMS announced plans to adopt the new Metropolitan Statistical Area (MSA) definitions.  If the Proposed Rule is finalized, the new MSAs would be effective for Medicare payment purposes beginning October 1, 2014. 

Under the new delineations, 37 urban counties become rural, 105 rural counties become urban, and 46 counties move from one MSA to another.  If CMS adopts the new designations, many aspects of provider payments and regulation could be affected.

Wage Index

Most significantly, if the proposal to adopt the new MSAs is finalized, many hospitals will be reassigned to a new wage index area.  Under the Medicare inpatient hospital prospective payment systems, payments are geographically adjusted by a wage index, which is intended to adjust payments to reflect labor cost variations between localities.  CMS uses the MSA designations to identify labor markets and calculate and assign wage index values for providers.  CMS calculates a distinct wage index for each MSA and one wage index per state for the areas that lie outside of MSAs.  Therefore, a hospital that is reclassified from urban to rural, rural to urban, or from one urban MSA to another can see a significant increase or decrease in Medicare payments. 

In order to reduce any negative effects of changes in hospital wage indices due to the proposed adoption of the new MSAs, CMS proposes to provide for some limited transition periods.  Hospitals that have not voluntarily reclassified to another MSA and that would move from an urban MSA to a rural area would continue to be paid as if in an urban MSA for a period of three years.  Similarly, hospitals that were deemed urban but would lose such status under the new MSAs would be provided a three-year transition period.  All other hospitals that would experience a decrease in wage index as a result of the new MSAs would be given a one-year transition period during which they would receive a 50/50 blended payment based on the new and old MSA wage indices. 

A hospital that voluntarily reclassified into an MSA that would be reconfigured under the new MSAs would be assigned to an MSA that would contain the most proximate county that is located outside of the hospital’s proposed FY 2015 geographic labor market area and is part of the original FY 2014 MSA to which the hospital is currently reclassified.  Hospitals that are reclassified are urged to review the tables posted by CMS to verify their area assignment and associated wage index, and to confirm that the areas to which they are proposed to be reclassified for FY 2015 would continue to provide a higher wage index than their otherwise applicable geographic area wage index.  Reclassified hospitals that wish to be reassigned to an alternate MSA (other than the MSA to which their reclassification is proposed to be reassigned) must request such reassignment within 45 days of the publication of the Proposed Rule.  In addition, reclassified hospitals that would be reassigned to an MSA in which they are geographically located will have their reclassification terminated unless notice is provided to CMS at within 45 days of the publication of the Proposed Rule.

Rural Hospital Designation Eligibility

The new area designations also affect hospitals with special payment status that may be dependent on being located in a rural area, such as Sole Community Hospital (SCH), Rural Referral Center (RRC), Medicare-dependent hospital (MDH) and Critical Access Hospital (CAH) status.  A CAH that finds itself in an urban area as a result of these changes will retain its rural status and CAH designation for two years, during which time it can seek an urban-to-rural redesignation under 42 CFR § 412.103, if it can meet the qualification criteria.

CMS does not propose a transition for Prospective Payment System hospitals with designations dependent on being in a rural area, such as SCHs and MDHs.  As a result, if the Proposed Rule is implemented, hospitals with SCH or MDH status, where that status is dependent upon being located in a rural area, could lose their status effective October 1, 2014.  Hospitals in this situation could seek an urban-to-rural redesignation under 42 CFR § 412.103, but that redesignation is not available to all hospitals.  RRC status is less likely to be affected by these changes because of a statutory grandfather provision enacted in 1997.

Physician Self-Referral (Stark) Law

Although the matter is not discussed in the Proposed Rule, CMS adoption of the new MSAs for hospital payment purposes also could affect the availability of certain exceptions under the federal physician self-referral law (known as the Stark Law), because the definition of “rural” under the Stark Law is tied to the designation of MSAs for inpatient hospital payment purposes.  Special exceptions to the bar on physician self-referral under the Stark Law are available to physicians with ownership interests in non-hospital rural providers and certain intra-family rural referrals.  In addition, the requirements of the recruitment exception are less stringent for recruitments to rural areas.  Physicians and entities that are currently involved in arrangements that involve a Stark Law exception dependent on rural location should review the list of redesignated areas in the Proposed Rule to evaluate the potential effects of the changes to such arrangements.

The Proposed Rule includes numerous changes beyond those described here.  Hospitals are encouraged to review the Proposed Rule thoroughly to evaluate all changes that could be of relevance.  CMS is accepting comments on the Proposed Rule through June 30, 2014.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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