CMS Proposal to Adopt New OMB Delineations May Affect Medicare Reimbursement, GME Payments, and Regulatory Compliance

by Bradley Arant Boult Cummings LLP

On April 30, 2014, the Centers for Medicare and Medicaid Services (CMS) issued proposed rules for the Fiscal Year 2015 Medicare Hospital Inpatient Prospective Payment System, in which CMS announced several updates, including its adoption of the new core-based statistical areas (CBSAs), developed by the United States Office of Management and Budget (OMB) in February 2013 using the 2010 Decennial Census data. Under the new OMB delineations (that include revisions to metropolitan statistical areas (MSAs), metropolitan divisions, micropolitan statistical areas, CBSAs and New England City and Town Areas), there would be new CBSAs, urban counties that become rural, rural counties that become urban, and existing CBSAs that are split. CMS notes in the preamble to the proposed rule that the updated OMB delineations must be used to “maintain a more accurate and up-to-date payment system that reflects the reality of population shifts and labor market conditions.” If finalized, the proposed rules would be effective October 1, 2014, and could have a major impact on hospital Medicare reimbursement, graduate and indirect medical education payments, and regulatory compliance.

Effects on Medicare Payment

One of the adjustments in Medicare’s inpatient hospital prospective payment formula takes into account the variances in wage levels paid by hospitals in different geographic areas as compared to the national average hospital age level. CMS calculates a wage index for each Medicare hospital based on the hospital’s specific labor market. The specific labor markets are based upon OMB’s delineation of CBSAs. Due to CMS’s implementation of OMB’s revised CBSA delineations, 37 urban counties will become rural counties, 105 rural counties will become urban counties, and several urban counties will move from one CBSA to another. Recognizing that the reclassifications will have positive and negative effects, CMS proposes a wage index transition period for hospitals experiencing negative effects from the delineations’ implementation.

Urban Counties Becoming Rural Counties

CMS noted that 37 counties and 12 hospitals that were previously designated part of an urban CBSA would be reclassified and considered to be in a rural area under the new OMB delineations, including:

  • Greene County in Alabama,
  • George and Stone Counties in Mississippi,
  • Anson and Greene Counties in North Carolina, and
  • Stewart County in Tennessee.

(A complete list of the counties that would lose urban status can be found at 79 Fed. Reg. 28,056.)

Rural areas typically have lower area wage index values than urban areas, and, therefore, hospitals losing urban status may experience a decrease in payment. To alleviate the negative impact of the new OMB delineations, hospitals currently located in an urban county that would become rural, and would have no form of voluntary wage index reclassification or redesignation, would be assigned the urban wage index value of the CBSA in which they are currently located for a period of three fiscal years. For hospitals that are currently located in rural areas, but are deemed to be urban due to geographic reclassification and would no longer be eligible for urban status under the new OMB delineations, a similar three-year transition period would apply.

Rural Counties Becoming Urban Counties

Under the new OMB delineations, CMS recognizes 105 counties and 81 hospitals currently located in rural areas that would be located in urban areas, including:


  • Baldwin County and Pickens County, which would become part of the Daphne-Fairhope-Foley CBSA and Tuscaloosa CBSA, respectively.


  • Benton County and Yazoo County would become part of the Memphis, Tennessee CBSA and the Jackson, Mississippi CBSA, respectively.

North Carolina

  • Iredell, Lincoln, and Rowan Counties would become part of the Charlotte-Concord-Gastonia, NC-SC CBSA, and Craven, Jones and Pamlico Counties would become part of the New Bern CBSA.


  • Campbell, Morgan and Roane Counties would become part of the Knoxville CBSA, Crockett County would become part of the Jackson, Tennessee CBSA, and Maury County would become part of the Nashville-Davidson-Murfreesboro-Franklin CBSA.

(A complete list of the counties that would gain urban status can be found at 79 Fed. Reg. 28,057-58.)

Because hospitals located in urban areas typically receive a higher wage index value than hospitals located in rural areas, some hospitals may experience higher reimbursement rates as a result of the reclassification. However, for all hospitals that would experience a decrease in their actual payment wage index exclusively due to the proposed implementation of the new OMB delineations, CMS proposes a one-year blended wage index comprised of 50 percent of their wage index based on the new OMB delineations and 50 percent of their wage index based on their current labor market area. (See Fiscal Year 2005 IPPS Final Rule (69 Fed. Reg. 49,221; 69 Fed. Reg. 60,252) and Fiscal Year 2010 IPPS/LTCH PPS Final Rule (74 Fed. Reg. 43,940).)

Hospitals Voluntarily Reclassified

For hospitals that have applied for voluntary reclassification into a CBSA that would be reconfigured under the new OMB delineations, CMS proposes to assign such reclassified hospitals to a CBSA that (1) would contain the most proximate county that is located outside of the hospital’s proposed labor market area under the new OMB delineations and (2) is part of the original CBSA to which the hospital is reclassified. For reclassified hospitals that would be reassigned to the CBSA in which they are geographically located, CMS will terminate such hospital’s reclassification unless the hospital provides notice to CMS by June 30, 2014. Similarly, a reclassified hospital may request reassignment to a CBSA other than the CBSA to which it is reassigned under the new OMB delineations. A hospital must request the reassignment to CMS no later than June 30, 2014.

Critical Access Hospitals and Other Hospitals with Rural Reclassifications

Hospitals are eligible for designation as Critical Access Hospitals (CAH) only if they are located in a county or equivalent unit of local government in a rural area or are being treated as being located in a rural area. Previously issued final rules limited the application of the regulation to specific time periods. Thus, without a regulatory amendment each time OMB makes new delineations, a CAH re-located to an urban area as a result of such delineations would not have two years to reclassify as rural.

To mitigate any negative effects of the loss of CAH status, CMS proposes a two-year transition period for facilities that lose CAH status as a result of the new OMB delineations. In the FY 2005 and FY 2010 IPPS Final Rules, CMS applied similar grace periods as a result of new OMB delineations. Previously issued final rules limited the application of the regulation to specific time periods; thus, without a new amendment to the regulations each time OMB makes new delineations, a CAH that becomes located in an urban area as a result of such delineations would not have two years to reclassify as rural.

Accordingly, in the proposed rules, CMS recommends regulatory revisions providing for a two-year transition period applicable any time a new OMB delineation causes the rural county in which a CAH is located to be redesignated in an urban area. During the two-year grace period, an affected CAH must be reclassified as a rural facility in order to continue Medicare participation as a CAH. CMS did not propose a similar transition period for other hospitals with rural classifications, including Rural Referral Centers (RRCs) and Sole Community Hospitals (SCHs), however. Instead, CMS noted that, for any change in the rural classification of counties in which RRCs and SCHs are located, “we believe [such hospitals] will have adequate time to apply for a new reclassification.”

Effects on Graduate and Indirect Medical Education Payments

The proposed rules set forth a number of changes to direct graduate medical education (GME) and indirect medical education (IME) payments and requirements. Proposed changes include alterations to existing requirements for rural hospitals with residency training programs and urban hospitals with rural track programs, clarification regarding counting resident time served in non-provider settings, and alterations to effective dates of Full Time-Equivalent (FTE) caps, among other things. In particular, the proposed rule seeks to address issues in which hospitals have been redesignated from rural to urban as a result of the new OMB labor market area delineations. Under the proposed rules, hospitals that are newly designated as urban hospitals would be able to continue building a program for the remainder of the cap-building period and receive a permanent FTE resident cap adjustment for their new programs and retain any increases to resident caps previously received. In addition, the proposed rules include an exception or “grace period” for urban hospitals training residents in a rural track program where the rural hospital or non-hospital teaching site with which the urban hospital is partnered is redesignated from rural to urban.

Effects on Regulatory Compliance

While CMS does not address compliance concerns associated with the proposed rules, it is important to note that the new OMB delineations could result in regulatory exposure for providers that rely on rural geographic location exceptions to the federal physician self-referral law (the “Stark Law”). Under the Stark Law, a physician may not make a referral to an entity for the provision of a designated health service for which Medicare payment may be made if the physician or an immediate family member has a financial relationship with the entity, unless either the referral or the financial relationship is excepted from the statute’s coverage. The Stark Law provides certain exceptions for rural providers, including physician ownership of non-hospital rural providers and certain intra-family referrals in rural areas. Because the Stark Law defines “rural” to incorporate OMB delineations of rural and urban areas, rural providers that will become urban under the new OMB delineations may not be able to claim an exception under the Stark Law to protect certain ownership interests and arrangements. More importantly, ownership interests and arrangements that are currently covered by an exception to the Stark Law based upon rural geographic location may no longer be covered.

Key Takeaways

If finalized, the proposed rules for the Fiscal Year 2015 Medicare Hospital Inpatient Prospective Payment System will have a significant impact on Medicare reimbursement and regulatory compliance. The following list highlights the key takeaways of the proposed rules:

  • Hospitals with current reclassifications should verify area wage indexes associated with the proposed rule and confirm that the areas to which they have been reclassified for Fiscal Year 2015 would continue to provide a higher wage index than their geographic area wage index. The indexes are contained in Tables 4A-2 and 4B-2 and are available in CMS’s Fiscal Year 2015 Proposed Rule Tables. Based upon the wage index amounts, the hospitals should notify CMS by email to if they wish to continue their current reclassification or if they wish to request reassignment to another CBSA no later than June 30, 2014.
  • Hospitals with current rural reclassifications, including CAHs, RRCs, and SCHs, should review their original reclassification application and determine whether the reclassification status would still apply under the new OMB delineations. CAHs that lose rural reclassification status as a result of the new OMB delineations have a two-year grace period during which they must seek a new rural reclassification. However, RRCs, SCHs, and other hospitals with active rural reclassifications that no longer qualify for such reclassifications do not have a similar grace period and must submit a complete application for reclassification before October 1, 2014, to maintain rural status.
  • Providers that rely on the “rural” exceptions to the Stark Law to protect certain ownership interests and arrangements should review the new OMB delineations to determine their effect on the availability of the “rural” exceptions. Review the map of the new OMB delineations.
  • Both rural and urban hospitals with GME and IME programs should review the proposed rule sections discussing the OMB delineations to determine whether any rural-to-urban or urban-to-rural designations will impact their programs and to consider whether the grace periods proposed will offer sufficient flexibility for the continuation of existing GME and IME programs. Providers may also be pleased with CMS’s additional transparency as it affects the regulations governing GME and IME payments.


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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