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

by McDermott Will & Emery

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.

© McDermott Will & Emery | Attorney Advertising

Written by:

McDermott Will & Emery

McDermott Will & Emery on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.