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By Olivia Rose
Pilot Writer 

Medicare reimbursement's role in hospital's finances


February 1, 2024

The Medicare reimbursement program for Critical Access Hospitals was a key topic at the Petersburg Medical Center Hospital Board and Petersburg Borough Assembly annual work session on Jan. 30.

PMC is a Critical Access Hospital (CAH) - the designation was created by Congress in the late 1990s to reduce the financial vulnerability of smaller hospitals in isolated rural communities.

Facilities that are recognized as critical access hospitals must meet certain qualifying criteria, and they get to participate in a beneficial Medicare reimbursement program where much of the cost of providing care to Medicare patients is reimbursed. In the state of Alaska, Medicaid provides reimbursement as well, said PMC CFO Jason McCormick.

At the work session, he explained that through the Critical Access Hospital program, the hospital is reimbursed based on cost - cost not meaning what was charged to patients, but rather the cost to run the organization. "So salaries, benefits, utility bills, insurance ... depreciation, all of those kinds of things that go into our cost."

The amount of an organization's annual costs that Medicare will pay for is based on the percentage of Medicare patients cared for.

According to McCormick, "Between Medicare and Medicaid, they make up 70% of the business we do, so they'll cover 70% of those costs."

Medicare reimburses rural hospitals based on audited costs to operate the business each year; at the end of the year, the cost report is created, and checks are balanced between the entities.

This reimbursement program is a crucial part of Petersburg's ability to afford to build and operate a hospital.

Because annual depreciation is included as an operating cost covered by the Medicare reimbursement program, if Medicare and Medicaid make up 70% of patient care, effectively 70% of the costs for building the new facilities would be covered over time.

He explained that, with the current estimated $95 million overall cost to build the new hospital facilities, the annual depreciation divided over 28 years will be $3,392,000 each year in the cost report for the hospital; then based on that reported cost, at 70%, Medicare and Medicaid would pay PMC $2,375,000 annually for that reimbursement.

What's more, McCormick said if the building is paid off by its completion date, ideally through grants being the current goal, the annual depreciation is still reported in the cost report and Medicare will still be responsible to pay PMC that $2,375,000 every year for building that building.

He echoed this again the following day at the PMC Open House event, presenting to the community attendees: "Let's say that we pay for the building with grants, that's our goal, and the building's completely paid for by the time we finish the building. We still turn around and report these [depreciation] costs in the cost report and Medicare pays us ... because we get paid based on cost, not based on our revenues. This is how we are able to avoid having to put any kind of burden upon the community to help pay for this building."

At the work session, Hofstetter clarified that the reimbursed money paid to PMC "could potentially go towards ... maintenance improvements, or it can go for sustainability of the cost of running the building..."

"How can we afford the building after it's built? ... This could be one way to do it," said Hofstetter.

Earlier discussion about fallback options for funding brought up a USDA direct loan program for rural hospitals. However, Hofstetter expressed that the option was not his favorite.

"One of the reasons why I'm so aggressive and want state and federal [grants] ... not going to taxpayers ... not getting financing is ... that depreciation payment, that $2.3 million ... we could pay that financing loan, that USDA loan, with that amount ... but ... I would rather have that go back into the facility and then that gets reinvested into Petersburg through programs and through the facility itself and for maintaining the facility," said Hofstetter.

Part of the reason PMC struggles to "barely break even from year to year cash flow basis," McCormick explained, is because the existing building is fully depreciated - meaning "there is no [depreciation] cost to report anymore and so we don't get that in our reimbursement, yet we still have a lot of expenditure with regards to repairing different parts of the building."

McCormick has been involved in building several hospitals over the course of his career and he said the concerns about how the building will be paid for prior to building it are not unusual. He notes two things that follow after the building is built: one "the cost-based reimbursement kicks in," and two, people "start bringing their care back and we expand services, and the organization ... soon find themselves in a very healthy financial situation."

If grant funding pays for the building, Medicare and Medicaid will still pay 70% of the cost of the building over the course of 28 years through depreciation cost reimbursement; likewise, if PMC finances part of the building, Medicare and Medicaid will reimburse 70% of the interest expense, McCormick presented.

If operational costs like utilities increase at the new building, 70% of those costs will flow through the cost-based reimbursement for Medicare and Medicaid.

As the aging population gradually costs more to the Medicare program, McCormick said it is "important not to delay" the new hospital project because "Medicare is cutting programs, and what they'll do is, if you're in it, they'll grandfather you in it, but new people won't be able to access it."

"It's important that we move forward and get this in place," he said at the open house. "It's not going to get cheaper the longer we wait. And we could get to a point where these programs that help us pay for it, won't be available."


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