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The hospital board gave unanimous approval for applying for the designation at their monthly board meeting last week, after hearing a presentation about the issue.

PAHCS administration will now have to apply for the designation with the state health department, with the goal of getting the designation in a couple months.

Critical-access hospitals are a federal designation that affects federal reimbursement for Medicare patients, which account for approximately 60 percent of the hospital caseload for PAHCS. Instead of paying on a fixed rate based on the diagnosis, the designation would allow PAHCS to bill for actual costs for Medicare patients in the hospital. (The designation would not affect reimbursement for either clinic patients or nursing home residents.)

CEO Steve Moburg said that conservative estimates by the administration indicate that the critical-access designation would yield between $750,000 and $1,000,000 in additional revenue per year for PAHCS.

Here's how it works. In the early 1980s, Medicare reimbursement shifted from cost-based to case-based. This means that reimbursement was done based on the diagnosis. Every illness had a corresponding monetary value.

What it did not take into account is that some cases were more severe than others and cost more to treat. This was especially true for rural health care providers with smaller volumes and greater overhead costs per patient.

This case-based reimbursement system led to larger health care organizations, in an effort for greater efficiency.

The system was a triple whammy for rural facilities, said Moburg, because rural facilities have higher usership by Medicare (elderly) patients, have smaller volumes and higher per-patient costs, and actually got lower reimbursement under the case-based system than urban facilities.

Then, about seven years ago, the federal government recognized that rural providers are crucial and need higher reimbursement rates. "The term 'critical access' recognizes the critical importance of rural health care facilities," said Moburg.

Currently, 47 hospitals (out of 88 in the state) have the critical-access designation.

PAHCS had not applied before because the original restrictions were too severe while the financial benefits too small.

Because PAHCS offers more services than many rural hospitals, restrictions like a maximum hospital stay of 96 hours was unpalatable. But now that requirement has been reduced to a maximum average hospital stay of 96 hours. Currently, the average hospital stay at PAHCS is around 60 hours, well under that threshold.

Another requirement is that critical-access hospitals can only have 25 beds: 15 for acute patients and 10 swing beds. This also is not a problem for PAHCS, which has an average daily hospital census of five patients. (The bed limit for critical-access hospitals could be expanded in the future, and PAHCS could opt out of the program.)

"We will be able to see the same patients," said Moburg. "The community and patients won't notice a difference. Neither will the staff. The only difference will be the payment we receive."

PAHCS studied the switch to a critical-access hospital based on its 2001 cost report - based on its fiscal year from Oct. 1, 2000, to Sept. 30, 2001 - but at that time the benefit was not as dramatic, said Moburg. But with the recent construction project, including renovations at the hospital, in the 2002 cost report - based on the fiscal year from Oct. 1, 2001, to Sept. 30, 2002 - the change in reimbursement was very dramatic, since the project costs were recognized in the cost-based reimbursement for a critical-access hospital.

This leads to the estimate of at least $750,000 in additional reimbursement per year by switching to critical access.

PAHCS's three main payers - Medicare, Medicaid, and commercial insurance -Êall pay less for services than what PAHCS bills. (The fourth payer - private payers - do pay full rates but are the most likely to be unable to pay their bills, leading to uncollectible accounts.)

As a result, PAHCS writes off nearly a third of what it bills. In 10 months of the current fiscal year, for example, PAHCS has billed patients $27.25 million for services rendered, but PAHCS has written off $8.67 million as uncollectible.

What the better reimbursement for Medicare patients under the critical-access program will do is give PAHCS more of these dollars that would otherwise be written off.

With its recent expansion and rising costs having put PAHCS in a tight cash-flow position, the additional revenue should be very handy.

In addition to its application for critical-access designation to the state health department, PAHCS will have to show that it has appropriate procedures and policies and pass a state survey, all things that it does anyway to have a state license, said Moburg.

PAHCS hopes to have the new reimbursement in place as close to the start of its 2004 fiscal year as possible, said Moburg. The 2004 fiscal year starts on Oct. 1, 2003.