Criteria and Payment for Sole Community Hospitals and for Medicare Dependent Hospitals

A. - Criteria for Sole Community Hospitals (SCHs) 

A sole community hospital (SCH) is a hospital that is paid under the Medicare hospital inpatient prospective payment system (IPPS) and is either located more than 35 miles from other like hospitals or is located in a rural area, and meets the criteria for SCH status as specified at 42 CFR 412.92 (Title 42 of the Code of Federal Regulations, Section 412.92, Special treatment: Sole community hospitals). A hospital may be designated as an SCH effective with cost reporting periods beginning on or after October 1, 1990.

B. - Criteria for Medicare Dependent Hospitals (MDHs) 

A Medicare-dependent, small rural hospital (MDH) is a hospital that is paid under the Medicare hospital inpatient prospective payment system (IPPS) and meets the criteria for MDH status as specified at 42 CFR 412.108 (Title 42 of the Code of Federal Regulations, Section 412.108 Special treatment: Medicare-dependent, small rural hospitals). A hospital may be designated as an MDH effective with cost reporting periods beginning on or after April 1, 1990, and ending on or before March 31, 1993, and for discharges occurring on or after October 1, 1997, and before October 1, 2011.

C. - Payment to SCHs and MDHs 

SCHs and MDHs are paid based on either the Federal rate or their hospital-specific (HSP) rate, whichever will result in the greatest payment. The HSP rate is the hospital’s rate based on their updated costs per discharge for a particular fiscal year (FY) as specified in statute. Like all IPPS hospitals paid, SCHs and MDHs are paid for their discharges based on the diagnosis-related DRG classification and weights regardless of whether payment based on the Federal rate or the hospital’s HSP rate results in the greatest payment.

SCHs will be paid based on their HSP rate for either FY 1982, 1987, 1996 (for cost reporting periods beginning on or after October 1, 2000) or 2006 (for cost reporting periods beginning on or after January 1, 2009) if this results in a greater payment than the Federal rate. For more detail, see 42 CFR 412.92(d) and 42 CFR 412.73, 412.75, 412.77, and 412.78, respectively, for determining the HSP rates for FYs 1982, 1987, 1996 and 2006. 

MDHs will be paid based on their HSP rate for either FY 1982, 1987, or 2002 (for cost reporting periods beginning on or after October 1, 2006) if this results in a greater payment than the Federal rate. For more detail, see 42 CFR 412.108(c) and 42 CFR 412.73, 412.75, and 412.79, respectively, for determining the HSP rates for FYs 1982, 1987, and 2002.

In addition, qualifying SCHs and MDHs that experience a significant decrease in its number of discharges may receive an additional payment as specified at 42 CFR 412.92(e) and 42 CFR 412.108(d), respectively. 

In general, the HSP rates for both SCHs and MDHs are updated annually. The HSP rates are updated for inflation by the applicable market basket increase for each FY after the base period year, and are also adjusted by a budget neutrality factor to account for the annual DRG reclassification and recalibration for each year from FY 1993 forward, regardless of the year of the base period. (For reference purposes, the budget neutrality adjustment factors are listed below at the end of this section.) For the inflation update, beginning FY 2005, if the hospital did not submit quality data, the market basket update is reduced by a percentage specified in statute for the applicable FY consistent with section 1886(b)(3)(B)(viii) of the Act.

Applicable Fiscal Year	Budget Neutrality Adjustment Factors
1993	0.999851
1994	0.999003
1995	0.998050
1996	0.999306
1997	0.998703
1998	0.997731
1999	0.998978
2000	0.997808
2001	0.997174
2002	0.995821
2003	0.993111
2004	1.002608
2005	0.999876
2006	0.998993
2007	0.997395
2008	0.995743
2009	0.998795
2010	0.997941