It’s no secret that Medicare providers will have to transition from fee-for-service to fee-for-value in the next few years in order to sustain their profits. The financial downside to remaining in fee-for-service will soon exceed the risks of transitioning to alternative payment systems. For critical access hospitals (CAHs) – small, usually rural hospitals with an underserved and vulnerable patient base – this transition can be complicated due to how they are reimbursed by Medicare. Caravan Health recently explored how to manage this transition in an interactive webinar.  

Getting into the details of cost-based reimbursement 

Caravan CEO and Founder Lynn Barr and Eric Shell from Stroudwater Associates shared how CAHs can get ready for value-based payments. CAHs are paid by Medicare based on their costs, rather than a set amount per diagnosis like other hospitals. This cost-based payment, while intended to create stability for these hospitals, can actually create some uncertainty, especially when used in value-based payments.  

After reimbursing throughout the year based on estimated costs, the government calculates a year end settlement to reconcile a CAH’s estimated costs with actual costs. These year-end settlements paid either to or from the CAH can be quite large, topping $1 million per year, and can distort value-based payment savings or losses. Settlements paid or due are not included in value-based payment calculations, which make rural spending appear higher or lower that it really is, and artificially increase or decrease shared savings. 

Year-end settlements usually result from changes in service volume, expenses, or the hospital’s chargemaster rates or list prices. For example, if a busy physician leaves the rural community, the volume of service will decrease, and due to fixed costs and fewer services, costs per service will increase. In a big flu season like 2018, the volume of services increased and costs per service decreased. Unless the CAH adjusts its cost reporting in a timely manner, the CAH would be paid either too little or too much per service throughout the year and the true costs will be either overstated or understated.   

Problems arising from inaccurate cost reporting 

These settlements can cause several problems for CAHs. If cost reporting – and therefore internal accounting – is inaccurate, CAH leadership can make important decisions based on faulty information. For example, hospital leaders may pursue an investing or staffing strategy based on a too-high or too-low estimate of the organization’s financial position.  

Apart from the effect on decision-making, it’s never easy for a CAH to make a large payment at the end of the year since the hospital may have already allocated the money. In addition, if a CAH is underpaid throughout the year by FFS Medicare, it may also be underpaid by Medicare Advantage and Medicaid.  

Key strategies for CAHs to manage uncertainty 

The CAH, its leadership, and any ACO partners need to have the most accurate possible cost-reporting during the year. Eric and Lynn had some specific recommendations for CAHs. First, if there are significant changes in service volume or chargemaster rates, the CAH should file an interim cost report to correct their payment rates with their Medicare Administrative Contractor (MAC). This will keep reimbursement accurate and avoid large settlements that undermine value-based payments. Second, CAH CFOs should project settlements on the balance sheet so the organization has a view into its true financial performance. 

Providers all trying to “cross the shaky bridge” 

During the webinar, Eric shared the analogy of “crossing the shaky bridge” to illustrate the challenge of transitioning from fee-for-service to a new world of population-based payment systems. Moving forward into alternative payment models is the key to encouraging health care rather than sick care. There is a lot to figure out along the way.  


All providers need to find ways to provide the quality and cost-efficiency that Medicare will pay for. A Caravan Health collaborative ACO can be a great choice for these small rural providers. In a collaborative ACO, independent providers that are too small to take on risk in value-based payment alone can join together to reach scale for predictable ACO results. Other advantages to taking risk in an ACO include being exempt from MIPS and getting a 5 percent part B bonus. Contact us at to hear more about how we can help your organization succeed in value-based care.  

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