In an interim final rule published in the Federal Register on April 21 ("Rule"), the Centers for Medicare & Medicaid Services ("CMS") amended its regulations to allow PPS hospitals located in urban areas to obtain a "412.103" urban to rural reclassification and also be reclassified for wage index purposes by the Medicare Geographic Classification Review Board ("MGCRB"). Since Congress added the urban to rural reclassification option in Section 401 of the Balanced Budget Refinement Act of 1999, CMS policy has prohibited hospitals from having both. However, as result of losing challenges to that policy in two federal appellate court decisions, CMS conceded the issue nationally by issuing the Rule.This change significantly expands the options for some urban hospitals to improve their Medicare reimbursement by obtaining a better wage index through the more flexible rural wage index reclassification rules. Besides the wage index impact, such hospitals may also benefit from sole community hospital ("SCH") status, rural referral center ("RRC") status, Medicare dependent small rural hospital ("MDH") status or some combination of these and wage index reclassification. SCH or RRC status will also make it easier to qualify for the 340B drug discount program. 

Urban hospitals should evaluate whether this change presents an opportunity to implement a strategy using one or more of these options.  Any such strategy must be carefully evaluated and implemented to take into account the various timing requirements, the impact on inpatient and outpatient payment and the process for obtaining 340B eligibility.  In some instances the strategy may necessitate short term pain for a long term gain.  Taking the right steps at the right time can optimize these results.


On July 23, 2015, the U.S. Court of Appeals for the Third Circuit issued a decision in Geisinger Community Medical Center v. Secretary, 794 F.3d 383 (3rd Cir. 2015) in which the court held that a hospital with rural status via 42 C.F.R. § 412.103 could apply for MGCRB reclassification. In that case, Geisinger Community Medical Center ("Geisinger"), a hospital located in the Scranton-Wilkes-Barre-Hazleton, PA MSA (an urban area), applied for and received rural reclassification under 42 C.F.R. § 412.103. Geisinger then applied to the MGCRB for wage index reclassification from rural Pennsylvania (based on its § 412.103 rural status) to the Allentown-Bethlehem-Easton, PA-NJ MSA (another urban area). However, Geisinger was precluded from receiving MGCRB reclassification while it had § 412.103 rural status due to the regulation at 42 C.F.R. § 412.230(a)(5)(iii).

The Medicare Inpatient Prospective Payment System is governed by the Social Security Act Section 1886(d) (42 U.S.C. § 1395ww(d)), which is sometimes referred to as "subsection (d)." The IPPS and other Medicare payment programs classify hospitals into rural and urban status for a variety of purposes. Subsection (d) also contains the statutory requirements for the MGCRB reclassification process, which allows hospitals to reclassify from one area to another for wage index purposes. See, 42 U.S.C. § 1395ww(d)(10). In 1999 (10 years after the MGCRB was established), Congress enacted Section 401 of Public Law 106-113 (codified at 42 U.S.C. § 1395ww(d)(8)) ("Section 401"), which established a separate procedure whereby urban hospitals can be reclassified from urban to rural status if they meet certain criteria. The Secretary of HHS promulgated regulations under Section 401 at 42 C.F.R. § 412.103. 

When it implemented Section 401 at 42 C.F.R. § 412.103, HHS also amended 42 C.F.R. § 412.230(a)(5)(iii) to prohibit hospitals with § 412.103 rural status from also being reclassified for wage index purposes by the MGCRB ("Reclassification Rule"). The agency was concerned that hospitals would use both reclassification processes to "game" the system. See, 65 Fed.Reg. 47,054, 47,087 (Aug. 1, 2000). Geisinger challenged the Reclassification Rule as unlawful based on the statutory language of Section 401.

In reviewing the statute and regulations, the Third Circuit held that the Reclassification Rule was unlawful because it violated express language in the Social Security Act and Section 401. The court pointed to language in Section 401 requiring CMS to treat hospitals that are reclassified as rural under Section 401 (42 C.F.R. § 412.103) for all purposes of subsection (d), which includes the MGCRB process at Section 1886(d)(10). 

More recently, the U.S. Court of Appeals for the Second Circuit issued its decision in Lawrence + Memorial Hospital v. Secretary 812 F.3d 257 (2nd Cir. 2016) and came to the same conclusion as the Third Circuit in Geisinger. So, there were two separate appeals courts that had struck down the Reclassification Rule, but CMS and MGCRB were still applying the Reclassification Rule to hospitals in other jurisdictions.

In the Rule, CMS decided to acquiesce to these two decisions to have a uniform national policy and is revising its regulations to remove the Reclassification Rule. This means that hospitals can now have a 412.103 reclassification and obtain wage index reclassification through the MGCRB process. CMS will apply the less stringent wage index and proximity criteria applicable to rural hospitals (106 percent and 82 percent wage tests, 35-mile proximity) to hospitals with § 412.103 rural status applying for MGCRB reclassification.

In addition, a hospital with a MGCRB wage index reclassification can be approved for a 412.103 reclassification and keep its MGCRB reclassification. It is also important to note that a hospital with both a 412.103 reclassification and a MGCRB reclassification will be treated as urban for wage index purposes and rural for other Medicare purposes. A hospital considering taking advantage of the Rule should conduct a thorough analysis of its reclassification options, including the impact on its wage index and the timeline for submitting reclassification applications.

Practical Takeaways

  • Urban hospitals should determine if they are able to use the 412.103 and MGCRB reclassification processes to enhance their Medicare payments.
  • In some situations, hospitals may have additional wage index reclassification opportunities by first getting rural status and using the less stringent wage index and proximity criteria applicable to rural hospitals. However, the hospital should conduct a detailed analysis of the impacts of reclassifying because it may need to suffer through short-term periods of decreased Medicare payments to get longer term benefits. In addition, reclassifying could impact the payments of other hospitals in the area.
  • Adding to the complexity is the difference in timing between inpatient and outpatient wage index updates, the various approval timelines for SCH, RRC, MDH and wage index reclassification.
  • Reclassifying may have beneficial effects other than an increase in wage index for the hospital. For example, a hospital may be able to qualify for SCH or MDH status or the 340B program.

A copy of the Rule is available here.