Medicare Volume Decrease Adjustment (VDA) for Sole Community and Medicare-Dependent Hospitals

Eligibility

The VDA is available to hospitals classified as a Sole Community Hospital (SCH) under 42 CFR 412.92(e) or a Medicare-dependent, small rural hospital (MDH) under 42 CFR 412.108(d). CMS guidance is in the Provider Reimbursement Manual, Part 1, §2810.1; the MDH provision applies the same methodology (§2810.1.H).

1. A decrease of more than 5% in total discharges

Total inpatient discharges in the cost reporting period must be more than 5% lower than in the immediately preceding cost reporting period. If either period is not 12 months long, discharges are converted to a monthly figure and multiplied by 12. Each year is compared only with the year before it: in a sustained decline, a later year qualifies only if it is itself more than 5% below its own prior year (PRM-1 §2810.1.A.2).

2. Circumstances beyond the hospital’s control

The decline must result from an unusual situation or occurrence imposed on the hospital from outside. CMS’s examples include strikes, floods, inability to recruit essential physician staff, unusually prolonged severe weather, and serious, prolonged economic recessions that directly affect admissions. CMS also considers how often the hospital has requested a VDA, whether it relies repeatedly on the same circumstances, and whether it took reasonable steps to mitigate the decline, such as recruiting a replacement physician or cutting costs where possible (PRM-1 §2810.1.A.1).

3. Costs exceed payments

The request must show that total Program inpatient operating cost, excluding pass-through costs, exceeds the total payment for inpatient operating costs (plus the operating portion of any low-volume hospital adjustment). On Form CMS-2552-10 that is Worksheet D-1, Part II, line 53 compared with Worksheet E, Part A, line 49 (PRM-1 §2810.1.C.4).

MDH hospitals: see the dated notice at the top of this page about the December 1, 2026 SCH application deadline.

Timeline

The calculation for cost reporting periods beginning on or after October 1, 2017

For these periods, the VDA equals the hospital’s fixed Medicare inpatient operating costs minus the fixed-cost share of its total MS-DRG revenue for inpatient operating costs (including outlier, DSH, and IME payments) (42 CFR 412.92(e)(3)). PRM-1 §2810.1.D.2.b sets out four steps:

1. Fixed cost ratio: inpatient fixed and semi-fixed costs (identified by the hospital, verified by the MAC) divided by total inpatient operating costs.
2. Fixed share of cost: the ratio times Program inpatient operating costs.
3. Fixed share of payment: the ratio times total payment for inpatient operating costs, including the operating portion of any low-volume adjustment.
4. VDA: step 2 minus step 3.

CMS’s own illustration (PRM-1 §2810.1, Example C): total inpatient operating costs of $3,200,000 with $2,720,000 fixed and semi-fixed gives a ratio of 0.85. Program inpatient operating costs of $1,600,000 × 0.85 = $1,360,000. Payments of $1,200,000 plus a $200,000 operating low-volume adjustment = $1,400,000 × 0.85 = $1,190,000. VDA = $170,000.

What changed from the earlier method

• For these periods, hospitals no longer have to show they adjusted inpatient staffing to the lower volume, and MACs no longer reduce the payment for “excess staffing.”
• The payment is not subject to the earlier ceiling, which was based on the lesser of prior-year costs updated to current dollars or current-year Program inpatient operating costs.
• The MAC still considers the hospital’s needs and circumstances, including the reasonable cost of core staff and services, its fixed and semi-fixed costs, and how long the decrease has lasted (42 CFR 412.92(e)(3)(i)). For a short decline most semi-fixed costs are treated as fixed; as a decline continues, CMS expects a cost-effective hospital to cut unnecessary expenses, and semi-fixed costs it did not cut may be excluded (PRM-1 §2810.1.B).

Source for the changes: PRM-1 §2810.1.C.6.b. Periods beginning before October 1, 2017 use the earlier method in §2810.1.D.2.a.

Documentation the request must include

Per PRM-1 §2810.1.C, the request must include the following, or have it readily available to the MAC:

• General information: signed by a hospital official, with the hospital’s name, address, CCN, and date of SCH (or MDH) classification.
• Discharge data: discharges for the requested period and the immediately preceding period, annualized if either is not 12 months.
• Circumstances: a narrative of the occurrence, its onset date, its end date if applicable, and how it affected discharges.
• Cost data: the requested and preceding periods, showing Program inpatient operating cost exceeds total inpatient operating payment.
• Cost actions: a narrative of what the hospital did to reduce costs or align them with the lower volume.
• Fixed and semi-fixed cost support: the classification behind the fixed cost ratio. (Core staff comparisons by cost center apply to periods beginning before October 1, 2017.)

See our VDA eligibility checklist for a printable version. A VDA review is also a good time to check for unclaimed bad debt; see Medicare bad debt recovery.